ITAT: Section 36(1)(viia) Deduction Allowed on Total Income; Section 263 Revision Upheld Only for 14A Non-Examination

Nutan Nagarik Sahakari Bank Ltd. filed its return for A.Y. 2020-21, declaring income of Rs. 17.15 crore, and the assessment was completed under Section 143(3) without any variation. During post-assessment scrutiny, the Principal CIT invoked Section 263 on two grounds, the Assessing Officer wrongly allowed deduction under Section 36(1)(viia) by computing it on total income including capital gains, and second, that the AO failed to apply Section 14A despite the assessee earning exempt interest from tax-free bonds.

The PCIT held that the AO had allowed an excessive deduction and made no inquiry about disallowance relating to exempt income, rendering the assessment both erroneous and prejudicial to the Revenue. The assessee challenged the revision and argued that both issues were thoroughly examined during assessment proceedings.

Central Issue: Whether the PCIT validly exercised revisional jurisdiction under Section 263 in respect of (i) deduction under Section 36(1)(viia), and (ii) non-application of Section 14A, considering whether the AO’s order was erroneous and prejudicial to the interests of the Revenue.

ITAT’s Verdict: The Tribunal held that the PCIT’s revision on the Section 36(1)(viia) issue was untenable. The Bench observed that the statutory language of Section 36(1)(viia) expressly refers to “total income,” which, when read with Sections 2(45) and 5, includes income from all sources. The provision contains no restriction limiting computation to business income, and neither courts nor tax authorities may read such a limitation into the statute. Since the AO had computed the deduction in conformity with the clear wording of the law, and the view taken was legally sustainable after due enquiry, the assessment was not erroneous on this aspect. The revision was therefore quashed to that extent.

However, on the Section 14A issue, the Tribunal found that the AO had not examined the exempt interest income or recorded any satisfaction regarding the applicability or non-applicability of Section 14A read with Rule 8D. This complete lack of enquiry justified the PCIT’s assumption of jurisdiction. The revision was therefore upheld on this limited issue. The assessee’s appeal was partly allowed.

To Read Full Judgment, Download PDF Given Below