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U/s 80P Deduction Cannot Be Withdrawn Through Section 154: ITAT Says Debatable Issues Are Beyond Rectification Powers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