Tax department rejected ₹37.82 lakh deduction, but ITAT cancelled the 200% penalty: What the ruling means

A Bangalore ITAT ruling has deleted a ₹23.31 lakh penalty imposed on a cooperative housing society that claimed a ₹37.82 lakh deduction under section 80P. The tribunal said a fully disclosed, bona fide claim on a debatable tax issue does not amount to misreporting.

A tax deduction claim that is later rejected by the Income Tax Department does not automatically amount to misreporting of income, the Income Tax Appellate Tribunal (ITAT), Bangalore, has ruled. The tribunal deleted a ₹23.31 lakh penalty imposed on a cooperative housing society after it claimed a ₹37.82 lakh deduction on interest income.

The ruling in Pashupalana Elake Noukarara Gruha Nirmana Sahakara Sanga Nigama v. Income Tax Officer, ITA No. 2366/Bang/2025, concerned assessment year 2018-19. The tribunal held that the deduction claim was a debatable legal issue, particularly because there were conflicting judicial decisions on whether such interest income qualified for deduction under section 80P(2)(d) of the Income-tax Act.

Why was the ₹37.82 lakh deduction rejected?

The Mysore-based cooperative housing society had filed its return on 29 September 2018, declaring nil income. It disclosed interest income from various banks and claimed ₹37.82 lakh as deduction under section 80P(2)(d). It also claimed another ₹50,000 under section 80P(2)(c)(ii).

During scrutiny, the assessing officer disallowed the section 80P deduction. The officer relied on a Karnataka High Court ruling that had held that interest earned by a cooperative society on deposits with cooperative banks was not eligible for deduction under section 80P(2)(d) in the circumstances of that case.

The department subsequently initiated penalty proceedings under section 270A. It treated the deduction claim as misreporting of income and determined the under-reported income at ₹37.82 lakh. Tax on the amount was calculated at about ₹11.65 lakh, resulting in a penalty of ₹23.31 lakh, equivalent to 200% of the tax.