Bhavana Co-op. Credit Society Niyamita Vs PCIT (ITAT Bangalore)
The Tribunal examined the scope of its jurisdiction in an appeal against a revision order passed under section 263 of the Income Tax Act. It reiterated that unlike a regular appeal against an assessment—where additions and disallowances are examined on facts and law—an appeal against a revision order is limited to assessing (1) whether the assumption of jurisdiction under section 263 is valid, (2) whether the Principal Commissioner’s (PCIT) conclusion that the order is “erroneous and prejudicial” is sustainable, and (3) whether due process was followed. The Tribunal emphasized that it cannot uphold the PCIT’s order on grounds not mentioned by the PCIT, relying on binding decisions including Chandrika Educational Trust and Save a Family Plan (India).
The PCIT’s show cause notice stated that the assessee had earned interest income from bank investments, which, according to the PCIT, should have been taxed under section 56 as per the Supreme Court’s decision in Totagars Co-operative Sale Society Ltd. The PCIT claimed that the Assessing Officer (AO) failed to examine this issue, rendering the assessment erroneous and prejudicial to the revenue. The Tribunal noted that the PCIT did not specify which clause of Explanation 2 to section 263 was being invoked.
The Tribunal reviewed section 263, along with judicial interpretations from the Supreme Court and High Courts, including Malabar Industrial Co. Ltd., Dawjee Dadabhoy, and Ashish Rajpal, which collectively establish that jurisdiction under section 263 requires satisfaction of twin conditions: the order must be erroneous, and it must be prejudicial to the revenue. A mere error is insufficient; loss of lawful revenue must be demonstrated. Additionally, when two views are possible and the AO adopts one, that alone does not justify revision.
The Tribunal examined whether the AO had failed to conduct proper inquiry. The assessee, a co-operative credit society, filed a nil return claiming deduction under section 80P(2)(a)(i). The case was selected for complete scrutiny, including verification of Chapter VI-A deductions. The AO issued a detailed questionnaire under section 142(1), seeking information regarding deductions, eligibility, bank accounts, and supporting evidence. The assessee submitted written explanations stating that all income—including interest, fees, and charges—was attributable to its business of providing credit facilities to members and therefore eligible for deduction under section 80P(2)(a)(i). After considering the submissions and evidence, the AO accepted the returned income, recording that the issues were explained and no adverse inference was drawn.
The Tribunal concluded that the AO had indeed made inquiries and adopted a plausible view. Citing Karnataka High Court rulings, including Chemsworth Pvt. Ltd., it noted that inadequacy of inquiry does not grant jurisdiction under section 263. It also noted several jurisdictional decisions supporting the assessee’s position that interest earned by co-operative societies from bank deposits is attributable to business and eligible for deduction under section 80P(2)(a)(i). Although contrary Karnataka High Court decisions exist, the Tribunal held that the issue is debatable and that where two views are possible, the AO’s view cannot be termed erroneous or prejudicial.
The Tribunal also held that clause (d) of Explanation 2 to section 263 does not apply, as the AO’s view was supported by various Karnataka High Court decisions and could not be said to violate any binding precedent. Referring to Supreme Court rulings including Max India Ltd. and the principle that where two views are possible the one favorable to the assessee must be adopted, the Tribunal further held that the Totagars decision relied on by the PCIT was confined to its own facts and distinguishable, as confirmed by Karnataka High Court in Guttigedarara Credit Co-operative Society Ltd.
The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the revenue. Accordingly, it annulled the PCIT’s revision order under section 263. The Tribunal also allowed a connected appeal involving identical facts and issues (ITA No. 1072/Bang/2025) on the same reasoning. Both appeals were allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
