Bank Attachment Fails to Consider Section 80P(2) Exemption: Karnataka HC Quashes Ex-Parte Income Tax Assessment Order [Read Order]

In a recent ruling, the Karnataka High Court set aside an ex-parte income tax assessment order after finding that the authorities failed to consider the Petitioner's claim for exemption under Section 80P(2) of the Income Tax Act and wrongly treated farmer deposits as unexplained income.

The case involved Prathamika Krishi Pathina Sahakara Sangha Niyamitha, a Credit Co-operative Society, which challenged the assessment order and subsequent bank attachment notices. The Petitioner contended lthat they could not participate in the original proceedings because their auditor failed to inform them about the notices issued under Section 148 of the Act.

The Petitioner argued that the Assessing Officer had treated member deposits as unexplained credits and disallowed the exemption under Section 80P(2) without verifying the facts. It was submitted that the Society possessed necessary material to prove that the deposits belonged to farmers and were eligible for exemption.

The Revenue opposed the petition, arguing that the Petitioner was not diligent in participating in the proceedings, leaving the authority with no option but to pass an order based on available material.

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The bench of Justice S Sunil Dutt Yadav perused the assessment order and noted that the Petitioner had not participated in the proceedings, leading to additions on the head of unexplained sales and the denial of the Section 80P(2) exemption.

The Court observed:

“Noticing the assertion of the petitioner that it is a Credit Co-operative Society and that they have material to demonstrate under Section 80P(2) as well as material to demonstrate and meet the grounds raised in the show-cause notice... and noticing the financial prejudice that may be caused to the petitioner if order is allowed to remain, the petition requires to be allowed, while affording an opportunity to the petitioner to participate in the assessment proceedings.”

The High Court allowed the petition and set aside the assessment order, demand notice, and the bank attachment order. The matter was remitted to the stage of the notice issued under Section 148A(b) for fresh consideration. The Court directed the Petitioner to appear before the Income Tax Officer on 25.05.2026 and imposed a cost of Rs. 10,000/- payable to the Karnataka Advocates Clerks Benevolent Trust.

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