ITAT Ahmedabad: Debatable Issues Cannot Be Rectified Under Section 154; Relief to Madhavpura Mercantile Co-op Bank

April 7, 2026 : The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has reiterated that issues involving interpretation of law and capable of multiple views fall outside the scope of rectification under Section 154 of the Income Tax Act, 1961. Granting substantial relief, the Tribunal quashed the rectification order passed against The Madhavpura Mercantile Co-Operative Bank Ltd. (under liquidation) and also allowed deduction of bad debts for a subsequent year.

The ruling was delivered by a Bench comprising Judicial Member Suchitra R. Kamble and Accountant Member Narendra Prasad Sinha in a common order dated April 7, 2026.

Rectification under Section 154: Limited Scope Reaffirmed

For Assessment Year 2016–17, the assessee had originally declared nil income after setting off brought forward business losses exceeding ₹54.28 crore. The assessment was completed under Section 143(3) at nil income.

Subsequently, the Assessing Officer invoked Section 154 and treated ₹8.15 crore arising from sale of depreciable assets as short-term capital gains under Section 50, disallowing its set-off against brought forward business losses.

The Tribunal noted that the issue—whether such gains could be set off against business losses—was debatable, with divergent judicial precedents, including decisions permitting such set-off. It held that:

• Section 154 is confined to patent and obvious mistakes
• Issues requiring interpretation or involving competing legal views cannot be rectified
• The Assessing Officer had effectively attempted a review of the original assessment, which is impermissible under Section 154

On this basis, the Tribunal quashed the rectification order, holding that the jurisdiction under Section 154 had been wrongly invoked.

No Diversion of Income to DICGC by Overriding Title

The assessee argued that, being under liquidation, its income was diverted at source to the Deposit Insurance and Credit Guarantee Corporation (DICGC) due to overriding title.

The Tribunal rejected this contention, clarifying that:

• The Supreme Court decision in Deposit Insurance and Credit Guarantee Corporation v. Raghupathi Raghavan only establishes priority of payment to DICGC
• Income first accrues to the bank (through the liquidator)
• DICGC merely has preferential recovery rights, not ownership of income at source

Accordingly, the theory of diversion of income by overriding title was held inapplicable.

Bad Debts Allowed: No Need to Prove Irrecoverability

For Assessment Year 2017–18, the Tribunal dealt with disallowance of bad debts amounting to ₹54.36 lakh.

Allowing the claim, the Tribunal held:

• The debts were written off in the books of account
• They arose in the ordinary course of banking business
• The Assessing Officer failed to provide any valid basis for disallowance

Reaffirming settled law post-amendment, the Tribunal observed that:

• It is not necessary to prove that the debt has become irrecoverable
• Writing off in books is sufficient to claim deduction under Section 36(1)(vii), read with Section 36(2)

The addition was accordingly deleted.

Outcome

• AY 2016–17: Rectification order under Section 154 quashed
• AY 2017–18: Disallowance of bad debts deleted
• Appeals partly allowed in favour of the assessee

Cause Title: The Madhavpura Mercantile Co-Operative Bank Ltd. (Under Liquidation) v. ACIT
Case No.: ITA Nos. 2241 & 2242/Ahd/2025