Case Law Details
Gnana Shale Souhardha Cooperative Limited Vs PCIT (ITAT Bangalore)
ITAT Bangalore held that 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.
Facts- The assessee is a co-operative society, providing credit facilities to its members. For AY 2015-2016, the ROI 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.
Aggrieved by the order of the PCIT, the assessee filed the present appeal before the Tribunal.
Conclusion- The Hon’ble jurisdictional High Court in the case of Totagars Co-operative Sale Society Ltd. v. ITO reported in (2015) 58 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.
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.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
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 20152016.
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) CIT & Anr. v. ISRO Satellite Centre, in ITA No.532 of 2008 and other batch of appeal order dated 28.10.2011 (Karnataka)
(vi) 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 Pr.CIT & Anr. v. Totagars Co-operative Sale Society Ltd. 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 Cooperative 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 Pr.CIT & Anr. v. Totagars Co-operative Sale Society Ltd. 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 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 02nd day of November, 2022.
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