CIT Vs Pandyan Grama Bank (High Court Madras)
Summary: The Madras High Court dismissed seven Revenue appeals concerning Pandyan Grama Bank for assessment years 2007–08 to 2011–12, upholding the bank’s entitlement to deduction under Section 80P of the Income-tax Act, 1961. The dispute concerned whether the insertion of Section 80P(4) by the Finance Act, 2006, with effect from 1 April 2007, excluded a Regional Rural Bank from that deduction despite the statutory fiction in Section 22 of the Regional Rural Banks Act, 1976, which deems such a bank to be a co-operative society for income-tax purposes. The bank’s status as a Regional Rural Bank was undisputed throughout the assessment and revision proceedings.
For AY 2007–08, the Assessing Officer had originally accepted the deduction in the assessment completed on 19 March 2009. The Commissioner subsequently invoked Section 263, considering the assessment erroneous and prejudicial to the interests of the Revenue, and directed reconsideration of the claim. While the bank’s appeal against that revision was pending, the Assessing Officer passed a consequential order on 20 April 2010 withdrawing the deduction by applying Section 80P(4). The Tribunal quashed the revision on jurisdictional grounds and on merits, holding that the original assessment adopted a permissible view and that the deeming provision continued to apply.
The Revenue argued that the bank’s activities were akin to banking and that Section 80P(4), read with the definitions under the Banking Regulation Act, 1949, displaced its claim to deduction. It sought to classify the assessee as a primary co-operative bank or primary credit society. The bank maintained that its statutory status as a Regional Rural Bank continued and that Section 22 had not been overridden. Its counsel cited eight decisions, including those concerning Baroda Uttar Pradesh Gramin Bank, Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd., Jafari Momin Vikas Co-op. Credit Society Ltd., Vidarbha Konkan Gramin Bank, Karnataka Vikas Grameena Bank and Savera Industries Ltd.
The High Court rejected the Revenue’s attempted reclassification because it contradicted both the record and the Department’s consistent treatment of the assessee as a Regional Rural Bank, including in the consequential assessment. The definitions relied upon under Part V of the Banking Regulation Act did not govern the case on those facts. The Court treated the Regional Rural Banks Act as a self-contained enactment and held that the specific income-tax deeming fiction in Section 22 remained operative. It also upheld the Tribunal’s conclusion on Section 263, finding that the Assessing Officer had rightly granted the deduction in the original assessment. All substantial questions of law were answered in the assessee’s favour, and the appeals were dismissed without costs.
Cases Discussed
- Vidarbha Konkan Gramin Bank v. ITO — ITA No. 7/Nag/2019, dated 28 November 2024 (ITAT Nagpur). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
- Asstt. CIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. — ITA No. 163/Jodh/2019, dated 11 September 2023 (ITAT Jodhpur). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
- Karnataka Vikas Grameena Bank v. Asstt. CIT — ITA No. 611/Bang/2020, dated 5 November 2022 (ITAT Bangalore). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
- Pr. CIT v. Baroda Uttar Pradesh Gramin Bank — (2022) 447 ITR 218 (Allahabad High Court). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
- Pr. CIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. — Income Tax Appeal No. 2 of 2019, dated 13 August 2019 (Rajasthan High Court). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
- Baroda Uttar Pradesh Gramin Bank v. Dy. CIT — (2018) 169 ITD 656; (2018) 91 taxmann.com 182 (ITAT Allahabad). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
- CIT v. Savera Industries Ltd. — TCA No. 839 of 2016, dated 11 January 2017 (Madras High Court). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
- CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. — (2014) 362 ITR 331; (2014) 49 taxmann.com 571 (Gujarat High Court). Cited by the assessee in support of its claim that deduction remained available after the insertion of Section 80P(4).
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
This batch of seven appeals relate to the Pandyan Grama Bank (Bank) for assessment years (AY) 2007 – 08 (two appeals), 2008 – 09, (two appeals), 2009 – 10, 2010 – 11 and 2011 – 12.
2. The assessee / respondent is a Regional Rural Bank (RRB) governed by the provisions of the Regional Rural Banks Act, 1976 (in short ‘RRB Act’). The status of the assessee as being a RRB is not in dispute and the Department also has proceeded on the basis that it is an RRB both pre and post the proceedings under Section 263 of the Income-Tax Act, 1961 (in short, ‘IT Act’) for AY 2007 – 08, that was the genesis by which the issues under consideration arose.
3. We have heard Mr.Mahalingam, learned Senior Standing Counsel for the appellant / Department and Mr.A.S.Sriraman and Mr.R.Vijayaraghavan learned counsel for the Bank.
4. The assessee had been claiming deduction under Section 80P of the IT Act read with Section 22 of the RRB Act, which entitled it to claim the status of cooperative society by way of a deeming fiction.
5. While so, Section 80P was amended vide Finance Act 2006 by insertion of sub-section (4), with effect from 01.04.2007. Sub-section (4) provided that the benefit under Section 80P shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agriculture and rural development bank. The terms ‘co-operative bank’ and ‘primary co-operative agricultural and rural development bank’ are defined in the Explanation to Section 80P(4), and sub-section (4) and the Explanation read as follows:-
(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank.
Explanation. – For the purposes of this sub-section,-
(a)”co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(b)”primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.
6. The assessment for AY 2007 – 08 was completed originally on 19.03.2009, the assessing officer accepting the case of the assessee in relation to the deduction sought.
7. While so, the Commissioner of Income-Tax (in short ‘CIT’), being of the view that the assessment was both erroneous and prejudicial to the interests of the Revenue, exercised powers of revision under Section 263 and directed the assessing officer to re-look into the deduction sought. The order under Section 263 was the subject matter of challenge before the Tribunal, which quashed the same.
8. An order consequential to the Section 263 order came to be passed by the assessing officer on 20.04.2010, even when the appeal was pending before the Tribunal wherein, invoking Section 80P(4), the assessing authority proceeded to withdraw the deduction originally granted. It is relevant to note that even while doing so, the officer reiterates the status of the assessee as a Regional Rural Bank established under the RRB Act.
9. We first take up TC 1447 of 2010 as that relates to the challenge to order of the Tribunal setting aside the Section 263 of the order passed by the CIT. The Tribunal had allowed the appeal both on the question of jurisdiction of the officer as well on the merits of the matter.
10. As far as jurisdiction is concerned, the Tribunal proceeds on the basis that the view taken by the assessing officer at the first instance was a probable view and hence assumption of jurisdiction under Section 263 was itself bad in law.
11. That apart, and on the merits of the matter, the Tribunal noted the deeming fiction under Section 22 of the RRB Act by virtue of which, a Regional Rural Bank is to be deemed to be a co-operative society and hence concluded that the assessee which still continue to be entitled to the benefit of
12. The substantial questions of law in TCA No. 1447 of 2010 admitted on 21.02.2011 are:
“1.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in quashing the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act?
2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in quashing the order passed by the Commissioner of Income Tax under Section 264, even though the deduction under Section 80P(2)(a)(i) to the Co-operative Banks has been withdrawn by an amendment to insertion to sub-section (4) in Section 80P with effect from 1.4.2007 (Assessment year 2007-08) onwards is valid?”
13. The substantial question admitted in the other appeals relating to the claim of deduction under Section 80P is common across appeals, and reads as follows:-
“Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that in view of Sections 22 and 23 of the RRB Act, the assessee should be treated as co-operative society on the ground that the said Sections having not been overridden, when sub section 4 of Section 80P introduced by Finance Act of 2006 clearly takes a Co-operative Bank out of the purview of the deduction available under Section 80P(2) (a)(i)?”
14. Mr. Mahalingam would rely almost substantially on sub-section (4) of Section 80P inserted with effect from 1.4.2007. According to him, the activities of the assessee are akin to that of a Bank and hence, with the insertion of subsection 4 to Section 80P, the benefit of the deeming fiction under Section 22 of the RRB Act would cease. Drawing our attention to Section 56 of the Banking Regulation Act, he would submit that the assessee must be classified as a primary co-operative bank or a primary credit society, both of which have been denuded of the deduction under Section 80P on account of the insertion of subsection (4).
15. Per contra, learned counsel for the assessee would submit that the entitlement to the deduction would continue even after insertion of sub-section (4) as the status of the assessee continues to be a Regional Rural Bank and the benefit of Section 22 would hence continue to be available. Assessee relies on a slew of decisions as follows:-
(i) Pr. CIT v. Baroda Uttar Pradesh Gramin Bank 447 ITR 218 (Allahabad)
(ii) Pr. CIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. [Income Tax Appeal No. 2 of 2019, dated13-8-2019]
(iii) CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. 362 ITR 331 (Gujarat)
(iv) Baroda Uttar Pradesh Gramin Bank v. Dy. CIT 169 ITD 656 (Allahabad – Trib.)
(v) Asstt. CIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. [IT Appeal No. 163 (Jodh.) of 2019, dated 11-9-2023]
(vi) Vidarbha Konkan Gramin Bank v. ITO [IT Appeal No. 7 (Nag.) of 2019, dated 28-11-2024]
(vii) Karnataka Vikas Grameena Bank v. Asstt. CIT [IT Appeal No. 611 (Bang) of 2020, dated 5-11-2022]
(viii) CIT v. Savera Industries Ltd. TCA No. 839 of 2016, dated 11-1-2017]
16. We have heard both learned counsel and also perused the material papers and the case law cited.
17. To reiterate, the status of the assessee as a Regional Rural Bank has never been questioned by the Revenue. In fact, in order of assessment under Section 143(3) for AY 2007 – 08, the assessing authority has granted the deduction under Section 80P recording categorically that the assessee is a Regional Rural Bank entitled to the benefit of Section 22 of the RRB Act.
18. Even post the order passed under Section 263 by the CIT, the assessing authority, in the consequential order passed under Section 143(3) read with Section 263 on 20.4.2010, reiterates the position that the assessee was a Regional Rural Bank governed by the RRB Act. Hence there is absolutely no merit whatsoever in the learned Standing Counsel putting forth an altogether different case now, particularly, one that is at variance with the facts on record and the stand of the revenue in the entire proceedings.
Part V of the Banking Regulation Act, to which our attention has been drawn by Mr.Mahalingam, in our considered view, does not have any application to this case. References has been made to the definitions of primary co-operative bank and primary credit society under Section 56(ccv) and (ccvi) as below:-
(ccv) “primary Co-operative Bank” means a co-operative society, other than a primary agricultural credit society-
(1) the primary object or principal business of which is the transaction of banking business;
(2) the paid-up share capital and reserves of which are less than one lakh of rupees; and
(3) the bye-laws of which do not permit admission of any other co-operative society as a member:
Provided that this sub-clause shall not apply to the admission of a Co-operative Bank as a member by reason of such Co-operative Bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose.
(ccvi) “primary credit society” means a co-operative society, other than a primary agricultural credit society,-
(1) the primary object or principal business of which is the transaction of banking business;
(2) the paid-up share capital and reserves of which are less than one lakh of rupees; and
(3) the bye-laws of which do not permit admission of any other co-operative society as a member:
Provided that this sub-clause shall not apply to the admission of a Co-operative Bank as a member by reason of such Co-operative Bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose.
20. In our considered view, these references are not material to this matter as it has never been the case of the Revenue that the assessee falls within the description of either a primary co-operative Bank or primary credit society. We thus reject the argument that the assessee bank falls under the categories of entities referred to in Section 80P(4) of the Act.
21. The functioning of Regional Rural Banks is governed by the Regional Rural Bank Act that defines an RRB, under Section 3 of the RRB Act as a body corporate with perpetual succession and a common seal with power. It may subject to the provisions of this Act, engage in the following activities: acquire, hold and dispose of property and contract and sue and be sued in its name, subscribe to the share capital of such Regional Rural Bank, train personnel of such Regional Rural Bank, and provide managerial and financial assistance to such Regional Rural Bank, as may be mutually agreed upon between the Sponsor Bank and the Regional Rural Bank.
22. The RRB Act goes on to deal in extenso with the method of incorporation, activities and other aspects germane to the functioning of an RRB and is hence a self-contained enactment governing all aspects of the functioning of an RRB. Section 22 of the RRB Act contains a fiction by virtue of which an RRB is deemed to be a co-operative society for the purposes of the Income-Tax Act, 1961. Section 22 reads as follows:-
“Regional Rural bank to be deemed to be a co-operative society for purpose of the Income-tax Act, 1961. – For the purpose of the Income-tax Act, 1961 (43 of 1961), or any other enactment for the time being in force relating to any tax on income, profits, or gains, a Regional Rural Bank shall be deemed to be a co-operative society.”
23. Section 80P(1) grants deduction to a cooperative society in respect of the incomes as enumerated under sub-section (2) thereof, and the deeming fiction under Section 22 of the RRB Act, which is specific to the provisions of the IT Act, has not been overridden in any manner till date.
24. We also concur with the findings of the Tribunal in relation to the assumption of jurisdiction under Section 263 as, in our considered view, the officer in the order of assessment passed at the first instance, had rightly granted the deduction under Section 80P in view of Section 22 of the RRB Act.
25. In light of this discussion, the substantial questions are answered in favour of the assessee, and these appeals are dismissed. No costs.
Notes:
1 447 ITR 218 (Allahabad)
2 DB Income Tax Appeal No.2/2019 dated1
3 08.2019 3 (2014) 49 taxmann.com 571 (Gujarat)
4 (2018) 91 taxmann.com 182 (Allahabad – Trib)
5 ITA No.163/Jodh/2019 dated 11.09.2023
6 ITA No.7/Nag./2019 dated 28.11.2024
7 ITA No. 611/Bang/2020 dated 5.11.2022
8 TCA No.39 of 2016 dated 11.1.2017
