Revisionary jurisdiction under Section 263 cannot be reason for failure to deal with an alternative claim

Facts and Issues of the Case

The brief facts relating to the case are that the assessee is a cooperative society engaged in the activity of providing loans and accepting deposits from its members. For the impugned year return of income had been filed by the assessee declaring Nil income after claiming deduction u/s 80P of the Act at Rs.24,87,788/- which was accepted by the Assessing Officer (AO) in the assessment framed u/s 143(3) of the Act, wherein minor addition of Rs.35,138/- was made on account of excess deduction claimed u/s 80P(2)(c)(ii) of the Act. Subsequently, on verification of records the Ld.PCIT noted that the assessee had received substantial interest on Fixed deposits from various banks including ADC Bank and Mehsana Urban Bank which did not qualify for deduction u/s 80P(2)(d) of the Act since the banks from which interest had been earned did not qualify as cooperative society for the purpose of claiming deduction under section 80P(2)(d) of the Act. Finding that the assessing officer had failed to examine this issue and had as a consequence incorrectly allowed assesses claim of deduction of interest income earned from deposits/FDRs under section 80P of the Act, he initiated revisionary proceedings u/s 263 of the Act ,issuing show cause notice to the assessee in this regard. Due reply was filed by the assessee contending that he had claimed deduction of the said incomes u/s 80P(2)(a)(i) of the Act ,which he contended it qualified for, and not u/s 80P(2)(d) of the Act as noted by the Ld.PCIT. He also contended that his claim was allowable as per both the sections, 80P(2)(d)/(a)(i) of the Act. The Ld.PCIT however dismissed the contentions of the assessee discussing in detail the allowability of the claim u/s 80P(2)(a)(i) of the Act, holding that the assessee did not qualify for deduction under the said section. Accordingly he held the assessment order passed to be erroneous and prejudicial to the interest of the Revenue since the AO had allowed this claim of the assessee for deduction of interest income u/s 80P(2)(a)( i) of the Act. He thereafter set aside the order of the AO directing him to pass a fresh order as per law after examining the issue legally and after allowing assessee opportunity of hearing. The detailed findings of the Ld.PCIT in this regard are at para 5 & 6 of his order which shall be referred to and reproduced by us wherever considered necessary.

The assessee has challenged this order before us raising the following grounds:

“1. The Ld. PCIT-3, Ahmedabad has erred in issuing show cause notice u/s 263 of the IT •Act, 1961 dated 15/01/2019 without properly verifying the assessment order where deduction of Rs.24,87,788/- was granted u/s 80P(2)(a)(i) and not u/s 80P(2(d) of the IT Act, 1961 as noted by the office of PCIT-3, Ahmedabad.

2. The Ld. PCIT-3, Ahmedabad further erred in assuming jurisdiction u/s 263 of the IT Act, without properly appreciating the facts of the case and the legal position placed before him that the order passed by the assessing officer is not erroneous in so far as prejudicial to the interest of revenue.

3. The Ld. PCIT-3, Ahmedabad also erred in giving direction to the assessing officer to pass a fresh assessment order as per law after examining properly the legal position discussed by him in his order.

4. The Ld. PCIT-3, Ahmedabad ought to have considered the plea of the appellant society that interest income is not out of investment made by the assessee society but out of its operational funds and therefore question of applying the ratio laid down by Supreme Court in case of M/s. Totgar Co- operative Society 322 ITR 283 does not arise.

The Ld. PCIT-3, Ahmedabad ought to have considered the plea of the appellant society that interest income under dispute qualifies for deduction under section 80P(2) (d) of the Act as well.”

The primary arguments by the Ld.Counsel for the assessee against the of the impugned order of the Ld.PCIT being not in accordance with law, before us was that:

the proceedings u/s 263 of the Act was initiated by the Ld.PCIT finding the assessment order erroneous on the premise of non allowability of claim of deduction of interest income earned as per section 80P (2)(d) of the Act, while it was held erroneous on a different premise of non allowability u/s 80P(2)(a)(i) of the Act.
that the ld.Pr.CIT while so changing track regarding the issue on which the assessment order was found erroneous, had not even confronted this change of track to the assessee and the assessee was not put to notice at all that the Ld.PCIT had found the order of the AO erroneous on account of claim of non allowability of claim of deduction u/s 80P(2)(a)(i) of the Act; Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of PCIT vs Universal Music India Ltd. in Income Tax Appeal No. 238 of 2018 dated April 19, 2022, for the proposition that order passed u/s 263 without confronting the assessee with the issue on which assessment order was found erroneous was not sustainable in law being passed in contravention to the principles of natural justice. Copy of the order was placed before us.
that in any case it had been demonstrated to the Pr.CIT, when the show cause notice was issued to the assessee under section 263 of the Act, that his claim was allowable even as per section 80P(2)(d) of the Act and the Ld.PCIT had held the assessment order erroneous without dealing with this alternate claim of allowability of deduction by the assessee. He pointed out from the communication to the Pr.CIT against the show cause notice, placed before us at P.B page no.25-26 and 27-33 that the assessee had stated that his claim was allowable even under section 80P(2)(d) of the Act ;
that after giving a finding that the assessee had incorrectly claimed deduction under section 80P(2)(a)(i) on account of interest income earned on deposits/FDRs with various banks, the ld.Pr.CIT had still directed the AO to reconsider the issue afresh and pass fresh assessment order as per law after examining the above legal position. He contended that it is clear, that even the Ld.Pr.CIT was not sure, whether the assessee’s claim was in accordance with law or not. Therefore he contended there was no finding of error by the Ld.PCIT in the order of the AO even with regards to the claim of deduction u/s 80P(2)(a)(i) of the Act.

The ld.counsel for the assessee contended that for the above reasons, the order passed under section 263 of the Act, without giving due opportunity of hearing to the assessee to explain its case, and when even the Ld.Pr.CIT was not sure of there being any error in the order of the AO in allowing the claim of deduction in respect of interest earned from the FDRs in the bank and without dealing with the claim of the assessee that the deduction was alternately allowable u/s 80P(2) (d) of the Act, was not in accordance with law and needed to be set aside. The Ld DR per contra supported the order of the Ld.PCIT.

Observation by the court

The court have gone through the order of the Pr.CIT, have heard both the parties and carefully gone through the documents and case laws referred to before us.

As rightly pointed out by the ld.counsel for the assessee, proceedings in exercise of revisionary powers under section 263 of the Act in the present case had been initiated finding that the assessee had been wrongly allowed claim of deduction of interest income earned from the deposits/FDRs in bank as per section 80P(2)(d) of the Act, noting that bank from which interest income was earned did not qualify as “cooperative bank” for the purpose of being eligible to claim deduction.

The order also reveals, as pointed out by the Ld.Counsel for the assessee, that despite initiating the said proceedings finding the assessment order erroneous on account of the assessee being ineligible to claim deduction of interest income as per section 80(P)(2)(d) of the Act, the ld.Pr.CIT went on to hold the assessment order erroneous for the reasons that the assessee was not eligible to claim deduction of the said income as per section 80P(2)(a)(i) of the Act. Thus, facts before us confirm the contention of the ld.counsel for the assessee, that while revisionary proceedings were initiated finding the assessee ineligible for claim of deduction under section 80P on one premise, the order was ultimately found to be erroneous finding the assessee ineligible for claiming deduction on another premise.

Having found so, the court are not in agreement with the Ld.Counsel for the assessee that the fact that the assessee was not put to notice by the Ld.PCIT about the premise on which the assessment order was ultimately found erroneous while assuming jurisdiction u/s 263 of the Act renders the order passed u/s 263 invalid. This issue stands settled by the Hon’ble apex court in the case of Commissioner of Income Tax , Mumbai v Amitabh Bachchan 2016 wherein the Hon’ble apex court laid down the proposition that section 263 of the Act does not require prior notice to be given to the assessee for assuming jurisdiction to proceed under the section. It was held that all that the section requires is hearing the assessee before passing order u/s 263 of the Act ,as failure to afford an opportunity of hearing to the assessee would render the order passed legally fragile on the ground of violation of principles of natural justice. This argument of the Ld.Counsel for the assessee is therefore dismissed.

The next contention that the order of the Ld.PCIT needs to set aside being passed without giving opportunity of hearing to the assessee, the court find, merits consideration. The contention of the Ld.Counsel for the assessee in this regard was that the specific ground on which the assesses claim of deduction u/s 80P of interest income earned from FD’s etc in Banks was found incorrect, being not allowable as per section 80P(2)(a)(i) of the Act, was never confronted to the assessee.

A perusal of the order of the ld.Pr.CIT does not reveal any such opportunity being given to the assessee. The show cause notice issued by the Ld.PCIT to the assessee while assuming jurisdiction u/s 263 of the Act mentions the disallowability of the claim of deduction as per a different provision i.e 80P(2)(d) of the Act. The ld.DR was unable to demonstrate that the assessee was issued notice prior to holding the assessment order being erroneous on account of allowing deduction of interest income u/s 80P(2)(a)(i) of the Act. The court have noted that the assessee in his reply filed to the Ld.PCIT in response to notice issued under section 263 of the Act had pointed out that the Ld.PCIT had wrongly found the deduction claimed by the assessee u/s 80P(2)(d) of the Act and it was clarified that the assessee had claimed deduction u/s 80P(2)(a)(i) of the Act. The assessee the court have noted had also pointed out thereafter that his claim was allowable under both circumstances and cited case laws in support of his contention. But thereafter the Ld.PCIT proceeded to discuss the allowability of the claim only as per section 80P(2)(a)(i) of the Act and finding it to be not allowable ultimately held the assessment order erroneous for allowing the claim of the assessee.

While so discussing the allowability of claim of deduction u/s 80P(2)(a)(i) of the Act, the Ld.PCIT noted that the decisions relied upon by the assessee were to the effect that where operational funds were invested in Banks the interest earned thereon would qualify for deduction u/s 80P(2)(a)(i) of the Act. He thereafter analysized certain facts emanating from the balance sheet of the assessee relating to deposits in Banks made by it and the outstanding liabilities of the assesee and noted that the investments made in banks was 35.6% of its liabilities. From this analysis he derived that having small depositors there was no need to maintain such huge liquidity and even the bye laws of the society do not prescribe maintaining such huge liquidity . He accordingly derived from this analysis that the deposits were made in Banks with the motive of earning interest thereon and not for the purposes of maintaining liquidity. He thereafter went on to hold that the decisions relied upon by the assessee since did not consider this factual aspect they were of no assistance to the assessee.

Considering the fact that the Ld.PCIT had analysed certain facts relating to the issue while arriving at his finding, it was imperative upon him to have confronted the facts and analysis to the assessee for his rebuttal thereon. Not doing so tantamount to taking an adverse view on facts at the back of the assessee, which is in clear violation of the principles of natural justice. The suo moto submissions made by the assessee regarding his eligibility to claim deduction on this ground cannot by any stretch be said to tantamount to having heard the assessee on this premise, more particularly when the Ld.PCIT brushed aside this contention on the basis of certain facts which the assessee was not even put to notice. Any submissions made without putting the assessee to notice relation to. The order passed by the Ld.PCIT is in clear violation of the principles of natural justice and needs to be set aside for this reason alone the court hold.

The court have also taken note of the decision of Hon’ble Bombay High Court in the case of Pr.CIT Vs. Universal Music India P.Ltd., Income Tax Appeal No.238 of 2018 dated 19.4.2022 wherein for identical reasons, where order passed under section 263 of the Act on an issue which was not even raised by the CIT and even show cause notice was silent about it, said order was found to be in violation of principle of natural justice and set aside. Hon’ble High Court has noted the fact and the issue raised under section 263,the issue for passing the order under section 263 not being raised by the CIT in the notice served upon the assessee, and not even being confronted by the CIT before the passing the order.

Hon’ble High Court thereafter distinguished the judgment of Hon’ble Apex court in the case of CIT Vs. Amitabh Bachchan, 69 which was relied upon by the ld.counsel for the Revenue for the proposition that provisions of section 263 did not warrant any notice to be issued and what only required was to give the assessee an opportunity of being heard before reaching his decision and not before commencing the enquiry. Hon’ble High Court held that as per the judgment of Hon’ble Apex Court itself, the assessee needed to be heard before the Commissioner takes a decision on the issue, and in the present case no such opportunity being given to the assessee before the Commissioner reached his decision; the revisionary order had rightly been set aside by the ITAT as in violation of principle of natural justice.

Having said so, the court further find that the order of the ld.Pr.CIT is liable to be set aside also for the reasons that though the assessee had canvassed that his claim of deduction under section 80P(2) qualified under sub-clause (d) thereof, the ld.Pr.CIT chose to dwell on the issue of its allowability under clause (a)(i) of section 80P(2) finding it to be not allowable under the said clause and as a consequence holding the assessment order to be erroneous for allowing the claim of the assessee and did not apply his mind at all, to the claim being alternatively allowable under sub-clause (d) of section 80P(2).

The reply filed by the assessee to the Ld.PCIT during the course of revisionary proceedings dated 01/02/2019, placed before us reveals that the assessee had pleaded that cooperative banks qualified as cooperative societies and therefore interest received from cooperative banks by the assessee in the present case qualified for deduction u/s 80P(2)(d) of the Act.

Since the assessee had demonstrated his claim being allowed alternatively under another clause of section 80P(2), the ld.Pr.CIT ought to have dealt with this claim of the assessee before arriving at a finding of error in the assessment order holding the claim of deduction u/s 80P of the Act as being incorrectly allowed by the AO. It is only after dealing with this alternative claim and finding it to be incorrect that it could be said that the allowance of deduction of interest income had resulted in prejudice to the Revenue, which condition also needs to be satisfied alongwith finding the assessment order erroneous for exercising revisionary jurisdiction u/s 263 of the Act. In the circumstance that the assesses claim is found allowable under section 80P(2)(d) of the Act, the allowance of deduction u/s 80P(2)(a)(i) of the Act by the AO cannot be said to be to the prejudice of the Revenue since in any case the assesses claim of deduction was allowable.

Having not so dealt with alternative claim of the assessee, there could not be said to be any finding of the error causing prejudice to the Revenue in the order of the AO and for this reason also the order passed by the ld.Pr.CIT needs to be aside.

For the above reasons, the court hold that the order passed under section 263 of the Act is not accordance with law. The same is hereby set aside, and order of the AO is restored.