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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Chandra Poojari, AM & Shri George George K, JM
Per Bench :
These appeals at the instance of the assessee are directed against two orders of the CIT(A), both dated 23.01.2020. The relevant assessment years are 2009-2010 and 2014-2015.
Common issue is raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order.
The solitary issue that is raised is whether the CIT(A) is justified in confirming the Assessing Officer’s order in denying the claim of deduction u/s 80P(2)(a)(i) of the I.T.Act.
The brief facts of the case are as follow:
ITA Nos.152-153/Coch/2020 2 M/s.Chevayur SCB Ltd. The assessee is a co-operative society registered under the Kerala Co-operative Societies Act, 1969. For the assessment years 2009-2010 and 2014-2015, returns were filed after claiming deduction u/s 80P of the I.T.Act. The assessment orders were passed for assessment years 2009- 2010 and 2014-2015, wherein the Assessing Officer disallowed the claim of deduction u/s 80P of the I.T.Act. The reasoning of the Assessing Officer to disallow the claim of deduction u/s 80P(2)(a)(i) of the I.T.Act was that the assessee was essentially doing the business of banking, and therefore, in view of insertion of section 80P(4) of the I.T.Act with effect from 01.04.2007, the assessee will not be entitled to deduction u/s 80P of the I.T.Act.
Aggrieved by the orders passed by the Assessing Officer disallowing the claim of deduction u/s 80P(2) of the I.T.Act, the assessee preferred appeals before the first appellate authority for assessment years 2009-2010 and 2014-2015. The CIT(A) placing reliance on the judgment of the Full Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT [(2019) 414 ITR 67 (Ker.) (FB) (HC)] held that the Assessing Officer had made elaborate findings and has come to a factual finding that agricultural credit provided by the assessee is only minuscule and assessee cannot be termed as primary agricultural credit society. Accordingly disallowance of claim of deduction u/s 80P of the I.T.Act made by the Assessing Officer was upheld by the CIT(A). In the result the appeals filed by the assessee
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were rejected by the CIT(A) for assessment years 2009-2010 and 2014-2015.
Aggrieved by the orders passed by the CIT(A), the assessee has preferred these appeals before the Tribunal. The learned AR has also filed a written submission, which reads as follow:-
“01. Your appellant is a society registered under the Kerala Co-operative Societies Act, 1969 and is providing credit facilities to its members. Your appellant does not have a license from the Reserve Bank of India to do business of a co operative bank and in spite of the Honorable Supreme Court of India holding in para 24 of The Citizen Co operative Society Limited Vs Assistant Commissioner of Income Tax (2017) 397 ITR 0001 (para 24), that an assessee who does not have a license from the Reserve Bank of India to do business of a co operative bank will not come under the mischief of sub section 4 of section 80P, the learned Commissioner of Income Tax (Appeals) has chosen to do just that. It is against such an order of the Learned Commissioner of Income Tax (Appeals) that this appeal has been filed.
The learned Commissioner of Income Tax (Appeals), while rejecting the plea of your appellant to follow the direction of the Supreme Court of India, has (in para 15 of his Order) chosen to hold "if a society is functioning as PACS, then the deduction would be granted, else not. Once it is held that the assessee society (being PACS) is violating all the norms and rules of its charter, then it cannot take recourse to claim it again by falling back to provisions of Section 80P (2). If appellant's contention is to be accepted then an exception to exception in Section 80P(4) in terms of PACS would be rendered redundant and that is not what legislature intended. If PACS, even if they are held as not PACS by the Assessing Officer would again be entitled to claim deduction by falling back to Section 80P(2) then legislature should have stopped by just carving out a simple exception or exclusion of Co-operative banks without mentioning PACS in Section 80P(4). Legislature in its wisdom intended to grant deduction under section 80P to those Primary Agricultural Credit Societies, which are truly following the charter of PACS, and not to those Societies, which are doing banking business in the guise of PACS. Mischief created by Section 80P (4) of the I.T. Act will entirely take out all defaulting PACS out of the purview of eligibility of deduction under Section 80P without
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depending upon the source of income (interest on investment with Co-operative Societies as claimed by appellant under Section 80P(2)(d)). Exception of PACS out of co-operative banks has been carved out in section 80P(4) and like cooperative banks, provision of Section 80P(4) will hit them completely if it is held by the Assessing Officer that a particular PACS is engaged in banking business like commercial bank / cooperative bank and thus violating its charter. The intention of legislature is clear from the context of Section 80P(4) whereby PACS are placed in same family as Cooperative banks and if there is violation or true activities of that PACS is not in compliance with norms for which it was granted certificate and instead doing banking business, then no deduction be given to such PACS under section 80P(2) (like cooperative banks). Once it is held that assessee Society being PACS is violating its charter, then for the purpose of income tax, it is to be assessed as AOP doing banking business liable for tax".
Your Honours, from the above it would appear that learned Assessing Officer and the learned Commissioner of Income (Appeals), do not consider that a PACS is also a society registered under the Kerala Co Operative Societies Act. For if they did, after holding that your appellant has failed to satisfy the criteria to be held as a PACS and is therefore not a PACS, the learned Assessing Officer ought to have proceeded to assess your appellant as co-operative society and granted 80P deduction if otherwise it is entitled to it. In fact the Assessment Order records status of your appellant as "AOP (Co operative Society)" except that the deduction u/s 80P was denied by resorting to 80P(4) but in contravention of the Honorable Supreme Court's decision in The Citizens case.
During the assessment proceedings and while preparing the Remand Report the learned Assessing Officer had opportunity to examine in detail the working of your appellant. Vide para 15 of the Assessment Order, the learned Officer has found that your appellant is "doing true banking business". It is therefore respectfully submitted the Learned Officer then ought to have determined that your appellant is eligible for deduction under provisions of section 80P(2)(a)(i). The learned Officer in his Remand Report has stated that there are different classes of member A, B, C and D and there is absolutely no identity between the contributors towards the surplus and participators in surplus and hence the principle of mutuality is missing. It is respectfully submitted that under similar circumstance the Honorable Madras High Court (para 13) has held in The Principal Commissioner of Income Tax Vs M/S S 1308 Ammapet Primary Agricultural Co-operative Bank Limited (Appeal No 882 and 891 of 2018) "the Assessing
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Officer fell into an error in drawing a distinction between A Class members and B Class members. For the purpose of being entitled to a relief under 'Section 80P of the Act, all that is required is that the co operative society should answer the description of society engaged in carrying on the business of providing credit facilities to its members. Once the description is answered, then automatically, the benefit of Section 80P of the Act would stand attracted subject to the provisions contained in Sub-Section (2) of section 80P of the Act”. The learned Officer ought to have Seen that under section 2(1) of the Kerala Co-operative Societies Act, 1969, a "member means a person joining in the application for the registration of a Co operative society or a person admitted to membership after such registration in accordance with this Act, the rules and the by laws, and includes a nominal or associate member". As held by the Madras High Court the Assessing Officer fell in an error in drawing a distinction between different classes of members. All that was required to be shown is that your appellant was undertaking activities for which deduction u/s 80P was allowable. This finding the learned Officer has already recorded in para 15 of the Assessment Order that your appellant is carrying on the business of banking.
The learned Commissioner of Income Tax (Appeals) has stated "The intention of legislature is clear from the context of Section 80P(4) whereby PACSs are placed in same family as Cooperative banks and if there is violation or true activities of that PACSs is not in compliance with norms for which it was granted certificate and instead doing banking business, then no deduction be given to such PACSs under section 80P(2) (like cooperative banks). It is respectfully submitted that is not the intention of the legislature when section 80P(4) was introduced. The relevant Explanatory Note reads as under:
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.
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
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credit society and primary co-operative agricultural and rural development bank have also been defined to lend clarity to them.
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.
It is respectfully submitted that not only does your appellant not function at par with commercial and co operative banks, your appellant does not "enjoy" tax benefits that are available for commercial and co operative banks. For eg deduction u/s 36(i)(viia) or deduction u/s 43D is not applicable for your appellant. Commercial and Co operative Banks are required to follow the income recognition and provisioning prudential norms and are taxed after taking into account such accounting. Co operative Societies on the contrary are not required to follow the income recognition and provisioning prudential norms. Their incomes are therefore inflated (as they recognize interest income on even non performing assets) on the income side and in order to show a true and fair view, necessary provisions are made in the accounts. Taxing such unrealized income without considering the provisions created for such unrealized income is akin to taxing unreal income. It is respectfully submitted that it could not have been the intention of the legislature to place co operative societies engaged in banking or providing credit to its members at a disadvantageous position as compared to commercial and co operative banks. The reason such tax concessions like 36(i)(viia) and 43D is not applicable to your appellant is because even otherwise it is exempt u/s 80P and therefore the question of such a claim does not arise. In Income Tax there are other examples where similar activity is carried out, in one instance it is taxable in another it is not. For eg educational institutions. If 7 persons form a public charitable trust, get 12AA registration and adhere to the law the entire excess of Income over Expenditure in running an Educational Institution is exempt, however high the surplus may be. If these same people form a partnership or even a co operative society and run a similar educational institution, they will have to pay Income Tax on the surplus. Likewise under the provisions of section 80P" a co operative society engaged in giving credit to it's members is eligible for deduction unless it comes within the mischief of 80P(4), and the Supreme Court of India has held co operative societies (like your appellant) who do not have license to do banking business will not. CBDT Circular No.133/2007 dated 9th May, 2007, has clarified that for a society which does not fall within the
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meaning of Co operative Bank as defined in part V of the Banking Regulation Act,1949, 80P(4) will not apply.
It therefore stands to reason that section 80P(4) is not applicable to a co operative society which is doing banking or providing credit to its members.
05.. This Honorable Bench in Peroorkada Service Co operative Bank Limited Vs Income Tax Officer, Ward 2(1), Trivandrum (ITA N067/COCH/2019 decided on 17-05-2019) in para 7.1 directed that the Assessing Officer shall examine the activities of the assessee and determine whether its activities are in compliance with the activities of a co operative society functioning under the Kerala Co operative Societies Act, 1969 and grant deduction u/s 80P(2) in accordance with law. This is in contrast to the learned Commissioner of Income Tax (Appeals) concluding assessee society (being PACS) is violating all the norms and rules of it's charter, then it cannot take recourse to claim it again by falling back to provisions of Section 80P(Your appellant wishes to submit there is no charter for a being classified as a PACS). The only charter that is relevant for your appellant is the Kerala Co operative Societies Act and Bye Laws that govern your appellant. For being classified as a PACS there are some conditions that are to be satisfied. If they are not satisfied your appellant is not a PACS. If in the next year your appellant satisfies those conditions, then we are a PACS. In either years we remain a co operative society. Neither in the assessment order nor in the remand report is there anything to construe that your appellant was not in compliance with the provisions of the Kerala Co operatives Societies Act. 1969 or it's bye laws. It is therefore prayed that this Honorable Bench grant your appellant deduction u/s 80P(2)(a)(i).
The learned Commissioner of Income Tax (Appeals) has relied on the decision of the Supreme Court of India in the case of Hari Chand Shrigopal, [2011] 1 SCC 236, held that a person, invoking an exception or exemption provisions, to relieve him of tax liability must establish clearly that he is covered by the said provisions and, in case of doubt or ambiguity, the benefit of it must go to the State.". It is submitted that there is no doubt or ambiguity in your appellant's case. The doubt has arisen on account of misinterpretation of legislative intent (while introducing section 80P(4)), by the learned Commissioner of Income Tax (Appeals). The correct way to interpret this very section viz section 80P has been decided by the Supreme Court of India in The Kerala State Co operative Marketing Federation Ltd Vs Commissioner of Income Tax (CA Nos15430/96, 2354-55/96). It was held by the Supreme Court of India that "the correct
ITA Nos.152-153/Coch/2020 8 M/s.Chevayur SCB Ltd. way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises to whether any particular category of income of a co operative society is exempt from tax what has to be seen is whether income fell within any of several heads of exemption. If it fell within anyone head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption". When your appellant has not satisfied the condition to be classified as a PACS, it becomes just a co operative society. And it engaged in providing credit to it's members such income is exempt from tax under the provisions of section 80P.”
6.1 The learned Departmental Representative, on the other hand, strongly supported the orders passed by the Income Tax Authorities.
We have heard the rival submissions and perused the material on record. The Hon’ble jurisdictional High Court in the case of Chirakkal Service Co-operative Co-operative Bank Ltd. v. CIT [(2016) 384 ITR 490 (Ker.)] had held that when a certificate has been issued to an assessee by the Registrar of Co-operative Societies characterizing it as primary agricultural credit society, necessarily, the deduction u/s 80P(2) of the I.T.Act has to be granted to the assessee. However, the Full Bench of the Hon’ble Kerala High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT (supra) had reversed the above findings of the Hon’ble Kerala High Court in the case of Chirakkal Service Co-operative Co- operative Bank Ltd. v. CIT (supra). The Larger Bench of the Hon’ble Kerala High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT (supra) held that the Assessing Officer has to conduct an inquiry into the factual situation as
ITA Nos.152-153/Coch/2020 9 M/s.Chevayur SCB Ltd. to the activities of the assessee society to determine the eligibility of deduction u/s 80P of the I.T.Act. It was held by the Hon’ble High Court that the Assessing Officer is not bound by the registration certificate issued by the Registrar of Kerala Co-operative Society classifying the assessee-society as a co-operative society. The Hon’ble High Court held that each assessment year is separate and eligibility shall be verified by the Assessing Officer for each of the assessment years. The finding of the Larger Bench of the Hon’ble High Court reads as follows:-
“33. In view of the law laid down by the Apex Court in Citizen Co-operative Society [397 ITR 1] it cannot be contended that, while considering the claim made by an assessee society for deduction under Section 80P of the IT Act, after the introduction of sub-section (4) thereof, the Assessing Officer has to extend the benefits available, merely looking at the class of the society as per the certificate of registration issued under the Central or State Co-operative Societies Act and the Rules made thereunder. On such a claim for deduction under Section 80P of the IT Act, the Assessing Officer has to conduct an enquiry into the factual situation as to the activities of the assessee society and arrive at a conclusion whether benefits can be extended or not in the light of the provisions under sub-section (4) of Section 80P.
In Chirakkal [384 ITR 490] the Division Bench held that the appellant societies 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 to be 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 and as such, they are entitled for the benefit of sub-section (4) of Section 80P of the IT Act to ease themselves out from the coverage of Section 80P and that, the authorities under the IT Act cannot probe into any issues or such matters relating to such societies and that, Primary Agricultural Credit Societies registered as such under the
ITA Nos.152-153/Coch/2020 10 M/s.Chevayur SCB Ltd. KCS Act and classified so, under the Act, including the appellants are entitled to such exemption. 34. In Chirakkal [384 ITR 490] the Division Bench expressed a divergent opinion, without noticing the law laid down in Antony Pattukulangara [2012 (3) KHC 726] and Perinthalmanna [363 ITR 268]. Moreover, the law laid down by the Division Bench in Chirakkal [384 ITR 490] is not good law, since, in view of the law laid down by the Apex Court in Citizen Co-operative Society [397 ITR 1], on a claim for deduction under Section 80P of the Income Tax Act, by reason of sub-section (4) thereof, the Assessing Officer has to conduct an enquiry into the factual situation as to the activities of the assessee society and arrive at a conclusion whether benefits can be extended or not in the light of the provisions under sub-section (4) of Section 80P of the IT Act. In view of the law laid down by the Apex Court in Citizen Co- operative Society [397 ITR 1] the law laid down by the Division Bench Perinthalmanna [363 ITR 268] has to be affirmed and we do so.
In view of the law laid down by the Apex Court in Ace Multi Axes Systems’ case (supra), since each assessment year is a separate unit, the intention of the legislature is in no manner defeated by not allowing deduction under Section 80P of the IT Act, by reason of sub-section (4) thereof, if the assessee society ceases to be the specified class of societies for which the deduction is provided, even if it was eligible in the initial years.”
7.1 In the instant case, the Assessing Officer had denied the claim of deduction u/s 80P of the I.T.Act for the reason that assessee was essentially doing the business of banking and disbursement of agricultural loans by the assessee was only minuscule. Therefore, the Assessing Officer concluded that the assessee cannot be treated as co-operative society. The Assessing Officer after perusing the narration of the loan extracts in the statutory audit report for assessment years 2009-2010 and 2014-2015, came to the conclusion that out of the total loan disbursement, only a minuscule portion has been advanced for agricultural purposes. We are of the view that the narration in loan extracts in the audit reports by
ITA Nos.152-153/Coch/2020 11 M/s.Chevayur SCB Ltd. itself may not conclusive to prove whether loan is a agricultural loan or a non-agricultural loan. The gold loans may or may not be disbursed for the purpose of agricultural purposes. Necessarily, the A.O. had to examine the details of each loan disbursement and determine the purpose for which the loans were disbursed, i.e., whether it is for agricultural purpose or non-agricultural purpose. In these cases, such a detailed examination has not been conducted by the A.O. At the time of assessment, the judgment of the Hon’ble jurisdictional High Court in the case of Chirakkal Service Cooperative Bank Ltd. (supra) was ruling the roost and the certificate issued by the Registrar of Co-operative Society terming the assessee as a primary agricultural credit society would be sufficient for grant of deduction u/s 80P of the I.T.Act. In the light of the dictum laid down by the Full Bench of the Hon’ble Kerala High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT (supra), we are of the view that there should be fresh examination by the Assessing Officer as regards the nature of each loan disbursement and purpose for which it has been disbursed, i.e., whether it for agricultural purpose or not. The A.O. shall list out the instances where loans have disbursed for non-agricultural purposes etc. and accordingly conclude that the assessee’s activities are not in compliance with the activities of primary agricultural credit society functioning under the Kerala Co- operative Societies Act, 1969, before denying the claim of deduction u/s 80P(2) of the I.T.Act. For the above said purpose, the issue raised in these appeals is restored to the files of the Assessing Officer. The Assessing Officer shall
ITA Nos.152-153/Coch/2020 12 M/s.Chevayur SCB Ltd. examine the activities of the assessee-society by following the dictum laid down by the Full Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT (supra) and shall take a decision in accordance with law. Needless to state, the assessee shall co-operate with the A.O. and shall furnish the necessary details called for. Further, the assessee shall not seek unnecessary adjournment. It is ordered accordingly.
In the result, the appeals filed by the assessee are allowed for statistical purposes.
Order pronounced on this 24th day of June, 2020.
Sd/- Sd/- (Chandra Poojari) (George George K.) ACCOUNTANT MEMBER JUDICIAL MEMBER
Cochin, dated 24th June, 2020 Devadas G*
Copy to : 1. The Appellant 2. The Respondent 3. The CIT(A), Kozhikode. 4. The Pr.CIT, Kozhikode. 5. The DR, ITAT, Kochi 6. Guard File.
Asst.Registrar/ITAT/Kochi