Bangalore ITAT Strikes Down Section 270A Penalty on Co-operative Society's Bona Fide Section 80P Deduction Claim

Case Overview

Background and Factual Matrix

A co-operative society, Vande Matharam Vividhoddesha Souharda Sahakari Limited, found itself at the receiving end of penalty proceedings under Section 270A of the Income Tax Act, 1961, despite having its deduction claim accepted by the Assessing Officer on more than one occasion. The dispute revolved around the society's claim of deduction under Section 80P(2)(a)(i) in respect of interest income earned from deposits placed with co-operative banks and scheduled banks.

The assessee had duly filed its return of income on 30/09/2018, claiming the entire income as deductible under Section 80P(2)(a)(i). The case was subsequently selected for limited scrutiny, following which the Assessing Officer, after examining the relevant details, accepted the return and passed an order under Section 143(3) of the Income Tax Act, 1961, without disturbing the deduction.

Chronological Sequence of Events

First Acceptance — Scrutiny Assessment

The assessee's claim under Section 80P(2)(a)(i) was put to scrutiny and the Assessing Officer, having reviewed the documentation, accepted the deduction in the order passed under Section 143(3). No adverse inference was drawn at this stage.

Second Acceptance — First Rectification Order

Subsequently, the Assessing Officer initiated rectification proceedings under Section 154 of the Income Tax Act, 1961. Even in this rectification order dated 08/04/2021, the deduction claimed by the assessee under Section 80P(2)(a)(i) remained undisturbed. The AO was clearly satisfied with the legitimacy of the deduction on two independent occasions.

Reversal — Second Rectification Proceedings

At a later stage, the Assessing Officer initiated a fresh round of rectification under Section 154, this time reversing the benefit previously extended to the assessee. The basis for this reversal was a set of judicial precedents rendered by the Hon'ble Supreme Court and the Hon'ble Jurisdictional High Court, which held that interest income earned from co-operative banks and scheduled banks is not eligible for deduction either under Section 80P(2)(a)(i) or Section 80P(2)(d) of the Income Tax Act, 1961.

Significantly, the rectification order under Section 154 that denied the deduction also proposed initiation of penalty proceedings under Section 270A of the Act for alleged under-reporting of income.

Penalty Proceedings Under Section 270A

Show-Cause Notice and AO's Order

The Assessing Officer issued a show-cause notice dated 21/05/2024 calling upon the assessee to explain why penalty should not be imposed under Section 270A for under-reporting of income. The assessee responded by pointing out that the disallowance of the Section 80P(2)(a)(i) deduction had already been challenged in an appeal filed before the CIT(A) against the rectification order. Despite this clarification, the Assessing Officer proceeded to confirm the penalty under Section 270A.