The Commissioner of Income Tax, Chandigarh vs Haryana State Co-operative Land Development Bank Ltd.

N.K. Sud, J.—The assesses is a Cooperative Society engaged in the business of advancing credit to its members for development of agriculture and farming in the State of Haryana. It filed its return of income for the assessment year 1989-90 on 12.5.1989 declaring Nil income as it had claimed a deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961 (for short ''the Act) in respect of its entire business income. The return was processed u/s 143(1)(a) of the Act on 31.8.1989 in which an adjustment to he tune of Rs.11,98,354/- was made by observing that interest received from the employees on the loans advanced to them and misc. income of Rs.43,431/- did not qualify for deduction u/s 80P(2)(a)(i) of the Act.

The assesses filed an application u/s 154 of the Act claiming that the adjustment of Rs. 11,98,354/- had been wrongly made, but the same was rejected by the Assessing Officer vide order dated 30.3.1990. He observed that the deduction admissible u/s 80P(2)(a)(i) of the Act was in respect of the income of a Cooperative Society carrying on of the business of banking or providing credit facilities to its members. He was of the view that as per bylaws of the assesses the activity of earning interest on loans from its staff members could not be said to be business of banking or providing credit facilities to its members and therefore, income from the same was not eligible for deduction u/s 80P(2)(a)(i) of the Act.

The assessee preferred an appeal before the Commissioner of Income Tax (Appeals), Chandigarh, which was accepted on the ground that since the assessee was engaged in the business of providing credit facilities to its members for the development of agriculture and farming in the State of Haryana, its entire income was exempt u/s 80P(2)(a)(i) of the Act. He further held that even the misc. income being incidental to carrying on of the business of banking of the assessee was eligible for the aforesaid deduction. For this purpose, the Commissioner of Income Tax (Appeals) referred to the Appellate order of the earlier year whereby disallowance of deduction on the same grounds had been deleted.

Aggrieved by the order of the commissioner of Income Tax (Appeals), the Revenue filed an appeal before the Income Tax Appellate Tribunal (for short ''the Tribunal'') which was dismissed vide order dated 15.7.1998. The Tribunal observed that the Assessing Officer had allowed exemption in respect of interest from all others except from the staff members. The Tribunal was of the view that even the interest earned from the employees had arisen from the business of banking as no distinction could be made between giving of loans to the staff members and advancing loans to the "borrowers. Thus relying on the observations of the Supreme Court in H. K. MELINKERI Vs. APPROPRIATE AUTHORITY and Another, , it held that the income from interest on loans advanced to the staff members was eligible for deduction u/s 80P(2)(a)(i) of the Act. The Tribunal also upheld the assessee''s claim for deduction under the said provision in respect of the misc. income on the ground that the same was incidental to carrying on of the business of banking by the assessee.

The Revenue moved an application u/s 256(1) of the Act requiring the Tribunal to refer the following question of law for determination by this Court:

"Whether on the facts and in the circumstances of the case the Hon''ble I.T.A.T. was right in law in deleting addition of Rs. 11,98,534/- by holding that the said income of interest earned by the Society on loans advanced to its employees is also covered for exemption under the provisions of section 80P(2)(a)(i) of the Income Tax Act, 1961"

The Tribunal rejected the same vide order dated 4.1.1999 on the ground that no referable question of law arose out of the order of the Tribunal as the finding of the Tribunal was based on the decision of the Apex Court in Madhya Pradesh Co-operative Bank Ltd. ''s case (supra). It was further observed that the finding about the misc. income being incidental to carrying on the of the business of banking was a question of fact.

The Revenue has now filed this petition u/s 256(2) of the Act seeking a direction to the Tribunal to state the case and refer the question of law proposed by it for the opinion of this Court.

We have heard Mr. R.P. Sawhney, Sr. Advocate, for the petitioner.

It is an admitted position that disallowance of the deduction claimed u/s 80P(2)(a)(i) of the Act has been made by way of an adjustment u/s 143(1)(a) of the Act. It is also an admitted position that no disallowance out of deduction claimed against such income had been made in the past and, if made, was deleted in appeal. Thus under such circumstances the deduction claimed by the assessee u/s 80P(2)(a)(i) of the Act could not possibly be said to be prima facie inadmissible warranting disallowance by way of adjustment u/s 143(1)(a) of the Act. It is by now a well settled proposition of law that under the first proviso to section 143(1)(a) of the Act, the Assessing Officer can make an adjustment in income by disallowing deduction claimed in the return if it is prima facie inadmissible on the basis of information available in such return or accounts or documents accompanying the return. Reference in this behalf can be usefully made to the judgment of the Bombay High Court in Khatau Junkar Ltd. and another Vs. K.S. Pathania and another, . In this case, the Bombay High Court analysed the change in position regrad-ing summary assessment brought about by the Direct Tax (Amendment) Act, 1987 w.e.f. 1.4.1989. It was noticed that under the new provision only an intimation had to be sent by the Income Tax Officer as set out in section 143(1)(a) of the Act. Since there was no assessment, the right of the assessee to object to a summary assessment had also been deleted. Referring to Clause (iii) of the proviso to Section 143(1)(a), it was held that a deduction could only be disallowed by way of an adjustment if it was prima facie in admissible on the basis of the information available in the return, accounts or documents. In the final analysis, the Court held as under: -

"It is also pointed out by the petitioners that it is only u/s 143(1)(a) that there is a provision for refund being granted to the assessee, if it is found that the amount paid by the assessee by way of tax and interest is in excess of what is due. Even u/s 143(2), there is no provision for refund of any excess tax or interest paid. It is, therefore, necessary that the Income Tax Officer determines the tax and interest due or refund payable on the basis of the return at the intimation stage and grants it. Refunds cannot be withheld by disallowing deductions not disallowable on the basis of the return. Moreover, there is a provision for levy of additional tax u/s 143(1A). In case the intimation shows that certain claims of the assessee have been disallowed and more tax or interest is liable to be paid by the assessee, additional tax of 20% can be levied as per that section. Even if the assessee succeeds in a regular assessment thereafter, there is no provision for refund. If, therefore, the power of the Income Tax Officer, at the state of intimation, to disallow claims in the manner claimed by the respondents is accepted, the consequences for the assessee would be grave. We have no reason to hold that such was the intention of the Legislature, either from the language of Section 143(1)(a) or even from the objects and reasons for the amendment in question, which would indicate the circumstances giving rise to the amendment.

On the other hand, if Section 143(1)(a) is interpreted as it should be, there is no prejudice to the Department. Because, in every case where the revenue desires to have evidence in support of any claim, a notice can always be issued u/s 143(2), a regular assessment made and the excess amount due recovered. Interpreting section 143(1)(a) in the manner suggested by the revenue would cause serious prejudice to the assesses who may be deprived of deductions which may be legitimately due to them without any notice, without any hearing and without any chance being given to him of producing evidence in support of the claim, however, legitimate it may be. It would also entail for the assessee a denial of a right of refund, if any, u/s 143(1)(a) and would further entail additional tax u/s 143(1A). There is no warrant for such an interpretation which is contrary to the express terms of Section 143(1)(a)."

In the light of the aforesaid legal position, could a credit entry of interest received from the employees in the profit and loss account of the assessee-society which is engaged in the business of advancing credits to its members lead to a prima facie inference that it does not pertain to its banking business? The answer, in our considered view, is in the negative. The matter needs to be enquired into and determined on the basis of the evidence. Further even if such an activity were to be held to be non-banking, it would have to be determined as to whether it has resulted income or loss which would then need to be quantified to see the extent of deduction claimed u/s 80(P)(2)(a)(i) of the Act. Without such quantification, it could not be said whether the to total deduction claimed by the assessee u/s 80P(2)(a)(i) of the Act also included deduction in respect of such a non-banking activity. In these circumstances, we are of the considered view that the disallowance made in the present case u/s 143(1)(a) of the Act was itself uncalled for. Once that is the position, the question sought to be referred for our consideration is merely of academic interest as whatever be the result on merits, the disallowance made u/s 143(1)(a) of the Act cannot be sustained.

There is another angle also. It has been found as a fact by the Tribunal that the assessee-bank had borrowed money at interest rates upto 11 percent and had advanced loans to its staff members at a concessional rate. It is, therefore, evident that in the activity of advancing loans to the staff members, the interest paid on the money borrowed for this purpose would have to be set off against the interest-charged from the staff members. The net result in this activity would be loss. Thus in the absence of any income from this activity, no deduction u/s 80P(2)(a)(i) could have been claimed. In view of this also, the question sought to be referred to us, is merely of academic interest.

In view of the above, we hold that no referable question of law arises from the order of the Tribunal. The petition is, accordingly, dismissed.

Sd/-JawaharLal Gupla,J.