Deduction Under Section 80P Allowed on Return Filed Pursuant to Section 148 Notice Sets Aside PCIT Order

 Co-op Bank and NKGSB Co-operative Bank and basis that, the case of the assessee was opened for scrutiny. Thereafter, the assessment order u/s. 147 r.w.s. 144 r.w.s. 144B of the Act, was passed on 29.01.2025, wherein the assessed income was determined at Rs. 41,090/- as declared by the assessee in return of income filed in response to notice u/s. 148 of the Act.

3. Subsequently, the assessment records were examined and the ld. PCIT observed that the assessee has shown interest income of Rs. 20,26,566/- and claimed deduction u/s. 80P(2)(d) of the Act, and referring to the provisions of Section 80AC, it was held that since the assessee has not filed any return u/s. 139(1) of the Act, therefore, the order passed u/s. 147 r.w.s. 144 r.w.s. 144B is erroneous as well as prejudicial to the interest of the Revenue as the Assessing Officer has passed the order allowing the deduction of Rs. 20,26,566/- u/s. 80P(2)(d) of the Act, without inquiring into the claim of the assessee and a show cause was issued to the assessee.

4. In response, the assessee submitted that Section 80AC did not apply to section 80P(2)(d) for A.Y. 2020-21 and it is only by the Finance Act, 2021, which expanded the scope of Section 80AC to all deductions under chapter VIA, Part-C and which is applicable from A.Y. 2021-22 onwards. It was further submitted that the return filed in response to notice u/s. 148 should be treated as return filed in terms of timelines u/s 139(1) and all lawful deductions available under the Act are claimable therein. Further, it was submitted that the matter relating to claim of deduction u/s. 80P was specifically examined by the Assessing Officer and similar deduction was allowed to the assessee in A.Y. 2012-13. Further, reliance was placed on the various Coordinate Benches decisions, wherein, in respect of interest on deposits placed with co-operative banks, the Coordinate Benches have allowed the claim of deduction under section 80P(2)(d) of the Act.

5. The ld. PCIT refers to the amendments brought in by the Finance Act, 2018 and held that from A.Y. 2018-19, timely filing of return of income u/s. 139(1) of the Act has been made a mandatory condition for claiming any deduction under Chapter VIA, Part C and the various decisions relied on by the assessee were distinguished stating that in those decisions, the applicability of mandatory nature of Section 80AC as amended by Finance Act, 2018 were not considered. It was held that the assessment order passed by the Assessing Officer is erroneous insofar as prejudicial to the interest of the Revenue as the deduction under Chapter VIA, Part C has been allowed without examining and enforcing the mandatory condition prescribed u/s. 80AC requiring filing of return of income within due date specified u/s. 139(1) and the assessment order was set aside and the Assessing Officer was directed to withdraw and disallow the deduction claimed u/s. 80P(2)(d) of the Act as the assessee, being a non-filer, has failed to satisfy the mandatory condition prescribed u/s. 80AC of the Act. Against the said order, the assessee is in appeal before us.

6. During the course of hearing, the ld. AR reiterated the contentions raised before the ld. CIT(A). Further, our reference was drawn to the provisions of sub-section (2) to Section 148, wherein it has been stated that the return filed in response to notice u/s. 148 shall be considered as a return required to be furnished u/s. 139 of the Act. Further, it was submitted that the Assessing Officer has duly examined the claim of the deduction u/s. 80P(2)(d) of the Act and the said view is supported by the decision of various Benches of the Tribunal. Therefore, the view so taken by the Assessing Officer cannot be held to be erroneous view and therefore, the order passed by the ld. PCIT be set aside.

7. The ld. DR has been heard, who has relied on the order passed by the ld. PCIT. Further, the ld DR relied upon the decision of the Hon’ble Supreme Court in case of CIT v. Sun Engineering Works (P.) Ltd. 198 ITR 297 (SC) and submitted that being a case of reopening u/s 148 of the Act, the assessee could not have claimed the deduction u/s 80(P)(2)(d) of the Act.

8. In his rejoinder, the ld. AR submitted that the Revenue cannot be allowed to improve upon its case as the contentions advanced by the ld. DR are beyond the scope of the findings and order of the ld. PCIT. It was further submitted that it is a case of assessment and not reassessment as no assessment has happened and concluded earlier in absence of the return of income; and the claim has been made in relation to deposits which were subject matter of notice u/s 148 and the decision of the Hon’ble Supreme Court doesn’t support the case of the Revenue and stand distinguishable.

9. We have heard the rival contentions and perused the material available on record. Admittedly, it is a case where no return of income was filed originally u/s 139(1) of the Act and pursuant to issuance of notice u/s 148, the assessee filed its return of income disclosing interest income on deposits placed with co-operative banks and claiming deduction on such interest income u/s 80(P)(2)(d) of the Act. The Assessing officer didn’t make any additions in respect of bank deposits in respect of which the notice u/s 148 was issued and the returned income was accepted after examination and verification of the claim made by the assessee in respect of interest income on the bank deposits u/s 80P(2)(d) and assessment proceedings were completed u/s 147 r/w 144 r/w 144B of the Act. It is therefore a case of assessment (and not that of reassessment) though completed u/s 147 of the Act in absence of any original return of income.

10. The ld. PCIT has invoked his jurisdiction u/s 263 stating that since the assessee has not filed any return u/s. 139(1) of the Act and at the same time, has claimed deduction u/s. 80P(2)(d) of the Act, the same is hit by the provisions of section 80AC of the Act which the AO has failed to consider/examine and hence, the order so passed by the AO was held to be erroneous in so far as prejudicial to the interest of the Revenue.

11. The findings of the ld. PCIT are limited to applicability of section 80AC of the Act and therefore, the limited question that arises for consideration in the present case is where the assessee files its return of income for the first time in response to notice u/s 148 and assessment (and not the reassessment) has to be undertaken u/s 147, how do one construe the provisions of section 80AC of the Act.

12. There is no dispute that provisions of section 80AC(ii) are required to be complied with and applicable for the impugned assessment year 2020-21. It provides that where in computing the total income of an assessee of any previous year relevant to assessment year commencing on or after the 1^st day of April 2018, any deduction is admissible under any provisions of chapter under the heading “C-deduction in respect of certain income”, no such deduction shall be allowed to the assessee unless the assessee furnishes a return of its income for such assessment year on or before the due date specified under sub-section (1) of section 139 of the Act. The emphasis thereon is on the timelines provided u/s 139(1) and not the return filed originally u/s 139(1) of the Act.

13. In the instant case, given that the return of income has been filed for the first time in response to notice u/s 148, the provisions of sub-section (2) of section 148 are equally relevant. The said provisions provide that the return of income required under sub-section (1) shall be furnished in such form and verified in such manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, apply accordingly as if such return were a return required to be furnished under section 139 of the Act. It further provides that any return of income required under sub-section (1) of section 148 furnished after the expiry of the period specified in the notice under the said sub-section shall not be deemed to be a return under section 139 of the Act.

14. We therefore find that provisions of section 148 mandates that where a return is filed in response to notice u/s 148, all the provisions of the Act, which includes the provisions of section 80AC, shall apply as if such return is a return furnished u/s 139 of the Act. There is thus a necessary nexus which is in-built in the provisions of section 148 and section 80AC and one needs to do a co-joint reading of both the provisions instead of reading each of the provisions on a stand-alone basis or ignoring the one and applying the other provisions. In the instant case, we find that ld. PCIT has failed to take into consideration the provision of sub-section (2) to section 148 of the Act and has referred to provisions of section 80AC on a standalone basis.

15. Therefore, where the return, in response to notice u/s 148, is filed within time prescribed therein, such a return of income shall be taken as a return filed in accordance with section 148 of the Act and the provisions of section 80AC and in particular, the filing of return of income within time prescribed u/s 139(1) are said to be complied with. In the instant case, admittedly, the assessee has filed its return of income on 12/04/2024 within the time limit prescribed for filing the return of income in terms of notice u/s 148 dated 18/03/2024 and it is not even the case of the Revenue that the return of income has not been filed within the time allowed u/s 148(2) of the Act and therefore, where such a return of income has been filed u/s 148, the same is in compliance with the requirements of section 80AC of the Act.

16. It is a settled position that while the Revenue can support and defend the order of the ld. PCIT, the contentions needs to be restricted in the context of the reasoning and findings of the ld. PCIT which is emanating from the show-cause and the final order so passed by the ld. PCIT and the same cannot be expanded by way of fresh contentions during the course of hearing before us. Therefore, the contention of the ld. DR that being a case of reopening u/s 148 of the Act, the assessee could not have claimed the deduction u/s 80(P)(2)(d), the said contention is not in context of either the show-cause or the findings of the ld. PCIT while setting aside the assessment order.

17. Having said that, even for academic purposes, if we were to consider the aforesaid contention, we find that the reliance placed by the ld. DR on the decision in case of Sun Engineering Works (P.) Ltd. (supra) is misplaced and founded on an incomplete appreciation of the ratio laid down by the Hon’ble Supreme Court. A careful reading of the judgment makes it abundantly clear that it was a case of reopening where the original assessment stood concluded and it was held by the Hon’ble Supreme Court that while reassessment proceedings cannot be converted into a forum for reopening concluded matters unrelated to escaped income, at the same time, where the matter is reopened, the assessee is not precluded from raising claims which are directly relatable to the income that has escaped assessment and the relevant findings therein read as under:

“As a result of the aforesaid discussion, we find that in proceedings under section 147, the ITO may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of notice under section 148 and where reassessment is made under section 147 in respect of income which has escaped tax, the ITO’s jurisdiction is confined to only such income which has escaped tax or has been under- assessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to reagitate questions which had been decided in the original assessment proceedings. It is only the underassessment which is set aside and not the entire assessment when reassessment proceedings are initiated. The ITO cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters which are not the subject matter of proceedings under section 147. An assessee cannot resist validly initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in 152(2). The words ‘such income’ in section 147 cases under section 152(2) clearly refer to the income which is chargeable to tax but has ‘escaped assessment and the ITO’s jurisdiction under the section is confined only to such income which has escaped assessment. It does not extend to reconsidering generally the concluded earlier assessment. Claims which have been disallowed in the original assessment proceeding cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain income which had escaped assessment because the controversy on reassessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment. A matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to the item sought to be taxed as “escaped income”. Indeed, in the reassessment proceedings for bringing to tax items which had escaped assessment, it would be open to an assessee to put forward claims for deduction of any expenditure in respect of that income or the non- taxability of the items at all. Keeping in view the object and purpose of the proceedings under section 147 which are for the benefit of the revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceeding, unless relatable to “escaped income” and reagitate the concluded matters. Even in cases where the claims of the assessee during the course of reassesament proceedings related to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of ‘reassessment’ cannot be reduced beyond the income originally assessed.”

18. In the present case, the subject matter of notice u/s 148 were the deposits placed by the assesse with the Co-operatives Banks and consequently, the interest income arising on the said deposits were also subject matter of examination and in the return of income filed in response to notice u/s 148, the deduction claimed u/s 80P(2)(d) was in respect of interest income on the same bank deposits which was intrinsically and directly connected with bank deposits. Therefore, the claim so made by the assesse was not extraneous or unrelated to the subject matter of assessment but goes to the computation of the very income sought to be taxed in the assessment proceedings. The decision of the Hon’ble Supreme Court thus supports the case of the assesse rather than that of the Revenue.

19. Further, we find that the matter relating to claim of deduction u/s 80P(2)(d) has been duly examined by the AO as evident from the contents of the assessment order and the claim has been allowed after due application of mind by the AO and which also stand supported by the decisions of the various Benches of the Tribunal where the claim on interest income on deposits placed with co-operatives banks have been allowed and thus, the view so taken by the AO cannot be held to be erroneous in nature.

20. In light of aforesaid discussion and in the entirety of facts and circumstances of the case, we find that the order so passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of the Revenue. The order of the ld. PCIT u/s 263 is accordingly set-aside and that of the AO is sustained.

21. In the result, the appeal filed by the assessee is allowed.