Regional Rural Bank Wins: ITAT Allows 80P Deduction, Declines to Uphold Reassessment

The assessee, being a Regional Rural Bank governed by the RRB Act, filed its return for AY 2016–17, claiming deduction under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer reopened the case under Section 147 and denied the deduction, treating the bank as a cooperative bank ineligible for such benefit. Consequently, the total income was assessed at Rs. 67.65 crore.

The bank challenged the reassessment and denial of deduction before the CIT(A), which allowed the appeal by following consistent Tribunal rulings in the assessee’s favour. The Revenue filed an appeal before the ITAT. In contrast, the assessee filed a cross-objection challenging the validity of the reassessment and the denial of deduction on interest earned from the income tax refund.

Main Issues: Eligibility of the bank for deduction under Section 80P, validity of reassessment under Section 147 without fresh material, entitlement to deduction on refund interest under Section 80P, and correctness of interest computation under Section 244A.

ITAT Decision: The ITAT upheld the CIT(A)’s decision, holding the assessee eligible for deduction under Section 80P as a deemed cooperative society under Section 22 of the RRB Act, with Section 32 overriding conflicting laws and CBDT circulars. The Tribunal also permitted the deduction of interest from tax refunds as business income, citing Punjab State Co-op Bank Ltd., based on previous decisions and the Bhilwara Zila case.

The Revenue’s appeal was rejected, and the AO was instructed to recalculate interest under Section 244A from the TDS payment date, and the reassessment issue was left unresolved.

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