PCIT Vs Peroorkada Service Co-operative Bank Ltd (Kerala High Court)
The Peroorkada Service Co-Operative Bank Ltd found itself in a legal battle that revolved around Section 80P of the Income Tax Act. Specifically, the issue at hand was the interest income earned by the bank from investments of surplus funds in cooperative banks and treasuries. This article delves into the case of ITA NO. 323 OF 2019, discussing the crucial aspects and outcomes.
Section 80P and Interest Income: The primary contention in this case was whether the interest income earned by the assessee, which resulted from investing surplus funds in cooperative banks and treasuries, falls within the purview of Section 80P(2)(a)(i) of the Income Tax Act. The claim was that this income should be entirely deductible. However, the Assessing Officer disagreed and treated the interest income as non-business income, rejecting the deduction claim.
Facts: The assessee was involved in banking activities and providing credit facilities to its members. They argued for a full deduction under Section 80P(2)(a)(i) and included interest income from surplus funds as business income eligible for deduction. The Assessing Officer, though, denied this claim, categorizing the interest income as non-business income. Furthermore, it was determined that the interest income did not align with Section 80P(2)(d) of the Act, resulting in the rejection of the deduction request.
Held: The authorities stated that to benefit from Section 80P(2)(a), the institution must satisfy two key requirements. First, it must be a cooperative society. In this case, this requirement was met. However, it must also establish that the interest income derives from banking activities or providing credit facilities. In this scenario, the interest income from depositing idle funds did not qualify under Section 80P(2)(a)(i).
Section 80P(2)(d) – A Saving Grace: Section 80P(2)(d) deals with interest derived by cooperative societies from investments with other cooperative societies. The authorities clarified that income earned from District Cooperative Banks and State Cooperative Banks falls under Section 80P(2)(d) and is thus eligible for deduction. Therefore, income sourced from the treasury is not eligible for deduction, whereas interest income from cooperative societies registered under the Kerala Cooperative Societies Act qualifies.
Conclusion: The Kerala High Court’s decision in ITA NO. 323 OF 2019 clarified that the interest income earned by the Peroorkada Service Co-Operative Bank Ltd from investing surplus funds did not fall within Section 80P(2)(a)(i) but found eligibility for deduction under Section 80P(2)(d) for income from specific cooperative societies. This ruling offers important insights into the interpretation of tax laws concerning cooperative banks’ interest income, emphasizing the need for a precise understanding of the provisions.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
S.V.Bhatti, J.
Heard learned Standing Counsel Mr Christopher Abraham for appellant and Mr C A Jojo, learned counsel for respondent in ITA Nos.323/2019 and 5/2020. No representation for respondent in ITA No.142/2019.
ITA No.142/2019 [Assessment Year 2014-15]
2. The Principal Commissioner of Income Tax -Thiruvananthapuram/Revenue is the appellant. Vilappil Service Co-operative Bank Ltd, Peyad, Thiruvananthapuram/assessee is the respondent. The appeal is at the instance of the Revenue under Section 260A of the Income Tax Act, 1961 (for short ‘the Act’) against the order dated 19.09.2018 of the Income Tax Appellate Tribunal (for short ‘Tribunal’), Cochin Bench, Cochin in ITA No. 196/Coch/2018. The subject matter of the appeal relates to the issues arising from the return filed by the assessee for the Assessment Year 2014-15.
2.1 The assessee is a Primary Agricultural Credit Society registered under the Kerala Co-operative Societies Act 1969. The assessee is engaged in banking activity and providing credit facilities to its members. The assessee claimed complete deduction of income under Section 80P(2)(a)(i) of the Act and also claimed inclusion of interest income earned by the assessee from the deposit of idle funds with co-operative bank and treasury treating the said income as business income falling within the admissible ambit of deduction under Section 80P(2) (a)(i) of the Act. The Assessing Officer rejected the claims of the assessee for deduction under Section 80P(2)(a)(i) and treated the interest income as income from other sources and also that the interest income does not come within the purview of Section 80P(2)(d) of the Act the deduction claim made by the assessee has been rejected. The assessee aggrieved by the order of Assessing Officer in Annexure-A filed appeal before the Commissioner of Income Tax (Appeals). The CIT (Appeals), through order in Annexure-B dated 28.02.2018, allowed the appeal of the assessee, thereby admitted the claim of assessee of total income eligible for deduction under Section 80P(2)(a)(i) of the Act. The appellate authority firstly accepted that the assessee is entitled to claim deduction as a registered co- operative society and that the interest income earned by the assessee from the investment with District Co-operative Bank and Treasury forms part of business income of the assessee. The Revenue, aggrieved by the order in Annexure-B dated 28.02.2018, filed ITA No. 196/Coch/2018 before the Tribunal and through the order impugned the Tribunal dismissed the appeal filed by the Department. Hence, the instant appeal.
3. The appeal is admitted on the following substantial questions of law:
“i) Whether, on the facts and circumstances of the case and in law, is the Tribunal justified in holding that the assessee is eligible for claiming deduction under section 80P of the Income Tax Act when the assessee failed to fulfil the principal objective of providing agricultural credits to agriculturists?
ii) Whether, on the facts and circumstances of the case and in law, is the Tribunal justified in holding that the classification of “Primary Agricultural Credit Society” made by the competent authority under Kerala Co-operative Societies Act is binding on the authorities under the Income Tax Act for determining the eligibility for deduction under section 80P(4) of the Income Tax Act?
iii) Is not the conclusion reached by the ITAT that the Assessing Officer cannot probe into details as to the fulfilment of the principal objective of ‘providing agricultural credits to members’ by PACs, erroneous and unjustified in view of the provisions of KCS Act?
iv) Is not the above decision of the ITAT relying on the High Court decision in the case of Chirakkal Service Co-op bank &connected cases {[2016]384 ITR 490(Ker)} contradictory to the decision rendered by this Hon’ble Court in an earlier case – M/s Perinthalmanna Service Co-operative Bank {reported in [2014]363 ITR 268(Ker)}
v) Should not have the Tribunal noticed in the light of the findings of the Hon’ble Apex Court in the case Sabarkhanta Zilla Kharid Vechan Sangh Ltd. Vs CIT reported in 203 ITR 1027(SC), that eligible deduction under section 80(1)(d) [substituted by section 80P by the Finance (No.2) Act, 1967 w.e.f 01.04.1968] of the Income Tax Act, 1961 in respect of cooperative societies/banks doing both agricultural and nonagricultural activities should not be 100% of the gross profits and gains of business of such societies etc., but should be limited to the profits generated from agricultural activities alone performed by such assessees?
vi) Whether on the facts and in the circumstances of the case, the order of the ITAT is correct in not duly considering that the interest income earned from deposits with banks cannot be attributable as profit and gains from the business of providing credit facilities to its members u/s80P(2)(a)(i) & in not considering the case law in 322 ITR 283 M/s Totgar Cooperative Sales Society applicable in the case?
Substantial Question nos.1 to 4
4. Learned counsel appearing for the Revenue and the assessee state that the substantial question nos.1 to 4 excerpted supra are covered by the judgment of the Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax1; the assessee since is a registered Co-operative Society and the deduction claimed is interest earned from loans lent to members and amount invested with Co-operative Bank and Treasury, so the threshold eligibility of deduction is admissible to assessee and accordingly the income earned by way of interest from members is eligible for deduction under Section 80P(2)(a)(i) of the Act. Accordingly the questions can be answered against the Revenue and in favour of the assessee. Statement is placed on record. Substantial question nos.1 to 4 are answered in favour of the assessee and against the Revenue.
Substantial Question nos.5 and 6
5. Substantial Question nos. 5 and 6 relate to the claim of deduction made by the assessee of interest income earned from the deposits the assessee has made with District/State Co-operative Banks and Treasury. The details of the interest earned from the investments with above three institutions are stated thus:
