HASSAN CO OPERATIVE SOCIETY LIMITED,HASSAN vs. THE INCOME TAX OFFICER, WARD 1, HASSAN

The brief facts of the case are that the assessee is a co-operative society and filed their return of income on 02/11/2017. The assessee claimed deduction u/s. 80P(2) of the Act on the entire income earned by them. The case of the assessee was selected for scrutiny and assessment proceedings u/s. 143(3) was completed in which the deduction claimed u/s. 80P(2)(d) were denied and the total income has been determined at Rs. 6,56,461/-. The audit wing has raised an objection that the sources for the cash deposits have not been examined and the issue for which the case was selected for scrutiny has not been verified. The AO had verified the cash deposits made into the bank accounts of the assessee and sought for the sources for the said cash deposits which includes the demonetization period. Notice u/s. 148 was issued after following the procedure prescribed u/s. 148A of the Act. Subsequently, notices u/s. 142(1) were issued and the assessee had also submitted their explanations. In the reply to the Question no. 10, the assessee submitted that they had claimed deduction u/s. 80P(2)(a)(i) as well as u/s. 80P(2)(c) of the Act and submitted that the scrutiny assessment made u/s. 143(3) was under challenge before the Ld.CIT(A) and later on before this Tribunal and also enclosed the copy of the Tribunal order. After going through the said explanations and the documents, the AO had concluded that the assessee is having the source for the cash deposits and accepted the explanations and dropped the said proposals.

The AO based on the return of income filed pursuant to the notice issued u/s. 148 of the Act, had found that the assessee had claimed the deduction u/s. 80P(2) of the Act on the interest income earned from the banks. The AO had considered the original assessment order made u/s. 143(3) of the Act in which a deduction u/s. 80P(2)(d) was granted to the extent of Rs. 3,42,480/- had assessed the balance income of Rs. 9,56,461/- as the income was not eligible for deduction. The assessee filed their objections but the AO had relied on the judgment of the Hon’ble Jurisdictional High Court reported in 395 ITR 611 in the case of Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sales Society and confirmed the disallowance u/s. 80P(2)(d) of the Act.

As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had dismissed the appeal on the ground that the assessee had not responded to the several hearing notices and therefore he concluded that the assessee has no interest in prosecuting the appeal.

As against the said order, the assessee is in appeal before this Tribunal.

At the time of hearing, the Ld.AR submitted that the AO had failed to issue the notice u/s. 148A(b) of the Act and therefore the entire reassessment proceedings are invalid. The Ld.AR also filed additional grounds in which the assessee had challenged the notice issued u/s. 148 by the Jurisdictional AO after the faceless assessment scheme has come into effect. The Ld.AR also raised a ground that no sanction has been obtained u/s. 151 of the Act and even if the sanction has been obtained, it is a mechanical one. The assessee had also raised an alternate ground that the AO had not allowed the cost of funds while disallowing the deduction claimed u/s. 80P(2)(d) of the Act. The Ld.AR also made a submission that the assessment is bad in law since the same has been made after three years when the income determined by the AO is below Rs. 50 Lakhs and also relied on the judgment of the Hon’ble Rajasthan High Court reported in (2024) 159 taxmann.com 306 (Rajasthan) in the case of Bijendra Singh vs. ITO to the above said proposition.

The Ld DR relied on the orders of the lower authorities.

We have heard the arguments of both sides and perused the materials available on record.

We have considered the main grounds raised in the appeal in which the assessee had alleged that the AO had failed to issue the notice u/s. 148A(b) of the Act and therefore the entire reassessment proceedings are invalid. We have also considered the legal submission made by the assessee and relying on the Hon’ble Rajasthan High Court judgment in which the assessee had attacked the notice issued u/s. 148A(b) as invalid since the same was issued after a period of 3 years. There are contradictions in the said submissions and therefore it is not proved beyond doubt that the AO had not followed the procedure prescribed u/s 148A of the act. Similarly, the assessee had also raised some other legal grounds which also includes the non-granting of the cost of funds while disallowing the deduction claimed u/s. 80P(2)(d) of the Act. No doubt, the officer has to grant the cost of funds if the assessee is not entitled for deduction u/s. 80P(2)(d) of the Act when the said interest income was treated as income from other sources.

We have considered the assessment order as well the Ld.CIT(A) order and also the grounds raised by the assessee and the assessee had not raised several grounds before the Ld.CIT(A) and in fact, the assessee had not appeared before the Ld.CIT(A) and therefore an ex-parte order has been passed by the Ld.CIT(A). In such circumstances, we are of the view that the assessee may be granted an opportunity to appear before the Ld.CIT(A) and canvas all the available grounds to him and in such event, the Ld.CIT(A) would decide the appeal on merits after hearing the assessee. We are also observing that if the Ld.CIT(A) is not convinced with the arguments of the assessee, necessarily the income disallowed should be treated as income from other sources and the benefit of cost of funds etc. should be granted while fixing the income from other sources. With the above directions, we set aside the order of the Ld.CIT(A) and remit this issue to the file of the Ld.CIT(A) for denovo consideration and in accordance with the directions stated supra.

In the result, the appeal filed by the assessee is allowed for statistical purposes.