ITAT Orders Re-adjudication on Section 80P(2)(e) for Agricultural Loan Deductions

Savanoor Primary Agricultural Co-operative Society Ltd. (ITAT Bangalore)

Introduction: The recent decision by the Income Tax Appellate Tribunal (ITAT) Bangalore regarding the case of Savanoor Primary Agricultural Co-operative Society Ltd. involves the re-adjudication of a deduction under Section 80P(2)(e) of the Income Tax Act. This article provides an in-depth analysis of the tribunal’s order, examining the issues raised, arguments presented, and the implications of the decision.

Detailed Analysis:

Savanoor Primary Agricultural Co-operative Society Ltd., a registered co-operative society under the Karnataka State Co­operative Societies Act, filed an appeal against the CIT(A)’s order concerning the denial of a deduction under Section 80P of the Income Tax Act for the assessment year 2018-19.

The tribunal’s decision primarily focuses on several issues raised by the assessee regarding different sections of Section 80P:

1. Section 80P(2)(a)(i) and 80P(2)(d) Deduction: The tribunal upheld the CIT(A)’s decision to deny deduction under these sections concerning interest and dividend income earned from co-operative banks and investments. The tribunal referred to relevant judicial precedents and directives, supporting the denial of deduction.

2. Section 80P(2)(a)(iii) Deduction: The tribunal directed re-examination of the deduction claimed by the assessee for commission income earned from marketing agricultural produce. The lack of necessary documentation and incorrect claim under this section necessitated a fresh examination by the assessing officer.

3. Section 80P(2)(e) Deduction: The tribunal also ordered re-adjudication of the deduction claimed by the assessee under this section for income earned from letting of godowns for storage of agricultural produce against loans provided. The tribunal noted that full details were not available before the assessing officer, warranting a fresh examination of the claim.

Conclusion: The ITAT Bangalore’s decision highlights the importance of proper documentation and accurate classification of income for claiming deductions under Section 80P of the Income Tax Act. While some claims were upheld or partially allowed, others required re-adjudication due to incomplete information or misclassification. This case underscores the significance of thorough compliance with tax laws and the need for clear evidence to support deduction claims.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 22.09.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2018-19.

2. Brief facts of the case are as follows:

Assessee is a co-operative society registered under the Karnataka State Co­operative Societies Act, 1959. It is engaged in the business of providing credit facilities to its members. For the Assessment Year 2018-19, the return of income was filed on 14.10.2018 declaring Nil income after claiming deduction of Rs.81,61,682/- under section 80P of the Act. The assessment was selected for scrutiny and notice under section 143(2) of the Act was issued on 20.09.20 19. The assessment was completed under section 143(3) r.w.s. 143(3A) and 143(3B) of the Act vide order dated 25.02.2018. In the said Assessment Order, claim of deduction under section 80P was denied and the total income was determined at Rs.81,61,689/- as against the Nil income declared by the assessee society.

3. Aggrieved by the Assessment Order, assessee preferred appeal before the First Appellate Authority (FAA). The CIT(A) partly allowed the appeal of the The CIT(A) directed the AO to verify the extent of credit facilities provided to non-members and deny the deduction under section 80P of the Act to that extent. As regards claim of deduction under sections 80P(2)(a)(iii) and 80P(2)(d) / 80P(2)(e) of the Act, the CIT(A) confirmed the view taken by the AO. The CIT(A) held that assessee is not entitled to deduction under section 80P(2)(d) or under section 80P(2)(a)(i) of the Act w.r.t. interest / dividend received on investments with co-operative banks. However, the CIT(A) allowed the alternative claim of the assessee and directed the AO to allow cost of funds for earning the interest income which is to be assessed under the head “Income from Other Sources” under section 56 of the Act.

4. Aggrieved by the Order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed two sets of Paper Books enclosing therein case laws relied on, calculation of cost of funds, bye-laws of the assessee society, submissions made before the CIT(A), etc. The learned AR reiterated the submissions made before the AO and the CIT(A).

5. Learned DR, on the other hand, supported the findings of the CIT(A).

6.  We have heard the rival submissions and perused the material on record. Assessee’s claim of deduction under section 80P of the Act are detailed below:

7. Before the Tribunal, assessee has raised 10 grounds. All the grounds relate to the following issues:

i. Issue No.1 : Deduction claimed under section 80P(2)(a)(i) of the Act on interest / dividend income earned from co-operative bank (Grounds 5, 7 and 8)

ii. Issue No.2 : Deduction under section 80P(2)(d) of the Act on interest / dividend earned from co-operative bank (Ground 6)

iii. Deduction under section 80P(2)(a)(iii) of the Act in respect of commission earned from Mangalore Agriculturists Souhardha Sahakari Ltd., (MASS Ltd.,) (ground 3)

iv. Deduction under section 80P(2)(e) of the Act on the income earned from storing the pledged agricultural produce against loans given (Ground 9)

8. We shall adjudicate the above issues as under:

9. Issue Nos.1 and 2: Deduction claimed under section 80P(2)(a)(i) and 80P2)(d) of the Act (Grounds 5 to 8)

9.1.1 As regards the claim of deduction under section 80P(2)(a)(i) of the Act, the CIT(A) partly allowed the appeal of the assessee by following the judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT, reported in 431 ITR 1 (SC). The CIT(A) directed the AO to examine whether assessee is extending / providing credit facilities to non-members and income earned out of such activity cannot be granted deduction under section 80P(2)(a)(i) of the Act. The above direction of the learned CIT(A) is in conformity with the dictum laid down by the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. (supra). Hence, we see no reason to interfere with the order of the CIT(A) on this aspect of the issue and we confirm the same.

9.1.2 As regards the interest income earned with investments in co-operative banks, the CIT(A) followed the dictum laid down by the Hon’ble jurisdictional High Court in the case of PCIT Vs. Totgars Co-operative Society Ltd., reported in 395 ITR 611 (Karnataka) which was followed by the Bangalore Bench of the Tribunal in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT in ITA No.453/Bang/2020 (order dated 13.08.2021). The CIT(A) has elaborately extracted the order of the Tribunal in the case of Vasavamba Co-operative Society Ltd., (supra) (refer para 8.1 of the CIT(A)’s order). Therefore, we are not reiterating the same in this order. The Bangalore Bench of the Tribunal in the case of Vasavamba Co-operative Society Ltd., (supra) had categorically held that with regard to interest / dividend income earned out of investments made with banks / government securities is not entitled to deduction either under sections 80P(2)(a)(i) or 80P(2)(d) of the Act. Therefore, following the judgment of the Hon’ble High Court in the case of PCIT Vs. Totgars Co-operative Society Ltd., (supra) and the order of the Bangalore Bench of the Tribunal in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT (surpa), we hold that CIT(A) is justified in not granting deduction either under section 80P(2)(a)(i) or under section 80P(2)(d) of the Act with respect to the interest income earned on investments made with co-operative banks / scheduled banks.

9.1.3 The learned AR, during the course of hearing before the Tribunal, had contended that assessee ought to be allowed cost of funds with regard to interest income that is assessed under section 56 of the Act. We find this prayer of the assessee has been duly heeded to by the CIT(A) by allowing ground No.7 raised before him. The CIT(A), by following the judgment of the Hon’ble jurisdictional High Court in the case of Totgars Co-operative Sale Society Ltd., Vs. ITO reported in (2015) 58 taxmann.com 35 (Karnataka), had directed the AO to allow cost of funds.

9.1.4 Further, assessee has also raised the contention in the grounds that interest received from certain co-operative banks is on account of compliance with Rule 28 of the Karnataka Co-operative Societies Rules, 1960. Therefore, it constitutes income from business of providing credit facilities to its members and hence the same is eligible for deduction under section 80P(2)(a)(i) of the Act. This identical contention of the assessee has also been dealt with by the Bangalore Bench of the Tribunal in the case of Vasavamba Co-operative Society Ltd., Vs. PCIT (supra). The Bangalore Bench of the Tribunal, in the aforesaid case, had restored the matter to the AO for fresh examination. The relevant finding of the Bangalore Bench of the Tribunal reads as follows:

“18. The issue raised by the Assessee in the aforesaid grounds require examination because if there are statutory compulsions that the money should be invested in a particular manner to run business of the Assessee then the interest income arising from such investments have business nexus and should be considered as income derived from the business of providing credit facility to the members. This aspect requires examination by the AO as it has not been raised before the CIT. We therefore modify the order of the CIT by remanding the issue raised in ground No.5 to 7 alone to the AO for examination afresh. In other respects we confirm the order of the CIT.”

9.1.5 In light of the aforesaid order of the Bangalore Bench of the Tribunal, we direct the AO to examine whether interest income is earned out of investments which are in compliance under the relevant Karnataka Co-operative Societies Rules and Act. If the same is found to be out of compulsions, the interest income derived would be entitled to deduction under section 80P(2)(a)(i) of the Act. With the aforesaid observations, we restore grounds 5 to 8 to the files of the AO. It is ordered accordingly.

9.2 Issue No. 3 : Deduction under section 80P(2)(a)(iii) of the Act (Ground 3)

9.2.1 During the relevant Assessment Year, assessee society had earned income of Rs.1,71,588/- which was claimed as deduction under section 80P(2)(a)(iii) of the Act. The AO disallowed the claim of deduction due to the absence of any details furnished to establish the entire facts (refer pages 3 to 5 of the Assessment Order).

9.2.2 Aggrieved, assessee filed appeal before the FAA. It was submitted before the FAA that assessee society had earned commission income from MASS Ltd., a co-operative society by marketing the arecanut grown by the members. It is claimed that a copy of the agreement was submitted along with the submissions dated 11.10.2022. The CIT(A), however, dismissed and upheld the addition made by the AO. The CIT(A) stated that agreement has not been enclosed along with the submission and there is no indication as to how signing of the agreement facilitate the complete marketing of the agricultural produce of its members which shall include performance of activities involved in the flow of agricultural produce from the point of initial agricultural production till they reach hands of the ultimate users / consumers.

9.2.3 Aggrieved, assessee has raised this issue before the Tribunal. The learned AR had submitted that in the return of income the assessee had mistakenly claimed deduction under section 80P(2)(iii) of the Act. It was submitted that the assessee ought to have claimed the deduction under section 80P(2)(e) of the Act. It was submitted that agreement entered with MASS Ltd., is to provide infrastructure facilities such as space to unload, inspect and store the arecanut received from members of MASS Ltd. Therefore, the agreement is to provide necessary storage facilities to stock the goods until dispatched to MASS Ltd., and the assessee society has no right over the arecanuts received. It was submitted that the commission income earned from MASS Ltd., is in return for providing space for storage of goods and therefore entitled to deduction under section 80P(2)(e) of the Act.

9.2.4 The learned DR supported the orders of the AO and the CIT(A).

9.2.5 We have heard the rival submissions and perused the material on record. Assessee has wrongly claimed deduction under section 80P(2)(a)(iii) of the Act instead of claiming deduction under section 80P(2)(e) of the Act. Assessee has also not furnished the necessary documents before the AO. Consequently, the claim of deduction was not granted by the AO. In the interest of justice and equity, we are of the view that this issue needs to be examined afresh by the AO. Therefore, as regards the claim of deduction of Rs. 1,71,568/- whether assessee is entitled to deduction under any of the limbs under section 80P of the Act shall be examined afresh. Assessee shall furnish necessary materials / evidences to substantiate its claim. It is ordered accordingly.

9.3 Issue No. 3 : Deduction under section 80P(2)(e) of the Act (Ground 9)

9.3.1 Assessee had made a claim of deduction under section 80P(2)(e) of the Act amounting to Rs.1,39,200/-. The AO disallowed the claim of deduction due to the absence of details to establish the entire facts (refer pages 9 and 10 of Assessment Order).

9.3.2 Aggrieved by the Assessment Order, assessee filed appeal before the FAA. The CIT(A) rejected the contention of the assessee by holding that the activities of storing the pledged agricultural produce against loans given do not qualify for deduction under section 80P(2)(e) of the Act.

9.3.3 Aggrieved by the Order of the CIT(A), assessee has raised this issue before the Tribunal. The assessee, before the Tribunal, submitted that it provides loans against agricultural produce. Therefore, providing loan against pledged article is incident to providing credit facilities to its members. Hence, it is attributed to the business income eligible for deduction under section 80P(2)(a)(i) of the Act.

 9.3.4 We have heard the rival submissions and perused the material on record. Assessee had made claim for deduction under section 80P(2)(e) of the Act before the income-tax authorities. The claim of deduction was denied by the AO since complete facts were not produced before him. Before the Tribunal, assessee submits that it is entitled to deduction under section 80P(2)(a)(i) of the Act since assessee gives loans on agricultural produce to its members which is incidental to its business; hence, eligible for deduction under section 80P(2)(a)(i) of the Act. We are of the view that the issue raised in ground No.9 also requires to be adjudicated since full details were not available before the AO. For adjudicating this issue, matter is restored to the files of the AO. It is ordered accordingly.

9.3.5 Therefore, ground No.9 is allowed for statistical purposes.

10. In the result, appeal filed by the assessee is allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.