ITAT Curbs Revisionary Powers: Assessment Based on Binding Precedent Stands Valid

In a significant ruling for co-operative societies, the Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has reinforced the limits of revisionary powers under Section 263 of the Income Tax Act. The Tribunal held that an assessment order cannot be termed "erroneous and prejudicial to the interests of the revenue" if the Assessing Officer (AO) has taken a view consistent with existing binding judicial precedents.

The Background of the Dispute

The appeal was filed by Sri Jayachamaraja Credit Co-operative Society Ltd. regarding a revision order passed by the Principal Commissioner of Income Tax (PCIT). The dispute centered on the Society's claim for a deduction under Section 80P(2)(a)(i) of the Act for interest income earned on investments made with banks and financial institutions.

The PCIT sought to revise the original assessment order, arguing that such interest income should have been taxed as "Income from Other Sources" under Section 56 rather than professional business income, citing the Supreme Court’s decision in Totgars Co-op. Sale Society Ltd. v. ITO .

Arguments at Play

The Society maintained that its interest income was inextricably linked to its primary business of providing credit facilities to its members, authorized under the Karnataka Co-operative Societies Act. Relying on the jurisdictional High Court’s ruling in Tumkur Merchants Souharda Credit Co-op. Ltd. , the tax counsel argued that the AO had conducted a thorough inquiry during the original assessment and that their interpretation of the law was one of the two "possible views" permissible under the law.

Conversely, the Revenue contended that the AO had failed to conduct sufficient verification, warranting the invocation of the revisionary power under Section 263 to correct an order they deemed fundamentally flawed.

Key Observations

The Tribunal highlighted the necessity of judicial consistency, noting that when an AO follows the view of the jurisdictional High Court, their decision cannot be labeled as "erroneous."

• "We hold that the order passed by the ld AO was based on binding judicial precedents could not be held to be erroneous and prejudicial to the interest of revenue and hence, order passed by the ld. PCIT u/s. 263 of the Act is not sustainable and hence quashed."
• "So, the decisions which were a binding judicial precedent, followed by the ld AO, such order could not be treated as erroneous."
• "Anyway, there were 2 decisions of Hon’ble Karnataka High Court dealing with the same issue, and the ld. AO has followed one of them. Therefore naturally there were 2 views possible and following one of the views does not make an order erroneous."

Legal Analysis and Decision

The Tribunal’s Bench—comprising Shri Prashant Maharishi (Vice President) and Shri Soundararajan K. (Judicial Member)—dismissed the PCIT’s order. They emphasized that the AO had issued a show-cause notice during the original proceedings and had applied their mind to the specific factual matrix before accepting the Society's return.

Furthermore, the ITAT pointed to more recent Supreme Court developments, such as the Mavilayi Service Co-operative Bank Ltd. case, confirming that the statutory provisions do not mandate the assessee be a primary agricultural credit society to claim 80P(2)(a)(i) deductions.

By quashing the revisionary order, the ITAT has reaffirmed the principle that tax authorities cannot use Section 263 as a tool to merely substitute one valid legal opinion for another, particularly when the original assessment is backed by High Court rulings. This decision provides much-needed relief to credit co-operative societies operating within Karnataka, shielding them from repeated litigation on long-standing operational issues.