State Bank Of India Employees' Co.Op. ... vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL " D " BENCH, AHMEDABAD (BEFORE SHRI MUKUL Kr. SHRAWAT, J.M. & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No.492 & 900/AHD/2014 (Assessment Years: 2009-10 & 2010-11)

State Bank of India V/S The CIT, Ahmedabad-1, Employees Co-Op. Credit & Ahmedabad Supply Society Ltd, SBI Main Branch Bhadra, Ahmedabad (Appellant) (Respondent)

PAN: AAAAS 7450B

Appellant by : Shri S.N. Divetia, A.R. Respondent by : Shri Subhash Bains, CIT/D.R

(आदे श)/ORDER

Date of hearing : 19-03-2015 Date of Pronouncement : 26 -03-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. These 2 appeals filed by the Assessee are against the order passed u/s 263 of the Act by CIT, Ahmedabad dated 19.02.2014 and 28.11.2013 for A.Ys. 2009-10 and 2010-11 respectively.

2. Before it was submitted that appeal for A.Y 2010-11 is late by 4 days and the reasons have interalia been stated to due to the nationwide strike of the employees and in support of which the sworn affidavit of the Secretary of the Society has been filed. Considering the reasons furnished and the 2 ITA No 492 & 900/AHD/2014 . A.Y. 2009-10& 2010-11 averments made in affidavit, we are of the view that there was reasonable cause for delayed filing and thus the delay of 4 days is condoned and the appeal for A.Y. 2010-2011 is admitted for hearing.

3. Before at the outset the Ld AR submitted both the appeals are against the order passed u/s 263 and though they pertain to different assessment year but the issue involved in both the years are identical except for the amount and therefore he has common submission to make for both the assessment years and therefore both the appeals can be disposed of together. Ld DR did not object to the aforesaid submission of ld. AR and therefore we proceed to dispose of both the appeals together for the sake of convenience and proceed with the facts for AY 09.10.

4. The facts as culled out from the material on record are as under.

5. Assessee is a co-operative society registered with Dist. Registrar, Gujarat State Co-op Act. It is stated to be registered with the object of accepting deposits from the employees of State Bank of India (SBI), Gujarat region with a view to encouraging thrift and providing credit facilities to them. For AY 2009-10, Assessee filed its return of income for on 21.8.2009 declaring total income of Rs Nil after claiming the entire amount of Rs 29,69,444/- as deduction u/s 80P of the Act. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 24.5.2011 and the total income as filed by the Assessee at Rs Nil was accepted by the AO. Subsequently, on examination of records of assessment, ld. CIT noticed that Assessee had earned interest of Rs 16,14,579/- from SBI which was claimed as deductible u/s 80P. CIT was of the view that only 3 ITA No 492 & 900/AHD/2014 . A.Y. 2009-10& 2010-11 interest/dividend derived by the assessee from its investment from other cooperative society is allowable as deduction. Since SBI is not a cooperative society, the interest of Rs 16.14 lacs earned from SBI was not eligible for deduction under the provisions of s. 80P(2)(d). He accordingly issued notice and called upon the Assessee to show cause as to why the order u/s 263 of the Act not be passed in response to which Assessee interalia objected to the initiation of proceedings u/s 263 and on merits submitted that the AO has rightly allowed the deduction u/s 80P. The submission of the Assessee was not found acceptable to the ld. CIT. He was of the view that the AO has overlooked the provisions of s. 80P(2)(d) and has also failed to conduct any enquiry in respect to interest received by Assessee from SBI and thus there was no application of mind by the AO and thus AO has erred in treating interest received from SBI as deductible u/s 80P(2) of the Act which has resulted in loss to Revenue. He accordingly held the order for A.Y. 2009-10 dated 24.5.2011 passed u/s 143(3) by the AO to be erroneous and prejudicial to the interest of Revenue and therefore cancelled the assessment order and directed the A.O to make the fresh assessment of the total income of the Assessee.

6. Aggrieved by the order of CIT, Assessee is now in appeal before us.

7. Before us, the ld. A.R. apart from reiterating the submissions made before CIT submitted that in the present case the pre-requisite conditions specified u/s 263 were not satisfied and therefore the proceedings u/s 263 lacks jurisdiction and are bad in law. He submitted that u/s 263, the CIT can revise an order passed by the AO only on the satisfaction of twin conditions namely (i) the order is erroneous and (ii) it is prejudicial to the interest of 4 ITA No 492 & 900/AHD/2014 . A.Y. 2009-10& 2010-11 Revenue. If one of them is absent i.e. if either the order of the Revenue is erroneous but is not prejudicial to the interest of the Revenue or if it is not erroneous but is prejudicial to the interest of Revenue - recourse cannot be had to s. 263(1). He further submitted that the error envisaged by s. 263 is not one which depends on possibility or guesswork but it should be an actual error either of facts or of law. He further submitted that when two views are possible and the AO has taken one view with which the CIT does not agree, the order of the AO cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the AO is unsustainable in law and for the aforesaid proposition he relied on the decision in the case of Malabar Ind.

Co Vs CIT (2000) 243 ITR 83 (SC). He also relied on the decision of Hon'ble Apex Court in the case of CIT vs Max India Ltd (2007) 295 ITR 282 (SC) for the proposition that where two views are possible and the ITO has taken one view with which the CIT does not agree, the order of the ITO cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law. With respect to the issue of claim of deduction u/s 80P, the Ld AR submitted that during the course of assessment proceedings, A.O, apart from raising various query, AO vide notice u/s 142(1) dated 29.4.2011, had raised a specific query with respect to the claim of deduction u/s 80P (the copy of which is placed at page 37 of the paper book) and the query of the AO was also replied by the Assessee vide its reply dated 9.5.2011 (the copy of which is placed at page 34 & 35 of the paper book). The Id. A.R. therefore submitted that after considering the submissions of the Assessee and on being satisfied by the replies given by Assessee, the Assessee was allowed the deduction u/s 80P.

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8. On the merits of the case ld. AR submitted that Assessee is a cooperative society formed by the employees of SBI Gujarat Circle under the Gujarat Co-operative Societies Act 1961 in the category of Employees Co-op. Credit society for the purpose of encouragement of savings and providing credit facilities to the members of the society. He further submitted that the assessee is not engaged in any other activity other than giving credit facility to its members who are employees of SBI. He further submitted that the income generated by the Assessee is mainly on account of differential rate of amount of deposits received from the members and the amount of loans given to the members. He therefore submitted that the income generated is only from the contributions received from the members and Assessee does not deal in any way with any other person other than its members. He further submitted that SBI deducts the contribution from the salary of the employees and the collective contribution received on account of members is remitted to the Assessee generally on the 1st of every month. The amount of loan is given to the employees on the fixed day of the month (around 15th of month) and not every day. During the intervening period, the idle money collected by the Assessee is deposited with SBI for the purpose of earning interest. As and when the amount is required, the deposits with SBI are liquidated and utilized for the purpose of the activities of the Assessee. He therefore submitted that the deposit of amount with SBI is incurred during the course of business and is part of its activity and cannot be seen in isolation. He further relied on the decision in the case of CIT vs. Jafari Momin Vikas Co- Operative Credit Society Ltd (2014) 362 ITR 331 (Guj). He further submitted that the decision of Apex Court in the case of The Totgars Co- Operative Sale Society Ltd. vs. ITO (2010) 322 ITR 283 is not applicable to the present case. The Id. D.R. on the other hand supported the order of CIT.

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He further submitted that when A.O has allowed the claim without any discussion, the order was erroneous and prejudicial to the interest of the Revenue and for which he placed reliance on the decision in the case of CIT vs. Infosys Technologies Ltd. 17 Taxman.com 203 (Karnataka). He also placed reliance on the decision in the case of CIT vs. Usha International Ltd. 348 ITR 485 (Del.) and other decisions. He further submitted that by setting aside the order of A.O no prejudice would be caused to Assessee as the Assessee will be getting an opportunity to represent its case once again. He thus supported the order of CIT.

9. We have heard the rival submissions and perused the material on record. The issue in the present case is above the invoking of provisions of Section 263 by CIT.

10. S. 263(1) of the Act, the powers under which CIT has assumed power for revision reads as under:

"The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment."

11. The reading of the above provisions makes it very clear that the power of suo motu revision u/s 263(1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist.

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Two circumstances must exist to enable the Commissioner to exercise power of revision u/s 263, namely (i) the order is erroneous (ii) by virtue of being erroneous prejudice has been caused to the interests of the Revenue.

12. Hon'ble Apex Court in the case of Malabar Industrial Co Ltd Vs CIT (2000) 243 ITR 83 (SC) has held that CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue--recourse cannot be had to s. 263(1). It was further held that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO; when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.

13. In the present case , it is an undisputed fact that the Assessee is a cooperative society registered under the Gujarat Cooperative Societies Act 1961 which is formed by the members of the employees of SBI, Gujarat Circle. The main object of the Assessee is to receive the contributions from the members from their salaries received from SBI on monthly basis. Out of the corpus received by way of share capital and contribution from members, the Assessee gives loans to the members as per their requirements. The income of the Assessee is from the interest that it earns on the credit faculties which is extended to its members. It is the Assessee's contention that the money 8 ITA No 492 & 900/AHD/2014 . A.Y. 2009-10& 2010-11 that is received from the members is not kept idle and is therefore deposited with SBI from which also it earns interest and therefore the deposits with SBI should not been seen in isolation.

14. Under Section 80P(2)(a)(i) of the Act, the profits and gains of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is exempt. What is exempt is the business income attributable to the activities of banking or providing credit facilities to the members which is included in the gross total income of the society. Section 80P(2) provides that the deduction would only be available to the whole of the amount of profits and gains attributable to its activities meaning thereby that the deduction will be allowed only when there is direct or proximate connection with or nexus to the income and the business carried on by the Society. It is also an undisputed fact that the Assessee has earned interest from the deposits it has placed with SBI (State Bank of India) and it is Assessee's contention that the deposits with SBI is to ensure that the funds received from the members on the regular basis is not kept idle and thus earn interest. Here it will be relevant to note that Section 80P(2)(d) provides that interest and dividend received by a cooperative society from investments with other cooperative society is exempt from tax. It is also an undisputed fact that SBI is not a cooperative society and therefore the interest received from SBI cannot be considered to be exempt u/s 80P(2)(d) of the Act. In the present case, the interest income earned on extending credit facilities by the Assessee to its members will be business income as there exists nexus between the income and the business of the society, which is extending credit facility to its members but it cannot be said that there is such nexus between the interests earned on deposits made with the SBI. It may be true 9 ITA No 492 & 900/AHD/2014 . A.Y. 2009-10& 2010-11 that deposits are made in banks so that the funds are not kept idle but we are of the view that the motive for making deposits with SBI cannot change the character of interest income earned on deposit made from SBI to be one arising from business of providing credit facility to its member. We also find support to our view by the decision of Hon'ble Apex Court in the case of Totgars CCS Ltd (supra) where at Para 10 has held as under:

"10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under s. 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under s. 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is -- whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under s. 28 of the Act? In our view, such interest income would come in the category of "income from other sources", hence, such interest income would be taxable under s. 56 of the Act, as rightly held by the AO.

In this connection, we may analyze s. 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain incomes". The head note to s. 80P indicates that the said section deals with deductions in respect of income of co-operative societies. Sec. 80P(1), inter alia, states that where the gross total income of a cooperative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-society. An income, which is attributable to any of the specified activities in s. 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under s. 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words 10 ITA No 492 & 900/AHD/2014 . A.Y. 2009-10& 2010-11 "profits and gains of business" mentioned in s. 80P(2) of the Act.

In the present case, as stated above, assessee-society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under s. 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities.

Such an amount, which was retained by the assessee-society, was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in s. 80P(2)(a)(i) of the Act or in s. 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the AO was right in taxing the interest income, indicated above, under s. 56 of the Act."

15. Before us, Ld AR has relied on the decision of Hon'ble Gujarat High Court in the case of Jafri Momin Vikas Coop Society (supra) but we find that the aforesaid decision is not applicable to the present facts because in that case the issue before the Hon'ble High Court was as to whether the Hon'ble Tribunal was correct in allowing deduction under section 80P(2)(a)(i) to assessee's society even though same is covered under section 80P(4) r.w.s 2(24) (viia) being income from providing credit facilities carried on by a co- operative society with its member?.

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16. Before us, it is also ld. AR's submission that during the course of assessment proceedings, A.O had raised a specific query with respect to the assessee's claim of deduction u/s 80P and after application of mind the claim was allowed and in such circumstance the exercise of jurisdiction u/s 263 is not permissible. We are not in agreement with the submission of the Ld AR for the reason that though we find that AO had raised a query with respect to claim with respect to deduction u/s 80P but neither there was any query of the AO, with respect to the claim of deduction 80P(2)(d) and therefore no submission of the Assessee, with respect to interest earned from SBI and therefore it cannot be said that there was application of mind by the AO on that issue and for which we also find support by the decision in the case of Gee Vee Enterprises vs. Addl CIT & ORS (1975) 99 ITR 375 (Del) where the Hon'ble Delhi High Court has observed that the 1TO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in s. 263 emerges out of this context. It is because it is incumbent on the 1TO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in s. 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.

17. Considering the facts and circumstances of the case and for the reasons stated hereinabove and relying on the decisions cited hereinabove, we are of 12 ITA No 492 & 900/AHD/2014 . A.Y. 2009-10& 2010-11 the view that the order of the AO which was revised by the CIT in his order u/s 263 was erroneous and therefore exercise of jurisdiction u/s 263 by ld. CIT was justified. We therefore dismiss the ground of Assessee and in the result the appeal of Assessee is dismissed.

18. With respect to A.Y. 2010-2011 before us, since both the parties have admitted that the facts and circumstances of the case of AY 10-11 is also identical to that of AY 09-10, we therefore for the reasons stated hereinabove while dismissing the appeal for AY 09-10 and for similar reasons dismiss the appeal of the assessee for AY 10-11also.

19. In the result, both the appeals of the Assessee are dismissed.

Order pronounced in Open Court on 26 - 03 - 2015.

Sd/- Sd/- (MUKUL Kr. SHRAWAT) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad