ITAT Bangalore: Section 80P Deduction Cannot Be Revoked via Section 154 When Legal Issue is Debatable

Overview

The Bangalore Bench of the Income Tax Appellate Tribunal, in the case of ITO Vs Karavali Credit Co-operative Society, has reaffirmed a crucial limitation on the powers of rectification under Section 154 of the Income Tax Act 1961.

The Tribunal held that where the eligibility of deduction under Section 80P on interest income from deposits with co-operative and other banks is a debatable legal question, the Assessing Officer (AO) is not permitted to invoke Section 154 to withdraw such deduction.

Relying on the classic Supreme Court ruling in T.S. Balaram, Income-tax Officer vs. Volkart Brothers, the ITAT reiterated that only a clear, self-evident error can be rectified under Section 154. If the issue involves interpretation, competing judicial views, or requires detailed reasoning, it falls outside the ambit of “mistake apparent from the record”.

In consequence, the Tribunal dismissed the Revenue’s appeal and upheld the order of the CIT(A) cancelling the rectification order passed by the AO.

Factual Background

Return of Income and Original Assessment

  1. The assessee, Karavali Credit Co-operative Society, filed its return of income for AY 2018-19 on 27/09/2018.
  2. It disclosed a Gross Total Income of Rs. 3,88,52,753/-.
  3. A deduction of Rs. 3,88,52,753/- was claimed under Section 80P(2)(a)(i), resulting in NIL taxable income.
  4. The Gross Total Income included interest income of Rs. 5,50,83,385/- from deposits kept with banks.
  5. The case was picked up for limited scrutiny under the E-assessment Scheme 2019, focusing on:
    • Investments/Advances/Loans
    • Deduction from total income under Chapter VI-A

The National Faceless Assessment Centre (NaFAC) completed the assessment under Section 143(3) r.w.s. 143(3A) & 143(3B) on 18/02/2021, accepting the returned income and the assessee’s claim under Section 80P(2)(a)(i).

Subsequently, a minor rectification was done under Section 154 on 19-04-2021, only to correct computation of interest under Section 234C. The Section 80P claim remained undisturbed at that stage.

Trigger for Rectification under Section 154

AO’s Subsequent View on Interest Income

Later, on further verification, the AO observed:

  • The assessee had claimed Rs. 3,88,52,753/- as deduction under Section 80P(2)(a)(i) against the same amount of gross total income.
  • As per the financial statements, the assessee had placed term/fixed deposits of Rs. 51,16,01,397/- with various banks, including co-operative banks.
  • From such deposits, it had earned interest income of Rs. 5,50,83,385/-.

The AO noted that, at the time of the earlier assessment (Section 143(3)) and rectification (Section 154 dated 19.04.2021), deduction under Section 80P(2)(a)(i) had been allowed even on this interest income.

Relying primarily on:

  • M/s Totgars Co-operative Sale Society Ltd vs. ITO (2010) 322 ITR 283 (SC), and
  • PCIT Hubli Vs. M/s Totgars Co-operative Sale Society Ltd, ITA No. 100066/2016 dated 16.06.2017 (Karnataka High Court)

the AO concluded that interest earned from investments in co-operative and scheduled banks was not eligible for deduction under Section 80P, either under Section 80P(2)(a)(i) or Section 80P(2)(d).

The AO reasoned that:

  • Non-compliance with binding decisions of the Hon’ble Supreme Court and the jurisdictional High Court constitutes a mistake apparent from the record, as recognized in:

    • ACIT Vs Saurashtra Kutch Stock Exchange Ltd. (SC) 305 ITR 227, and
    • Kil Kotagiri Tea and Coffee Estates Co. Ltd Vs ITAT (Ker) 174 ITR 579

  • Thus, according to the AO, the allowance of deduction on interest income from co-operative and scheduled banks was an error that could validly be corrected by invoking Section 154.

On this premise, the AO issued a notice dated 15-11-2023 to the assessee proposing rectification of the so-called “mistake apparent from the record”.

Assessee’s Response Before the AO

The assessee submitted a detailed reply on 28-11-2023 (letter dated 27-11-2021), contending:

  • The interest income from co-operative banks is either:
    • Business income eligible for deduction under Section 80P(2)(a)(i), or
    • Income eligible for deduction under Section 80P(2)(d) being interest from investments in co-operative banks.