U/s 80P Deduction Cannot Be Withdrawn Through Section 154: ITAT Says Debatable Issues Are Beyond Rectification Powers

ITO Vs Karavali Credit Co-operative Society (ITAT Bangalore)

U/s 80P Deduction Cannot Be Withdrawn Through Section 154: ITAT Says Debatable Issues Are Beyond Rectification Powers

In a significant ruling for co-operative credit societies, the Bangalore ITAT held that the Assessing Officer cannot invoke Section 154 to withdraw deduction under Section 80P merely because of a different interpretation of judicial precedents on interest income earned from bank deposits. The Tribunal upheld the CIT(A)’s order deleting the rectification made by the AO.

The assessee, Karavali Credit Co-operative Society, had originally been allowed deduction under Section 80P(2)(a)(i) in a scrutiny assessment. Subsequently, the AO initiated rectification proceedings under Section 154 and withdrew deduction on interest income of about ₹5.51 crore earned from deposits with co-operative and other banks, relying on the Supreme Court decision in Totgars Co-operative Sale Society Ltd. and certain Karnataka High Court decisions.

The society contended that the interest income was eligible for deduction either under Section 80P(2)(a)(i) as business income or under Section 80P(2)(d) in respect of investments with co-operative banks. It was further argued that several judicial decisions, including decisions of the Karnataka High Court and various Tribunal Benches, supported the assessee’s claim and therefore the issue was at least debatable.

The Tribunal agreed with the assessee and observed that there are conflicting judicial views on the tax treatment of interest earned by co-operative societies from deposits with co-operative banks. Whether such income is assessable as business income or income from other sources, and whether deduction is available under Section 80P, are issues on which more than one view is possible.

Relying on the landmark Supreme Court judgment in T.S. Balaram v. Volkart Brothers, the ITAT reiterated that a “mistake apparent from the record” must be obvious and patent. Where an issue requires detailed reasoning or where two views are reasonably possible, rectification under Section 154 is impermissible. Since the very eligibility of deduction under Section 80P on such interest income remains a debatable question, the AO exceeded the scope of Section 154 by attempting to revisit the issue through rectification proceedings.

Accordingly, the Tribunal dismissed the Revenue’s appeal and upheld the CIT(A)’s order cancelling the rectification

AUTHOR”S COMMENTS

Even if the Revenue believes a deduction under Section 80P has been wrongly allowed, it cannot use Section 154 to revisit a debatable legal issue. Where judicial opinions differ and detailed interpretation is required, the matter falls outside the narrow scope of rectification proceedings.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal is filed by the income tax officer Ward – 1 (1), Bangalore (the learned assessing Officer) against the appellate order passed by the CIT appeal punchKula dated 4 November 2025 for assessment year 2018 – 19 wherein the appeal filed by the assessee against the rectification order passed by the learned assessing officer under section 154 of the act dated 24 May 2024 was allowed. The learned assessing officer is aggrieved and is in appeal before us.

2. Brief leaf fact shows that the assessee had filed Return of Income for the AY 2018-19 on 27/O9/2018. The assessee declared Gross Total income of Rs.3,88,52,753/- and claimed Rs.3,88,52,753/- as deduction under Section u/s.80P(2)\a)(i) and had offered NIL income to tax, which includes Income from Other Sources ie, interest income of Rs.5,50,83,385/- received from the deposits made in bank accounts. The assessee’s case was selected for limited scrutiny assessment under the E-assessment Scheme. 2019 for verification of two issues viz., Investments/Advances/Loans and Deduction from Total Income under Chapter VI-A. The assessment was completed by the NaFAC u/s 143(3) r.w.s 143(3A) & 143(3B) of the I.T Act on 18/02/2021 accepting the Returned Income. Subsequently. the assessment order u/s 143(3) of the I.T Act 1961 was rectified vide order u/s 154 dated 19-04-2021 rectifying the interest u/s 234C wrongly computed.

3. Later, further the assessing officer noted that during the year the assessee has declared gross total income of Rs.3,88,52,753/ and has claimed deduction u/s.80P(2) \(a)(i) of Rs.3,88,52,753/-. As per the balance sheet and the P & L account, during the year, the assessee invested Rs.51,16,01,397/- in term deposits/fixed deposits in various banks including Cooperative Banks and earned interest of Rs.5,50,83,385/-. During assessment proceedings u/s 143(3) of the I.T Act 1961 dated 18.02.2021 and during the proceedings dated 19.04.2021 u/s 154 of the I.T. Act the Assessing Officer has allowed the deduction claimed by the assessee u/s 80P(2)(a)(i) of the Act.

4. According to the learned assessing officer in this case the assessee has made investments in Co-operative banks and scheduled banks and has earned interest of Rs.5,50,83,385/- for the A.Y. 2018-19. As per the decision of the Hon’ble Apex Court in the case of M/s Totgars Co-operative sale society Ltd vs. ITO (2010)322 ITR 283(SC) and in the decision of Jurisdictional Court (Karnataka High Court) in the case of PCIT Hubli Vs. M/s Totgars Co-operative sale society Ltd in ITA No. 100066/2016 dated 16.06.2017 the deductions claimed uls 80P(2\d) of the | T Act 1961 has to be disallowed with respect of interest earned from the Co-operative banks and scheduled banks. Not following the decision of the Hon’ble Supreme Court/ Hon’ble Jurisdictional High Court constitutes mistake apparent from the records as stated 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. Hence any decision of dispute on law point settled by the Hon’ble Supreme Court or Hon’ble Jurisdictional High Court can be taken as base for rectification subsequently. Considering the above the assessee’s claim for deduction with respect to interest income from Co-operative banks and scheduled banks is not eligible for deduction under any provisions of section 80P of the IT Act 1961 and is a mistake apparent from the records and it is required to be rectified and therefore the learned assessing officer invoke the provisions of section 154 of the act.. Accordingly notice dated 15-11-2023 was issued to the assessee proposing to rectify the above mistake which is apparent from the records.

5. The assesses furnished response to the above notice on 28-11-2023 vide letter dated 27-11-2021. The assessee in the letter furnished on 28-11-2023 has relied on various judicial pronouncements to substantiate the claim for deduction either u/s 80P (2) (a) (i) or u/s 80P (2) (d) of the I.T Act on interest earned from Co-operative banks.

6. The learned assessing officer rejected the contention raised by the assessee and held that The decision of the Hon’ble Apex Court in the case of M/s Totgars Co-operative sale society Ltd vs. ITO (2010)322 ITR 283(SC) and in the decision of Jurisdictional Court (Karnataka High Court) in the case of PCIT Hubli Vs. M/s Totgars Co-operative sale society Ltd in ITA No. 100066/2016 dated 16.06.2017 is subsequent to all the judicial pronouncements quoted by the assesses to substantiate the claim for deduction either u/s 80P(2)(a)(i) or u/s 80P(2)(d) of the I.T Act on interest earned from Co-operative banks. Therefore, the claim of the assessee for deduction either u/s 80P (2) (a) (i) or u/s 80P (2) (d) of the I.T Act on interest earned from Co-operative banks is not accepted. Accordingly, the order under section 154 of the act was passed denying the assessee deduction of interest income of ₹ 55,083,385.

7. Aggrieved with the rectification order passed by the learned assessing officer, the assessee preferred an appeal before the learned CIT – A. Assessee submitted thatThe detailed breakup of the total interest income of Rs. 5,50,83,385/- is Interest from Cooperative Banks: Rs. 5,50,29,504/-which is eligible for deduction under Section 80P(2)(a)(i) as business income and further Interest from Nationalized/Scheduled Banks: Rs. 53,881/ Legal Treatment: Eligible for deduction under Section 80P(2)(a)(i) due to statutory compliance under Karnataka Cooperative Societies Rules and business nexus. Total Interest Income: Rs. 5,50,83,385/-.

8. The learned CIT – A decided the issue as under:

“6.1 These grounds of appeal relate to disallowance of deduction u/s 80P of the Act by the AO. It has been submitted by the appellant that the society has claimed deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, which specifically provides for deduction of income earned by a co-operative society engaged in carrying on the business of providing credit facilities to its members.

6.2 It has been further argued that the provisions of Section 80P(4) of the Act apply to co-operative banks and not to primary agricultural credit societies. The assessee is not a co-operative bank and is governed by the Karnataka Co-operative Societies Act. Interest earned from investments in other co-operative banks and societies is deductible under Section 80P(2)(d). The Totagars decision was distinguished in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO, where it was held that interest earned on surplus funds not immediately required for business, deposited in co-operative banks, qualifies for deduction.

6.3 As regards claim of deduction u/s 80P(2)(d) of the Act by the appellant, it is noted that this issue has been examined in various decisions of the Courts and the Tribunals wherein it has been held that Co-operative Banks continued to be Co-operative Societies and therefore, the interest income derived by Co-operative Societies from its investments with Co-operative Banks are entitled for the deduction u/s 80P. Further, it is noted that the coordinate Bench of the Hon’ble ITAT, Mumbai in the case of Laxmi Co-Operative Housing Society vs ITO, 22(2)(1), Mumbai in ITA No. 136/Mum/2024 for the Assessment Year 2020-21 vide order dated 21-08-2024 has allowed deduction u/s 80P(2)(d) of the Act on interest received from Cooperative Banks and has held as under:

“8. We have carefully considered the rival contention and perused the orders of the learned lower authorities. It is an undisputed fact that. a. assessee is a cooperative housing society which has put fixed deposits with other cooperative banks and maintains the savings bank account with those cooperative banks.

b. From these investments the assessee is deriving interest income. Whether such interest income is eligible for deduction under section 80P(2)(d) of the act or not is the short issue involved in this appeal.

c. There is plethora of judicial precedents in favour of the assessee wherein it has been held that the definition of the cooperative society under section 2(19) of the income tax act provides that cooperative society means a cooperative society registered under the cooperative societies act, 1912 or under any other law for the time being in force in any State for the registration of cooperative societies.

d. According to the provisions of section 80P(1) in case of an assessee being a cooperative society the gross total income includes any income referred to in subsection (2) such amount shall be allowed to be deducted from the total income.

e. According to the provisions of subsection (2) of that section, clause (d) provides that if such cooperative societies earn income by way of interest or dividend derived by the cooperative society from its investment with any other cooperative societies the whole of such income is deductible.

f. According to the provisions of section 80P(4) it is also provided that this section shall not apply in relation to any cooperative banks. Therefore, if the assessee is a cooperative bank the deduction under section 80P is denied.

g. Admittedly the assessee is not a cooperative bank and therefore the provisions of section 80P(4) does not apply to the assessee.

h. Now it is to be seen whether the assessee’s claim falls under the clause (d) of subsection 2 or not. It is also a fact that all these banks are the cooperative societies under the Maharashtra cooperative societies act. They are cooperative societies carrying on the business of the cooperative bank.

i. In view of this the claim of deduction cannot be denied to the assessee on interest income earned by it from its investment in fixed deposits and savings bank deposits with those banks.

j. Accordingly, we do not find any reason to uphold the orders of the learned lower authorities. k. Accordingly, we direct the learned assessing officer to grant deduction of Rs. 8,602,497/- to the assessee under section 80P(2)(d) of the act. l. In view of this the appeal of the assessee is allowed on the subject matter of the claim.

9. In the result appeal of the assessee is allowed.”

6.4 Further, the Hon’ble jurisdictional ITAT, “C” Bench, Bangalore in ITA No. 376 to 379/Bang/2023 vide order dated 23.07.2023 in the case of The Totgars Co-operative Sale Society Ltd Vs ACIT has held as under:

“9.3 At this juncture, we respectfully following the view taken by the Hon’ble Karnataka High Court in the case of PCIT & Anr. Vs. Totagars Cooperative Sale Society reported in (2017) 392 ITR 74 and Hon’ble Gujarat High Court in the case of State Bank Of India Vs. CIT reported in (2016) 389 ITR 578, hold that the interest income earned by a cooperative society on its investments held with a cooperative bank would be eligible for claim of deduction under Sec.80P(2)(d) of the Act.

9.4 It is directed that the interest earned by the assessee from commercial banks may be considered under the head ‘income from other sources’ and relief may be granted as available to the assessee u/s 57 of the Act in accordance with law. In view of the findings of the Hon’ble ITATs as mentioned supra, the appellant is eligible for deduction u/s 80P(2)(d) of the Act on interest income earned by it on its investments held with cooperative banks and the same is allowed. As regards interest earned by the assessee from commercial banks, the AO is directed to consider the same under the head ‘income from other sources’ and relief may be granted as available under section 57 of the Act in accordance with law.”

9. The learned departmental representative vehemently stated that the learned CIT – A is incorrect in holding that assessee is entitled to deduction of the bank interest earned from the cooperative banks as deduction under section 80 P (2) (d) of the act in view of the direct binding decision of the honourable Karnataka High Court. Therefore, the order of the learned assessing officer passed under section 154 of the act needs to be upheld.

10. The learned authorised representative vehemently stated that the learned CIT – A has stated that the provisions of section 154 of the income tax act cannot be exercised where the issue is debatable. He further submitted that in the present case the assessee is a members credit cooperative society and the interest income earned by the assessee is eligible for deduction under section 80 P (2) (a) (i) of the act by the binding decisions of the honourable Karnataka High Court in case of This issue is also squarely covered in favour of the assessee by the decision of the honourable Karnataka High Court in case of Principal Commissioner of Income-tax, Hubli vs. Totagars Co-operative Sale Society [2017] 78 com169 (Karnataka)/[2017] 392 ITR 74 (Karnataka)[05-01-2017] and Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax officer Word-V, Tumkur [2015] 55 taxmann.com 447 (Karnataka)/[2015] 230 Taxman 309 (Karnataka)[28-10-2014] and Guttigedarara Credit Co-operative Society Ltd. vs. Income-tax Officer, Ward 2(2), Mysore [2015] 60 taxmann.com 215 (Karnataka)/[2015] 234 Taxman 476 (Karnataka)/[2015] 377 ITR 464 (Karnataka)[09-06-2015] [ all these three decisions considered and interpreted the decision of Honourable Supreme court in Totgars, Co-operative Sale Society Ltd. vs. Income-tax Officer, Karnataka [2010] 188 Taxman 282 (SC)/[2010] 322 ITR 283 (SC)/[2010] 229 CTR 209 (SC)[08-02-2010]] . He therefore submitted that when there are conceivably two opinions, on an issue, the jurisdiction under section 154 of the act cannot be exercised.

11. On careful consideration of the orders of the learned that lower authorities and the submissions made before us, we find that in this case the assessee has been denied deduction under section 80 P (2) (a) (i) of the act with respect to the interest income earned from the cooperative banks amounting to ₹ 5.5 crores on the basis of the decision of the honourable Karnataka High Court in case of Principal Commissioner of Income-tax, Hubballi vs. Totagars Co-operative Sale Society [2017] 83 com140 (Karnataka)/[2017] 395 ITR 611 (Karnataka)/[2017] 297 CTR 158 (Karnataka)[16-06-2017]. It is also apparent that whether the interest income chargeable to tax under the head income from other sources or under the head business income though received from cooperative banks is also having conceivably two opinions. The claim of the assessee is that it is the business income and the claim of the learned assessing officer in a rectification proceeding is that it is income from other sources and therefore the assessee is not entitled to deduction under section 80 P (2) (d) of the act. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions. In view of the above facts, we do not find any infirmity in the order of the learned CIT – A in holding that the issue cannot be rectified under section 154 of the act in view of the judicial opinion divided on this issue. This is also supported by the decision of the honourable Supreme Court in case of T.S. Balaram, Income-tax Officer vs. Volkart Brothers [1971] 82 ITR 50 (SC) [05-08-1971].

12. In the result appeal filed by the learned assessing officer is dismissed.

Order pronounced in the open court on 29^th May 2026.