Citation Codes

Equivalent Citations

citation codes

Case Number

ITA 887/BANG/2022

Disposition

in part

Attorney(S)

Acts

SECTION 56 INCOME TAX ACT
26.12.2017 u/s 143(3) of the I.T.Act
u/s 143(3) of the I.T.Act
2 (d) of section 263(1) of the I.T.Act

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Smart Summary

Case Summary: ITA No.887/Bang/2022 (Asst. Year 2015-2016)

Factual and Procedural Background

The assessee, M/s. Gnana Shale Souhardha Co-operative Limited (a co-operative society providing credit facilities to its members), filed its return of income for the assessment year 2015-2016 on 21.09.2015 declaring nil income after claiming deductions under section 80P of the Income-tax Act. The Assessing Officer completed assessment by order dated 26.12.2017 under section 143(3) accepting the returned income.

The Principal Commissioner of Income-tax (PCIT) issued a notice under section 263 of the Income-tax Act on the ground that the assessee had earned interest income of Rs.15,08,488 from investments with other co-operative banks which, according to the PCIT, was not entitled to deduction under sections 80P(2)(a)(i) and 80P(2)(d). The assessee filed written submissions dated 16.03.2022 which were rejected. The PCIT, following judicial pronouncements (including Totagar's Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283 (SC) and the Karnataka High Court decision in Prl. Commissioner Of Income Tax v. Totagars), set aside the AO's order dated 26.12.2017 as "erroneous and prejudicial to the interest of revenue" and directed the AO to bring the interest income to tax denying the claim under section 80P.

The assessee filed the present appeal before the Income Tax Appellate Tribunal. There was a delay of 115 days in filing the appeal (period excluded per the Apex Court order in SMW(C) No.3 of 2020), and the assessee filed a condonation petition supported by an affidavit explaining it became aware of the impugned order only on 08.09.2022 (via an e-mail from the Demand Facilitation Centre), and had subsequently submitted representations. The Tribunal condoned the delay and proceeded to dispose of the appeal on merits.

Legal Issues Presented

Whether the PCIT was justified in invoking the jurisdiction under section 263 of the Income-tax Act and in setting aside the Assessing Officer's order as "erroneous and prejudicial to the interest of the revenue"?
Whether the notice issued for initiation of proceedings under section 263 of the Act is bad in law?
Whether interest income earned by the assessee on investments with co-operative banks is entitled to deduction under section 80P, or falls under "income from other sources" (section 56)?
If interest income is assessable as "income from other sources", whether proportionate expenses/administrative expenditure incurred in earning that interest are allowable as deduction under section 57?

Arguments of the Parties

Appellant's Arguments (Assessee / Learned AR)

The appellant contended that the PCIT was not justified in invoking section 263 and setting aside the AO's order as erroneous and prejudicial to the interest of revenue.
The notice under section 263 was asserted to be bad in law.
On merits, the appellant's limited submission was that where income is assessed under the head "income from other sources" (section 56), only the net interest income ought to be taxed — i.e., administrative and other proportionate expenditure incurred to earn the interest should be allowed as deduction under section 57.
For condonation of delay, the assessee explained it learned of the impugned order only on 08.09.2022 (via e-mail), replied on 14.09.2022, and thereafter pursued appeals; the assessee relied on several judicial decisions in support of condonation.

Respondent's Arguments (Department / Learned DR and PCIT)

The Departmental Representative supported the PCIT's order under section 263.
The PCIT's position (as reflected in the impugned order) was that interest income on investments with co-operative banks is not entitled to deduction under section 80P, relying on the Supreme Court decision in Totagar's Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283 (SC) and the jurisdictional High Court decision (Prl. Commissioner v. Totagars – 2017).
Accordingly, the PCIT had set aside the AO's order and directed the AO to bring the said interest income to tax by denying the claim under section 80P.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Collector, Land Acquisition v. MST. Katiji and Others (1987) 167 ITR 471 (SC)	Cited by the assessee's counsel in support of condonation of delay.	The Tribunal noted the case among the judicial pronouncements relied upon and, together with other authorities cited, found sufficient cause to condone the delay.
Concord of India Insurance Co. Ltd. v. Smt. Nirmala Devi 118 ITR 507 (SC)	Cited by the assessee's counsel in support of condonation of delay.	Included in the list of authorities on which the assessee relied; Tribunal relied on the judicial pronouncements cited supra to condone delay.
Radha Krishna Rai v. Allahabad Bank & Others (2009) 9 SCC 733	Cited by the assessee's counsel in support of condonation of delay.	Part of the body of authorities relied upon for condonation; Tribunal referred to these in concluding there was sufficient cause to condone delay.
CIT v. West Bengal Infrastructure Development Finance Corporation Limited (2011) 334 ITR 269 (SC)	Cited by the assessee's counsel in support of condonation of delay.	Included among the cases the Tribunal considered relevant to condonation and relied on in arriving at the condonation order.
Commissioner Of Income Tax & Anr. v. Isro Satellite Centre (Karnataka), ITA No.532 of 2008 and batch (order dated 28.10.2011)	Cited by the assessee's counsel in support of condonation of delay.	Listed among the judicial pronouncements relied upon; contributed to the Tribunal's view that sufficient cause existed to condone delay.
Smt. Shakuntala Hegde, Legal Heir of Mr. Ramakrishna Hegde v. ACIT, ITA No.2785/Bang/2014 (order dated 25.04.2016)	Cited by the assessee's counsel in support of condonation of delay.	Included in the authorities relied upon; Tribunal relied on these authorities to condone the delay.
CIT v. K.S.P. Shanmugavel Nadar (1987) 30 Taxmann 133 (Madras)	Cited by the assessee's counsel in support of condonation of delay.	Part of the judicial pronouncements listed; relied upon by Tribunal when condoning delay.
M/s. Midas Polymer Compounds Pvt. Ltd. v. ACIT, ITA No.288/Coch/2017 (order dated 25.06.2018)	Cited by the assessee's counsel in support of condonation of delay.	Included among the authorities the Tribunal considered in its order condoning delay.
Anatek Services Pvt. Ltd. v. ACIT, ITA No.102 of 2008 (judgment dated 11.02.2022) (Bombay)	Cited by the assessee's counsel in support of condonation of delay.	Among the judicial pronouncements relied upon; influenced the Tribunal's conclusion on condonation.
Totagar's Co-operative Sale Society Ltd. v. ITO (2010) 322 ITR 283 (SC)	Held that interest income earned by a co-operative society on deposits falls within "other income" (section 56) and is not eligible for deduction under section 80P.	The PCIT followed this Supreme Court precedent in setting aside the AO's order under section 263; the Tribunal accepted that the AO's order was not in accordance with this Supreme Court judgment and held the PCIT's action under section 263 was correct.
Prl. Commissioner Of Income Tax v. Totagars Co-Operative Sale Society (2017) 395 ITR 611 (Karnataka)	Jurisdictional High Court decision interpreting application of Totagar's judgment and its consequences for co-operative societies.	The Tribunal relied on this jurisdictional High Court decision (cited by the PCIT) to affirm that the AO's order was contrary to binding judicial pronouncements and therefore could be set aside under section 263.
Totagars Co-operative Sale Society Ltd. v. ITO (2015) 58 Taxmann.com 35 (Karnataka)	Held that where interest is taxable under section 56 as "other income", proportionate costs and administrative expenditure incurred in earning such interest may be allowed as deduction under section 57 (i.e., only net income should be taxable).	The Tribunal relied on this High Court finding to direct restoration of the case to the Assessing Officer to examine, untrammelled by the PCIT's direction, whether the assessee incurred expenditure for earning the interest income and, if so, to allow deductions under section 57.

Court's Reasoning and Analysis

The Tribunal first considered the condonation application for the delay of 115 days in filing the appeal. The assessee's explanation was that it became aware of the impugned order only on 08.09.2022 via an e-mail from the Demand Facilitation Centre and had taken steps thereafter. The assessee also relied on multiple judicial authorities in support of condonation. After hearing rival submissions and perusing the record, the Tribunal concluded there was "sufficient cause" and no laches attributable to the assessee, and—relying on the judicial pronouncements cited—condoned the delay and proceeded to decide the appeal on merits.

On the merits, the Tribunal examined the PCIT's decision under section 263 to set aside the AO's assessment dated 26.12.2017. The PCIT had applied the Supreme Court decision in Totagar's Co-operative Sale Society Ltd. v. ITO (2010) and the jurisdictional High Court decision (Prl. Commissioner v. Totagars, 2017) to conclude that interest income from investments with co-operative banks was not entitled to deduction under section 80P and thus the AO's order was not in accordance with binding judicial pronouncements.

The Tribunal noted Explanation 2(d) to section 263(1) of the Income-tax Act, which provides that an assessment order not made in accordance with the judgment of the jurisdictional High Court or the Supreme Court shall be deemed to be erroneous and prejudicial to the interest of the revenue. Applying that statutory provision and the cited precedents, the Tribunal held that the PCIT correctly set aside the AO's order under section 263.

The Tribunal then considered the assessee's limited submission that, if the interest income is taxed as "income from other sources" (section 56), the assessee is nonetheless entitled to deduct proportionate administrative and other expenditure incurred in earning that interest under section 57. Although this specific plea had not been raised before the PCIT, the Tribunal observed that the Act envisages taxing only net income (income after allowable expenses) and, in light of the Karnataka High Court decision in Totagars (2015) 58 Taxmann.com 35, the Tribunal concluded that the plea must be entertained.

Consequently, the Tribunal restored the case to the file of the Assessing Officer with a direction: the AO is to examine whether the assessee incurred any expenditure for earning the interest income assessed under the head "income from other sources", and if so, allow the relevant deduction under section 57. The AO is to examine this issue untrammelled by the PCIT's directions in the impugned order under section 263.

Holding and Implications

Core Ruling: The Tribunal condoned the delay of 115 days in filing the appeal, held that the PCIT was justified in setting aside the AO's order under section 263 (since the AO's order was not in accordance with binding judicial pronouncements), and restored the case to the Assessing Officer to examine, in the first instance, whether the assessee is entitled to deductions under section 57 in respect of expenditure incurred in earning the interest income. The appeal was partly allowed for statistical purposes.

Implications and consequences:

The Assessing Officer is directed to examine whether the assessee incurred expenditure for earning the interest income assessed under "income from other sources", and if so, to allow deduction under section 57; this examination is to be made free from any fetters imposed by the PCIT's direction under section 263.
The PCIT's invocation of section 263 to set aside the AO's order was upheld by the Tribunal to the extent that the AO's order was inconsistent with binding decisions of higher courts (notably the Supreme Court in Totagar's and the jurisdictional High Court decisions).
The Tribunal did not purport to create any new legal precedent; it applied existing Supreme Court and High Court authorities (as cited) and directed factual and consequential examination by the AO with respect to allowable deductions under section 57. The order is therefore directed at the parties' rights and liabilities in this particular assessment; the Tribunal expressly restored the matter for fresh consideration on the subsidiary issue of allowable expenses.

Disposition: Order pronounced on 02 November 2022. The appeal is partly allowed for statistical purposes; copy of the order was directed to the parties and specified officers as listed in the Tribunal's order.

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Gnana Shale Souhardha Co-Operative Limited, Bangalore v. Principal Commissioner Of Income Tax, Bengaluru-6, Bengaluru

IN THE INCOME TAX APPELLATE TRIBUNAL

BANGALORE BENCHES "B", BANGALORE Before Shri George George K, JM & Shri Laxmi Prasad Sahu, AM ITA No.887/Bang/2022 : Asst.Year 2015-2016

M/s.Gnana Shale Souhardha Co- operative Limited 147/3, Laxmi Nivasa Sanjay Nagar Main Road Sanjaynagar Bangalore – 560 094. PAN : AABAG063P.	v.	The Principal Commissioner of Income-tax, Bangalore – 6.
(Appellant)	(Respondent)

Appellant by : Sri.S.V.Ravishankar, Advocate

Respondent by : Ms.Susan D George, CIT -DR

Date of

Date of Hearing : 01.11.2022 Pronouncement : 02.11.2022

O R D E R

Per George George K, JM :

This appeal at the instance of the assessee is directed against Principal Commissioner of Income-tax's (PCIT) order dated 20.03.2020. The relevant assessment year is 2015-

2016.

2. There is a delay of 115 days in filing this appeal. The delay of 115 days is after excluding the period from 15.03.2020 to 30.05.2022, in view of the judgment of the Hon'ble Apex Court in SMW(C) No.3 of 2020 dated 23.09.2021 due to outbreak of Covid-19 pandemic. The assessee has filed a condonation petition as well as an Affidavit of CEO of the assessee, stating the reasons for belated filing of the appeal before the Tribunal. It is stated in the condonation petition

that the assessee came to the knowledge of the impugned order only on 08.09.2022 when it received a mail from Demand Facilitation Centre, Income Tax Department with respect to the outstanding demand of the assessee, to which it submitted reply on 14.09.2022, thereafter it was realized that the order u/s 263 of the I.T.Act was passed by the PCIT. It was also stated that the order of the Assessing Officer giving effect to the PCIT's order was passed on 30.03.2021, against which an appeal was filed before the CIT(A) on 27.09.2022. It was prayed that the Tribunal may take a lenient and compassionate view and delay of 115 days in filing the appeal before the Tribunal may be condoned. It was also prayed that the assessee would be put to great hardship and irreparable injury whereas no hardship or injury would be caused to the Revenue, if this application of condonation of delay is allowed. In this context, the learned AR had relied on the following judicial pronouncements:-

(i) Collector, Land Acquisition v. MST.Katiji and Others (1987) 167 ITR 471 (SC).

(ii) Concord of India Insurance Co.Ltd. v. Smt.Nirmala Devi & Others 118 ITR 507 (SC).

(iii) Radha Krishna Rai v. Allahabad Bank & Others (2009) 9 Supreme Court Cases 733.

(iv) CIT v. West Bengal Infrastructure Development Finance Corporation Limited (2011) 334 ITR 269

(SC).

(v) Commissioner Of Income Tax & Anr. v. Isro Satellite Centre, in ITA No.532 of 2008 and other batch of appeal order dated 28.10.2011 (Karnataka)

(vi) Smt.Shakuntala Hegde, Legal Heir of Mr.Ramakrishna Hegde v. ACIT in ITA No.2785/Bang/2014 (order dated 25.04.2016)

(vii) CIT v. K.S.P.Shanmugavel Nadar (1987) 30 Taxmann 133 (Madras)

(viii) M/s.Midas Polymer Compounds Pvt. Ltd. v. ACIT in ITA No.288/Coch/2017 (order dated 25.06.2018)

(ix) Anatek Services Pvt. Ltd. v. ACIT in ITA No.102 of 2008 (judgment dated 11.02.2022) (Bombay)

3. The learned Departmental Representative was duly heard.

4. We have heard rival submissions and perused the material on record. On perusal of the reasons stated in the petition for condonation of delay for belated filing of the appeal before the Tribunal, we are of the view there is sufficient cause and no latches can be attributed to the assessee for belated filing of this appeal before the Tribunal. In this context, we rely on the judicial pronouncements, cited supra. Therefore, the delay of 115 days in filing this appeal before the Tribunal is condoned and we proceed to dispose of the same on merits.

5. The grounds raised read as follows:-

"1. The order passed by the learned Principal Commissioner of Income Tax, Bengaluru-g, passed under section 263 of the Act is so far as it is against the, Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.

2. The notice issued for initiation of proceedings under section 263 of the Act is bad in law.

3. The Learned PCIT is not justified in law in invoking the jurisdiction under section 263 of the Act 'and setting aside the order of the learned assessing officer as being "erroneous and prejudicial to the interest of the revenue".

4. The learned PCIT is not justified in law in holding that the order passed by the assessing officer is bad in law, without appreciating that there was no error in the orders passed, much less prejudicial to the interest of revenue, on the facts and circumstances of the case.

5. The learned PCIT failed to appreciate that the provisions of section 263 of the Act shall be attracted only when the order is both erroneous and prejudicial to the interest of revenue and since the order passed under section 143(3) of the Act was not erroneous, much less prejudicial, the invoking of section 63 was not warranted on the facts and circumstances of the case.

6. Grounds on Merits of the Case:

a. The learned PCIT was not justified in appreciating that the directions of the Supreme Court has not been followed, while directing the assessing officer to make a disallowance, on the facts and circumstance of the case.

b. The learned CIT was not justified in appreciating that the interest income on fixed deposits, when considered under the head other sources, the interest expenditure incurred was also required to be set off against the income, on the facts and circumstances of the case.

7. The appellant craves to add, alter, amend, substitute, change and delete any of the grounds of appeal.

8. For the above and other grounds that may be urged at the time of hearing of the appeal, the Appellant prays that the appeal may be allowed and justice rendered.

6. The brief facts of the case are as follows:

The assessee is a co-operative society, providing credit facilities to its members. For the assessment year 2015-2016, the return of income was filed on 21.09.2015 declaring `Nil' income after claiming deduction u/s 80P of the I.T.Act. The assessment was completed vide order dated 26.12.2017 u/s 143(3) of the I.T.Act by accepting the returned income. The PCIT issued notice u/s 263 of the I.T.Act, since accordingly to him, the assessee had earned interest income of Rs.15,08,488 on account of investments made with other co-operative banks and the said income is not entitled to deduction u/s 80P(2)(a)(i) and 80P(2)(d) of the I.T.Act. To the notices issued,

the assessee filed written submission dated 16.03.2022, which is reproduced at para 3 of the impugned order of the PCIT. The contention raised by the assessee was rejected by the PCIT. The PCIT by following the judgment of the Hon'ble Apex Court in the case of Totagar's Co-operative Sale Society Ltd. v. ITO reported in (2010) 322 ITR 283 (SC) and the judgment of the Hon'ble jurisdictional High Court in the case of Prl. Commissioner Of Income Tax v. Totagars Co-Operative Sale Society reported in (2017) 395 ITR 611 (Kar.), set aside the order of the A.O. dated 26.12.2017 as erroneous and prejudicial to the interest of the revenue. The PCIT directed the A.O. to bring to tax the aforesaid interest income by denying the claim u/s 80P of the I.T.Act, in view of the above judicial pronouncements, cited supra.

7. Aggrieved by the order of the PCIT, the assessee filed the present appeal before the Tribunal. The limited submission of the learned AR is that when income is sought to be assessed under the head `income from other sources'', only the net interest income earned from scheduled banks ought to be brought to tax. In other words, the learned AR submitted that the administrative expenses and expenses to earn the said interest income, which is brought to tax u/s 56 of the I.T.Act, ought to be allowed as deduction u/s 57 of the I.T.Act. In this context, the learned AR relied on the judgment of the Hon'ble Apex Court relied on by the PCIT and also the judgment of the Hon'ble jurisdictional High Court in the case of Totagars Co- operative Sale Society Ltd. v. ITO reported in (2015) 58 Taxmann.com 35 (Karnataka).

8. The learned DR supported the order of the PCIT.

9. We have heard rival submissions and perused the material on record. The assessee had earned interest income on investments made with co-operative banks. Such interest income is not entitled to deduction u/s 80P of the I.T.Act in the light of the judgment of the Hon'ble Apex Court in the case of Totagar's Co-operative Sale Society Ltd. v. ITO reported in (2010) 322 ITR 283 (SC) and the judgement of the Hon'ble jurisdictional High Court in the case of Prl. Commissioner Of Income Tax v. Totagars Co-Operative Sale Society reported in (2017)

395 ITR 611 (Kar.). The Explanation 2 (d) of section 263(1) of the I.T.Act states that an assessment order passed not in accordance with the judgment of the Hon'ble jurisdictional High Court or the Hon'ble Supreme Court shall deem to be an order erroneous and prejudicial to the interest of the Revenue. Therefore, the order of the Assessing Officer dated 26.12.2017 passed u/s 143(3) of the I.T.Act allowing interest income on investments with the co-operative banks has been correctly set aside by the PCIT in the impugned order passed u/s 263 of the I.T.Act.

10. As mentioned earlier, the limited submission of the learned AR is that when income is sought to be assessed on the said interest income, the expenses incurred for earning such income would be entitled to deduction u/s 57 of the I.T.Act. The Hon'ble jurisdictional High Court in the case of Totagars Co-operative Sale Society Ltd. v. ITO reported in (2015) 58 Taxmann.com 35 (Karnataka) had held when the assessee-co-operative society earned interest on deposits kept with scheduled banks only the net interest, i.e., the interest

income reduced by the administrative expenses and other proportionate expenditure to earn the said income had to be brought to tax u/s 56 of the I.T.Act. The relevant finding of the Hon'ble jurisdictional High Court in the case of Totagars Co-operative Sale Society Ltd. v. ITO reported in (2015) 58 Taxmann.com 35 (Karnataka), reads as follows:-

"11. Having heard the learned counsel for the parties and perusing the records and in the light of the finding recorded by the Hon'ble Supreme Court that the interest income earned by the appellant falls within the category of "other income" what falls for consideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deduction in respect of proportionate costs incurred as permissible under Section 57.

12. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as "other income" falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from "other sources", the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee.

13. Accordingly, we answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits."

11. The assessee has not raised the plea before the PCIT that it has to be given deduction u/s 57 of the I.T.Act, in respect of expenditure for earning the interest income. However, inspite of such plea not being raised before the PCIT, we are of the view that since the Act prescribes for

taxing only the net income (i.e. total income minus the expenses incurred for earning such income), this plea of the assessee has to be necessarily entertained, especially in the light of the judgment of the Hon'ble jurisdictional High Court in the case of Totagars Sale Co-operative Society v. ITO [2015] 58 taxmann.com 35 (Karnataka). Accordingly, the case is restored to the files of the A.O. The A.O. is directed to examine whether assessee has incurred any expenditure for earning interest income, which is assessed under the head `income from other sources'. If so, the same shall be allowed as deduction u/s 57 of the I.T.Act. The A.O. shall examine the aforesaid issue untrammeled by the direction of the PCIT in the impugned order passed u/s 263 of the I.T.Act. It is ordered accordingly.

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

Order pronounced on this 02^ndday of November, 2022. Sd/- Sd/-

(Laxmi Prasad Sahu) (George George K)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Bangalore; Dated : 02^ndNovember, 2022. Devadas G*

Copy to :

1. The Appellant.

2. The Respondent.

3. The PCIT-6, Bangalore.

4. The Addl.CIT Range 6(3), Bangalore.

5. The DR, ITAT, Bengaluru.

6. Guard File. Asst.Registrar/ITAT, Bangalore

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