Deduction U/s. 80P(2) cannot be denied to registered Primary Agricultural Credit Society for doing banking business

ITO Vs. Edarikode Service Co-operative Bank Ltd. (ITAT Cochin)

In this case  assessments were completed under section 143(3) read with section 147 of the Income Tax Act for the above mentioned assessment years, by denying the claim of deduction under section 80P(2) of the Income Tax Act. The reason for the assessing officer to deny the benefit of deduction under section 80P(2) of the Act was that the assessee was primarily engaged in the business of banking and in view of the provisions of section 80P(4), the co-operative society doing business of banking is not entitled to the benefit of deduction under section 80P(2) of the Act.

ITAT held that as the assessee had produced a certificate showing that it was registered as Primary Agricultural Credit Society under the provision of Co-operative Societies Act, therefore, the assessee was entitled to the benefit of deduction under section 80P(2).

Full Text of the ITAT Order is as follows:-

These appeals at the instance of the Revenue and the Cross Objections preferred by the assessee are directed against the consolidated order of the Commissioner (Appeals)-III, Kochi dated 23-6-2016. The relevant assessment year are 2009-10 to 2011-12.

2. Since common issue is raised in these appeals and they pertain to the same assessee, these appeals and Cross Objections were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

3. We shall first take up for adjudication revenue’s appeals. In the revenue’s appeals, identical grounds are raised and they read as follows :–

1. The order of the learned Commissioner (Appeals) is against law, facts and circumstances of the case.

2. Whether on the facts and in the circumstances of the case, the Commissioner (Appeals) is right in law in holding that the assessee is eligible for claiming deduction under section 80P of the Income Tax Act when the assessee failed to fulfill the principal objective of providing agricultural credits to members?

3. The Kerala Co-operative Societies Act (Amendment) Act, 2010, Act 7 of 2010 stipulates that if the principal objective of providing agricultural credits to members is not fulfilled, such society shall lose all characteristics of a Primary Agricultural Credit Society. In view of this, is not the decision of the Commissioner (Appeals) is against law?

4. The Hon’ble High Court of Kerala had in the case of M/s. Perinthalmanna Service Co-operative Bank v. CIT in ITA No. 4 of 2014 held that “an inquiry has to be conducted into the factual situation whether co-operative bank is conducting the business as Primary Agricultural Credit Society or a Primary Co-operative agricultural and rural development bank and depending upon the transactions, the assessing officer has to extend the benefits available and not merely looking at the registration certificate by the Kerala Co-operative Societies Act or the nomenclature”.

5. In view of the above, the reliance placed by the Commissioner (Appeals) in the decision of the Hon’ble High Court of Kerala in the case of M/s. Chirakkal Service Co-operative Bank & Ors. in ITA No. 212 of 2013 is not correct, especially when a contrary view was taken by another division bench of the High Court in the case of M/s. Perinthalmanna Service Co-operative Bank in ITA No. 4 of 2014.

6. The decision of the Hon’ble High Court of Kerala in the case of M/s. Chirakkal Service Co-operative Banki & Ors. in ITA No. 212 of 2013, relied on by the Commissioner (Appeals) has not become conclusive as the decision was not accepted by the department and SLP is being filed in the Supreme Court.

7. For these and other grounds that may be urged at the time of hearing, it is requested that the order of the Commissioner (Appeals) may be set aside and that of the assessing officer restored.

4. Briefly stated, the facts in relation to the revenue’s appeals are as follows :–

The assessee is a co-operative society registered under the Kerala Cooperative Societies Act, 1969. It is engaged in providing credit facilities to its members. For the assessment years 2009-10 to 2011-12, no returns of income were filed by the assessee. The assessing officer issued notices under section 148 of the Income Tax Act for the above mentioned assessment years on 16-7-2013. Pursuant to the notices issued under section 148 of the Act, the assessee filed its returns of income, declaring income of Rs. 1,77,550, 2,53,760 and Rs. 82,650 for the assessment years 2009-10 to 2011-12 respectively. The assessments were completed under section 143(3) read with section 147 of the Income Tax Act for the above mentioned assessment years, by denying the claim of deduction under section 80P(2) of the Income Tax Act. The reason for the assessing officer to deny the benefit of deduction under section 80P(2) of the Act was that the assessee was primarily engaged in the business of banking and in view of the provisions of section 80P(4), the co-operative society doing business of banking is not entitled to the benefit of deduction under section 80P(2) of the Act.

5. Aggrieved by the action of the assessing officer in denying the claim of deduction under section 80P(2) for the assessment years 2009-10 to 2011-12, the assessee filed the appeals before the first appellate authority. The Commissioner (Appeals) partly allowed the appeals of the assessee. The Commissioner (Appeals) directed the assessing officer to grant deduction under section 80P(2) of the Act for the assessment years 2009-10 to 2011-12. The Commissioner (Appeals), In taking the above view, relied on the judgment of the Hon’ble Kerala High Court in the case of Chirakkal Service Co-operative Bank Limited v. CIT 284 ITR 490. As regards the assessee’s challenge to the re-opening of the assessments by issuance of notices under section 148 of the Act, the Commissioner (Appeals) confirmed the validity of the opening of the assessments.

6. Aggrieved by the order of the Commissioner (Appeals) in granting the benefit of deduction under section 80P(2) of the Act, the Revenue has filed the present appeals before the Tribunal. The learned Departmental Representative apart from relying on the grounds of appeal, has filed a brief argument note. The argument note submitted by the learned Departmental Representative reads as follows :–

“In the case of ESCB Ltd., out of the total loan sanctioned, only negligible percentage given for agricultural purpose.

Hence the assessing officer denied the exemption claimed under section 80P.

The Commissioner (Appeals) allowed the appeal of the assessee relying on the Kerala High Court decision in the case of M/s. Chirackkal Co-op Bank Ltd. v. CIT in ITA No. 212/Coch/2013, date 15-2-2016.

The SLP is being filed by the Department before the Hon. Supreme Court.

Further reliance is place on the Hon. Supreme Court judgment 203 ITR 1027 – case of Sabarkanthe Zilla Kharid Vechan Sangh v. CIT (held – what was deductible under section 80P(1) was only that portion of said amount as can be called total income attributable to activities defined in clause (5) of 80B i.e., deduction from tax available only in relation to net profit and not gross profit).

2. Further in view of the provisions of 80P(4) of the Income Tax Act and amendment made to section 2(v) in the Kerala Co-op Societies Act (Amendment) Act 2010, Act 7 of 2010, order of assessing officer & Commissioner (Appeals) be upheld and appeal filed by assessee be dismissed.

3. As may be seen from para 1 above, appellant assessee has filed return of income for the assessment year 2007-08 to 2010-11 beyond limit given under section 139(1). In view of the judgment 266 ITR 1 (SC) – Prakashnath Khanna & Another v. CIT, order of the assessing officer & Commissioner (Appeals) be upheld.”

7. The learned Authorized Representative on the other hand supported the findings/ conclusions of the Commissioner (Appeals) as regards grant of deduction under section 80P(2) of the Act.

8. We have heard the rival submissions and perused the material on record. The Hon’ble jurisdictional High Court in the case of The Chirakkal Service Cooperative Bank Ltd. & Ors. (supra) has held that the primary agricultural credit society registered under the Kerala Cooperative Societies Act, 1969, is entitled to the benefit of deduction under sections 80P(2). The Hon’ble High Court was considering the following substantial question of law :–

(a) Whether on the facts and in the circumstances of the case under consideration, the Tribunal is correct in law in deciding against the assessee, the issue regarding entitlement for exemption under section 80P, ignoring the fact that the assessee is a primary agricultural credit society?

8.1 In considering the above question of law, the Hon’ble High Court rendered the following findings :–

“15. Appellants in these different appeals are indisputably societies registered under the Kerala co-operative societies Act, 1969, for sort, KCS Act and the bye-laws of each of them, as made available to this court as part of the paper books, clearly show that they have been classified as primary agricultural credit societies by the competent authority under the provisions of that Act. The parliament, having defined the term ‘co-operative society’ for the purposes of the BR Act with reference to, among other things, the registration of a society under any State law relating to co-operative societies for the time being; it cannot but be taken that the purpose of the societies so registered under the State Law and its objects have to be understood as those which have been approved by the competent authority under such State law. This, we visualise as due reciprocative legislative exercise by the Parliament recognising the predominance of decisions rendered under the relevant State Law. In this view of the matter, all the appellants having been classified as primary agricultural credit societies by the competent authority under the KCS Act, it has necessarily to be held that the principal object of such societies is to undertake agricultural credit activities and to provide loans and advances for agricultural purposes, the rate ‘of interest on such loans and advances to be at the rate fixed by the Registrar of co-operative societies under the KCS Act and having its area of operation confined to a village, panchayat or a municipality. This is the consequence of the definition clause in section 2(oaa) of the KCS Act. The authorities under the Income Tax Act cannot probe into any issue or such matter relating to such applicants.

16. The position of law being as above with reference to the statutory provisions, the appellants had shown to the authorities and the Tribunal that they are primary agricultural credit societies in terms of clause (cciv) of section 5 of the BR Act, having regard to the primary object or principal business of each of the appellants. It is also clear from the materials on record that the bye-laws of each of the appellants do not permit admission of any other co-operative society as member, except may be, in accordance with the proviso to sub-clause 2 of section 5(cciv) of the BR Act. The different orders of the Tribunal which are impeached in these appeals do not contain any finding of fact to the effect that the bye- 1aws of any of the appellant or its classification by the competent authority under the KCS Act 1S anything different from what we have stated herein above. For this reason, it cannot but be held that the appellants are entitled to exemption from the provisions of section 80P of the Income Tax Act by virtue of sub- section 4 of that sect; on. In this view of the matter, the appeals succeed.

17. In the light of the aforesaid, we answer substantia1 question ‘A’ in favour of the appellants and hold that the Tribunal erred in law in deciding the issue regarding the entitlement of exemption under section 80P against the appellants. We hold that the primary agricultural credit societies, registered as such under the KCS Act; and classified so, under that Act, including the appellants are entitled to such exemption.”

8.2 In the instant case, admittedly, the assessee has produced a certificate showing that it is registered as a Primary Agricultural Credit Society under the provisions of the Kerala Co-operative Societies Act, 1969. Since the Hon’ble Kerala High Court has categorically held that a Primary Agricultural Credit Society registered under the Kerala Co-operative Societies Act, 1969 is entitled to the benefit of deduction under section 80P(2) of the Act, we are of the view that the Commissioner (Appeals) is justified in directing the assessing officer to grant the benefit of deduction under section 80P(2) of the Act.

8.3 As for the judgment of the Hon’ble Jurisdictional High Court in the case of Perinthalmanna Service Co-operative Bank v. ITO (363 ITR 268), relied on by learned Departmental Representative, this was pronounced on 31-1-2014 prior to the judgment of Hon’ble Jurisdictional High Court in the case of Chirakkal Service Co-operative Bank Ltd. v. CIT (supra) which came on 15-1-2016. Further the said case dealt with the revisionary powers of the Commissioner under section 263 of the Act when the assessing officer had failed to make necessary enquiries. Under such circumstances, we do not find any reason to interfere with the order of the Commissioner (Appeals). Hence the appeals filed by the Revenue are dismissed.

Cross Objection Nos. 33 to 35/Coch/2016 (by the assessee)

9. The Cross Objections filed by the assessee are supporting the order of the Commissioner (Appeals). Since we have dismissed the appeals filed by the Revenue, the Cross Objections filed by the assessee have become infructuous and the same are dismissed.

10. To sum-up, the appeals filed by the Revenue and the Cross Objections filed by the assessee are dismissed.