The Income Tax Appellate Tribunal (ITAT) of Ahmedabad in a recent case allowed a deduction claim made by a Co-operative Society under Section 80P(2)(d) of the Income Tax Act, 1961 (ITA) related to interest income earned from a Co-operative Bank. Consequently the tribunal set aside a revision order passed by the Principal Commissioner of Income Tax (PCIT).
The Assessee, Posun Credit Co-op Society, a co-operative credit society registered under the Gujarat Co-operative Act, filed its return of income on August 3, 2018, declaring “Nil” income.
The society had accepted deposits from its members and advanced loans to them. As part of its income, the Assessee earned revenue from these advances as well as interest from nationalized and co-operative banks. On January 22, 2021, the Assessing Officer (AO) passed an order under Section 143(3) of the tax statute, making an addition of ₹11,58,473, which was attributed to the interest received from nationalized banks, categorizing it as “income from other sources.” However, the AO allowed deductions under Section 80P(2)(d) of the tax legislature for the interest earned from the Kaira District Central Co-operative Bank, which amounted to ₹15,70,347.
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Section 80P(2)(d) of the ITA allows deductions for co-operative societies in respect of income earned from other co-operative societies. In this case, the Assessee had claimed a total deduction of ₹36,18,006, which included interest earned from the Kaira District Central Co-operative Bank. The PCIT, during a review of the case, expressed concerns about whether the AO had conducted sufficient inquiry regarding the Assessee’s entitlement to these deductions. The PCIT argued that the AO allowed the relief under Section 80P(2)(d) without properly examining the implications of Section 80P(4) of the tax legislature, which specifically denies the benefit of Section 80P to co-operative banks.
The PCIT invoked Section 263 of the tax statute, a provision that gives revisional power to the Commissioner of Income Tax if they find that an assessment order is “erroneous and prejudicial to the interests of the revenue.” The PCIT issued a show-cause notice to the Assessee, questioning the validity of the deductions allowed and claiming that the AO did not conduct a thorough inquiry. The PCIT stressed that proper examination should have been carried out in light of Section 80P(4) of ITA, which, according to the PCIT, might have limited the Assessee’s ability to claim such deductions.
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After reviewing the Assessee’s responses and submissions, the PCIT concluded that the AO had not conducted adequate inquiries into the Assessee’s claims and set aside the original assessment order. The PCIT directed the AO to conduct a fresh assessment in accordance with the law.
Aggrieved by this revisionary order, the Assessee filed an appeal before the ITAT.
The Assessee’s counsel before the tribunal argued that the AO had already made full inquiries into the matter during the initial assessment, specifically regarding the deduction under Section 80P(2)(d) of ITA. The Assessee pointed out that the AO had disallowed the interest income from nationalized banks, which demonstrated that a thorough examination was conducted.
The Assessee also cited several judicial precedents, including the decision of the Supreme Court in Vatika Limited (2014), where the court held that in cases where there are multiple judicial decisions, the one more favorable to the taxpayer should be followed. The Assessee further argued that the PCIT’s invocation of Section 263 of ITA was not justified, as it amounted to merely providing a second opinion on a matter that had already been thoroughly considered by the AO.
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The Departmental Representative, on the other hand, supported the PCIT’s decision and referred to the Supreme Court judgment in Totgar’s Co-operative Sale Society vs. ITO (2010), which ruled against allowing deductions under Section 80P for interest earned on deposits from nationalized banks. The Department contended that the PCIT was correct in invoking Section 263 of the tax legislature, as the AO had not properly scrutinized the Assessee’s claim concerning the interest income from the Kaira District Central Co-operative Bank.
After hearing arguments from both parties and reviewing the relevant material, the bench of Ms Suchitra Kamble and Mr Narendra Prasad Sinha concluded that the Assessee’s claim under Section 80P(2)(d) of ITA had been sufficiently examined during the original assessment proceedings. The tribunal noted that the AO had specifically questioned the Assessee regarding its deductions and had disallowed the interest income from nationalized banks, indicating that the matter had been adequately investigated. It was observed that there were binding judicial precedents that supported the Assessee’s claim, and these decisions should have been taken into account by the PCIT.
The ITAT ruled that the invocation of Section 263 by the PCIT was not justified, as the AO had made a proper inquiry into the relevant issues. The tribunal further held that the PCIT’s order, which was based on the contention that no proper inquiry had been conducted, was not sustainable. Consequently, the ITAT set aside the PCIT’s order, allowing the Assessee’s appeal.
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