SRI GURU RAMALINGESHWARA SOUHARDA PATTINA SAHAKARI NIYAMITHA ,MASKI vs. PR. COMMISSIONER OF INCOME TAX , HUBLI

The facts in brief are that the assessee is cooperative society carrying on banking business, accepting deposits from its members and Page 2 of 12

1 Subsequently on examination of the assessment records, the learned PCIT noticed that the assessee had earned interest income of ₹76,90,564/- from deposits made with co-operative banks and commercial banks. The ld. PCIT observed that while completing the assessment under section 143(3) r.w.s. 144B on 06.09.2022, the AO did not examine the nature and taxability of this interest income.

2 According to the PCIT, as per the judgment of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. vs. ITO (322 ITR 283), interest earned on surplus funds deposited with banks is taxable under the head “Income from Other Sources” under section 56 of the Act and not as business income. Therefore, such income is not eligible for deduction under section 80P(2)(a)(i) of the Act.

3 The ld. PCIT further observed that the interest was earned from deposits with co-operative banks and commercial banks and not from investments with another co-operative society. Hence, deduction under section 80P(2)(d) was also not allowable. 3.4 The ld. PCIT also relied on the decision of the Karnataka High Court in PCIT vs. Totgar Co-operative Sale Society (ITA No.100066/2016 dated 16.06.2017) reported in 83 taxmann.com 140 where it was held Page 3 of 12

5 Based on these facts, the ld. PCIT formed the view that the AO failed to properly examine this issue and allowed the deduction without verification. Therefore, the assessment order was considered erroneous and prejudicial to the interests of the Revenue under section 263 of the Act.

6 In response to the notice issued under section 263 of the Act, the assessee submitted that the assessment order passed by the AO was not erroneous and that the AO had passed the order after examining the details submitted by the assessee.

The assessee argued that the decision of the Hon’ble Supreme Court in the case of Totgars Co-operative Sale Society Ltd. was not directly applicable. In that case the society was engaged in trading activities, whereas the assessee is engaged in the business of providing credit facilities to its members.

1 It was also submitted that under the provisions of the Karnataka Souharda Sahakari Act, the assessee is required to maintain certain reserves and liquidity in the form of deposits. Therefore, making deposits with banks is a normal part of its business activity.

2 The assessee therefore contended that the interest income earned from such deposits should be treated as business income and Page 4 of 12

The ld. PCIT examined the submissions of the assessee but did not accept them. The ld. PCIT held that the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd. has clearly stated that interest earned from deposits with banks is taxable under the head “Income from Other Sources.”

1 The PCIT also relied on the decision of the Karnataka High Court in PCIT vs. Totagars Co-operative Sale Society (2017) which held that interest earned from deposits of surplus funds does not arise from business operations and therefore deduction under section 80P of the Act cannot be allowed.

2 The ld. PCIT further noted that the AO had not made proper enquiries regarding the nature of this interest income. As per Explanation 2 to section 263 of the Act, an order passed without proper enquiry or verification is considered erroneous and prejudicial to the interests of the Revenue.

3 Therefore, the PCIT held that the assessment order dated 06.09.2022 was passed without proper examination of the issue. The order was accordingly set aside under section 263 of the Act, and the Assessing Officer was directed to examine the issue again and pass a fresh assessment order after giving opportunity to the assessee. Page 5 of 12

Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us.

The learned AR before us filed a paper book running from pages 1 to 72 and contended that the twin conditions prescribed u/s 263 of the Act, namely that the assessment order should be both erroneous and prejudicial to the interest of revenue, are not satisfied in the present case.

1 The Ld. AR submitted that the assessment in the present case was completed by the AO u/s 143(3) of the Act after conducting necessary enquiries. During the course of assessment proceedings the AO issued notice u/s 143(2) dated 29.06.2021 and notice u/s 142(1) dated 23.11.2021 calling for details. In response, the assessee filed detailed replies along with supporting documents on various dates, copies of which are placed in the paper book. The assessee also filed reply dated 24.08.2022 in response to the show cause notice issued by the AO during the assessment proceedings.

2 The Ld. AR further submitted that the documents placed in the paper book clearly show that the AO had examined the issue of deduction under section 80P of the Act during the assessment proceedings. After considering the replies and material placed on record, the AO took a conscious decision and completed the assessment accepting the return income. Therefore, it cannot be said that the AO passed the order without enquiry. Page 6 of 12

3 It was further contended that the Ld. PCIT has invoked the provisions of section 263 merely on the ground that the enquiry made by the AO was not sufficient. However, it is settled law that section 263 cannot be invoked for conducting further enquiries when the AO has already examined the issue. At best, it can be a case of difference of opinion. Such a situation does not render the assessment order erroneous.

4 The Ld. AR therefore submitted that since the AO had conducted enquiries and taken a possible view on the basis of materials available on record, the assumption of juri iction u/s 263 by the Ld. PCIT is not justified and the revision order deserves to be quashed.

On the other hand, the learned DR before us strongly supported the order passed by ld. PCIT. It was submitted that the AO had failed to conduct proper and adequate enquiry on the relevant issue of deduction under section 80P of the Act while completing the assessment u/s 143(3) of the Act. The assessment order is silent on the proper examination of the issue, and no proper verification was carried out by the AO.

1 The Ld. DR contended that the Ld. PCIT, after examining the assessment records, found that the AO had not made proper enquiries which were required under the facts of the case. Therefore, the assessment order became erroneous and prejudicial to the interest of revenue. It was thus submitted that the Ld. PCIT has rightly exercised the revisionary juri iction u/s 263 of the Act and the order passed by the Ld. PCIT deserves to be upheld. The Ld. DR to buttress his argument Page 7 of 12

1 From the records placed before us, we notice that during the course of the assessment proceedings the AO had specifically raised a query with regard to the interest income of ₹76,90,564 earned by the assessee from deposits made with RDCC Bank, PKGB Maski, Mudgal Urban Bank, Manvi PS Bank, SUCO Bank and Mucco Bank and asked the assessee to explain why the said income should not be disallowed for deduction under section 80P(2)(a)(i) of the Act.

2 In response to the above query, the assessee filed a detailed reply explaining the nature of its activities and the circumstances under which such deposits were maintained. The assessee submitted that it is a credit cooperative society engaged in the business of accepting deposits from members and lending the same to members. The assessee claimed that the deposits placed with co-operative banks were out of operational funds and in the normal course of business. It was further explained that under the circular issued by Karnataka State Souharda Federal Cooperative Ltd., the cooperative societies are required to maintain a portion (20%) of their deposits with banks for liquidity and Page 8 of 12

3 After considering the reply and the documents furnished by the assessee, the Assessing Officer accepted the explanation and recorded that the assessee had furnished all the relevant information for claiming deduction under section 80P(2)(a)(i) and the submissions of the assessee were found to be in order. Accordingly, the returned income was accepted and the assessment was completed under section 143(3) r.w.s. 144B of the Act without making any variation. The above narrated facts can be verified from para 3.2.3 to para 4 or pages 4 to 6 of the assessment order.

5 From the above sequence of events, it is clear that the AO had indeed made enquiry on the issue of interest income from deposits with co-operative banks. The assessee had furnished a detailed explanation and supporting material. After examining the same, the AO formed a view and accepted the claim of the assessee. Therefore, it cannot be said that the assessment order was passed without enquiry or verification.

6 It is a settled position of law where the AO has conducted enquiry and has taken a possible view based on the materials available on record, the same cannot be revised under section 263 of the Act merely Page 9 of 12

7 In the present case, the view taken by the AO after considering the explanation of the assessee is clearly one of the possible views. The ld. PCIT has invoked section 263 of the Act only on the basis that, according to him, a different view should have been taken in light of certain judicial decisions. Such action of the ld. PCIT amounts to nothing but a change of opinion, which is not permissible under section 263 of the Act.

8 Before parting we note that the Ld. DR has placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs. Paville Projects Pvt. Ltd.(supra) to support the action of the Ld. PCIT in invoking the revisionary juri iction u/s 263 of the Act. However, the said decision is clearly distinguishable on facts and does not advance the case of the Revenue. Page 10 of 12

9 In the case of CIT vs. Paville Projects Pvt. Ltd., the assessee had claimed a substantial amount paid to shareholders pursuant to a family settlement as “cost of improvement” while computing capital gains on sale of property. The learned CIT(A) found that such payments were not related to the capital asset and did not result in any addition or alteration which enhanced the value of the asset. Therefore, the claim allowed by the AO was contrary to the provisions of sections 48 and 55 of the Act. On those peculiar facts, the Hon’ble Supreme Court held that the assessment order allowing such deduction was clearly erroneous and prejudicial to the interests of the Revenue and therefore the exercise of juri iction u/s 263 of the Act was justified.

10 However, the facts of the present case stand on an entirely different footing. In the present case, the issue does not relate to allowability of an inherently impermissible deduction under the statute. The dispute is only with respect to the eligibility of deduction u/s 80P(2)(a)(i) of the Act on interest income earned from deposits with co- operative banks, which the assessee claimed as business income arising in the course of providing credit facilities to its members. The AO had specifically raised queries during the assessment proceedings, and the assessee furnished detailed replies explaining that such deposits were made out of operational funds and also to comply with liquidity requirements under the cooperative regulatory framework. After examining the materials placed on record, the AO accepted the explanation and completed the assessment u/s 143(3) of the Act.

11 Thus, unlike the case before the Hon’ble Supreme Court in Paville Projects, where the claim itself was legally untenable and contrary to the Page 11 of 12

12 Accordingly, the reliance placed by the Revenue on the decision of the Hon’ble Supreme Court in CIT vs. Paville Projects Pvt. Ltd. is misplaced and the ratio laid down therein does not apply to the facts of the present case.

13 In view of the above facts, we hold that the AO made proper enquiries regarding the interest income earned by the assessee and had taken a conscious decision after examining the submissions of the assessee. Therefore, the assessment order cannot be said to be erroneous insofar as it is prejudicial to the interests of the Revenue. Accordingly, the order passed by the learned PCIT under section 263 of the Act is set aside and the assessment order passed by the AO is restored. The grounds raised by the assessee are therefore allowed. 10. In the result, the appeal of the assessee is hereby allowed.

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file