THE ITO, WD-1, KOLLAM, KOLLAM vs. M/S.CHATHANNOOR SERVICE CO-OP BANK LTD, KOLLAM

Two issues are raised in these appeals – (i) whether the assessee is entitled to deduction u/s 80P of the I.T.Act; (ii) whether the interest income received on investments can be treated as ‘income from business’ and granted deduction u/s 80P of the I.T.Act.

Brief facts of the case are as follows: The assessee in this case is a registered as co-operative societies under the Kerala State Co-operative Societies Act,

Aggrieved by the orders of the assessment, the assessee filed appeal before the first appellate authority. The CIT(A) by following the judgment of the Hon’ble jurisdictional High Court in the case of Chirakkal Service Co-operative Bank Ltd. (384 ITR 490) allowed the claim of deduction u/s 80P of the I.T.Act. As regards interest received on investments, the CIT(A) held that the same should be assessed as `income from business’ since these investments were made in the course of business of the assessee. It was concluded by the CIT(A) that such interest income was entitled to deduction u/s 80P of the I.T.Act. In holding so, the learned CIT(A) relied on the order of the Tribunal in the case of Kizhathadiyoor Service Co-operative Bank Limited in ITA No.525/Coch/2014 (Order dated 20.07.2016).

Aggrieved by the orders of the CIT(A), the Department has filed the present appeal before the Tribunal. The grounds raised in this appeal read as follows:

The Learned Commissioner of Income tax (Appeals), Trivandrum erred in concluding that "the appellant is eligible for deduction under section

The present appeal involves substantial question of law on the issue of deduction u/s 80P of the Act:

The present appeal involves substantial question of law on the issue of eligibility of interest income earned by the Appellant from other Banks and Treasury, as whether on the facts and in the circumstances of the case, the order of CIT(A) is correct: (i) in not duly considering that the interest income received from deposits made with banks cannot be attributable as profit and gains from out of providing credit facilities to its members u/s 80P(a)(i)?

For these and other grounds that may be advanced at the time of hearing the order of the learned Commissioner of Income tax (Appeals), Thiruvananthapuram on the above points may be set aside and that of the Assessing Officer restored.”

The learned Departmental Representative relied on the grounds raised in the appeal. Further, the learned DR placed reliance on the latest judgment of the Larger Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT [ITA No.97/2016 order dated 19th March, 2019]. None was present on behalf of the

We have heard the Departmental Representative and perused the material on record. The Larger Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. (supra) held that the Assessing Officer has to conduct an inquiry into the factual situation as 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:-

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 KCS Act and classified so, under the Act, including the appellants are entitled to such exemption.

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

As regards the interest on the investments with Co- operative Banks and other Banks, the co-ordinate Bench order of the Tribunal in the case of Kizhathadiyoor Service Co- operative Bank Limited (supra) held that interest income earned from investments with treasuries and banks is part of banking activity of the assessee, and therefore, the said interest income was eligible to be assessed as `income from business’ instead of `income from other sources’. However, as regards the grant of deduction u/s 80P of the I.T.Act on such interest income, the Assessing Officer shall follow the law laid down by the Larger Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT [ITA No.97/2016 order dated 19th March, 2019] and examine the

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