Rectification Can’t Rewrite Scrutiny Order: ITAT Quashes 80P Disallowance for Co-op Society

Primary Agricultural Credit Co-operative Society Vs ITO (ITAT Bangalore)

Rectification Can’t Rewrite Scrutiny Order — ITAT Quashes 80P Disallowance for Co-op Society; ITAT Bangalore sets aside rectification disallowing 80P deduction – delay condoned for co-operative society

Assessee, a Primary Agricultural Credit Co-operative Society, filed return for AY 2020-21 declaring NIL income after claiming deduction u/s 80P(2)(a)(i) on interest earned from deposits with co-operative banks. Assessment u/s 143(3) was completed on 19.09.2022 accepting the claim except for a small disallowance of ₹91,130.

Subsequently, based on an audit objection, AO passed a rectification order u/s 154 r.w.s. 143(3) on 19.12.2024, holding that the society’s deposits with co-operative banks were not part of providing credit facilities to members, & hence deduction u/s 80P(2)(a)(i) amounting to ₹42.53 lakh was wrongly allowed. Total income was recomputed at ₹43.44 lakh.

The appeal before CIT(A) was filed 32 days late, explaining that the secretary was not legally trained & did not comprehend the impact of the rectification until a large demand notice was received. The CIT(A) refused to condone the delay & dismissed the appeal.

On further appeal, Tribunal noted that the explanation constituted sufficient cause for condoning the 32-day delay & that the CIT(A)’s refusal was unjustified. On merits, it found that no notice had been issued prior to passing the rectification order, violating Sec. 154 procedure. It held that the AO had already verified & allowed the deduction during regular assessment after examining by-laws, membership, & responses. Hence, the issue was debatable & could not be rectified u/s 154.

Referring to the Supreme Court ruling in Mavilayi Service Co-operative Bank Ltd. v. CIT, the Tribunal reiterated that a primary agricultural credit co-operative society engaged in lending to members is entitled to full deduction u/s 80P(2)(a)(i) on interest income from co-operative banks. Therefore, the rectification order based merely on an audit objection was unsustainable.

The Tribunal accordingly quashed both the Sec. 154 rectification order & the appellate order, condoned the delay, & restored the 80P deduction.

Essence of Ruling

A co-operative society’s 80P claim allowed after scrutiny cannot later be withdrawn under Section 154 merely due to an audit objection, as such matters are debatable. Delay in appeal filing due to lack of legal awareness is condonable when bona fide.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal is filed by Primary Agriculture Credit Co-operative Society (the assessee/appellant) for the assessment year 2020-21 against the appellate order passed by the Addl/JCIT(A)-2, Pune [ld. CIT(A)] dated 28.7.2025 wherein the appeal filed by the assessee against the assessment order passed u/s. 154 of the Income-tax Act, 1961 [the Act] dated 19.12.2024 by the ITO, Ward 1, Chikamaglur was rejected for the reason that the appeal was filed with a delay of 254 days which was not found as because of sufficient reasons and appeal of the assessee was not admitted.

2. The assessee is aggrieved and is in appeal before us.

3. The brief facts show that assessee is a primary co-operative agricultural society, filed its return of income on 30.1.2021 at Rs.Nil. The case of the assessee was selected for scrutiny and notice u/s. 143(2) of the Act was issued for limited scrutiny. The purpose of scrutiny was high creditors and liability and also deduction claimed under Chapter VIA. When assessee was questioned, assessee submitted its byelaws, nature of business activities and computation of income, registration certificate and bank statement. The ld. AO verified the same and in the end, made an addition of Rs.91,130 which is disallowance of capital expenditure. No addition was made with respect to the limited scrutiny notice and total income of assessee was assessed at Rs.91,130 by assessment order dated 19.9.2022.

4. Subsequently a rectification order u/s. 154 r.w.s. 143(3) of the Act was passed on 19.12.2024. The rectification order states that assessment order passed u/s. 143(3) of the act dated 19.9.2022 making a disallowance of Rs.91,130 for disallowance of income tax paid claimed as expenditure u/s. 37 of the Act is erroneous and therefore it was stated that based on the audit objection, it was noted that assessee deposited the funds in cooperative banks which was not a part of the business of providing credit facilities to its members and therefore on such interest income, the deduction claimed by the assessee u/s. 80P(2)(a)(I) of the Act has resulted into short computation of income to the tune of Rs.42,53,493, is required to be added. The ld. AO then made an addition to the computation issued by disallowing the deduction u/s. 80P of the Act. Thus in the original return of income, the deduction claimed by the assessee u/s. 80P of the Act of Rs.42,53,493 accepted in the computation sheet dated 19.9.2022 as correct deduction was rectified by withdrawing the above deduction. Thus, the total income of the assessee was determined at Rs.43,44,620. Against this rectification order passed u/s. 154 r.w.s. 143(3) of the Act dated 19.12.2024, the assessee preferred an appeal before the ld. CIT(A).

5. The ld. CIT(A) found that there is a delay in filing of the appeal. In Form 35 assessee has stated that order u/s. 154 of the Act was passed on 19.12.2024, however appeal was filed on 19.2.2025 and thus there was a delay of about 32 days in filing of the appeal. The assessee submitted a prayer for condonation of delay, also submitted an Affidavit. The main reason given by the assessee is that the person responsible was not adequately equipped to comprehend the legal notices and correspondence. Therefore, this appeal could not be filed within time and the delay is nominal, therefore should be condoned.

6. The ld. CIT(A) examined the claim and stated the reason submitted by the assessee is not a sufficient reason and therefore he dismissed the appeal as not admitted.

7. Assessee is aggrieved with the same. The ld. AR Mr. Siddesh N. Gaddi, CA submitted a paperbook containing 20 pages. He submitted that the ld. CIT(A) should have condoned the delay. With respect to the addition on the merits of the case, he submitted that the rectification order passed by the ld. AO is invalid. He submits that the rectification could not have been made by taking away the deduction already granted u/s. 143(3) proceedings by the ld. AO. He submits that even on the merits, the issue is squarely covered in favour of assessee by the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Cooperative Bank. Therefore, even otherwise on the merits, disallowance of deduction could not have been made in the 154 proceedings. He submits that if the issue is debatable, the consequent order passed u/s. 154 of the Act could not have been sustained. He even otherwise submitted that there is no error allowing the claim of assessee in the 143(3) proceedings u/s. 80P(2)(a)(i) of the Act.

8. The ld. DR, Shri Ganesh R. Ghale, Advocate, Standing Counsel for the revenue, submitted that the claim of the assessee was required to be examined in 143(3) proceedings and there was audit objection. Based on this, 154 order is correctly done.

9. He further submitted that there was a delay in filing of the appeal before the ld. CIT(A) which was not condoned as there was no sufficient reason shown.

10. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. We find that the assessee is a primary agricultural co-operative society which is engaged in the business of giving loan, etc. to its members. Return of income was filed which was selected for scrutiny for the specific purposes of verification of the deduction u/s. Chapter VIA of the Act. Assessee has claimed deduction of Rs.42,53,493. Assessment order so passed clearly states at para 4 that assessee has furnished the complete details through efiling portal. After examination in para 10 the ld. AO noted that on perusal of the response submitted by the assessee, the assessee has claimed deduction u/s. 80P of Rs.42,53,493. The assessee was specifically questioned and response was filed on 31.3.2022. Thereafter there is no query by the AO. The response of the assessee is that assessee is entitled to deduction on the whole of its income of Rs.42,53,493 u/s. 80P(2)(a)(i) of the Act. Therefore, the ld. AO accepted the claim of the deduction and did not make any disallowance thereof. Subsequently based on the audit objection, the ld. AO issued notice u/s. 154 of the Act and passed the order disallowing the deduction. Against this order, the assessee preferred an appeal which was late by 32 days.

11. The ld. CIT(A) did not condone the delay holding that the reason shown by the assessee was not reasonable cause. We find that assessee has made a reasonable cause that the person who was handing these maters was not adequately equipped and further the rectification order did not have any computation mechanism in the order. Therefore he could not comprehend the impact of the notice and subsequently when it was found that original demand raised in 143(3) proceedings of Rs.29,732 as per notice u/s. 156 dated 19.9.2022 has gone to Rs.17,51,392 by demand notice dated 19.12.2024 as per 154 order, the appeal was filed. We find that the ld. CIT(A) is not correct in not condoning the delay of 32 days. We find that there is sufficient cause shown by the assessee. Hence the order of the ld. CIT(A) is not sustainable.

12. Even otherwise, on the merits, we find that if there is a 154 order to be passed which is against the assessee, same is only to be passed after giving notice to the assessee. In this case, there is no such notice issued to the assessee and immediately deduction claimed by the assessee u/s. 80P(2)(a)(i) of the Act was withdrawn. This is not in accordance with the provisions of section 154 of the Act. Further assessee is a primary agricultural credit co­operative society which has claimed deduction on the whole of its income. The Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank has categorically held that such co-operative societies are entitled to deduction u/s. 80P(2)(a)(i) of the Act. Thus, there is no error in the order passed u/s. 143(3) passed by the ld. AO. Hence the rectification order passed on the basis of the minor audit objection is not sustainable.

13. Even otherwise, the claim of deduction has been verified by the AO u/s. 143(3) proceedings and then allowed the claim of deduction after verifying and accepting the explanation of the assessee. Therefore allowing claim after proper verification does not make a mistake apparent from the record. Therefore also, the order passed u/s. 154 of the Act by the ld. AO is not sustainable.

14. In view of the above facts and findings, the orders of the ld. lower authorities passed u/s. 154 of the Act and the appellate order sustaining the same are quashed.

15. In the result, the appeal filed by the assessee is allowed.

Pronounced in the open court on this 21^st day of October, 2025.