The Income Tax Appellate Tribunal (ITAT), Bangalore, has deleted a ₹23.31 lakh penalty imposed on a cooperative housing society after it claimed a ₹37.82 lakh deduction on interest income. According to reports from Mint, the tribunal ruled that a fully disclosed, bona fide claim on a debatable tax issue does not amount to misreporting. The ruling in Pashupalana Elake Noukarara Gruha Nirmana Sanga Nigama v. Income Tax Officer, ITA No. 2366/Bang/2025, concerned assessment year 2018-19. The case involved a Mysore-based cooperative housing society that had filed its return on 29 September 2018, declaring nil income and disclosing interest income from various banks including ₹40.21 lakh from MCD Cooperative Central Bank, ₹48,245 from Karnataka Bank, and ₹80,839 from the Income Tax Department.
The society claimed ₹37.82 lakh as deduction under section 80P(2)(d) and another ₹50,000 under section 80P(2)(c)(ii) on interest income from bank deposits. During scrutiny, the assessing officer disallowed the section 80P deduction, relying on a Karnataka High Court ruling that held interest earned by cooperative societies on deposits with cooperative banks was not eligible for deduction under section 80P(2)(d). The assessment order also initiated penalty proceedings under Section 270A, with the disputed deduction amounting to ₹37.82 lakh and tax calculated at around ₹11.65 lakh. The penalty was then imposed at 200% of the tax, resulting in the final penalty of ₹23.31 lakh.
The Bangalore ITAT agreed with the taxpayer's arguments that the claim was made in good faith and all relevant details were disclosed. According to Mint, the tribunal noted that while one Karnataka High Court ruling had gone against the taxpayer, an earlier Karnataka High Court decision dated January 5, 2017 had allowed such deductions, while another decision dated June 16, 2017 took a different view. The tribunal also pointed out that the adverse decision was pending before the Supreme Court in a special leave petition. It further noted that several other judicial decisions had allowed similar deduction claims, making the question of whether interest earned from cooperative banks qualified for deduction under section 80P(2)(d) a highly debatable issue. The tribunal emphasized that merely making a tax claim that is later rejected does not automatically mean the taxpayer has misreported income.
The ITAT found procedural problems in the penalty proceedings, as reported by Mint. The initial penalty notice referred only to under-reporting, while the final penalty order imposed a penalty for under-reporting arising from misreporting. The tribunal noted that the taxpayer had disclosed the relevant facts and its claim did not fall within any of the specified categories of misreporting under section 270A(9). Even if the income could technically be regarded as under-reported, the taxpayer's bona fide claim was covered by the exclusion under section 270A(6)(a). The tribunal found that the charge against the assessee was neither proper nor precise, as the conditions for imposing a penalty at 200% of taxable income were not met.
The ruling establishes that a claim that is transparently disclosed but later rejected on a debatable interpretation of tax law does not, by itself, establish misreporting. According to Mint, the distinction between a wrong or unsuccessful legal claim and misreporting of facts can be significant when the tax department considers a penalty under section 270A. The tribunal emphasized that this case does not mean every incorrect deduction claim will escape penalty, as the facts were important - the taxpayer had disclosed the income and deduction claim, and the underlying tax position was subject to conflicting judicial interpretations. As noted by Dinkar Sharma, Partner at Jotwani Associates, the ruling highlights the important distinction between a wrong or unsuccessful tax claim and misreporting of income, where a taxpayer has disclosed all material facts and the claim is based on a genuinely debatable legal position.
