Case Law Details

Case Name : Akshaya Souharda Credit Cooperative Limited Vs ITO (ITAT Bangalore)
Appeal Number : ITA No. 2574/Bang/2019
Date of Judgement/Order : 13/03/2020
Related Assessment Year : 2014-15
Courts : All ITAT (7482) ITAT Bangalore (443)

Akshaya Souharda Credit Cooperative Limited Vs ITO (ITAT Bangalore)

The issue under consideration is whether A.O. is correct in re-opening of assessment based on the same material on which he relied at the time of assessment u/s 143(3)?

The assessee is a co-operative engaged in providing credit facilities to its members. The assessee filed its return of income, claiming deduction u/s. 80P (2)(a)(i) of the Act. The assessee’s case was selected for scrutiny and the assessment was completed U/s 143(3) of the I.T.Act accepting the returned income. On examination of the financial statements of the assessee, the AO noticed that the assessee had earned interest on FDs kept with Scheduled banks, which had to be taxed as income from other sources u/s 56 the Act. and hence he has re-opened the assessment u/s 147.

ITAT states that it is only a change of opinion as the A.O. already formed an opinion and allowed deduction u/s 80P of the I.T.Act. Further, there is no tangible fresh material on the basis of which assessment is sought to be reopened. On mere change of opinion, the concluded assessment cannot be reopened as held by the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. 320 ITR 561 (SC). Further, it is to be noted that for reopening the concluded assessment, the Assessing Officer should form an opinion on the basis of same material which is already on record and not from any external sources, which is not justified in law. Hence ITAT quash the reassessment order.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal filed by the assessee is directed against the order of the CIT(A) dated 31.10.2019. The relevant assessment year is 2014-2015.

2. The assessee has raised following grounds:-

“1. That the order of the learned Commissioner of Income-Tax (Appeals) in so far it is prejudicial to the interests of the appellant is bad and erroneous in law and against the facts and circumstances of the case.

2. That the notice issued u/s. 148 is bad in law.

3. That the assessment made u/s. 147 is without jurisdiction and not valid.

4. That the learned Commissioner of Income-tax (Appeals) ought to have quashed the assessment proceedings made u/s. 147 as the assessment completed was not based on the reasons recorded.

5. That the learned Commissioner of Income-Tax (Appeals) erred in law and on facts in disallowing Rs.32,37,381/- claimed as deduction u/s. 80P(2)(a)(i) of the Act on the ground that the appellant is not a Co-operative Society since it is registered under Karnataka Souharda Sahakari Act, 1997.

6. That the learned lower authorities erred in law and on facts in disallowing Rs.32,37,381/- claimed as deduction u/s. 80P(2)(a)(i) of the Act on the ground that the appellant being a Co-operative Society deals with associate members and nominal members.

7. That the learned lower authorities erred in law and on facts in disallowing interest income of Rs.6,06,914/- earned from surplus funds kept as deposits in nationalised Banks and Co-operative banks since they are attributable to the business activities of the appellant which is eligible for deduction u/s. 80P(2)(a)(i) of the Act.

8. That the learned lower authorities erred in law and on facts in disallowing the deduction u/s. 80P(2)( d) of the Act on the interest income earned from deposits kept in the Co-operative Banks.

9. That the learned lower authorities ought to have provided deduction u/s 80P(2)(a)(i) proportionately to the extent of profit from the activities with the regular and associate members.

Each of the above grounds is without prejudice to one another, the appellant seeks the leave of the Hon’ble Income Tax Appellate Tribunal, Bangalore to allow, delete, amend or modify otherwise each of any of the grounds of appeal either before or at the time of hearing this appeal.”

3. The facts of the case are that the assessee is a cooperative engaged in providing credit facilities to its members. For the A.Y. 2014-15, the assessee filed its return of income, claiming deduction u/s. 80P (2)(a)(i) of the Act. The assessee’s case was selected for scrutiny and the assessment was completed U/s 143(3) of the I.T.Act accepting the returned income. On examination of the financial statements of the assessee, the AO noticed that the assessee had earned interest to the tune of Rs.6,06,914 on FDs kept with Scheduled banks, which had to be taxed as income from other sources u/s 56 the Act. A notice u/s 148 of the Act dated 03.11.2017 was issued by the AO, directing the assessee to file the return of income. In response, the assessee filed a letter dated 22.11.2017 requesting the AO to treat the return of income filed on 30.11.2014 as its return filed u/s 148 of the Act. The assessee requested for copy of the reasons recorded which were furnished to it. The assessee filed its objections to the reasons recorded, which the AO disposed of. Notice u/s 143(2) dated 30/05/2018 was served on the assessee. During the reassessment proceedings, the AO disallowed the claim of deduction u/s 80P(2)(a)(i) of the I.T.Act to the extent of interest income of Rs.6,06,914 earned from deposits kept in Nationalised Banks and Co-operative Banks, relying on the decision of the Hon’ble Supreme Court in the case of Totagar’s Co-operative Sale Society Ltd. Vs ITO (2010)188 Taxman 282(SC). The AO also sought for the details of members of the assessee. After examining the details of members of the society submitted by the assessee, the AO held that the assessee was not entitled for deduction u/s. 80P(2)(a)(i) of the Act on the ground that the assessee was providing services of banking/credit facility to the associate and non-associate members and hence the principle of mutuality was lacking. The AO further noted that the assessee, in contravention of its own bye-laws was accepting deposits from and extending loans to nonassociate members. The AO denied the claim of deduction under section 80P(2)(a)(i) of the I.T.Act on the basis of the decision of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. Vs. Assistant Commissioner of Income Tax) Circle 9(l), Hyderabad (2017) 84 taxmann.com 114(SC) wherein the Court held that an assessee cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members if it has carved out a category called ‘nominal members’ and hence the principle of mutuality was compromised.

4. Aggrieved by the order of the Assessing Officer, assessee carried the matter in appeal before the CIT(A), who confirmed the reopening of assessment and also decided the issue against the assessee. Against this, the assessee is in appeal before the Tribunal.

5. Before me, on the reopening of assessment, the learned AR submitted that the Assessing Officer has issued a notice dated 07.12.2017 and furnished the reasons recorded for reopening the assessment u/s 147 of the I.T.Act as “During the financial year 2013-14 relevant to assessment year 2014-15, the assessee society has earned interest income from various banks to the tune of Rs.6,06,914. The interest income earned by the society is on FDs parked with Scheduled Banks, which does not qualify deduction u/s 80P(2)(a)(i) of the I.T.Act. The same has to be taxed as income from other sources u/s 56 of the I.T.Act, 1961.” The assessee was subjected for scrutiny proceedings and order u/s 143(3) was passed on 18.11.2016 accepting the income declared in the return. During the original assessment proceedings, the deduction claimed u/s 80P of the Act was examined. After due examination by the A.O. the deduction was allowed. Therefore, reassessment in view of the deduction u/s 80P will be due to mere change of opinion. It has been held in the following decisions that even if the reassessment is in accordance with the proviso to section 147 of the I.T.Act, it cannot be made on a mere change of opinion. It was also held that even if an assessment is possibly reopened within a period of 4 years from the end of the relevant assessment years, the reassessment would be bad in law if it is on a mere change of opinion. The learned AR relied on the following decisions:-

(i) CIT v. Kelvinator of India Ltd. 320 ITR 561 (SC)

(ii) ACIT v. ICICI Security Primary Dealership Ltd. 348 ITR 299

5.1 The learned AR further submitted that another ground on which the reopening is bad in law is that the so called formation of belief is not based on any external source. It is well settled that in order to reopen the assessment u/s 143(3), the information that led to the belief of the assessing officer that the income has escaped assessment due to the failure of an assessee to disclose truly and fully all material facts should come from an external source. The “material” should be in the form of external material (i.e. other than information or material already available on record) or such material or information furnished by the assessee available on record found subsequently to be false. As the AO is acting on the basis of existing material which was already submitted to the assessing officer during the assessment proceedings, it obviously means that the material is already available on record, the assessee has disclosed such facts and materials and he cannot be accused of any concealment. The learned AR further submitted that it is clear that the alleged formation of belief is based on materials available on record. Therefore it cannot be said that the assessee has failed to disclose fully and truly all material facts. The learned AR submitted that a perusal of the recorded reasons shows that the alleged formation of belief is based on the original assessment proceedings. Hence, it is clear that the material for formation of belief has not come from external source. On this ground also, the reassessment is bad in law. To support his case, the learned AR relied on the following judgments:-

(i) CIT v. Ramakrishna Hedge [(2010) 326 ITR 347 (Kar.)]

(ii) CIT v. Stndard Chartered Finance Ltd. [(2012) 207 Taxman 136 (Kar.) (Mag.)] / [(2012) 21 Taxman.com 495 (Kar.)]

(iii) Parixit Industries (P.) Ltd. v. ACIT [(2013) 352 ITR 349 (Guj.)]

(iv) H.K.Buildcon Ltd. v. ITO [(2011) 339 ITR 535 (Guj.)]

(v) Lahneyer Holdings GmbH v. DCIT [376 ITR 70 (Del.)]

Accordingly, the learned AR pleaded that the proposed reopening is bad in law and the assessment order is to be quashed.

6. On the other hand, the learned Departmental Representative submitted that in this case, the scrutiny assessment was completed on 18.11.2016. Subsequently, the judgment of the Hon’ble Kamataka High Court in the case of Pr.CIT Hubballi and Anr. vs. The Totagars Co-operative Sale Society, Sirsi in ITA No.l00066/2016 was delivered on 16.06.2017. On examination of the financial statements of the assessee, it was seen that the assessee had earned interest income from deposits with Scheduled banks, which ought to have been taxed u/s 56 of the Act in line with the aforesaid judgment, hence there was reason to believe that the assessee’s income had escaped assessment. As for the AO’s action in reopening the assessment u/s 147 of the Act, at the stage when the AO examined the financial statements if he was prima facie satisfied that income had escaped assessment, he was competent to take action 147 of the Act to bring to tax any income which had escaped assessment as held by the Hon’ble Supreme Court in ACIT V. Rajesh Jhaveri Stock Brokers P. Ltd. [291 ITR 500]. The Apex court in this case, after considering various decisions rendered by it in the past, construed the words ‘reason to believe’ in section 147 of the Act and held that, if the AO has cause or justification to know or suppose that any income has escaped assessment, then it could be said that the AO had reason to believe that the income chargeable to tax has escaped assessment. The Apex Court further held that the expression `reason to believe’ in section 147 of the Act cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The Apex court held that, at the stage of issue of notice u/s 148 of the Act, the only question to be considered is, whether there was relevant material on which a reasonable person could have formed a requisite belief and not whether the materials would conclusively prove escapement of income. The relevant portion of the said decision is reproduced below:

“16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax ifhe has reason to believe that income for any assessment year has escaped assessment. The word ‘reason’ in the phrase ‘reason to believe’ would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces in Central Provinces Manganese Ore Co. Ltd. VITO (1991) 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is ‘reason to believe’, but not the established fact or escapement if income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the material would conclusively prove the escapement is not the concern at that stage. This is also because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction [see ITO v Selected Dalurband Coal Co. P. Ltd. (1996) 217 ITR 597 (SC); Raymond Woollen Mills Ltd. V ITO [(1990) 236 34(SC)].

6.1 The learned DR further submitted that the scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed conditions were required to be satisfied: firstly, the Assessing officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, and secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material fact necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words, if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment.” Applying the ratio laid down by the Apex court in the aforesaid case, it has to be seen in the present case whether the AO had any cause or justification to form a reasonable belief that income chargeable to tax has escape. assessment. It is clear from the facts of the assessee’s case, that the AO had reason to believe that income to the extent of Rs.6,06,915 had escaped assessment and he was, therefore, justified in invoking that provisions of section 147 of the Act for reopening the assessment u/s 148 of the Act. In this view of the matter, the AO’s action in reopening the assessee’s assessment for the assessment year 2014-15 is held to be justified and the relevant grounds of appeal raised by the should be rejected.

7. I have heard the rival submissions and perused the material on record. In this case, the original assessment was framed u/s 143(3) of the I.T.Act on 18.11.2016, assessing the total income at Rs.Nil. Later on, on examination of the financial statement filed before the Assessing Officer, it was found that the assessee has earned interest income at Rs.6,06,915 on a fixed deposit parked with Nationalized Bank and has claimed as deduction u/s 80P of the I.T.Act. According to the A.O., this income should be taxed as “income from other sources” u/s 56 of the I.T.Act. Hence, the assessee’s case was reopened u/s 147 of the I.T.Act after obtaining approval from Joint Commissioner of Income-tax, Range 6(3), Bengaluru and by recording the reasons as follows:-

“The assessee M/s Akshaya Souharda Credit Cooperative Ltd is assessed to tax vide PAN AABAA2870N before Income Tax Officer, Ward-T, Chikkaballapur. In the instant case scrutiny assessment u/s. 143(3) for the A.Y. 2014-15 was completed by the assessing officer on NIL Income. However, on examination of the financial statement filed before the Assessing Officer, the assessee during the financial year 2013-14 relevant to the assessment year 2014-15 has earned interest income of Rs. 6,06,915/- for the A.Y. 2014-15 on the fixed deposit parked with the nationalised bank and has claimed deduction u I». 80P of Income tax Act, 1961. However, the Interest income earned by the assessee should be taxed as Income from Other Sources u/s. 56 of Income tax Act, 1961. Hence, the assessee’s case was re-opened u/s 147 of Income tax Act, 1.961 after the prior approval of the Joint Commissioner of Income tax, Range 6(3), Bengaluru that “i have reason to believe the interest income on fixed deposits earned by the society which is chargeable to tax a/ s. 56 of the Income tax Act, 1961 for the A. Y. 2014-15 has escaped assessment”

7.1 Now the contention of the learned AR is that it is only a change of opinion as the Assessing Officer already formed an opinion and allowed deduction u/s 80P of the I.T.Act. The learned AR further contended that there is no tangible fresh material on the basis of which assessment is sought to be reopened. In the present case, the original assessment was completed u/s 143(3) of the Act on 18.11.2016 accepting the declared income and the A.O. examined the deduction u/s 80P of the Act and granted the deduction. Therefore, the reassessment in this case was made to withdraw deduction u/s 80P of the Act by treating the interest income under the head “income from other sources” instead of “business income”. This is nothing but change of opinion. On mere change of opinion, the concluded assessment cannot be reopened as held by the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. 320 ITR 561 (SC). Further, it is to be noted that for reopening the concluded assessment, the Assessing Officer should form an opinion on the basis of same material which is already on record and not from any external sources. For reopening an assessment, the Assessing Officer cannot consider the information which is already on record and it should be from outside sources as held by the Hon’ble Karnataka High Court in the case of CIT v. Ramakrishna Hegde [(2010) 326 ITR 437 (Kar.)]. Since there is no new material and on the available material the A.O. has reopened the present assessment. Being so, we cannot uphold the action of the reopening of assessment. For this proposition, reliance is placed on the following judgments, viz., (i) CIT v. Standard Chartered Finance Ltd. [(2012) 207 Taxman.136 (Kar.), (ii) Parixit Industires (P.) Ltd. v. ACIT [(2013) 352 ITR 349(Guj.)], (iii) H.K.Buildcon Ltd. v.ITO [(2011) 339 ITR 535 (Guj.)], and (iv) Lahneyer Holdings GmbH v. DCIT [376 ITR 70 (Del.)]. Accordingly, we quash the reassessment order. Since we have decided the issue on merits, we are refrain from going into other grounds raised by the assessee.

8. In the result, the appeal filed by the assessee is allowed.

Order pronounced on this 13th day of March, 2020.

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