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Facts
The assessee, a co-operative society, filed a return of income declaring 'nil' income after claiming deduction under Section 80P. The Assessing Officer (AO) disallowed a portion of this deduction which included net interest/dividend from investments in other co-operative banks and societies. The Principal Commissioner of Income Tax (PCIT) invoked revisionary powers under Section 263, finding the AO's order to be erroneous and prejudicial to revenue.
Held
The Tribunal held that the PCIT was justified in invoking Section 263 as the AO failed to properly consider the taxability of interest income as 'Income from other sources' under Section 56 and the disallowance of related interest expenditure under Section 57. The Tribunal also addressed the eligibility of the assessee for deduction under Section 80P(2)(d) for interest income, noting that it was not clearly attributable to the society's core activities.
Key Issues
Whether the PCIT rightly invoked Section 263, and whether the assessee was entitled to the claimed deduction under Section 80P(2)(d) for interest income from investments.
Sections Cited
263, 143(3), 143(3A), 143(3B), 57, 56, 80P, 80P(2), 80P(4), 80P(2)(a)(i), 80P(2)(a)(iii), 80P(2)(d)
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Before: SHRI PAWAN SINGH & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R PER BIJAYANANDA PRUSETH, AM: By way of this appeal, the assessee has challenged the correctness of the order passed by Ld. Principal Commissioner of Income-tax, Valsad [in short, ‘PCIT’], under section 263 of the Income-tax Act, 1961 (in short, ‘the Act’) dated 20.03.2024 for assessment years (AY) i.e.,2018-19, which in turn arose out of assessment order passed by National e-Assessment Centre, Delhi / Assessing Officer (in short, “AO”) under section 143(3) r.w.s. 143(3A) & 143(3B) of the Act on 12.04.2021. The assessee has raised the following grounds of appeal:-
1. “1. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in initiating the proceedings u/s 263 of the Act, 1961.
18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd.
On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in assuming jurisdiction/s 263 of the Act, 1961.
On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has erred in violating the principles of natural justice by not the mentioning the grounds for initiating action u/s 263 of the Income Tax Act, 1961 in the show cause notice issued. As such the order passed u/s 263 is void ab-initio. The action of the Ld. CIT was wholly unreasonable, uncalled for the bad in law.
On the facts and circumstances of the case as well as law on the subject, that the order of u/s 263 is merely ‘change in opinion’. The action of the Ld. Pr.CIT was wholly unreasonable, uncalled for and bad in law.
5. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in assuming that the Learned Assessing Officer had required to be disallowed interest expenditure as per provision of section 57 of the Act.
On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in assuming that the Ld.AO has passed the assessment order u/s 143(3) rws. 143(3A) & 143(3B) of the Act without verification of facts and without application of mind and correct law.
7. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in assuming that the Learned Assessing Officer had passed the erroneous order.
8. On the facts and circumstances of the case as well as law on the subject, the entire proceedings are bad-in-law and invalid as assessment order for the same year was framed, wherein due inquiry was made.
9. On the facts and circumstances of the case as well as law on the subject, the Learned Pr.Commissioner of the Income Tax has grievously erred in setting aside the assessment order u/s 143(3) rws 143(3A) & 143(3B) of the 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. Act without pointing out as to how the order is erroneous and prejudicial to interest of revenue.
It is therefore prayed that the above proposed proceedings may please be revoked as learned Members of the Tribunal may deem it proper. 11.Appellant craves liberty to add, alter or delete any ground(s) either before or in the course of the hearing of the appeal.” 2. The appellant has taken multiple grounds of appeal
they are inter- related and pertains to validity of jurisdiction u/s 263 of the Act and merit of the direction issued by Ld.PCIT.
3. The facts of the case in brief are that assessee, a co-operative society (AOP), filed its return of income (ROI) for the AY 2018-19 on 29.09.2018 declaring “nil” income after claim of deduction u/s 80P under Chapter VI-A of Rs.1,46,60,327/-. The case was selected for complete scrutiny on the issues of (i) investment/advances/loans, (ii) business expenses and (iii) deduction from total income under Chapter-VI-A. The assessee submitted that it was a multi- purpose co-operative society dealing mainly in marketing of agricultural produce grown by members of the co-operative society. The assessee-society had claimed deduction u/s 80P(2) of the Act amounting to Rs.1,46,60,327/-. The AO asked the assessee to furnish computation of income and break-up of claim of deduction u/s 80P(2)(d) of the Act. The assessee did not furnish any reply. The AO found that the deduction of Rs.1,46,60,327/- includes “net interest/Dividend from investment in other co-operative bank and societies.” AO found that assessee earned interest income out of surplus funds invested 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. in Valsad District Co-Operative Bank and after adjusting the expenses, it claimed the net deduction of Rs.58,33,332/- u/s 80P(2)(d) of the Act. It also claimed deduction of Rs.72,000/- being dividend received from Valsad District Central Co-operative Bank. The AO discussed provisions of Section 80P(4) of the Act and relied upon decision of Hon’ble Karnataka High Court in case of PCIT vs. The Totagars Co-operative Sales Society (order dated 16.06.2017), where it was held that though a co-operative bank may have a corporative body or skeleton of a co-operative society, its business is entirely different and i.e., the banking business. He held interest and dividend income earned from bank was income from other sources, which was not eligible for deduction u/s 80P(2)(d) of the Act. Therefore, he disallowed the above deduction and assessed income at Rs.59,05,332/- (58,33,332/- + 72,000).
4. Subsequently, Ld.PCIT called for the record and noticed that assessee had received gross interest income of Rs.3,35,16,510/- and dividend income of Rs.57,02,035/- totalling to Rs.3,92,18,545/- from Valsad District Central Co- operative Bank. He also found that assessee had claimed interest expenditure of Rs.2,41,38,304/- by paying interest towards loans taken from co-operative banks against overdraft on fixed deposits. The assessee had shown net interest income of Rs.1,50,80,241/- by netting the differential amount of interest (Rs.3,92,18,510 – Rs.2,41,38,304). As per section 57(iii) of the Act, income from other sources shall be computed after deducting expenditure laid out or expended wholly and exclusively for the purpose of making or earning such 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. income. He relied on the decision of ITAT Ahmedabad in case of The Govt. Servants Co-op Credit Society Ltd, Vadodara vs. ITO in dated 31.01.2019 for AY 2018-19 and for AY 2014-15 dated 31.07.2019 where it was held that interest earned on surplus funds deposited with Nationalized Bank and Co-Operative Bank are income from other sources u/s 56 of the Act. Since the interest expenditure related to overdraft loans against fixed deposits was not directly incurred for earning the interest income, the Ld. PCIT observed that the interest expense was not allowable under section 57 of the Act. The Ld. PCIT referred to two judgments i.e., The Government Servants Co-operative Credit Society Ltd, (supra) and ITAT Mumbai in case of Chandrakant R Agrawal vs. PCIT in ITA No.380/Mum/2020 dated 22.01.2021 where it was held that interest income from co-operative banks should be treated as “Income from other sources” u/s 56 of the Act and interest expenditure on loans taken against fixed deposits cannot be deducted. Despite these legal precedents, the AO had failed to disallow the interest expenditure of Rs.2,41,38,304/- as required u/s 57 of the Act, resulting in an erroneous assessment. The Ld. PCIT, therefore, found the AO's order to be both erroneous and prejudicial to the interests of revenue, as necessary verification and application of the correct law were not carried out by AO during assessment proceedings. A show-cause notice was issued to the assessee on 07.02.2024, asking why the AO's order should not be set aside u/s 263 of the Act. In response, the assessee contended that the case cited by the 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. Department were based on facts different from assessee’s case. The assessee argued that the reliance on ITAT judgments was unjustified, and that their status as a primary agricultural co-operative society is different. The Ld. PCIT, however, rejected this argument, stating that the provisions of section 56 and 57 apply equally to all types of taxpayers, irrespective of their status as a primary agricultural society or a credit co-operative society. The PCIT further pointed out that the interest paid on the loan against fixed deposits was not incurred for the specific purpose of earning interest income from Valsad District Central Co-operative Bank, thus disallowing the said deduction u/s 57 of the Act. The Ld. PCIT also addressed the issue with regard to assessee's argument about the reliance on ITAT rulings instead of jurisdictional High Court or Supreme Court decisions. The Ld. PCIT clarified that while the judgments referred to were from the ITAT, the said judgments had cited the relevant decisions from the jurisdictional High Court in case of State Bank of India vs. CIT(2016) 72 taxxmann.com 64 (Guj) and Hon’ble Supreme Court in case of Totgar's Cooperative Sale Society Ltd. 322 ITR 283 (SC) making them applicable. Therefore, the assessee's objections were unreasonable and rejected. 4.1 The Ld. PCIT emphasized that the AO had failed to make the necessary inquiries or verification required under the law, and had passed the order without applying the correct legal provisions. The Ld. PCIT relied upon decision of Hon’ble Supreme Court in case of CIT vs. Dr. V.P. Gopinath, 248 ITR 449 (SC)
18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. where it was held that interest on loan taken by assessee from bank on security of fixed deposits (FD) could not be deducted from interest income on FD placed with the bank. Hence, clause(d) of Explanation 2 of Section 263 of the Act is applicable in case of assessee. Considering escapement of income of Rs.2,41,38,304/- resulting in lawful loss of tax of Rs.83,50,323/-, the order of AO was also prejudicial to the interests of revenue. 4.2 Regarding contention of assessee that impugned issue was subject matter of appeal before CIT(A), the Ld. PCIT at para-11 of the order u/s 263 stated that the issue under consideration was neither under consideration before CIT(A) nor decided by CIT(A). The issue before CIT(A) was allowability of deduction u/s 80P(2) and not netting of interest income u/s 56 r.w.s. 57 of the Act. He derived support from the decisions of Hon’ble Supreme Court in case of CIT vs. Shri Arbuda Mills Ltd., 231 ITR 50 (SC) and CIT vs. Jaykumar B Patil, 236 ITR 469 (SC). 4.3. In view of the above facts and decisions, the Ld. PCIT concluded that the assessment order was erroneous and prejudicial to the interests of the revenue. He set aside the assessment order passed by the AO with a direction to pass a fresh assessment order after taking into consideration the issues as may have been already considered, together with the issues discussed in the order u/s 263 of the Act. The AO was also directed to make proper and meaningful enquiry on the issue discussed in the order u/s 263 of the Act.
18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd.
Aggrieved by the order of Ld. PCIT, the assessee has filed appeal before the ITAT. The Ld. AR of the assessee has filed a paper book containing details submitted before the lower authorities. The details include order of CIT(A) for AY 2017-18 and 2020-21. The Ld. AR of the assessee has filed copies of various decisions in favour of assessee. He submitted that Ld.PCIT relied on the decision of ITAT and not on decisions of Hon’ble jurisdictional High Court or Hon’ble Supreme Court. He submitted that assessee filed an appeal before CIT(A) against the impugned order of AO. The CIT(A) has subsequently decided the appeal in favour of the assessee. Similar issue was also decided in favour of the assessee in the appeal for AY 2020-21. The Ld.AR of the assessee submitted that facts of the case relied upon by the ITAT Ahmedabad in case of The Government Servants Credit Societies Ltd. (supra) are different from facts of the assessee. The assessee society is a Primary Agricultural Co-operative Society (PACS). He submitted that activities of the assessee are covered by both clauses (i) and (iii) of the sub-section(2) of Section 80P of the Act. The assessee is not covered under 80P(4) of the Act because it is not a co-operative bank. The Ld. AR has relied on the decision in case of The Mavilayi Service Co- operative Bank Ltd. & Ors. Vs. CIT & Anr. In Civil Appeal No. 8315 of 2019 dated 12.01.2021. The Ld. AR also filed copy of the certificate dated 05.03.2021 issued by the District Registrar, Co-operative Society, Navsari that the assessee/society has been registered as a “Primary Agriculture Credit Society” with registration No.8005 dated 11.12.1941. The Ld. AR, therefore, 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. submitted that order passed by the Ld.PCIT is not correct and is liable to be quashed.
6. On the other hand, Ld.CIT-DR has strongly relied on the order passed by Ld.PCIT. He has stated that Ld.PCIT has called for the records and duly examined it. He has also referred to provisions of section 263 of the Act and stated that the present case is covered by the scope and ambit of Section 263 of the Act because the AO has not made any inquiry which should have been made to come to a proper conclusion. The order passed by the Ld. PCIT is very detailed and well-reasoned and the Ld.PCIT has rightly relied on various decisions of Hon’ble Supreme Court, jurisdictional High Court and ITAT- Ahmedabad to hold that the order of AO was both erroneous and prejudicial to the interests of revenue u/s 263 of the Act. 6.1 Regarding argument of Ld. AR that the impugned issue was a subject matter of appeal before CIT(A), the Ld. CIT-DR submitted that the Ld. PCIT acted within his jurisdiction in initiating revision under section 263, as the AO's failure to disallow the interest expenditure without proper inquiry was prejudicial to the interests of the revenue. The argument that the appeal was allowed by the CIT(A) is not relevant and valid, as the issue decided by the CIT(A) pertains to section 80P of the Act, whereas the issue before Ld. PCIT was related to netting off the interest, which is not permissible when income is assessed u/s 56 of the Act. Additionally, it is only due to the lower tax effect that the department did not file an appeal against the CIT(A) order. Had the AO 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. disallowed netting of interest, the addition would have been of a higher amount, which would have enabled the revenue to file an appeal before the ITAT. 6.2 The Ld.CIT DR further submitted that the argument made by Ld. AR of the assessee that it is a credit society is incorrect; instead it is a co-operating society mainly involved in marketing of agriculture products. Referring to the chart provided during the hearing, the income component of the assessee does not primarily stem from money lending to members. Instead, it is an agricultural marketing society. Since the primary activity is not money lending, the interest and dividend income do not form part of the operating activities of the appellant and should be taxed under the head "Income from other sources." 6.3. The Ld. CIT-DR for the Revenue submitted that the AO passed the assessment order without conducting adequate inquiries or verification of the facts. The Ld. PCIT rightly pointed out that the interest expenditure claimed by the assessee was not allowable under section 57, as there was no direct nexus with earning interest income. He further submitted that as per section 57(iii) of the Act, any expenditure must be wholly and exclusively incurred to earn income under the head "income from other sources" to qualify for deduction. The interest expenditure of Rs.2,41,38,304/- was not incurred wholly and exclusively for the purpose of earning interest income from Valsad District 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. Central Co-operative Bank. Hence, the expenditure could not be deducted as claimed by the assessee. 6.4. The Ld. CIT-DR for the Revenue submitted that the decision of ITAT Ahmedabad in case of Govt Servants Co-Op Credit Society Ltd (supra) is applicable where it was held that interest income earned on surplus funds deposited with Nationalized and Co-operative Banks is to be treated as “Income from other sources” u/s 56, and any interest expenditure incurred against such income is not deductible under section 57. In State Bank of India vs., CIT (2016) the Hon’ble Gujarat High Court confirmed that interest income from co-operative banks is taxable u/s 56. This was further validated by the Supreme Court’s ruling in Totgars Co-operative Sale Society Ltd.(2010) which emphasized the importance of applying provisions uniformly, irrespective of the type of society. The Ld. CIT-DR also relied on the decision of ITAT Mumbai Benches in case of Chandrakant R Agrawal (supra) where the ITAT ruled that the deduction of interest expenditure against interest income was not permissible u/s 57(iii), reinforcing the position that only expenses directly related to earning the interest income are deductible. He also submitted that the assessee could not establish a direct connection between the interest expenditure and the interest income earned from Valsad District Central Co- operative Bank. The AO's failure to verify this nexus contributed to an erroneous assessment, which was properly rectified by the Ld. PCIT u/s 263. The Ld. CIT-DR finally submitted that based on the legal provisions and judicial 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. precedents, the Ld. PCIT correctly identified the errors in the AO's order and invoked the revisionary powers u/s 263 of the Act. The AO's failure to apply the provisions of section 56 and 57 and the incorrect allowance of interest expenditure, warrants the revision of the assessment order.
We have heard rival submissions and perused materials on record. We have also deliberated upon the decisions relied upon by both parties. We have also gone through the provisions of Section 263 of the Act. There is no dispute that case of the assessee was selected for complete scrutiny. Therefore, there was no restriction on the AO to conduct enquiry and verification on any relevant issue arising during assessment proceedings. The assessee had claimed deduction of Rs.1,46,60,327/- u/s 80P under Chapter-VIA of the Act. The AO, at para-4.1 of the assessment order, has noted from the details of the deduction claimed u/s 80P of the Act that the said deduction includes “net interest/ dividend from investment in other co-operative banks and societies amounting to Rs.1,15,35,367/- u/s 80P(2)(d) of the Act”. He found that interest income of Rs.58,33,332/- was from co-operative bank and dividend of Rs.72,000/- was received from Valsad District Central Co-Operative Bank. These two items of interest and dividend income from Co-Operative Bank were disallowed u/s 80P(2) of the Act by the AO. He had not dealt with issue of netting of interest income in the assessment order. The Ld. PCIT called for the records and found that the assessee-society had received gross interest income of Rs.3,35,16,510/- and has claimed interest expenditure of 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. Rs.2,41,38,304/- for loans taken from Co-operative Banks against overdraft on FDs. The details of interest received and interest paid as submitted by Ld. CIT- DR are as under: Details of interest paid Sr.No. Particulars Amount (in INR) 1 Interest on fixed deposits 8,867,160.00 2 Interest on saving deposits 4,883,128.45 3 Interest on loan against FD-Valsad Dist.Co-op.bank 24,306.00 4 Interest on compulsorydeposits 9,763,609.85 5 R.D Naik interest 5,650.00 6 NCDC loan Interest 173,026.00 7 VAT Interest 69.00 8 Interest on OD against FD-Surt People’s Co-op. Bank 221,355.00 TOTAL 24,138,304.30 Details of interest received Sr.No. Particulars Amount (in INR) 1 Package interest 4,161,872.36 2 Staff loan interest 18,488.00 3 Anaj S.M. Dhiran interest 2,465.13 4 Kapad S.M. Dhiran interest 25,704.54 5 Steel S.M. Dhiran interest 14.879.36 6 Interest from Valsad Jilla Fal Ane Sakbhaji Sahkari Sangh Ltd 4,808,471.48 7 Valsad Dist. Central C.op. FD Bank interest 19,458.166.00 8 Valsad Dist. Central Co-op SB Bank interest – Amalsad 116,817.00 9 Valsad Dist./ Central Co-op. Special Savings interest 4,928.00 10 NSC interest 46,129.00 11 Tractor Admin charge from farmer members 20,165.00 12 Surat People’s Co-op Bank SB interest 13,144.00 13 IDBI Bank Ltd. – SB interest 5,094.00 14 Valsad Dist. Central Co.op. SB Bank interest – Gandevi 1,523.00 15 Indusind Bank Ltd. –SB interest 86,473.00 16 Surat People’s Co-op Bank FD interest 4,370,758.00 17 HDFC Bank Ltd. – Bilimora SB interest 1,897.00 18 Interest from members at Branches 325,286.18 19 Interest from Gujarat State Bardoli Federation Ltd. (Net) (7,440.42) 20 Interest from Ultreatech Company deposit 12,000.00 21 Interest from Member – Tractor 30.00 22 Interest on deposit with companies 29,659.74 23 Dividend income 5,702.035.00 TOTAL 39,218,545.37 7.1 The Ld. PCIT stated that such interest income should be treated as “Income from other sources” u/s 56 and deduction u/s 57 of the Act permits expenses incurred wholly and exclusively for the purpose of earning such 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. income. Since interest expenditure related to overdraft loans against FD was not directly incurred for earning the interest income, the interest expense of Rs.2,41,38,304/- was not allowable u/s 57 of the Act. He has relied on the decisions in cases of The Government Servants Co-operative Credit Society Ltd. (supra), Chandrakant R Agawal (supra) State Bank of India (supra), Totgars Sales Co-operative Society Ltd. (supra), and Dr. V.P. Gopinathan (supra) while deciding the issue that interest earned by assessee-society was assessable under the head “Income from other sources” and deduction u/s 57(iii) of the Act is not permissible against interest income. Since the disallowance of Rs.2,41,38,304/- was not made by the AO, there was short levy of tax of Rs.83,50,323/-. Hence, order of AO was both erroneous and prejudicial to the interests of revenue u/s 263 of the Act. 7.2 Let us now discuss the scope and ambit of Section 263 of the Act. A bare reading of the section reveals that the Ld.PCIT can call for and examine the record of any proceedings under the Act and if he considers that any order passed by the AO is erroneous in so far as it is prejudicial to the interests of the revenue, he may after giving opportunity of hearing and after making or causing to be made such inquiry as he deems necessary, pass such order as the circumstances of the case justify. For ready reference, section 263 of the Act reproduced below: “263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous in 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, [including,- (i) An order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) An order modifying the order under section 92CA; or (iii) An order cancelling the order under section 92CA and directing a fresh order under the said section]. … … … Explanation-2- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so fa as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,- (a) The order is passed without making inquiries or verification which should ha been made; (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) The order has not been passed in accordance with a decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
7.3 The Hon’ble Apex Court in cases of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) and CIT vs. Greenworld Corporation, 314 ITR 81 (SC) held that the jurisdiction u/s 263 can be exercised only when both the following conditions are satisfied i.e., (i) the order of the Assessing Officer should be erroneous and (ii) it should be prejudicial to the interests of revenue. These conditions are conjunctive. The Hon’ble Apex Court in case of Max India Ltd. vs. CIT 295 ITR 282 (SC) held that the Commissioner has to be satisfied of the twin conditions as stated above. If one of them is absent, recourse cannot be had to Section 263 of the Act. As stated earlier, the case was selected for complete scrutiny. Hence, the AO was not precluded from making any enquiry which came to his notice during the assessment proceedings. The issue of 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. taxability of interest income under the head “Income from other sources” u/s 56 and allowability of deduction of interest paid u/s 57 of the Act has clearly not been considered by the AO. Hence, there are two issues which require deliberation in this case. The first issue is whether the Ld.PCIT legally and validly invoked the provisions of Section 263 of the Act; the other issue is merit of the case as per provisions of Section 56 and 57 of the Act. 7.4 Let us first decide whether conditions for invoking the provisions of Section 263 are satisfied in the present case. As stated earlier, the case was selected for complete scrutiny and hence, the AO was within his power to examine all issues which are embedded in the return of income and other details available during assessment proceedings. He was also entitled to make further enquiry after receiving details from the assessee. We find that the AO himself at para-4 of the assessment order has noticed that the deduction claimed u/s 80P(2)(d) of the Act includes “net interest and dividend from investment in other Co-operative Banks and Societies”. Therefore, it was clear that assessee had offered only net interest income from its investment in other banks/societies after claiming interests expenditure. As per various decisions of the Hon’ble Courts and ITATs, it is well established that interest would normally be assessed under the head “income from other sources”. The Hon’ble Supreme Court in case of Totgar’s Co-operative Sales Society Ltd. vs. ITO, 188 Taxman 282 (SC) held that investment in certain specified securities giving rise to interest income is to be taxed as “Income from other sources”.
18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. The Hon’ble Uttarkhand High Court in case of CIT vs. Laksar Co-operative Cane Development Union Ltd. (216 Taxman 218) held that interest earned by co- operative society on mutual funds invested with banks would be treated as “other income of the society”. The Hon’ble Delhi High Court in case of Mantola Co-operative Thrift and Credit Society Ltd. vs. CIT (229 Taxman 68) held that interest earned by assessee-co-operative society, engaged in providing credit facilities to its members, on deposits of surplus funds in FD is to be taxed as “Income from other sources”. Therefore, it is clear that the income earned by the assessee-society on FDs, SB interests etc., were liable to be assessed as “Income from other sources” u/s 56 of the Act. Hence, the AO should have considered the interest income u/s 56 of the Act. Once, the income is assessed u/s 56 of the Act, the deductions would be available only u/s 57 of the Act. Section 57(iii) requires that expenditure must be laid out or extended wholly and exclusively for the purpose of making or earning such income. The Hon’ble Supreme Court in case of Dr. V.P. Gopinathan (supra) held that interest on loan taken by the assessee from bank on security of FD could not be deducted from its income by way of interest on FD placed by him in the bank. Therefore, the assessee was required to offer gross interest income and not the net interest income. However, the AO has accepted the net interest income and has not disallowed the payment of interest of Rs.2,41,38,304/-. Thus, in view of ratio of the decision of the Hon’ble Supreme Court in case of Dr. V.P. Gopinathan (supra), the AO was clearly in error in not making the disallowance of the 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. interest paid by the assessee-society. Hence, the first limb of Section 263 is satisfied. The short levy of tax for failure to make the above addition was Rs.83,50,323/-; hence, the order also was prejudicial to the interest of revenue. Therefore, both limbs of section 263 are satisfied in the present case. The Ld.PCIT was therefore, justified in invoking the provisions of Section 263 of the Act to revise the assessment order passed by the AO u/s 143(3) r.w.s.
Having held that the Ld.PCIT rightly assumed jurisdiction u/s 263 of the Act, let us examine if the assessee was entitled to deduction u/s 80P(2)(d) of the Act in respect of the impugned amount. The Ld. AR has relied on the decision of in case of Mavilayi Services Co-operative Bank Ltd. (supra). The Hon’ble Supreme Court in the said case held as under: “…Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.”
The facts of the case are not similar to the above decision. The question of taxability of interest income and netting of interest income was not before Hon’ble Supreme Court. Be that as it may, there is no dispute that assessee is a “Primary Agriculture Credit Society” which is evident from the Certificate issued by District Registrar of Co-Operative Society, Navsari (page-35 of the paper book). Hence, assessee is not affected by Section 80P(4) of the Act. However, that itself, would not entitle assessee to claim benefit of deduction 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. u/s 80P(2)(a)(i) of the Act on the interest income which is clearly assessable as “Income from other sources” u/s 56 of the Act. As per section 80P of the Act, where, in case of a co-operative society, gross total income includes income in sub-section(2) of Section 80P, there shall be deduction in accordance with provisions of sub-section(2) of Section 80P. Sub-section-(2) includes co- operative society engaged in (i) carrying on business of banking or providing credit facility to its members [clause (i)], (ii) the marketing of agricultural produce grown by its members [clause (iii)] etc. The deduction would be the whole of the amount of profits and gains of business attributable to anyone or more of such activities. The Hon’ble Supreme Court in case of Totgar’s Co- operative Sale Society Ltd. (supra) held that the income in respect of which deduction is sought by a co-operative society u/s 80P(2) of the Act must constitute the operational income and not the other income which accrues to the society. The interest income from investment of surplus funds in short term deposit and securities is to be taxed as “Income from other sources” u/s 56 of the Act. Interest income of such society from amounts retained by it cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) or Section 80P(2)(a)(iii) of the Act. The Hon’ble Supreme Court in case of Mavilayi Services Co-operative Bank Ltd. (supra) held that once the assessee is entitled to avail of the deduction the entire amount of “profits and gains of business attributable” to any one or more activities mentioned in sub- section-(2) of 80P must be given by way of deduction. Therefore, the assessee 18-19 Amalsad Vibhag Vividh Karyakari Sahkari Khedut Mandli Ltd. would be entitled for the deduction on the profits and gains of business attributable to any one or more activities. We have already given the details of interest received and paid earlier. The assessee has received interest income from 22 different sources. It is not clear whether interests earned as mentioned in the table in para-6 are out of the profits and gains of the business attributable to any one or more activities mentioned in the sub- section(2) of Section 80P of the Act. No clear nexus between interest income and interest paid has been established. Therefore, the direction given by the Ld.PCIT is modified accordingly. In other words, order of the Ld.PCIT to set aside the order is upheld but the AO should consider the nexus of interest paid with the interest income and if the interest income is part of the business profit attributable to one of the activities mentioned in clause-(i) to (vii) of Section 80P(2)(a), allow the interest paid in respect of such business profit. After excluding such interest paid, the remaining interest expenditure should be disallowed. This ground of assessee’s appeal is partly allowed.
In the result, appeal filed by the assessee is partly allowed. Order is pronounced on 03/02/2025 in the open court.