ITAT Bangalore Quashes PCIT's Revision Orders: Interest Income from Banks Qualifies for 80P Deduction as Business Income

The Income Tax Appellate Tribunal (ITAT) Bangalore Bench, comprising Vice President Shri Prashant Maharishi and Judicial Member Shri Keshav Dubey, has ruled in favor of two co-operative credit societies, annulling revision orders passed by Principal Commissioners of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. In a common order dated December 3, 2025, for Assessment Year 2020-21, the Tribunal held that the Assessing Officer's (AO) acceptance of deductions under Section 80P(2)(a)(i) for interest income earned on deposits with co-operative and commercial banks was a plausible view and not erroneous or prejudicial to revenue interests.

Case Overview

The appeals, ITA No. 1074/Bang/2025 and ITA No. 1072/Bang/2025, were filed by M/s. Bhavana Co-op. Credit Society Niyamita (Hubli) and M/s. Gonikoppal Primary Rural Agricultural Credit Co-operative Society Ltd. (Kodagu), respectively, against revision orders dated March 25, 2025, and March 24, 2025, by PCIT Hubli and PCIT Bengaluru-3. Both societies, engaged in providing credit facilities to members, filed returns declaring nil income after claiming full deductions under Section 80P(2)(a)(i) on their gross receipts, including interest income of approximately Rs. 39.66 lakhs from fixed deposits and investments in banks.

The cases were selected for scrutiny under CASS due to high liabilities, low income relative to advances, and Chapter VI-A deductions. The AO, after issuing notices under Sections 143(2) and 142(1) and examining submissions, details of bank accounts, and eligibility criteria, completed assessments under Section 143(3) read with 144B on September 2, 2022, accepting the returns as filed.

PCITs invoked Section 263, arguing the AO erred by not taxing the interest as "income from other sources" under Section 56, relying on the Supreme Court's decision in Totagars Co-operative Sale Society Limited v. ITO (322 ITR 283). They set aside the assessments for fresh examination, deeming the orders erroneous and prejudicial under Explanation 2 to Section 263.

Arguments Presented

Assessee's Contentions:
Represented by Sri V. Srinivasan, the assessees argued that the AO applied due diligence, verifying documents and explanations, and rightly treated the interest as business income attributable to providing credit facilities. They emphasized compliance with the Karnataka Co-operative Societies Act, where surplus funds from member deposits are statutorily required to be invested in banks. Reliance was placed on Karnataka High Court rulings like Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO (230 Taxman 309) and Guttigedarara Credit Co-operative Society Ltd. v. ITO (377 ITR 464), holding such interest eligible for Section 80P(2)(a)(i) deduction. Alternatively, they sought deduction under Section 80P(2)(d). The assessees contended that PCIT cannot substitute their judgment for the AO's plausible view, and two interpretations exist on the issue.

Revenue's Contentions:
Sri Shivanand H Kalakeri, for the Department, supported the PCIT orders, asserting the interest on fixed deposits with banks (co-operative or commercial) is taxable under "income from other sources" per Totagars (SC) and Karnataka HC's affirmance in Pr. CIT v. Totagars Co-operative Sale Society Ltd. (395 ITR 611). They argued the AO failed to inquire properly, attracting clauses (a) and (d) of Explanation 2 to Section 263, and distinguished co-operative societies from banks under Supreme Court precedents like Citizen Co-operative Society Ltd. (397 ITR 1).

Key Precedents and Principles Applied

The Tribunal distinguished Totagars , noting it involved interest on members' retained sale proceeds (a liability), unlike here where funds were surplus from member deposits, attributable to the core business of credit provision. Citing Guttigedarara Credit Co-operative Society Ltd. (supra), the ITAT explained "attributable to" under Section 80P is broader than "derived from," encompassing interest on idle business funds.

The Tribunal reaffirmed principles from Malabar Industrial Co. Ltd. v. CIT (243 ITR 83, SC) that Section 263 requires both error and prejudice; a plausible view by the AO, even if debatable, cannot be revised. It invoked Karnataka HC's CIT v. Chemsworth Pvt. Ltd. (275 Taxman 408), holding mere inadequacy of inquiry does not justify revision if the AO examined records and took a tenable position.

Other supportive precedents included Lalitamba Pattina Souhardasahakari Niyamita v. ITO (ITA No. 100004/2018) and ITAT's Shri Mahaveer Co-operative Credit Society Ltd. v. ITO (ITA No. 06/Bang/2025). Contrasting views like Judicial Employees House Building Cooperative Society Limited v. ITO (ITA No. 93/2024) were acknowledged, but the Tribunal stressed the AO's view was sustainable, applying CIT v. Dilip Kumar & Co. (95 taxmann.com 327, SC) favoring the assessee in interpretive ambiguities.

Pivotal excerpt from the judgment:
> "Where two views are possible and the AO had taken one of the views, then also the same could not have been interfered with. Section 263 of the Act does not visualize a case of substitution of the judgment of the Commissioner for that of the subordinate authority."

Tribunal's Decision and Implications

The ITAT held the AO's inquiries under Section 142(1)—including deduction details, earnings, eligibility, bank statements, and evidence—demonstrated application of mind. No clause of Explanation 2 to Section 263 applied, as the order was neither without inquiry nor contrary to binding precedents. The revision orders were annulled, appeals allowed, and assessments restored.

This ruling reinforces protections for co-operative societies' Section 80P claims on bank interest, clarifying that PCITs cannot revise based on differing interpretations alone. It promotes certainty in tax assessments for primary credit societies, potentially benefiting similar entities by upholding AO discretion where views are plausible. The decision, applicable mutatis mutandis to both appeals, underscores the limited scope of revisional jurisdiction post-Finance Act, 2015 amendments.