URBAN CO OPERATIVE CREDIT SOCIETY LTD vs. ASSESSMENT UNIT

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WP/20372/2026HC KarnatakaKAHC01044892202603 September 2026Bench: B M SHYAM PRASAD11 pages
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What did the High Court hold?

The High Court allowed the writ petition in part. It quashed the impugned Assessment Order dated March 11, 2026, and restored the proceedings. The Court directed the first respondent to ensure the petitioner is provided an opportunity to file its documents to establish its claim for exemption under Section 80P of the IT Act, considering the Apex Court's decision and the nature of its deposits. The Court also noted that any computational error in the assessment order must be revisited in light of potential rectification. The reasoning was that if the petitioner had bona fide applied under Section 144A and was informed that its reliance on the Apex Court's decision could be considered in assessment proceedings, but the proceedings were completed the very next day without a reasonable opportunity, then the proceedings should be restored. The Court found merit in the petitioner's grievance that it could not place material on record due to the hasty completion of assessment.

What were the facts?

The petitioner, Urban Co-operative Credit Society Ltd., filed a writ petition challenging an assessment order dated March 11, 2026, for Assessment Year 2024-25. The petitioner claimed a deduction of Rs. 1,83,28,774/- under Section 80P of the Income Tax Act, 1961. The assessment order, passed under Section 143(3) read with Section 144B, disallowed this deduction. The petitioner also challenged the treatment of Rs. 137,35,35,447/- (unsecured loans and current liabilities) as income from other sources and a consequential demand notice. The petitioner had filed an application under Section 144A of the Act, which was disposed of on March 10, 2026, stating that the faceless assessment scheme under Section 144B provided sufficient safeguards. The assessment order was passed the very next day.

What were the issues?

1. Whether the petitioner, a Co-operative Credit Society, is entitled to exemption under Section 80P(2)(a)(i) of the IT Act on its interest income, in light of the Apex Court's decision in Mavilayi Service Co-operative Bank Ltd. and this Court's decisions in Guttigedarara Credit Co-operative Society and Tumkur Merchants Souharda? - Assessee's contention: The petitioner is entitled to the exemption as held by the Apex Court and this Court. The assessment proceedings were completed hastily after the Section 144A application, preventing the petitioner from submitting necessary documentation to justify its claim for exemption under Section 80P(4) of the IT Act. - Revenue's contention: The petitioner failed to produce material to demonstrate its entitlement to exemption or that the interest earned was from deposits with a co-operative society, not a bank. The revenue relies on a High Court judgment stating that interest earned from deposits with a bank, as opposed to a co-operative society, is taxable. 2. Whether the sum of Rs. 137,35,35,447/- comprising unsecured loans and current liabilities was correctly treated as income from other sources, when the assessment order had accepted it as a liability payable to members? - Assessee's contention: This sum was accepted as a liability to members and should not have been treated as income from other sources. - Revenue's contention: The revenue suggested there could be a rectification for any computational error, and the petitioner should verify the portal.

Which sections of the Income-tax Act were involved?

Section 80P,Section 80P(2)(a)(i),Section 80P(4),Section 143(3),Section 144A,Section 144B,Section 156

AI-generated summary — verify with the full judgment below

HC-KAR IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 3RD DAY OF SEPTEMBER 2026 BEFORE THE HON'BLE MR. JUSTICE B M SHYAM PRASAD WRIT PETITION NO. 20372 OF 2026 (T-IT)

BETWEEN:

URBAN CO OPERATIVE CREDIT SOCIETY LTD NO.1, CHURCH STREET, KANAKAPURA, RAMANAGARA DISTRICT-562117. REP. BY ITS INCHARGE GENERAL MANAGER, SRI PRAMOD C. REGISTERED UNDER SOCIETIES REGISTRATION ACT.

…PETITIONER (BY SRI. M.V. SHESHACHALA., SENIOR ADVOCATE FOR SRI. NAGHARISH G.S.., ADVOCATE)

AND:

1.

ASSESSMENT UNIT FACELESS ASSESSMENT CENTRE NORTH BLOCK, NEW DELHI-110001 REP. BY ASSESSING OFFICER.

Digitally signed by VANAMALA N Location: HIGH COURT OF KARNATAKA HC-KAR

2.

NATIONAL FACELESS ASSESSMENT CENTRE, NO.412-413, 1ST FLOOR, OPP. METRO PILLAR NO. 793 DWARKA MOR, NEW DELHI-110059. REP. BY ASSESSING OFFICER.

3.

JURISDICTIONAL ASSESSING OFFICER INCOME TAX OFFICER, WARD-1, RAMANAGAR, MAHATMA GANDHI ROAD, MANDIPET, AGRAHAR, RAMANAGARA-562159.

4.

PRINCIPAL COMMISSIONER OF INCOME TAX-1 BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BENGALURU-560034. …RESPONDENTS (BY SRI.M. THIRUMALESH., ADVOCATE A/W SRI. NIRMAL MATHEW., ADVOCATE)

THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THAT PART OF THE ASSESSMENT ORDER DATED 11.03.2026 BEARING NO. ITBA/AST/S143(3)/2025- 26/1087229136(1) ANNEXURE-F PASSED BY FIRST RESPONDENT FOR ASSESSMENT YEAR 2024-25 IN RESPECT OF INTEREST INCOME OF RS. 1,83,28,774/- AS IT IS EXEMPTED U/S. 80P(2)(A)(I) OF THE IT ACT AS HELD BY THE APEX COURT IN MAVILAYI SERVICE (SUPRA) AND THIS HON'BLE COURT IN HC-KAR GUTTIGEDARARA CREDIT CO-OPERATIVE SOCIETY (SUPRA) AND TUMKUR MERCHANTS SOUHARDA (SUPRA); B. QUASH THAT PART OF THE COMPUTATION SHEET BEARING NO. ITBA/AST/S/524/2025- 26/1087232436(1) DATED 11.03.2026 ANNEXURE-F1 PASSED BY FIRST RESPONDENT TREATING A SUM OF RS. 137,35,35,447/- (UNSECURED LOANS RS. 112,63,32,485/- AND CURRENT LIABILITIES OF RS.24,72,02,962/-) AS INCOME FROM OTHER SOURCES WHEN THE ASSESSMENT ORDER HAS SUM ACCEPTED THIS ITEM AS THE LIABILITY OF THE ASSESSEE PAYABLE TO MEMBERS; C. QUASH THE DEMAND NOTICE U/S. 156 OF THE IT ACT BEARING NO. ITBA/AST/S/156/2025-26/1087231761(1) DATED 11.03.2026 ANNEXURE-F2 PASSED BY FIRST RESPONDENT.

THIS PETITION, COMING ON FOR ORDERS, THIS DAY, ORDER WAS MADE THEREIN AS UNDER:

CORAM: HON'BLE MR. JUSTICE B M SHYAM PRASAD

ORAL ORDER

The petitioner is a Co-operative Credit Society Limited as contemplated under the Karnataka Co- operative Societies Act, 1959. The petitioner's grievance is with the Assessment Order under HC-KAR Section 143 (3) read with Section 144B of the Income Tax Act, 1961 [for short, ‘the IT Act’]. This Assessment Order is dated 11.03.2026 [Annexure-F], and it is for the assessment year 2024-25. The petitioner has filed returns for this assessment year claiming deduction of Rs.1,83,28,774/- under Section 80P of the IT Act.

2.

The petitioner, when issued with a notice of reassessment, has participated in the proceedings, but when informed during the proceedings that it will not be within the exceptions provided under Section 80P(4) of the IT Act, the petitioner has filed an application under Section 144A of the IT Act. This application is disposed of on 10.03.2026 observing thus:

“The assessment proceedings in the present case are being conducted under the faceless assessment scheme as provided in section 144 B of the Income Tax Act, 1961 (herein HC-KAR after referred to as ‘the Act’]. The said provision lays down a complete and self-contained procedure for completion of assessment, including mandatory review and approval by the specified authorities under the Scheme.

Further, the safeguards envisaged under section 144A of the act sand substantially addressed through the multi-layered review and approval mechanism prescribed under section 144B of the Act.”

3.

The impugned Assessment Order is dated the very next day and with the observation that though the petitioner has not produced books of accounts or member-wise loan details or documentary evidence to demonstrate that credit facilities were provided only to its members. Crucially, the observation is that the petitioner has failed to demonstrate that it falls within the exceptions provided under Section 80P(4) of the IT HC-KAR Act and that its interest/dividend income is earned from the deposits with eligible co-operative societies as contemplated under Section 80P(2)(d) of the Act.

4.

Sri M.V. Sheshachala, the learned Senior Counsel for the petitioner, relying upon the decision of the Apex Court in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, Calicut - [2021 123 taxmann.com 161 (SC)], submits that with this decision it is now settled that every Co- operative Society would be entitled to exemption and it is in view of this settled position that the petitioner has filed an application under Section 144A of the IT Act1 which stands disposed of on 10.03.2026

1 Power of Joint Commissioner to issue directions in certain cases.

144A. A Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to HC-KAR referring to the safeguards within the assessment proceedings. The learned Senior Counsel emphasizes that because the assessment proceedings are completed the very next day the petitioner could not place material on record to justify its case that its income is exempted in view of the applicability of Section 80P (4) of the IT Act.

5.

Sri M. Thirumalesh, who is assisted by Sri Nirmal Mathew [a learned senior standing counsel/standing counsel for the respondents], submits that the proceedings are completed because the petitioner has produced no material to demonstrate that it would be entitled for exemption or that the interest that it has earned is from deposits

enable him to complete the assessment and such directions shall be binding on the Assessing Officer : Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard. Explanation.—For the purposes of this section no direction as to the lines on which an investigation connected with the assessment should be made, shall be deemed to be a direction prejudicial to the assessee.

HC-KAR with a Co-operative Society and not a bank. The learned senior standing counsel proposes to rely upon a judgment of this Court to assert that notwithstanding the applicability of Section 80P(4) of the IT Act if a Co-operative Society has received interest from deposits with a bank, as against deposits with a Co-operative Society, such income would be taxable and there can be no deduction.

6.

In response, Sri M.V. Sheshachala submits that the petitioner could not place material to demonstrate that even on the second ground the petitioner would be entitled to claim exemption but has not only because of the circumstances emphasized by him. At this stage, this Court must refer to the petitioner’s grievance with certain computations in the Assessment Order and the response on behalf of the Revenue that there could be a rectification on the computational error and the petitioner must verify the portal.

HC-KAR

7.

In the circumstances, the question considered is whether this Court must intervene to restore the proceedings with an opportunity to the petitioner to file not just its books of accounts and other documents to establish that it is entitled for exemption in view of the decision of the Apex Court and that its income would be exempt from tax even otherwise. This question is answered in the light of the fact that the petitioner's application under Section 144A of the IT Act is disposed of on 10.03.2026 referring to the mechanism within the faceless assessment proceedings under Section 144B of the IT Act and that the Assessment Order is completed the very next day.

8.

If the petitioner has bona fide applied under Section 144A of the IT Act only to be informed that its reliance on the decision of the Apex Court could be considered in the assessment proceedings HC-KAR and the assessment proceedings are completed without a reasonable opportunity, this Court is persuaded to opine that the proceedings must be restored for due consideration with an opportunity to the petitioner to upload all the documents including the documents that would demonstrate its claim for exemption under the IT Act based on the nature of its deposits while also observing that the computational error, if any, in the Assessment Order must also revisited in the light of the rectification order that could be. As such, the following: ORDER The petition is allowed in part. The impugned Assessment Order dated 11.03.2026 [Annexure-F] is quashed restoring the proceedings calling upon the first respondent to ensure that an opportunity is enabled to the petitioner to HC-KAR file its documents in the light of this Court's observation.

Sd/- (B M SHYAM PRASAD) JUDGE

SA Ct:sr

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