NAGURI VYASAYA SEVA SAHAKARI SANGHA NIYAMITA,NAGURI, MANGALORE vs. INCOME-TAX OFFICER, WARD - 2(1), MANGALURU, MANGALORE

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ITA 664/BANG/2026Status: DisposedITAT Bangalore11 August 2026AY 2020-20215 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the AO wrongly invoked Section 154 to disallow a deduction that was allowed after a detailed scrutiny assessment. The issue was considered debatable and not an error apparent from the record, making rectification under Section 154 impermissible.

What were the facts?

The assessee, a co-operative society, claimed deduction under Section 80P(2)(a)(i) on interest income, which was accepted in a scrutiny assessment. The AO later initiated rectification proceedings under Section 154 to disallow this deduction based on Supreme Court and High Court judgments.

What were the issues?

Whether a deduction allowed in a scrutiny assessment order under Section 143(3) can be disallowed through rectification proceedings under Section 154, when the issue is debatable.

Which sections of the Income-tax Act were involved?

Section 80P(2)(a)(i),Section 154,Section 143(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, BANGALORE BENCHES, BANGALORE

Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.

आयकर अपीलीय अधिकरण, बेंगलुरू पीठें, बेंगलुरू INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCHES, BANGALORE BENCH: B BEFORE SHRI PRASHANT MAHARISHI, VICE – PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER ITA No. 664/Bang/2026 नििधारण वर्ा/Assessment Year: 2020-2021) Naguri Vyasaya Seva Sahakari The Income Tax Officer, Sangha Niyamita, Ward – 2(1), Naguri, Post Kankandy, Vs. Mangaluru. Mangaluru – 575 002. अपीलधर्थी Appellant प्रत्यर्थी Respondent

Permanent Account Number of AAAAN1138R Assessee:

अपीलधर्थी द्वारा/Appellant represented Sri. V. Srinivasan - Advocate by: प्रत्यर्थी द्वारा/Respondent represented Sri. Pradeep S - Addl. CIT by: सुनवाई की तारीख / Date of conclusion of hearing: 20-07-2026 घोषणा की तारीख / Date of pronouncement: 11-08-2026 आदेश / ORDER PER SHRI SOUNDARARAJAN K., JUDICIAL MEMBER: This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 30/01/2026 in respect of A.Y. 2020-21.

2.

The brief facts of the case are that the assessee is a co-operative society and filed their return of income on 15/01/2021. The assessee had claimed deduction u/s. 80P(2)(a)(i) of the Act on the gross total income and declared a Nil taxable income. The assessee’s case was selected for complete

ITA No. 664/Bang/2026 Naguri Vyasaya Seva Sahakari Sangha Niyamita scrutiny under CASS for verifying the deduction from the total income under Chapter VIA, high creditors, high interest expenditure etc. The assessment has been completed u/s. 143(3) of the Act in which the return of income has been accepted as such. Subsequently, the AO by relying on the judgment of the Hon’ble Supreme Court in the case of M/s. Totgars Co-operative Sale Society Ltd. vs. ITO reported in 322 ITR 283 and also the Hon’ble Jurisdictional High Court judgment in the case of PCIT vs. Totgars Co- operative Sale Society Ltd. was of the view that the deduction claimed u/s. 80P(2)(d) has to be disallowed since the said interest income were earned from the co-operative banks and scheduled banks. Therefore, the AO had proposed to disallow the said deductions and termed the same as a mistake apparent from the records. Notice u/s. 154 was issued for rectifying the said mistake for which the assessee also replied and the AO based on the details furnished by the assessee had restricted the disallowance to the interest income earned from the SCDCC Bank and Axis Bank and added the same as income by passing an order u/s. 154 of the Act. The AO also initiated penalty proceedings u/s. 270A of the Act for underreporting the income.

3.

As against the said order, the assessee filed an appeal before the Ld.CIT(A). The assessee contended that the claim was made u/s. 80P(2)(a)(i) of the Act and therefore the said income earned by the assessee is attributable to the business activities of the assessee and eligible for deduction u/s. 80P(2)(a)(i) of the Act. The assessee also challenged the rectification proceedings initiated u/s. 154 as void-ab-intio since the issues are debatable one and not falls within the scope of rectification u/s. 154. The Ld.CIT(A) had also relied on the judgments of the Hon’ble Supreme Court and Hon’ble Jurisdictional High Court and confirmed the rectification order. The Ld.CIT(A) had treated the income as income from other sources and also not granted the benefit of deductions towards the expenses for earning such interest income.

4.

As against the said order, the assessee is in appeal before this Tribunal.

ITA No. 664/Bang/2026 Naguri Vyasaya Seva Sahakari Sangha Niyamita 5. At the time of hearing, the Ld.AR submitted that the rectification order is not correct since there is no error apparent on the face of the record. The Ld.AR also submitted that the assessee had furnished all the details before the AO while completing the complete scrutiny assessment and the AO also verified all the details and granted the deduction u/s. 80P(2)(a)(i) of the Act. The Ld.AR further submitted that, therefore the AO has no jurisdiction to initiate proceedings u/s. 154 of the Act in which the deduction allowed was reversed. The Ld.AR submitted that the issue is a debatable one and therefore, the disallowance could not be made by rectifying the order made u/s. 143(3) of the Act. The Ld.AR further submitted that, if at all, the AO was of the view that the 143(3) order is not in accordance with the provisions of the Act, he can initiate other proceedings and not by resorting to section 154 of the Act. Further, the Ld.AR submitted that on merits also, the deduction claimed by the assessee is u/s. 80P(2)(a)(i) of the Act and therefore, the interest income earned could be treated as business income attributable to the business activities of the assessee and therefore eligible for deduction. The Ld.AR further submitted that simply because the interest income was earned from the banks, it could not be presumed that the deduction was claimed u/s. 80P(2)(d) of the Act and therefore prayed that the order passed u/s. 154 is to be set aside.

6.

The Ld.DR submitted that when the deduction has been wrongly allowed, in spite of the judgments of the Hon’ble Supreme Court as well as the Hon’ble Jurisdictional High Court, the order passed u/s. 143(3) is an erroneous order and liable to be rectified u/s. 154 of the Act and prayed to dismiss the appeal.

7.

We have heard the arguments of both sides and perused the materials available on record.

8.

We have perused the order passed u/s. 143(3) of the Act. In the said order, the AO himself has accepted that the assessee had claimed the deduction on the interest income earned by them u/s. 80P(2)(a)(i) of the Act

ITA No. 664/Bang/2026 Naguri Vyasaya Seva Sahakari Sangha Niyamita by treating the said income as business income and attributable to the business activities of the assessee. In fact, the said return was taken up for complete scrutiny and based on the submissions made by the assessee, the AO had accepted the said return and to that effect, an order u/s. 143(3) was made. Thereafter, the AO found that the said claim was not in accordance with the judgments of the Hon’ble Supreme Court as well as the Hon’ble Jurisdictional High Court and therefore proposed to disallow the said deduction claimed u/s. 80P(2)(a)(i) of the Act under the provisions of section 154 which is a provision for rectifying the errors apparent on the face of the record. In spite of the replies filed by the assessee, the AO had disallowed the deduction in respect of the interest income earned from the two banks.

9.

From the above said facts, we understand that the assessee had made a claim u/s. 80P(2)(a)(i) of the Act which was also accepted by the AO in the complete scrutiny assessment. The assessee had treated the said income as business income and therefore, the said claim was made. In the rectification order, the AO had denied the said deduction. We are not in agreement with the AO that the disallowance can be made by invoking section 154 of the Act. There are several judgments in which it was made clear that any error apparent on the face of the record is eligible for rectification u/s. 154 of the Act. In the present case, all the details were furnished by the assessee and the AO had also made a detailed verification in the scrutiny assessment and accepted the claim made by the assessee. It is not an intimation made u/s. 143(1) of the Act but an assessment order made u/s. 143(3) of the Act.

10.

When the assessee had claimed the deduction u/s. 80P(2)(a)(i) of the Act, the Ld.CIT(A) had observed that the deduction also could not be granted u/s. 80P(2)(d) of the Act. When the claim was made u/s. 80P(2)(a)(i) of the Act, the denial by relying on the Hon’ble Jurisdictional High Court judgment which are delivered on the deduction claimed u/s. 80P(2)(d) of the Act could not be a reason for denying the said deduction that too under the rectification proceedings u/s. 154 of the Act. Therefore, we are of the view that the invoking of section 154 for reversing the deduction already granted

ITA No. 664/Bang/2026 Naguri Vyasaya Seva Sahakari Sangha Niyamita is not in accordance with the provisions and the same is out of the purview of the section 154. This is not a simple error but a debatable issue and therefore the order passed u/s. 154 is liable to be set aside. Consequently, the order of the Ld.CIT(A) is also not sustainable. We, therefore, set aside the orders of the lower authorities.

11.

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

Order pronounced in the open court on 11th August, 2026.

Sd/- Sd/- PRASHANT MAHARISHI SOUNDARARAJAN K. VICE – PRESIDENT JUDICIAL MEMBER Bangalore, Dated: 11th August, 2026.

Copy to: Naguri Vyasaya Seva Sahakari Sangha Niyamita, 1 Naguri, Post Kankandy, Mangaluru – 575 002. The Income Tax Officer, 2 Ward – 2(1), Mangaluru. 3 The PCIT / CIT, 4 The D.R., ITAT, Bangalore Bench BY ORDER

ASSISTANT REGISTRAR, I.T.A.T., BANGALORE.

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