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Facts
The assessee, a co-operative society, filed its return for AY 2016-17 declaring NIL income after claiming a deduction of Rs. 20,18,882/- under Section 80P. The AO denied this deduction under Section 143(3) and subsequently initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars, which was upheld by the CIT(A).
Held
The Tribunal found that the allowability of the Section 80P deduction was a debatable issue, with the quantum appeal pending before the Karnataka High Court. Relying on High Court precedents, the Tribunal held that mere disallowance of a claim on a debatable issue, especially when details were disclosed and the claim was bona fide, does not automatically warrant a penalty under Section 271(1)(c). Consequently, the penalty levied by the lower authorities was deleted.
Key Issues
Whether penalty under Section 271(1)(c) can be imposed for a deduction claimed under Section 80P, when the issue is debatable and the quantum assessment is pending before the High Court.
Sections Cited
250, 80P, 80P(2), 80P(2)(a)(i), 80P(2)(d), 143(3), 271(1)(c), 274, 2(19)
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Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
O R D E R
PER KESHAV DUBEY, JUDICIAL MEMBER:
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 07.11.2024 vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1070176573(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2016-17.
2. The assessee has raised the following ground of appeal: -
1. That the order of the learned lower authorities in so far it is prejudicial to the interests of the appellant, is bad and erroneous to the facts and circumstances of the case.
That the notice u/s 274 r.w.s 271(1)(c) of the Act is vague, bad in law and without jurisdiction.
3. That the entire proceedings u/s 271(1)(c) of the Act are bad in law and without jurisdiction.
4. That the learned lower authorities erred in law and on facts in confirming the penalty order u/s 271(1)(c) despite the absence of any concealment of income or furnishing of inaccurate particulars by the appellant.
Shree Sharanabasaveshwar Credit Souhard Sahakari Ni Halingali Page 2 of 7 5. That the learned lower authorities erred in law and on facts in confirming the penalty order even though the assessment proceedings were pending before the High Court.
6. That the learned lower authorities ought to have considered the fact that the assessment proceedings against which penalty order was issued is still pending before the Hon'ble High Court of Karnataka.
7. That the lower authorities erred in law and on facts in failing to consider the appellant's submissions on the merits of the case.
8. That the learned lower authorities erred in law and on facts by stating that the appellant failed to provide satisfactory explanations or evidence for the claims, despite the appellant having submitted the required information.
9. Without prejudice to the above grounds of appeal, the learned Commissioner of Income Tax (Appeals) confirming the penalty at 100% of the disallowance of deduction u/s. 80P(2) of the Act instead of levying penalty on the tax liability.”
Brief facts of the case are that the assessee is a co-operative Society registered under the Karnataka Souharda Sahakari Act, 1997. The assessee provides credit facilities to its members. The assessee society filed its return of income for the A.Y. 2016-17 on 30.03.2017 declaring total income of Rs. NIL after claiming deduction under section 80P of the Act amounting to Rs.20,18,882/-. The case was selected for scrutiny under CASS and accordingly, assessment was completed under section 143(3) of the Act on 06.12.2018 by denying the deduction claimed under section 80P(2)(a)(i) of the Act amounting to Rs. 20,18,882/-. The AO thereafter initiated the penalty proceedings for furnishing inaccurate particulars of income vide notice u/s 274 r.w.s. 271(1)(c) of the Act dated 06/12/2018. During the course of penalty proceedings, it was submitted that the assessee had declared true and correct return, and the assessee neither concealed the income nor given any inaccurate particulars of income for the A.Y. 2016-17 and accordingly, prayed that as there was no malafide intention to conceal income or furnish inaccurate particulars, the proposed penalty proceedings may be dropped. The AO after considering the reply did not accept the contention mainly on the ground that the assessment order passed by Ld. AO is also upheld by the Ld.CIT(A). Further, Ld. AO also held that assessee Shree Sharanabasaveshwar Credit Souhard Sahakari Ni Halingali Page 3 of 7 has failed to discharge the burden of proof lying on them by giving any reliable and cogent reasons for furnishing the inaccurate particulars and accordingly, levied the penalty @100% of the tax sought to be evaded amounting to Rs.20,18,882/-.
Aggrieved by the aforesaid penalty order passed under section 271(1)(c) of the Act dated 28.03.2022, the assessee preferred an appeal before ld. CIT(A)/NFAC.
The Ld. CIT(A)/NFAC dismissed the appeal of the assessee by holding that the assessee has failed to offer any explanation in respect of disallowance of deduction under section 80P claimed and therefore the provisions of section 271(1)(c) r.w.s. Explanation 1 of the Act are clearly applicable in this case and accordingly held that Ld. AO was justified in holding that assessee has concealed the income. The ld. CIT(A)/NFAC also relied upon the various case laws in support of his contention.
Aggrieved by the order of the ld. CIT(A)/NFAC dated 07.11.2024 the assessee filed the present appeal before this Tribunal. The assessee has also filed paper book comprising 69 pages containing therein the written submissions along with various case laws relied upon by the assessee.
Before us, Ld.AR of the assessee submitted that the quantum appeal of the assessee is presently pending before the Hon’ble Karnataka High Court and therefore the lower authorities should not have passed an order of penalty so hastily. Further, Ld.AR of the assessee submitted that the deduction as claimed under section 80P of the Act is substantial question of law and the different benches of the Tribunal also differs in their opinion in deciding the present issue and therefore as the issue becomes debatable and the claim of the assessee is bonafide, the Ld. AO should not have levied penalty under section 271(1)(c) of the Act.
Ld. DR on the other hand heavily relied on the order of the ld. CIT(A)/NFAC.
We have heard rival submissions perused the material available on record. It is an undisputed fact that the claim of deduction under section 80P(2)(a)(i)/ 80P(2)(d) is a debatable issue. We take note of the fact that not only the different coordinate bench of the ITAT but also several High Courts also differ in their opinion in deciding the allowability of section 80P(2)(a)(i)/ 80P(2)(d). It is also an undisputed fact that the deduction under section 80P(2)(a)(i) of the Act is not granted to the assessee on the ground that the same is not proved to be a cooperative society and in the absence of registration under Karnataka Cooperative Societies Act, 1959, the assessee was found to be ineligible for claim of deduction amounting to Rs.20,18,882/-. Further considering the byelaws and the nature of business carried out by the assessee with nominal members (associate members) the AO held that it can’t be treated as a co-operative society meant only for its members and providing credit facilities to its members. Lastly, the interest received from the investment in Bagalkot District Central Co-op Bank Ltd. was also held to be not allowable u/s 80P(2)(a)(i)/ 80P(2)(d) of the Act.
9.1. Before us, Ld.AR of the assessee submitted that the quantum appeal in the case of the assessee is still pending before the Hon’ble Karnataka High Court, therefore we are of the opinion that the issue in the present case is debatable one and assessee by relying on the decision of the Hon’ble Karnataka High Court in the case of Swabhimani Souharda Credit Co. operative Ltd. v. CBDT [2020] 421 ITR 670 had categorically held that the entity registered under the Karnataka Souharda Sahakari Act, 1997 fit into the definition of “Cooperative Society” as enacted in section 2(19) of the Act and therefore subject to all just exceptions they are entitled to seek their claim for the benefit of section 80P of the said Act. Therefore, in our opinion Shree Sharanabasaveshwar Credit Souhard Sahakari Ni Halingali Page 5 of 7 the claim of deduction under section 80P of the Act of the assessee is Bonafide. Therefore, by relying on the Jurisdictional High Court decision in the case of CIT v. Manjunatha Cotton & Ginning Factory [2013] 359 ITR 565 (Karnataka), we are of the opinion that mere disallowance of deduction of claim under section 80P of the Act may not be themselves justify a penalty. The Hon’ble High Court held that the “levy of penalty is not matter of course. It has to be found that the assessee concealed any income. Where there is no concealment or no material for concealment, no penalty can be imposed. But, where the assessee has concealed income, any subsequent act of voluntary disclosure would not affect the imposition of penalty. The mere addition to the taxable income would not automatically lead to an order of penalty. Further, the levy of penalty is not an automatic concomitant of the assessment. Therefore, safeguards have been provided for in the Act itself to see that penalties are levied only in appropriate cases”. In the case of CIT v. Manjunatha Cotton & Ginning Factory (supra) the Hon’ble High Court of Karnataka held that additions or disallowances made on mere debatable issues, may not by themselves justify Penalty. The relevant para is reproduced below for ease of reference & convenience-
“34. The word "conceal" means to hide, to keep secret. The phrase "conceal the particulars of his income" would include false deduction or exemptions claimed by the assessee in his return. The word "conceal" involves a knowledge on the part of the assessee of the real income when giving the particulars. Concealment might arise even if the statement as to the income is a guarded one, as, for example, the enquiry should be made to ascertain the correct income. Concealment of income may arise in various ways. It may take various forms of manipulation of entries in accounts, non- disclosure of items of source that existed and income that has clearly been earned by the assessee in the previous year, claim of false deductions or losses, suppression of sales, camouflage of income as loans taken from third parties and claim of interest thereon as deduction, giving a colour of agricultural income to the otherwise taxable income, and unexplained investments that can be clearly attributed to concealed income. However, mere addition or estimates made on mere suspicion that there is something wrong with the book entries or their incompleteness, inadvertent omis'sions, debatable additions or disallowances, cash credits or investments not accepted as genuine, and rejection of a claim of expenses may not be them'selves justify a penalty. The finding in assessment proceedings can be rebutted in the penalty proceedings to evenrcternonstrate that the amount taxed was not income, or it has been taxed in the wrong year.”
9.2. Further, The Hon’ble High Court of Karnataka in the case of Commissioner of Income Tax vs. Ankita Electronics (P) Ltd. Reported in [2015] 379 ITR 50 (Karnataka) held as under-
8. The assessee in the present case had disclosed all the materials on which it was claiming deduction. The matter as to whether the deduction was to be given or not, was taken up by the revenue authorities and it was held that certain deductions claimed by the assessee were to be disallowed. It is not disputed that the questions regarding the disallowance of the deductions claimed by the assessee is under consideration by the High Court, as the appeal filed by the assessee has been admitted, on the substantial questions of law which have been reproduced hereinabove. The mere admission of the appeal by the High Court on the substantial questions of law as have been quoted above, would make it apparent that the additions made were debatable. The Tribunal has thus rightly held that the admission of substantial questions of law by the High Court leads credence to the bona fide of the assessee and therefore, the penalty is not exigible under Section 271(1)(c) of the Act. Merely because the claim of the assessee has been rejected by the revenue authorities would not make the assessee liable for penalty--------------- 14. In the present case, the details of the claim were provided by the assessee. The question is as to whether on such details, deductions could be allowed or not is still in doubt. Such questions have been admitted for determination by the High Court in the appeal filed by the assessee. The Apex Court in the aforesaid case of Reliance Petroproducts (supra) also held that "merely because the assessee had claimed the expenditure, which claim was not acceptable to the revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by AO for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the legislature".
9.3. Respectfully taking guidance and support from the above decisions of the Hon’ble Karnataka High Court, we delete the entire penalty of Rs.20,18,882/- levied under section 271(1)(c) of the Act. We order accordingly.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 12th August, 2025