The Income Tax Appellate Tribunal has clarified that the revisionary power under Section 263 of the Income Tax Act cannot be exercised merely because the Principal Commissioner disagrees with a plausible interpretation adopted by the Assessing Officer, even if it results in lower tax liability. This judgment reinforces the principle that two views on a debatable legal issue cannot justify interference under revisional jurisdiction.
Background & Facts
The Dispute
The appellant, Bharath Credit Co-operative Society Limited, is a registered co-operative society engaged in lending and deposit-taking activities exclusively for its members. For Assessment Year 2020-21, it claimed a deduction of Rs. 40,23,937 under Section 80P(2)(a)(i) of the Income Tax Act, 1961, on interest income earned from deposits held with commercial and co-operative banks. The Assessing Officer (AO) accepted this claim after examining documentary evidence and responses to statutory notices under Sections 143(2) and 142(1).
Procedural History
- January 2021: Assessee filed return declaring income of Rs. 1,79,390 after claiming deduction under Section 80P(2)(a)(i).
- August 2022: AO completed limited scrutiny assessment under Section 143(3) r.w.s. 144B, accepting the deduction claim after verifying submissions and documentary evidence.
- March 2025: Principal Commissioner of Income Tax (PCIT) invoked Section 263, setting aside the AO’s order on grounds that interest income from non-cooperative banks should have been taxed under Section 56 as "Income from Other Sources".
- January 2026: Appeal filed before ITAT Bangalore, challenging the PCIT’s revision order.
Relief Sought
The assessee sought annulment of the PCIT’s order under Section 263, arguing that the AO’s view was plausible, supported by jurisdictional High Court precedents, and not erroneous or prejudicial to revenue.
The Legal Issue
The central question was whether the Principal Commissioner could invoke Section 263 to revise an assessment order merely because he disagreed with the AO’s interpretation that interest income earned from bank deposits is "attributable to" the co-operative society’s primary business of providing credit facilities, thereby qualifying for deduction under Section 80P(2)(a)(i).
Arguments Presented
For the Appellant
The appellant argued that the AO’s order was not erroneous because:
- The AO conducted detailed verification through statutory notices and examined all submissions.
- The view taken - that interest income is attributable to the business of credit lending - was supported by multiple judgments of the Karnataka High Court.
- The Supreme Court’s decision in Totgars Co-operative Sale Society Ltd. v. ITO was distinguishable, as it involved retained sale proceeds from agricultural marketing, not surplus funds from core credit operations.
- Where two views are possible, the one favourable to the assessee must prevail, as held in Commissioner of Customs v. Dilip Kumar & Co.
For the Respondent
The Revenue contended that:
- Interest income from deposits with non-cooperative banks is not part of the co-operative’s business activity and must be taxed under Section 56.
- The AO failed to apply the binding precedent of Totgars and the Karnataka High Court’s decision in PCIT v. Totgars.
- The omission to disallow the deduction rendered the assessment erroneous and prejudicial to revenue under Explanation 2(d) to Section 263.
The Court's Analysis
The Tribunal emphasized that Section 263 requires twin conditions: (1) the AO’s order must be erroneous, and (2) it must be prejudicial to the interests of revenue. Neither condition was satisfied.
"Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue."
The Tribunal noted that the AO had issued detailed questionnaires under Section 142(1), specifically asking for details of investments and treatment of interest income. The assessee responded comprehensively. The AO’s conclusion that the interest was attributable to the business of credit lending was not a case of non-application of mind or failure to verify.
The Tribunal distinguished Totgars on facts: there, the interest arose from retained sale proceeds owed to members, constituting a liability. Here, the deposits were surplus funds from core operations, not liabilities. The Karnataka High Court in Guttigedarara Credit Co-operative Society Ltd. v. ITO had held that such interest is "attributable to" the business under Section 80P, given the wider meaning of "attributable" as opposed to "derived from".
The Tribunal further held that where two plausible views exist - one favouring the assessee and one favouring the Revenue - the AO’s view cannot be termed erroneous merely because the Commissioner disagrees. The Supreme Court in CIT v. Max India Ltd. and Malabar Industrial Co. Ltd. v. CIT had consistently held that revisional jurisdiction cannot be used to substitute one plausible view for another.
The Tribunal also rejected the Revenue’s reliance on Explanation 2(d), noting that the AO’s view was not contrary to any binding precedent but aligned with multiple Karnataka High Court rulings. The PCIT’s invocation of Section 263 was thus an impermissible substitution of judgment.
The Verdict
The assessee won. The Tribunal held that the AO’s order was neither erroneous nor prejudicial to revenue, as it reflected a plausible interpretation supported by jurisprudence. The PCIT’s order under Section 263 was annulled, and the original assessment stood restored.
What This Means For Similar Cases
Plausible Views Cannot Be Revised Under Section 263
- Practitioners must argue that where a legal provision permits multiple interpretations, the AO’s adoption of a reasonable view - even if later contested - cannot be grounds for revision.
- The burden is on the Revenue to prove the AO’s view is legally unsustainable, not merely incorrect or less favourable.
- Merely citing a contrary judgment does not establish error; the AO’s view must be legally untenable.
Documentation Is Key to Defending AO’s Application of Mind
- Ensure statutory notices under Section 142(1) specifically request details of disputed items (e.g., interest income, investment sources).
- Maintain a clear paper trail showing the AO examined submissions, applied mind, and recorded findings.
- Even if the order lacks detailed reasoning, the record must demonstrate verification occurred.
Section 80P Interpretation: "Attributable To" Is Broader Than "Derived From"
- Co-operative societies earning interest on surplus funds deposited in banks may claim deduction under Section 80P(2)(a)(i) if the funds are part of core credit operations.
- The term "attributable to" in Section 80P encompasses income arising from incidental but integral financial activities, not just direct lending.
- Rely on Guttigedarara and Andhra Pradesh State Co-operative Bank to argue that idle funds are not separate business but extensions of core activity.
