SHRI JADISIDDESHWAR URBAN CO OP CREDIT SOCIETY LIMITED,SUNADHOLI vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, HUBLI

The Ld. AR Mr Murgod submitted that, during the course of assessment proceedings the Ld. AO vide notice dt. 17/11/2021 issued u/s 142(1) of the Act through questionnaire relevant information & data called for. The assessee made detailed submission which was perused and upon satisfaction the Ld. AO concluded the assessment by accepting the retuned NIL income u/s 143(3) of the Act. It is contended that, merely because the assessment order does not speak in clear terms as to (i) what queries were raised, (ii) what was the submission made by the assessee and (iii) how the submissions were dealt with while forming conclusion on taxability of interest and deductibility thereof, the said order cannot be held to be erroneous and prejudicial to the interest of the Revenue. Without prejudice to earlier submissions and arguments made in this case, it is also contended that; if it accepted that there was no specific inquiry into ITAT-Panaji Page 4 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 interest income earned on investment from banks including co- operative banks was made in the course of assessment proceedings, the consequential assessment order at the most may be erroneous for a limited purpose, however such interest since attributable to primary business of providing credit facility and thus eligible for full deduction u/s 80P(2)(a)(i) of the Act therefore tax neutral. There is no loss to the ex-chequer/Revenue. It is thus claimed by the assessee that, it might be a case of no or insufficient inquiry and thus erroneous but not prejudicial to the interest of the Revenue because allowing deduction either u/s 80P(a)(i) or 80P(2)(d) of the Act was tax neutral. The later of twin conditions since not satisfied in the present case therefore the action of the Ld. PCIT deserves to be set- aside. To drive home former contention that, the appellant relied on and ITA No 1792/Mum/2025.

Heard rival party’s submissions and; subject to rule 18 of ITAT Rules, 1963 perused material placed on records, considered the facts of the case in light of settled legal position and we note that, the solitary dispute in the present case is over inquiry into earning of interest on Fixed Deposit held (i) co-operative banks and (ii) with other than co-operative banks and consequential determination of heads of income for taxability vis-à-vis deductibility therefrom u/c VI-A of the Act. ITAT-Panaji Page 6 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 6. The short question in the present appeal thus deals with ‘as to where inquiry into eligibility & entitlement for claiming deduction u/s 80P(2) of the Act is completely absent and assessment order is partly prejudicial, whether revisionary order be sustained?’

In adjudicating this core issue, let us first came to ambit scope of revisionary jurisdiction through judicial precedents. The Hon'ble apex court’s landmark decision in ‘Malabar Industrial Co. Ltd. Vs CIT’ reported at 243 ITR 83 made it ample clear that the crucial expression ‘prejudicial to the interest of the revenue’ is to be read in conjunction with an ‘erroneous order passed’ in assessment framing the subject-matter of revision. Their Hon’ble lordships have observed that, every loss of revenue in consequence to the assessment in issue cannot be treated as prejudicial to interest of the revenue. For example, where an assessing authority adopts one of the course possible in law and it has resulted in loss of revenue or where two issues are possible and one of them has been taken in assessment and the Commissioner does not agree to same, it cannot be taken as an instance involving erroneous assessment prejudicial to interest of the revenue unless of course the Assessing Officer’s view is unsustainable in law. The very view laid by the Hon’ble Apex Court (supra) stands reiterated in catena of judicial decisions viz; ‘CIT Vs Max India Ltd. ITAT-Panaji Page 7 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 (2007) 295 ITR 282 (SC), CIT v. Nahar Exports Ltd. (2007) 288 ITR 494 (P&H), CIT vs Gabriel India Ltd (1993) 203 ITR 108 (Bom) Grasim Industries vs. CIT (2010) 321 ITR, 92 (Bom).

Keeping in mind former settled legal position now reverting back to the present impugned order under challenge at the very outset we note that, it is an admitted fact that the appellant assessee is a co-operative society registered under State Co-operative society Act. The appellant for the year under consideration was engaged in the business of providing credit facilities to its members as one of its primary objects with which the registration to it was granted under the applicable state co-operative laws. In the course of carrying on its business of providing credit facilitates to its members the appellant for the year under consideration indisputably earned interest income which was admittedly accrued to or earned by it from loans extended by it to its members and from investment made/held by it with various banks including (i) nationalised banks, (ii) scheduled banks and (iii) co-operative bank. In earning such interest income (from members on deposits as well on investment with bank) the appellant inevitably also incurred/paid corresponding interest expenditure on deposits accepted by it and other such expenditure in providing such credit facility to its member which in turn yielded revenue to it. ITAT-Panaji Page 8 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 9. We note that, while carrying inquiries into taxable income and corresponding financial results, specific queries in relation to; (i) investment into fixed deposits/term deposits held with (a) co- operative societies & banks (b) commercial banks (c) scheduled banks and (d) national banks and (ii) interest earned out of such investment held with (a) co-operative societies & banks (b) commercial banks (c) scheduled banks and (d) national banks, were neither asked nor supplied. The copy of notice issued to the appellant seeking answer/information for the purpose of assessment (placed on pg 1-3 of p/b) were perused and we find much less inquiry either into (i) investment held by the appellant with banks (ii) interest earned on such investment and (iii) taxability vis-à-vis deductible of such interest u/s 80P(2) of the Act. In nutshell there was complete absence of inquiry into former issues while framing the scrutiny assessment. Further there is sufficient evidence on record to show or at least brought to our notice that while carrying out the assessment the Ld. AO caused no inquiry into (i) constitution of appellant assessee (ii) nature of activities carried out by it (iii) nature of interest earned on loans extended and on investment held with banks etc. & taxability thereof (iv) nature of surplus from business shown to have earned by the appellant assessee. ITAT-Panaji Page 9 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 10. Now coming to later condition that is ‘prejudicial to the interest is concerned’. As we note that, admittedly the appellant assessee earned interest on its investment held with both (a) co-operative societies and co-operative banks and as well as (b) other than co- operative banks. Insofar as the taxability or deductibility of interest earned on investment held with co-operative societies and co- operative banks (which primarily registered as co-operative societies) is concerned, such interest in our considered view since deductible u/s 80P(2)(d) of the Act, therefore absence of inquiry into such interest income qua investment held with co-operative societies / co- operative banks etc, would not lead to any Revenue loss to the department. In consequence the later condition prescribed by section 263 of the Act fails to satisfy so as to trigger regionary jurisdiction. Therefore impugned order on this issue of interest earned on investment with co-operative societies/banks etc. though held to be erroneous for no inquiry by the Ld. AO but since not prejudicial to the interest of the Revenue, hence cannot be sustained in view of the ratio laid down by the Hon’ble Apex Court in ‘Malabar Industrial Co. Ltd. Vs CIT’ (supra). The Ld. DR could hardly place object the application of former ration and in setting-aside the impugned order on this limited score or issue. ITAT-Panaji Page 10 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 11. Next comes to the interest income earned by the appellant on its investment held with other than co-operative societies and other than co-operative banks. Admittedly, there were no inquiries into the nature of investment and interest earned and therefore the impugned order as was already held as erroneous. Now insofar as the taxability of said interest is concerned, indisputably the nature of such interest income determines as to whether it is taxable u/s 28 of the Act as ‘business income’ or as ‘income from other sources’ u/s 56 of the Act. Once the issue of taxability is ceased by aforestated test, then next question arises or to be dealt with is as to whether such interest is deductible u/c VI-A of the Act or not. If the interest income qualifies to be chargeable to tax u/s 56 of the Act, then no deduction thereagainst would be permissible u/s VI-A of the Act. In the present case, since the assessment proceedings were culminated without any inquiry into nature of interest, its taxability and entitlement for deduction u/c VI-A of the Act, but allowing the deduction u/s VI-A of the Act without such inquiry, the impugned order thus not only rendered erroneous but also had an effect of Revenue loss to the ex- chequer. The twin conditions necessary for invocation of revisionary action u/s 263 of the Act, thus finds satisfied, in consequence the jurisdiction. ITAT-Panaji Page 11 of 12 Shri Jadisiddeshwar Urban Co-operative Credit Society, Ltd. Vs. PCIT AY: 2020-21 12. Placing reliance on ‘Smt. Godavari devi Saraf Vs CIT’ [1978, 113 ITR 589(Bom)] we in view of the principle laid down in ‘CIT Vs Gabrial India Ltd.’ & ‘Malabar Industrial Co. Ltd. Vs CIT’ (supra) adjudicate the limited issue in favour of Revenue by holding that, while assessing the interest income there was much less inquiry into the; (i) type & nature of investment held by the appellant assessee with other than co-operative bank (ii) nature of interest earned (iii) taxability of such interest under the Act and (iv) deductibility therefrom (if any) by the Ld. AO in reaching the conclusion to accept that such interest income was part of the regular business of the appellant assessee and eligible for deduction u/s 80P(2) of the Act. In view therefore, the impugned order holding the assessment order as erroneous and prejudicial to the interest of the Revenue in relation to former limited issue, is upheld. The respective ground thus stands partly allowed.

In result, the appeal stands PARTLY ALLOWED. In terms of rule 34 of ITAT Rules, the order pronounced in the open court on the date mentioned hereinbefore.