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Facts
The assessee, a primary agricultural credit co-operative society, claimed deduction under Section 80P(2)(a)(i) for nil income, but the Assessing Officer denied it, stating the society served non-members. While the assessee's appeal against this denial was pending before the CIT(A), the Pr. CIT initiated revisionary proceedings under Section 263, finding the AO's order erroneous and prejudicial for not verifying the taxability of reserves/provisions. The Pr. CIT rejected the assessee's merger doctrine argument, asserting the issues were distinct, and set aside the assessment for fresh adjudication by the AO.
Held
The Tribunal found no illegality in the Pr. CIT's order under Section 263, noting that the Pr. CIT merely set aside the assessment for fresh adjudication after due enquiry. It clarified that the issue of deduction under Section 80P was already before the CIT(A) and any addition warranted by the revision would only inflate business profits qualifying for the same deduction. The AO was directed to examine the merits of the addition during the consequential assessment.
Key Issues
Whether the Principal Commissioner of Income Tax was justified in exercising revisionary powers under Section 263 when the issue of Section 80P deduction was pending before the CIT(A), and whether the doctrine of merger applied to prevent such revision.
Sections Cited
263, 80P(2)(a)(i), 143(3), 144B
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI SONJOY SARMA, JM
O R D E R Per: Inturi Rama Rao, AM These appeal filed by the assessee are directed against different orders of the Principal Commissioner of Income Tax-1, Kochi (Pr. CIT) dated 25.03.2025 passed u/s. 263 of Income Tax Act, 1961 (hereinafter "the Act") for Assessment Years (AY) 2020- 21 to 2022-23.
Since identical issues and facts are involved in these appeals, they are heard together and disposed of by this common order.
to 348/Coch/2025 Kadungalloor Service Co-op. Bank Ltd. 3. For the sake of convenience and clarity the facts relevant to the appeal bearing ITA No. 346/Coch/2025 for AY 2020-21 are stated herein.
Brief facts of the case are that the appellant is a co-operative society registered under the Kerala State Co-operative Societies Act, 1969. It is classified as a primary agricultural credit co-operative society. It is engaged in the business of accepting deposits from members and providing credit facilities to members. The return of income for ay 2020-21 was filed on 10.11.2020 declaring Nil income after claiming deduction u/s. 80P(2)(a)(i) of the Act of Rs. 1,49,71,334/-. Against the said return of income, the assessment was completed by the ITO, Ward-2, Aluva (hereinafter called "the AO") vide order dated 26.09.2022 passed u/s. 143(3) r.w.s. 144B of the Act at a total income of Rs. 1,49,71,334/-. While doing so, the assessing authority had denied the claim for deduction u/s. 80P(2)(a)(i) of the Act by holding that the appellant co-operative society is catering to non members and general public, therefore, fails the test of principle of mutuality and applying the ratio of the decision of Hon'ble Supreme Court in the case of Citizen Co- operative Society v. ACIT 397 ITR 1.
Being aggrieved, an appeal was filed before the CIT(A) contesting the disallowance of claim for deduction u/s. 80P(2)(a)(i) of the Act. While the matter stood thus, the ld. Pr. CIT found that the assessment order passed by the AO is erroneous and prejudicial to 348/Coch/2025 Kadungalloor Service Co-op. Bank Ltd. to the interests of Revenue, as the AO failed to verify the issue of taxability of reserves/provisions debited to Profit & Loss A/c. and deducted from taxable income. Therefore, formed an opinion that the assessment order is erroneous and prejudicial to the interests of Revenue. Accordingly, issued show cause notice proposing revision of the assessment order u/s. 263 of the Act. In response to the show cause notice the appellant society had filed objection stating that revision is unwarranted as the proposed addition only would inflate business income of the appellant, which qualifies for deduction u/s. 80P(2)(a)(i) of the Act. It is further submitted that mere classification of account does not decide the deductibility or otherwise of the provision. Further, finally contended that the subject matter of contention is also the subject matter of appeal before the CIT(A). Therefore, the Pr. CIT ought not have exercised the power of revision.
On due consideration of the explanation offered by the appellant society the Pr. CIT further stated that the doctrine of merger has no application to the facts of the case, inasmuch as, the subject matter of appeal before the CIT(A) is distinct as it is concerned with the allowability of deduction u/s. 80P of the Act. Rejecting the explanation of the appellant, set aside the assessment order to the file of AO with a direction to pass a fresh assessment order after according reasonable opportunity of hearing to the appellant.
The learned A.R. submits that the ld. Commissioner of Income Tax ought not have exercised the power of revision u/s. 263 to set aside the assessment order to verify the taxability or otherwise of the provisions/reserves created during the year and debited to Profit & Loss A/c. not added back to the taxable income and similarly the provisions/reserves credited to Profit & Loss A/c. but not reduced from the total income, inasmuch as, the provision debited to Profit & Loss A/c. would only inflate the business income which qualifies for deduction u/s. 80P(2)(a)(i) of the Act. The issue of allowability of deduction u/s. 80P(2)(a)(i) is subject matter of appeal before the CIT(A). Therefore the Pr. CIT ought not have exercised jurisdiction in view of the provisions of section 263 and the doctrine of merger.
On the other hand, ld. CIT-DR, placing reliance on the order u/s. 263 submits that the order passed by the Pr. CIT is a speaking one and no interference is called for.
We heard the rival submissions and perused the material 10. on record. The Parliament had conferred the power of revision on the Commissioner of Income Tax u/s 263 of the Act in case the assessment order passed is erroneous and prejudicial to the interests of revenue. In order to invoke the power of revision, the above two conditions are required to be satisfied to 348/Coch/2025 Kadungalloor Service Co-op. Bank Ltd. cumulatively. References in this regard can be made to the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC) and in the case of CIT vs. Max India Ltd., 295 ITR 282 (SC). The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim took one of the plausible views, the assessment order cannot be termed as an “erroneous”.
In the present case, in the original assessment order passed by the AO deduction u/s. 80P(2)(a)(i) was denied. The said order was appealed against before the CIT(A), which is pending disposal. Without delving into the merits of the addition proposed by the ld. Pr.CIT in the order u/s. 263 of the Act, suffice to hold that if addition is warranted to the total income on account of items which are subject matter of revision u/s. 263, the same would only inflate the business profit of the appellant society which qualifies for deduction u/s. 80P(2)(a)(i) of the Act. However, the issue of eligibility for deduction u/s. 80P is now subject matter of appeal before the ld. CIT(A). Since the ld. Pr. CIT. had only set aside the assessment order for fresh adjudication after due enquiry after affording opportunity of hearing to the appellant, we do not find an illegality in the order passed by the ld. Pr. CIT. We do not find any merit in the appeal filed by the assessee. Needless to say that the AO to 348/Coch/2025 Kadungalloor Service Co-op. Bank Ltd. shall examine the merits of the addition as well while passing the consequential order to the order passed u/s. 263 of the Act. Appeal filed by the assessee stands dismissed.
Since identical issues and facts are involved in assessee’s appeal & 348/Coch/2025, our findings in ITA No. 245/Coch/2025 shall apply mutatis mutandis to this appeal also.
In the result, the appeals of the assessee stand dismissed.
Order pronounced in the open court on 15th July, 2025.