Case Law Details
Proceedings under Section 263 of the Act was initiated for two reasons. First was for allowing deduction of Rs.50,000/- to the assessee u/s.80P(2) (c) (ii) of the Act, when it had a trading loss of Rs.1,11,097.76. Assessee has no grievance on this. Its grievance is limited to revisionary powers exercised by the Id. CIT on interest expenditure claimed and allowed against interest income assessed under the head income from other sources. It is not disputed that assessee had received interest income of Rs.5,44,500/- on its deposits placed with treasury. During the course of original assessment proceedings, assessee had given a reply on this proposal of the Id. Assessing Officer. Pertinent part of the said reply is reproduced hereunder:-
‘Without prejudice to our claim of deduction u/s.80P(2) (a) (i) for the whole interest income on deposits with other institutions we have to state that the deposit with Treasury is part of the amount we have accepted as interest bearing deposits from members. So, we are eligible to claim that portion of interest as expense, which we have paid to the depositors.
In fact, bank deposited Rs.5,00,000/- at Treasury on 31.03.2007 for 78 months at 12% per annum at compound interest and it was matured on 08.10.2007. On maturity we got Rs.5,44,500/- as interest and it is included under interest received on deposits. As per the audited accounts, during the FY 2007-08 we paid Rs.1,25,g800/- as interest on deposits and the total deposit accepted from members as on 31.03.2008 was Rs15,57,94,539/-. Thus the average rate of interest comes to 8.03%. Hence, we are eligible to get deduction @8.03% per annum on Rs.5,00,000/- for 78 months as cost of funds deposited. This comes to Rs.2,60,975/- which may be deducted from the interest received on treasury deposits.. Over and above that we are eligible for deduction of Rs.50,000/- u/s. 80P(2) (c) also’:
A reading of the above reply clearly indicate that assessee had brought to the notice of the Id. Assessing Officer the tenure of the deposits on which it had earned interest of Rs.5,44,500/-. It had also stated that such deposits were made out of funds received from its members on which it paid interest of Rs.1,25,12,800/-, during the relevant previous year. Crux of the reply of the assessee was that if
interest income for 78 months was to be considered for assessment in one go, then cost of funds also was to reckoned for 78 months. What Id. Assessing Officer has stated in the assessment order dated 24.01.2014 which is subject matter of revision by the Principal Commissioner of Income Tax is reproduced hereunder:-
Therefore, the interest income of Rs.5,44,500/- as discussed above being interest income arising on the surplus vested in deposits which surplus was not required for business purposes is treated as income from Other Sources to be taxed under section 56 of the Act. However, the assessee vide letter dated 27.122013 has made a request to consider its claim of a portion of interest expense which the assessee had paid to the depositors. As per the audited accounts, the assessee paid Rs.1,25,12,800/- as interest on deposits and deposits accepted from members as on 31.012008 was Rs15,57,94,539/-. The proportionate interest expense that is allowable u/s.57 of the Act amounts to Rs.2,60,975/-. The balance income assessable under Income from other sources will be Rs. The assessee has also made a claim for deduction of Rs.50,000/- u/s. 80P(2)(c) of the Act.
Thus, when the Id. Assessing Officer allowed claim of expenditure to the assessee, calculating the prorata interest as a ratio of the total interest paid by the assessee during the relevant financial year, he was aware that, that the interest income was for 78 months. We cannot say that it was an erroneous view of law by the Id. Assessing Officer. When interest income was considered by the Id. Assessing Officer for the whole tenure of the deposits including period prior to the beginning of the previous year, interest expenditure also had to be reckoned for the same period. The view of the Principal Commissioner of Income Tax that interest expenditure alone had to be restricted to the proportionate amount for seven months in the relevant previous year, would be against the matching principles. In other words, it would result in a situation where interest income is reckoned for 78 months but expenditure only for 07 months. We can surely say that Id. Principal Commissioner of Income Tax was trying to substitute a legally permissible view taken by the Id. AO with another view which was not a rational one. Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd (supra) has clearly held that revisionary powers u/s.263 of the Act cannot be invoked for substituting a lawful view taken by the Id. Assessing Officer, with another view. Hence, while upholding the revision order in so far as it concerned allowance u/s.80P(2)(c) (ii) of the Act is concerned, we modify and delete that portion relating to treatment of income and expenditure under the head “income from other sources” on the interest income earned by the assessee from its deposits in Treasury, Kottayam. Order of the Id. CIT stands modified to this extent.
