Karnataka High Court: Deduction Under Section 80P Cannot Be Allowed Without Filing Return of Income

Background and Case Overview

In Madhu Souharda Pathina Sahakari Niyamitha Vs ITO, the Karnataka High Court examined whether an assessee, who did not file any return of income at all, could still claim deduction under Section 80P during a best judgment assessment under Section 144 of the Income Tax Act 1961.

The assessee, an Association of Persons (AOP), did not comply with a valid notice issued under Section 142(1) requiring it to file a return for Assessment Year 2017–18. This non-compliance led the Assessing Officer (AO) to complete the assessment under Section 144, determining total income at ₹26,00,810/-.

At the appellate stages before CIT(A) and the Income Tax Appellate Tribunal, “B” Bench, Bengaluru, the assessee claimed that it was eligible for deduction under Section 80P despite non-filing of return, and that Section 80A(5) did not bar such deduction in a case where no return had been filed. Both authorities rejected the claim.

The matter ultimately reached the Karnataka High Court, which upheld the view that:

No deduction under Chapter VI-A (including Section 80P) can be allowed if it is not claimed in a valid return of income.

Factual Matrix

Status and Assessment Year

  • The assessee was assessed in the capacity of an AOP.
  • The dispute related to Assessment Year 2017–18.

Non-Filing of Return and Best Judgment Assessment

  1. The assessee did not file any return of income for AY 2017–18.
  2. The AO issued a notice under Section 142(1) directing the assessee to file its return.
  3. The notice was duly served, but the assessee did not respond or file any return.
  4. In the absence of compliance, the AO invoked Section 144 and completed a best judgment assessment, computing total income at ₹26,00,810/-.

First Appeal Before CIT(A)

  • The assessee challenged the assessment and sought deduction under Section 80P.
  • CIT(A), vide order dated 27.09.2023, dismissed the appeal and upheld the assessment, including the denial of Section 80P deduction.

Second Appeal Before ITAT

  • The assessee carried the matter to the ITAT, Bengaluru, in ITA No. 969/Bang/2023.
  • The Tribunal dismissed the appeal on 02.01.2024, holding that:
    • Section 80A(5) and
    • Section 80AC
      operated as statutory bars against granting deduction under Section 80P in the absence of a return of income and a claim in such return.

The assessee then filed an appeal before the Karnataka High Court challenging the Tribunal’s order.

Arguments Advanced by the Assessee

Counsel for the assessee raised the following key submissions:

1. Entitlement to Section 80P Deduction Despite Non-Filing

  • It was conceded that no return of income had been filed for AY 2017–18.
  • However, the assessee contended that the nature of income and activities made it otherwise eligible for deduction under Section 80P.
  • The argument was that such eligibility should not be defeated merely due to absence of a return.

2. AO’s Duty in a Section 144 Assessment

The assessee argued that:

  • During a best judgment assessment under Section 144, the AO is required to compute income in accordance with law, which includes:
    • granting all eligible deductions,
    • even if the assessee has not filed a return.
  • On this basis, the assessee claimed that the AO ought to have allowed deduction under Section 80P while determining income under Section 144.

3. Interpretation of Section 80A(5)

The assessee’s counsel attempted to limit the scope of Section 80A(5) by contending: