2025 (1) TMI 1660 - AT - Income Tax

Assessee's s.80P(2)(d) deduction for cooperative bank interest not to be denied solely for reporting errors; AO must reassess

ITAT, Mumbai - AT held that the assessee's deduction claim under s.80P(2)(d) for interest from a co-operative bank cannot be summarily disallowed merely ... Deduction u/s 80P(2)(d) - interest income received from Co-operative Bank -adjustment proposed by the Central Processing Centre (CPC) under Section 143(1)(a) - assessee submitted that interest income was earned from deposit made with the co-operative bank, which is deemed to be interest income earned from the co-operative societies and eligible for deduction u/s 80P(2)(d) - HELD THAT:- Claim of the assessee cannot be summarily rejected merely due to incorrect reporting of interest and dividend income in the return of income. The intent and substance of the claim, as well as the supporting evidence, need to be examined in detail. It is well settled that procedural errors in reporting should not override the substantive rights of the taxpayer. The principle of natural justice demands that the claim of the assessee be duly considered by the AO after providing a reasonable opportunity to the assessee to clarify and substantiate its claim. In view of the above, we restore the matter to the file of the AO for fresh adjudication. AO is directed to: (i) Examine the claim of interest and dividend income in detail, ensuring that all relevant evidence and explanations provided by the assessee are taken into account. (ii) Examine the eligibility of the deduction claimed u/s 80P(2)(d) of the Act in accordance with the law. AO is accordingly directed to decide the issue of interest earned from cooperative banks after duly considering the provisions of the Act and judicial precedents, if any. The grounds raised by the assessee are allowed for statistical purposes ISSUES PRESENTED AND CONSIDERED 1. Whether interest income earned from deposits with a co-operative bank qualifies for deduction under Section 80P(2)(d) of the Income-tax Act when claimed by a co-operative society. 2. Whether an adjustment disallowing Section 80P(2)(d) claimed by the taxpayer may be validly made by the Central Processing Centre under Section 143(1)(a) on the ground of incorrect reporting in the return, without affording the assessee an opportunity for detailed adjudication. 3. Whether denial of the deduction on account of a procedural or reporting lapse contravenes principles of natural justice and the doctrine of substantial justice, and if so, what relief is appropriate. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility under Section 80P(2)(d): Legal framework The statutory provision grants deduction to specified co-operative societies in respect of income which includes interest 'from co-operative societies' as defined under the provision. The legal inquiry requires examining whether interest from deposits with a co-operative bank falls within the phraseology of Section 80P(2)(d) when claimed by a co-operative premises society. Precedent Treatment The Tribunal noted earlier decisions addressing similar claims; however, a number of those decisions were rendered in the context of assessment proceedings under Section 143(3) rather than processing under Section 143(1). One reported order dealing specifically with Section 143(1) was identified as directly relevant. The Tribunal treated decisions rendered under Section 143(3) as inapplicable to summary processing issues under Section 143(1). Interpretation and reasoning The Tribunal did not finally decide the substantive question of whether the interest qualifies under Section 80P(2)(d) on merits. Instead, it directed that the Assessing Officer examine the factual matrix and legal applicability of Section 80P(2)(d) after considering all evidence and explanations. The reasoning emphasises that entitlement under Section 80P(2)(d) depends on a fact-sensitive determination which cannot be concluded on the basis of a processing adjustment alone. Ratio vs. Obiter Ratio: It is a core holding that the substantive eligibility for deduction under Section 80P(2)(d) cannot be finally negatived by an automated or summary processing exercise without detailed adjudication; entitlement requires consideration of evidence and legal tests by the Assessing Officer. Obiter: The Tribunal's references to particular prior orders (other than the one addressing Section 143(1)) are treated as contextual and do not constitute binding determination on the statutory scope of Section 80P(2)(d). Conclusion The question of whether interest from deposits with a co-operative bank qualifies for deduction under Section 80P(2)(d) is remitted to the Assessing Officer for fresh adjudication; no conclusive finding on the substantive tax entitlement was made by the Tribunal. Issue 2 - Legitimacy of CPC adjustment under Section 143(1)(a) for incorrect reporting Legal framework Section 143(1)(a) permits processing of returns and issuance of intimation for arithmetic or clerical errors and adjustments discovered in automated processing. The CPC routinely compares reported heads of income with schedules and other return particulars to detect discrepancies. Precedent Treatment The Tribunal distinguished precedents decided in the context of assessments under Section 143(3) from those concerning intimation under Section 143(1). It treated a reported order dealing specifically with Section 143(1) as the only directly comparable authority; other decisions were regarded as inapplicable for the purpose of summary processing. Interpretation and reasoning The Tribunal held that an automated or summary processing adjustment under Section 143(1)(a) should not operate to finally deny a substantive deduction where the return contains a reporting error that can be clarified by the taxpayer. The CPC's mechanistic conclusion that gross total income did not include interest or dividend income because of placement in schedules was insufficient ground to deny the deduction without opportunity for detailed examination. The Tribunal emphasised the limits of CPC summary reassessment and the necessity of allowing the Assessing Officer to examine facts and supporting evidence on record. Ratio vs. Obiter Ratio: An intimation under Section 143(1)(a) arising from CPC processing cannot conclusively deny a taxpayer's substantive claim where the denial flows from an inadvertent or clerical mis-reporting; the matter must be afforded full adjudication by the Assessing Officer if the taxpayer furnishes explanations and evidence. Obiter: Observations as to which specific precedents are inapplicable (i.e., those from Section 143(3) context) are explanatory and contextual to the adjudication of summary processing limits. Conclusion The CPC's summary adjustment disallowing Section 80P(2)(d) solely on the basis of return presentation was held to be inappropriate for final decision; the matter is remitted to the Assessing Officer for detailed examination and determination in accordance with law. Issue 3 - Procedural lapse, natural justice and substantial justice Legal framework Principles of natural justice require that a taxpayer be given opportunity to explain, substantiate and produce evidence for claims made in a return. The doctrine of substantial justice prevents denial of substantive statutory benefits for mere procedural or technical errors where legislative conditions for entitlement are satisfied. Precedent Treatment The Tribunal referenced judicial sentiment that tax benefits should not be denied for technical or minor procedural errors and distinguished authorities according to whether they addressed substantive assessment proceedings or summary processing intimations. Interpretation and reasoning The Tribunal reasoned that the assessee's explanation of inadvertent mis-reporting warranted a full opportunity for the Assessing Officer to examine supporting evidence. Summary processing that deprives a taxpayer of a claimed statutory deduction on the basis of presentation alone offends the principles of natural justice and substantial justice. Accordingly, the Tribunal directed remand so that the AO may reconsider the claim after providing requisite opportunity and applying statutory tests and precedents. Ratio vs. Obiter Ratio: Procedural lapses in reporting cannot be the sole basis to deny substantive tax benefits without allowing the assessee to substantiate the claim; natural justice requires adjudicatory opportunity before final denial of deductions via CPC processing. Obiter: Comments on the broader policy against denying tax benefits for minor procedural errors serve as guiding principle rather than an exhaustive legal rule for all contexts. Conclusion The Tribunal held that denial of deduction on the ground of reporting error without detailed adjudication violates natural justice and substantial justice; it ordered remand to the Assessing Officer to examine evidence, eligibility under Section 80P(2)(d) and relevant judicial precedents, and to afford the assessee appropriate opportunity to substantiate the claim. Relief and Disposition The appeal was allowed for statistical purposes and the matter restored to the file of the Assessing Officer with directions to examine in detail the interest and dividend reporting, to consider eligibility for deduction under Section 80P(2)(d) in accordance with law and precedents, and to give the assessee opportunity to substantiate the claim; no final adjudication on the substantive deductibility was made by the Tribunal.