Case Law Details
It is, therefore, reiterated that regional rural banks are not eligible for deduction under section 80P of the Income-tax Act, 1961, from the assessment year 2007-08 onwards. Furthermore, Circular No. 319, dated January 1 , 1982, deeming any regional rural bank to be co-operative society stands withdrawn for application with effect from the assessment year 2007-08.
IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE
I.T.A.No. 215 & 216/Ind/2011 – A.Y. : 2007-08 & 2008-09
M/s.Vidisha Bhopal Kshetriya Gramin Bank, Appellant
vs.,
ACIT3(1), Vidisha Bhopal Respondent
Date of pronouncement : 18.06.2012
ORDER
PER R. C. SHARMA, A.M.
These are appeals filed by the assessee against the orders of CIT(A) dated 4.7.2011 and 8.7.2011 for the 2007-08 & 2008-09, respectively.
2. Rival contentions have been heard and records perused. Common grounds have been taken in both the years under consideration which basically pertains to decline the claim of deduction u/s 80P. The assessee is a Kshetriya Gramin Bank i.e. Regional Rural Bank, which claimed deduction u/s 80-P of the Income-tax Act, 1961. After reopening the assessment, the Assessing Officer declined assessee’s claim of deduction u/s 80P after having following observations :-
“Contention of the assessee is not acceptable as the deduction u/s 80P is available only to following Banks as discussed in Para-I.
1.Primary agricultural credit society (PACS)
2.Primary co-operative agricultural and Rural development Bank (PCARDB)
The inserted sub section 80P(4) does not allow deduction to any other co-operative bank. From the submission of assessee, it is clear assessee is not claiming exemption for being PACS or PCARDB. However assessee has taken a very hyper technical ground that assessee is co-operative society for the purposes of income tax act but not a Co-operative bank.
Assesse’s only contention is that exemption has been withdrawn from Co-operative Bank but assessee is not a Co-operative Bank within the meaning of section 80P (4).
Without prejudice to discussion in Para-l now it will be established that assessee is a co-operative bank for the purposes of income Tax Act also. As per section 80P(4) “Co-operative Bank” has been defined to mean “Co-operative Bank” as defined in Part – V of the Banking Regulation Act. 1949. As per Banking Regulation Act, 1949 Part V APPLICATION OF THE ACT TO CO-OPERATIVE BANKS (c) in section 5,-
(i) after clause (cc), the following clauses shall be inserted, namely.”- _
‘(cci) “co-operative bank” means a State co-operative bank, a Central co-operative bank and a primary co-operative bank ,
(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 not less than one lakh of rupees and
(3) the by-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
As per section 22 of RRB act assessee is a deemed co- operative society for the purposes of Income Tax act 1961.
As per section 22 of RRB act:- 22 – Regional Rural Bank to be deemed to be a Co- operative society for the purpose of “the Income tax act 1961. For the purpose of the Income Tax act 1961 (43 of 4 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. Hence assessee is a Co-operative society for the purposes of Income Tax act 1961 ;.and full filing all the 3 conditions mentioned above.
The fulfillment of all the 3 conditions is discussed as under :-
Condition -1
In para-1(b) it has been established that primary object or principal business of the assessee is the transaction of Banking business. Hence condition 1 of “primary co- operative bank” is fulfilled.
Condition – 2 As per RRB act 1976, :-
Issued capital.- * [(1) The issued capital of each Regional Rural Bank shall, in the first instance, be such as may be fixed by the Central Government in this behalf, but it shall in no case less than twenty- five lakhs of rupees or exceed one crore of rupees.] The assessee has paid up share capital of Rs. 1.00 Crore and Reserve & Surplus of Rs.24.81 Crores as on 3 1.03.2007 as per the annual report. Hence condition-2 of “Primary Co-operative bank” is also fulfilled.
Condition- 3
As assessee is not a registered society under Registrar of societies but has been established under RRB act and as per section 22 of RRB act assessee is a deemed society for the purposes of Income tax act. There is as such no member of the assessee as in case of any other society registered under registrar of society. Counsel of the assessee has submitted that there are no members and assessee is only a deemed society under RRB act.
The basic composition of the assessee is very close to the composition of a company. In case of assessee the composition has been defined in RRB act as under :-
(2) Of the capital issued by a Regional Rural Bank under sub-section (1), fifty per cent. shall be subscribed by the Central Government; fifteen per cent by the concerned State Government and thirty- five per cent by the Sponsor Bank.
In case of assessee only share holders of the assessee can be inferred as members of the assessee bank. Also from, the annual report following are the observations.
Share Capital
The authorised share capital of banks is Rs. 5.00 Crore. The paid-up capital is Rs. 1.00 Crore, subscribed by Govt. of India, Govt. of Madhya Pradesh & State Bank of Indore (Sponsor Bank) in the ration of 50: 15: 35 respectively.
Also proviso to condition-3 (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 cooperative society out of funds provided by the State Government for the purpose) makes it very clear that a share holder has been referred as a member. Rules and regulations and by-laws of the assessee are governed by RRB act. Under RRB act the composition of the asses see has been fixed as 50% share holding of Central Government, 15% of State Government and 35% of Sponsor Bank that is State Bank of Indore. RRB act prohibits introduction of any other share holder. Hence by-laws of assessee society do not permit admission of any other co-operative society as a member. Hence assessee is fulfilling all the 3 conditions of Primary Co-operative Bank under banking regulation act 1949 and hence a “co-operative bank” under Banking regulation act. Hence as per section 80P(4) assessee is co-operative bank for the purposes of Income Tax also. Hence no deduction u/s 80P is allowed to the assessee. I am also satisfied that inaccurate particulars of income were furnished and hence penalty u/s 27l(l)(c) is initiated separately.
As per the CBDT circular on finance act 2006 Circular no. 14/ 2006, dated 28-12-2006.
22.1 Section 80P, inter alia, provides for a deduction from the total income of the Co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.
22.2 The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore, section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions “co- operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” have also been defined to lend clarity to them.
22.3 Further, a new sub-clause (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of ‘income’. 22.4 Applicability – From assessment year 2007-08 onwards.
This makes it clear that income of business of banking has been brought under Section 80P of the Act for all the Co-operative societies except PACS and PCARDB. Hence no deduction u/s 80P is allowed to the assessee.
The exemption and deduction clauses of the act cannot be interpreted liberally and these should be allowed strictly only to those for whom these clauses are really meant for RRBs are Banking institutions performing as par with the commercial banks and the amendment has been brought u/s 80P(4) to withdraw such deduction all such profit earning banks. The legislative intent is very clear from the blow part of speech given by then Hon’ble Union minister of finance Shri P. Chidambram on 28.02.2006 presenting the budget and proposing the said amendment :-
XIV TAX PROPOSALS – Direct Taxes
166. Cooperative banks. like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies CPA CS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt (from tax under section 80P of the Income Tax Act However, I propose to exclude all other cooperative banks from the scope of that section. From the speech it is very clear that only PACS and PCARDB have been provided a special status because of their focus on agriculture sector and it has been specifically stated that all the other co-operative banks have been excluded from the scope of the section 80P. Hence no deduction u/s 80P is allowed to the assessee. “
3. By the impugned order, the ld. CIT(A) confirmed the action of the Assessing Officer after having following observations :-
“I have gone through the assessment order and the submission made by the appellant. In this regard it is pertinent to quote circular no. 6 of 2010 dated 20th November, 2010 of CBDT, which reads as under :-
“Circular No.6 of 2010, dated 20th September, 2010 . Subject: Eligibility of deduction under section 80P to regional rural banks
Section 80P of the Income-Tax Act, 1961, provides for a deduction from the income of cooperative societies referred to in that section.
2. As regional rural bank (RRB) are basically corporate entities ( and not cooperative societies ), they were considered to be not eligible for deduction u/s 80P when the Section was originally introduced. However, as Section 22 of the Regional Rural Bank Act provides that a RRB shall be deemed to be Co- operative Society for the purpose of the Income-tax Act, 1961, in order to make such banks eligible for deduction under section 80P, the CBDT issued a beneficial Circular No.319, dated January 11, 1982*, which stated that for the purpose of section 80P, a Regional Rural Bank shall be deemed to be a Co- operative Society.
3. Section 80P was amended by the Finance Act 2006, with effect from April 1, 2007, introducing subsection (4), which laid down specifically that the provisions of section 80P will not apply to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Accordingly, deduction under section 80P was no more available to any regional rural bank from the assessment year 2007-08 onwards.
As on dated August 25, 2006, addressed to the RBI was issued by Board clarifying that regional rural banks would not be eligible for deduction under section 80P of the Income-tax Act, 1961, from the assessment year 2007-08 onwards.
4.It has been brought to the notice of the Board that despite the amended provisions, some regional rural banks continue to claim deduction under section 80P on the ground that they are co-operative societies covered by section 80P(l) read with Board’s Circular No. 319, dated January 11, 1982.
5.It is, therefore, reiterated that regional rural banks are not eligible for deduction under section 80P of the Income-tax Act, 1961, from the assessment year 2007-08 onwards. Furthermore, Circular No. 319, dated January 1 I, 1982, deeming any regional rural bank to be co-operative society stands withdrawn for application with effect from the assessment year 2007-08.
The field officers may take note of this position and take remedial action, if required. ” In view of the above circular, I am not inclined to interfere with disallowance of 80P made by the AO and the disallowance of Rs. 5,30,07,997/- is, accordingly sustained. This ground of the appellant is dismissed.”
4. Against the above order, the assessee is in further appeal and has taken following grounds :-
1. That the Id. CIT(A) erred in confirming re-opening of the assessment u/s 147 and further holding that the notice u/s 148 was not issued without jurisdiction.
2.That the learned CIT(A) erred in maintaining disallowance of Rs.5,30,07,997- claimed as deduction u/s 80P of LT. Act, 1961.
3.That the learned CIT(A) erred in classifying the appellant Bank as ‘ Cooperative Bank’ falling within the definition of ‘cooperative bank’ as defined in Part V of Banking Regulation Act, 1949 and thereby denying benefit of deduction u/s 80P applying provisions of Sec 80(P)(4) of the Act.
4.That the learned CIT(A) erred in relying merely on the circular of CBDT in denying benefit of deduction u/s 80P in spite of mandatory provisions contained in Section 22 of the Regional Rural Development Bank Act, 1976 deeming the appellant bank as a ‘cooperative society’ for the purpose of Income-tax Act.
5.Shri Anil Khabya,C.A. appeared on behalf of the assessee and submitted as under :- ” The benefit of provisions of section 80P was made available to Regional Rural bank till Ass. Yr. 2006-07. However, an amendment was made by Finance Act, 2006 inserting sub-section (4) to section 80P w.e.f. 1-04-2007. The subsection (4) provided :(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agriculture and rural development bank. Explanation- For the purpose of this sub-section- (a). ‘Cooperative bank” and “primary agriculture 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 agriculture and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provided long term credit for agriculture and rural development activities.
From the plain reading of amended provision it emerges:-
(1) Provision of section 80P would not apply to any Cooperative bank other than a primary agriculture credit society or a primary co-operative agriculture and rural development bank.
(ii)” Cooperative bank” and “primary agriculture credit society” have been defined under the explanation to subsection (4) and they shall have the respective meaning assigned to them in Part- V of Banking Regulation Act, 1949.
(iii)To all other Cooperative Societies, the benefit hitherto available shall continue to apply.
Preamble of Part V of the Banking Regulation Act provides that Banking Regulation Act shall apply to Cooperative Societies subject to modifications. Provisions of Part V of the Banking Regulation Act applying on Cooperative Societies which have been registered or deemed to have been registered under any Central Act for the time being in force relating to the multi-State Societies, or any other Central or State law relating to Co-operative Societies for the time being in force. (Kindly refer section 56 (c)(i)(cciia) of Banking Regulation Act.
The assessee, being a Regional Rural Bank constituted under special provisions of RRB Act is not aCooperative Bank registered under any Cooperative Act. The provisions of Part V of Banking Regulation Act does not apply to a Regional Rural Bank constituted under a statute other than Cooperative Acts. The A.O. has admitted that the assessee cannot be covered in Part V of Banking Regulation Act under the category (1) State Cooperative bank and Central Cooperative bank. The only recourse left with him to some how cover the assessee under the definition of primary Co-operative Bank. For this purpose he has labored under erroneous assumptions and stretched the limited legal fiction created by Section 22 of RRB Act for the purpose of Income -tax Act to provisions of the Banking Regulation Act and Cooperative Act. The analysis given by the A. O. in deeming the assessee a ‘primary Co-operative Bank” is fallacious and devoid on any merit. To constitute a ‘primary Co-operative bank” the basic fundamental condition is that it should be a cooperative society registered under the Provisions of Cooperative Societies Act, 1912 (2 of 1912) or any law relating to co- operative societies for the time being in force in any State. The deeming provisions of Section 22 of RRB Act Have been incorporated for limited purpose only and they cannot be stretched to cover provisions of Banking Regulation Act, Cooperative Act etc.
It is a settled proposition of law that in interpreting a provision creating a legal fiction, the Court is to ascertain for what purpose the fiction is created, and after ascertaining this, the Court is to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction. But in so construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond the language of the section by which it is created. It cannot be extended by importing another fiction. And a legal fiction in terms enacted ‘for the purpose of a particular Act’ is normally restricted to that Act and cannot be extended to cover another Act. A legal fiction must be carried to its logical conclusion and not to an illogical length. (Kindly refer: CIT Vs. Elphinstore Spinning & Weaving Mills Co. (1960) 40 ITR 142, 154(SC); Rajputana Trading Co. Ltd V. CIT (1969) 72 ITR 2S6(SC); Dr. Baliram Waman Biray V. Justice B. Lentin (1989) 176 ITR 1,27(SC); CED v. Krishna Kumari Devi (1988) 173 ITR 561,565 (All); Gulab Chand Motilal v. CIT (1988) 174 ITR 117,122 (M.P.); CST v. Mohanlal Anil Kumar (1984) 57 STC 145 -149 (Bom).
The CIT(A) did not allow the benefit of section 80P on the ground that the circular No. 319 dt. 11-11-1982 has been withdrawn by the Board and therefore benefit of deduction could not be allowed to the appellant. The CIT(A) did not appreciated that the benefit u/s 80P has not been conferred on the appellant by clarificatory circular of the Board but by the specific deeming provisions of Section 22 of the Regional Rural Development Bank which is still in force. The benefit of deduction is available with or without the clarificatory circular of the Board. Withdrawal of a clarificatory circular has no effect on the admissibility of deduction U/S 80P.
It is a settled proposition of law that a departmental circular is not a law. It may bind IT authorities but the appellate authorities, Tribunal and Courts are not bound to take a judicial notice of circular. (Kindly refer 228 ITR 463(SC)- CIT Vs. Hero Cycle Ltd; 195 ITR 485(All)- Indo Gulf fertilizers & Chemicals Ltd.
It is respectfully submitted that Provisions of Part V of Banking Regulation Act are not applicable to our Bank. Our Bank is not covered under the definition of” Cooperative Banks” as defined in Part V of Banking Regulation Act. The provisions of Section 80(P) (4) excluding the benefit of Section 80P to certain Cooperative bank is not applicable in our case and we are entitled to claim benefit of Section 8OP which allows us benefit of deduction of entire profit earned from banking activities carried by our Bank. Therefore, in view of the clear cut provisions, the assessee is entitled to deduction u/s 80P of the Act because the exclusion must be specific and is to be construed strictly. “
6. Ld. Authorized Representative placed reliance on the decision of Coordinate Bench in the case of M.P. State Coop. Agricultural. And Rural Development Bank Limited order dated 1st February, 2012.
7. On the other hand Shri Keshave Saxena, ld. CIT DR contended that the assessee is merely a cooperative bank and after insertion of sub Section (4) of Section 80-P, the deduction available to the Coop. Bank have been withdrawn and that after amendment this deduction was available only to the primary agricultural credit society and/or primary coop. agricultural and Rural Development Bank Limited.
8. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that the assessee is a Regional Rural Bank engaged in the activity of banking/financing in the District of Bhopal and Vidisha. Return was filed to claim all deduction u/s 80P in respect of its income. Section 80P, inter alia, provides for a deduction from the total income of the Co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.
After insertion of sub Section (4) of Section 80-P, by Finance Act, 2006, w.e.f. 1.4.2007, this deduction is available only to –
1. Primary Agricultural Credit Society (PACS)
2.Primary Co-operative Agricultural and Rural Development Bank (PCARDB)
Further, a new sub-clause (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of “income’.”
Section 80P has been amended by Finance Act, 2006, and sub Section (4) has been inserted. As per finding recorded by lower authorities , the assessee is neither PACs nor PCARDB and hence not eligible for deduction U/S 80P.
A society fulfilling two conditions is a PCARDB as per explanation to section 80P(4)
(a) Area of operation confined to a taluk (b) The principal object of which is to provide for long term credit for agricultural and rural development activities. The principal object of the assessee has been discussed in detail later while discussing that assessee is not P ACS and the object of the assessee and the range of the activities is not confined to taluk but is extended to entire district of Bhopal & Vidisha. It is clear that the assessee is not fulfilling the second condition also. Hence, assessee is not PCARDB. Assessee is not PACS, as per the explanation to section 80P(4) PACS has been defined as in Part-V of the Banking Regulation Act, 1949. Primary object of principal business of PACS is to finance for agricultural purposes or purposes connected with agricultural activities. The primary object as well as activities of assessee are not confined to agricultural purposes but other purposes also. Hence, assessee is neither PACS nor PCARDB hence no exemption is available to the assessee u/s 80P. It was also submitted by the assessee during the assessment proceedings, “the assessee is a Regional Rural Bank carrying on banking activities in Bhopal and Vidisha District. Under the Provisions of section 22 of the RRB Act.
9. It is also not in dispute that the assessee is not claiming exemption as PACS for PCARDB. To clarify the amended provisions as brought by the Finance Act, 2006, the C.B.D.T. has also issued circular dated 28.12.2006, according to which after insertion of sub Section (4) in Section 80P, the benefit of provisions of Section 80P shall not apply in relation to any cooperative bank other than primary agricultural credit society or primary cooperative agricultural rural development Bank. Thus, income of business of banking has been brought u/s 80P for all the cooperative societies except PACS and PCARDB. The legislative intent for insertion of sub Section (4) as per the speech of Hon’ble Union Finance Minister on 28.2.2006 clearly shows that Coop. Banks were excluded from the benefit of Section 80P on the plea that like any other bank, the Coop. Banks are also lending institution and should pay tax on their profits. Accordingly, Coop. Banks were excluded from the scope of Section 80P.
10. To further clarify non eligibility of deduction of regional rural banks u/s 80P, CBDT vide Circular No. 6/2010 dated 20th September, 2010, provided as under :- “Section 80P of the Income-Tax Act, 1961, provides for a deduction from the income of cooperative societies referred to in that section.
2.As regional rural bank (RRB) are basically corporate entities ( and not cooperative societies ), they were considered to be not eligible e for deduction u/s 80P when the Section was originally introduced. However, as Section 22 of the Regional Rural Bank Act provides that a RRB shall be deemed to be Co- operative Society for the purpose of the Income-tax Act, 1961, in order to make such banks eligible for deduction under section 80P, the CBDT issued a beneficial Circular No.319, dated January 11, 1982*, which stated that for the purpose of section 80P, a Regional Rural Bank shall be deemed to be a Co- operative Society.
-Section 80P was amended by the Finance Act 2006, with effect from April 1, 2007, introducing sub- section (4), which laid down specifically that the provisions of section 80P will not apply to any co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Accordingly, deduction under section 80P was no more available to any regional rural bank from the assessment year 2007-08 onwards.
As on dated August 25, 2006, addressed to the RBI was issued by Board clarifying that regional rural banks would not be eligible for deduction under section 80P of the Income-tax Act, 1961, from the assessment year 2007-08 onwards.
4. It has been brought to the notice of the Board that despite the amended provisions, some regional rural banks continue to claim deduction under section 80P on the ground that they are co-operative societies covered by section 80P(l) read with Board’s Circular No. 319, dated January 11, 1982.
5. It is, therefore, reiterated that regional rural banks are not eligible for deduction under section 80P of the Income-tax Act, 1961, from the assessment year 2007-08 onwards. Furthermore, Circular No. 319, dated January 1 I, 1982, deeming any regional rural bank to be co-operative society stands withdrawn for application with effect from the assessment year 2007-08.
The field officers may take note of this position and take remedial action, if required. “
11. Now coming to the decision of the Coordinate Bench in the case of M. P. State Agricultural Rural Development Bank relied on by the ld. Authorized Representative, we found that action of CIT(A) to allow benefit of Section 80P was confirmed by Tribunal on the finding that the assessee is an Agricultural and Rural Development Bank. It was also observed that as per the findings recorded by the ld.CIT(A), the assessee is a co operative land mortgaged bank, therefore, the benefit of Section 80P was available to the assessee despite insertion of sub Section (4) of Section 80P. Thus, the facts of this case are quite distinguishable from the facts of the assessee’s case where the assessee is a Regional Rural Bank. As the facts are distinguishable, therefore, proposition laid down therein cannot be applied to the assessee, which is a Regional Rural Bank engaged in banking activities, therefore, clearly excluded from application of Section 80P, after insertion of sub Section (4) of Finance Act, 2006.
12. In view of the above discussion, we do not find any infirmity in the order of lower authorities for decline of claim of deduction u/s 80P of the Income-tax Act, 1961.
13. In the result, both the appeals of the assessee are dismissed.
This order has been pronounced in the open court on 18th June, 2012.
This decision is so naive.How can Dept. withdwew the exemption to RRB just because a Clarificatory Circular Explaining the legal position of RRB Act which deems it a “Cooperative Society “is withdrawn.
RRB was exempt from IT due to RRB Act’s specific position and not due to some Clarificatory Circular of CBDT , who withdrawal will de-exempt RRB from IT .
The Order Quality of Indore Tribunal is on a Free-fall.