Kaira District Co-op. Milk Producers Union Ltd. vs Assistant Commissioner of Income Tax

R. Balia, J.—By notice dated 23-2-1995, the Assessing Officer of the petitioner required the petitioner to furnish the returns of the assessment year 1991-92 u/s 148 of the income tax Act, 1961 (''the Act''). The reason for issuing notice u/s 148 was disclosed in the notice itself which reads as under:

Deduction u/s 80P(2)(d) of Rs. 1.26 crores was wrongly allowed, in view of the provisions of section 80AB as net result of the bank interest and commission is an expenditure of Rs. 2.77 crores. Thus, there is no income from interest from bank is included in the total income, further it is mentioned that interest from Bank is an interest on current account and not on investment.

It is this notice which is the subject-matter of this petition. The petitioner contends that the facts and circumstances of the present case discloses that notice has been issued by the Assessing Officer without application of mind to the facts before him for arriving at a satisfaction to have reason to believe that income chargeable to tax under the Act has escaped assessment and it also discloses that it is a case of mere change of opinion which does not confer jurisdiction on the Assessing Officer to take action u/s 148. In reply to this contention of the petitioner, Mr. Shelat, learned counsel for the revenue urged that as it appears from the assessment order for the assessment year 1991-92 that while considering deduction u/s 80P(2)(d), the Assessing Officer has not taken into consideration the provisions of section 80AB of the Act and, therefore, the Assessing Officer had reason to believe that income chargeable to tax has escaped the assessment which cannot be said to be a mere change of opinion and the action has been initiated with due application of mind. The sufficiency of the material or the final conclusion about the escapement being erroneous or not are not the relevant consideration for examining the validity of notice issued u/s 148 because it depends upon the subjective satisfaction of the assessing authority concerned, who has to hold at a belief about the escapement of income from tax.

It would be pertinent to notice certain facts about the present case in order to resolve the controversy raised before us. The petitioner is a cooperative society of the Milk Producers. Under the provisions of section 80P(2)(d), the cooperative society is entitled to claim deduction in respect of any income by way of interest or dividends derived by it from its investment in any other cooperative society to the extent such income is included in its gross total income. Section 80AB provides that for the purpose of computing deduction under any of the sections except 80N of the Act under heading C of Chapter XVI-A, the amount of income of the nature which is to be considered for deduction is itself first to be computed in accordance with the provisions of the Act before making any deduction under Chapter XVI and it is that amount which is deemed to be an income of the nature that has been included in total gross income of the assessee for the purpose of claiming deduction. Obviously, reading of these two provisions requires the assessing authority to first determine the gross income of the interest or dividends derived by the cooperative society from the investment in any other cooperative society by finding out the receipts on account of interest or dividends on investment by making adjustments of any amount spent for the purpose of earning that income on investment, in accordance with the provisions of the Act. Such adjustments include deduction of outgoing interest and other expenditure incurred by the assessee for the purpose of earning such interest or dividends which is to be considered for deduction u/s 80P(2) (d). The undisputed facts about the assessee are that for the year 1986-87, the Assessing Officer noticed that the assessee had paid huge amount by way of interest on short-term and long-term loans of current account. As deduction u/s 80P(2)(d) is only allowable as net surplus of interest on investment, by adjusting outgoing interest and commission on borrowings it was held by the Assessing Officer that since the net interest income is a negative figure, no deduction u/s 80P(2)(d) is admissible to the appellant. That obviously was the conclusion drawn by the Assessing Officer on the basis of the provisions of section 80P(2)(d) read with section 80AB. The fact that no reference has been made to section 80AB is of little consequence. That conclusion of the Assessing Officer was not accepted in appeal by recording the finding as under:

The 11th ground of appeal is in regard to the deduction u/s 80P(2)(d). The Assessing Officer considered this claim in paragraph 7 of the assessment order. It was noticed by the Assessing Officer that the appellant had paid huge amount of Rs. 1,81,15,962 by way of interest on short term and long term loans on current accounts. Since the deduction u/s 80P(2)(d) is only allowable on the net surplus of interest, the Assessing Officer held that since the net interest income is a negative figure, no deduction under this section is admissible to the appellant. The plea of the appellant that interest is earned only on the deposits with the bank on call money for 2 or 3 days, was not accepted by the Assessing Officer. Before me the arguments made before the Assessing Officer are reiterated. It is stated that whenever there are realisation of sale receipts, which the appellant does not require immediately, call deposits of three or four days duration are made with the cooperative bank and an amount of Rs. 27,33,646 has been earned by way of interest on these short-term deposits. Obviously, for making these deposits the appellant is not making any borrowings and, therefore, as far as this interest income is concerned, it is not income in the hands of the appellant. The fact that the appellant paid interest for its other borrowings made for business purpose is totally irrelevant when we are considering the question of income from this particular source. For earning this income the appellant is obviously not incurring expenditure and, therefore, the entire amount received by the appellant has got to be treated as the net income from this source and, therefore, this entire income has to be considered for deduction u/s 80P(2)(d). The Assessing Officer is, therefore, directed to allow the necessary deduction to the appellant.

The claim of the assessee in this regard were also accepted up to assessment year 1989-90 in appeals for respective years. From assessment order for the year 1990-91, which has been placed on record as Exh. I it is that this issue about computing the allowable deduction u/s 80P(2)(d) was calling attention of the Assessing Officer for some reason, notwithstanding the appellate orders for each years. The assessment of 1990-91 was completed only after the Assessing Officer had consultation with the Deputy Commissioner and the Commissioner concerned. The assessment order for the year 1990-91 is followed by a detailed office note, relevant portion or which reads as under:

The above-mentioned analysis were also discussed with D.C.(I.T.), Range-9, Ahmedabad on 19-1-1993 and on 1-3-1993. A discussion with D.C., Range-9 and the Commissioner was held on 1 -3-1993 to discuss this analysis.

In view of the abovementioned facts it is held that as there exist no relation between the funds on which interest is earned and interest is paid u/s 80P(2)(d) is allowed on the gross interest earnings.''

The aforesaid conclusion was as a result of discussion in consultation with the Dy. Commissioner as well as Commissioner with the entire material before them. For the assessment year 1991-92 also, the period in consideration in this petition, notice was issued to the assessee on 16-12-1992 for providing him information or clarification in respect of deduction claimed u/s 80P(2)(d) along with seeking other information. A reply to the notice in this regard was submitted on 4-1-1993. This was followed by furnishing a detailed statement of interest from investment showing availability of funds for deposits without the aid of borrowed capital. It is only after this enquiry that the assessment order was made on 28-3-1994 including the entire claim of the assessee u/s 80P(2)(d) in the computation of permissible deduction under Chapter XVI-A which was ultimately restricted to gross total income arrived at by the Assessing Officer before allowing such deduction. The fact that reference has not been made to section 80AB does not detract from the obvious that deduction u/s 80P(2)(d) was considered by the Assessing Officer by taking into account relevant provisions of the Act.

On 23-2-1995, the impugned notice was issued for reopening the assessment year 1991 -92. The petition was filed challenging this notice. In the meanwhile, the assessment order for 1992-93 came to be made by the very same authority who had issued impugned notice which has also been placed on record, from which it appears that on 4-1 -1995, that is to say, not long before issuing the impugned notice, the Assessing Officer asked the assessee detailed Explanation with regard to the claim of deduction u/s 80P(2)(d) in response to which a detailed reply was furnished by the assessee on 12-1-1995 along with details of the interest of investment from cooperative society and after taking into consideration the aforesaid material, the Assessing Officer accepted the entire claim of the assessee for deduction without making any adjustment of interest paid by the assessee on other accounts. The assessment order was made on 29-3-1995 barely about a month after issuance of the impugned notice.

From the above detailed facts, about which there is no dispute, it is obvious that since 1986-87, the assessee is claiming deduction u/s 80P(2)(d) on account of interest earned on investment with another cooperative society on the basis of gross receipt without adjusting against it the interest or commissions paid by it to its bankers on other account. In the year 1986-87, the Assessing Officer has disallowed the claim of the assessee which on an appeal was allowed in favour of the assessee well up to 1989-90, the allowance was made on appeal by Commissioner (Appeals). Thereafter, in the year 1990-91, the allowance was made without such adjustment of deducting interest on other accounts, which was referable to any interest earned on investment by the conscious deliberation which took place between the Assessing Officer, Dy. Commissioner and the Commissioner having full material before these three authorities. We are not expressing any opinion that Assessing Officer was justified in having recourse to these consultations in discharge of his duties, but the fact remains that the Assessing Officer was conscious about the claims made by the assessee, the position of interest earned on investment, vis-a-vis interests on commissions paid by it, and has been treating the investment income having no relation to the interest paid inasmuch as it was consistent finding that no interest has been paid on borrowings for earning interest on investment. Same was the position in 1991-92 after getting the details about the interest income and the break- up of the investment from time to time, from which interest was earned, the very Assessing Officer after issuing the impugned notice on 23-2-1995, barely after one month in pending assessment raising the same issue has again come to the conclusion that interest paid by the assessee is not adjustable against the interest earned on investment allowable for deduction u/s 80P(2)(d). In these circumstances, we are of the opinion that the impugned notices have been issued without due application of mind to the material before it for holding the belief about the escapement of income from tax which is sine qua non while assuming jurisdiction to act u/s 147 read with section 148. No doubt, the belief which the Assessing Officer is required to hold rests upon his subjective satisfaction and the sufficiency or adequacy of material or the seemingly erroneous view does not furnish a ground for judicial review of the action taken by the Assessing Officer, but such subjective satisfaction must rest on application of mind to existing material. Moreover, the satisfaction is required of the assessing authority alone and not of anybody else. Howsoever wide powers he may have, it cannot be used in arbitrary and unreasonable manner. Anything which leads to the conclusion that an action has been taken without application of mind would necessarily be within the ambit of an act which is arbitrary and unreasonable. Moreover, as we have noticed above, there appears to be no material much less any existing material on the basis of which the Assessing Officer could have reason to believe that the income chargeable to tax has escaped the assessment because of provisions of section 80AB. This is further strengthened by the fact that the very same Assessing Officer, in the pending assessment, has come again to the same conclusion as has been taken in the case of the assessee consistently in the earlier assessment orders, which further betrays the apprehension that the Assessing Officer though did not himself hold any belief in reason assigned but he was acting under some constraints to issue the notice which has not been disclosed. Otherwise, it does not stand to reason, that with the aforesaid background since 1986-87 had the Assessing Officer on his own been holding a view that the interest paid by the assessee has been wrongly not considered while considering the deduction u/s 80P(2)(d) on 23-2-1995 having all the materials before him, he could have taken a different view on 28-3-1995.

The apart at best it is a case of mere change of opinion which according to a Division Bench decision of this Court in the case of VXL India Ltd. v. Asstt. CIT [Special Civil Application No. 6291 of 1994, dated 26-4-1995] does not furnish a ground for the assessing authority to assume jurisdiction u/s 147 and it was held in the said decision: Howsoever wide the scope of taking action u/s 148 of the Act be, it does not confer jurisdiction on change of opinion on interpretation of a particular provision earlier adopted by the assessing authority. For coming to the conclusion whether there has been excessive loss or depreciation allowance or there has been under assessment at lower rate or for applying other provisions of Explanation 2, there must be material and that should have nexus to holding such opinion contrary to what has been expressed earlier. Scope of section 147 of the Act is not for reviewing its earlier order suo motu irrespective of there being any material to come to a different conclusion apart from just having a second thought about inferences drawn earlier.

Accordingly, this petition succeeds. The impugned notice dated 23-2-1995 (Annexure J) is quashed. Rule is made absolute. No order as to costs.