THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. M/S.ETTUMANOOR SERVICE CO-OPERATIVE BANK LTD

The assessee is a registered Primary Agricultural Credit Society. The appeal pertains to the returns filed by the assessee/respondent for the Assessment Year 2012-13. The assessee claims deduction under Section 80P(2)(i)(a) of the Income Tax Act. The Assessing Officer held that the assessee cannot be considered as a Primary Agricultural Credit Society, and that, for the subject Assessment Year the assessee claimed expenditure to the tune of Rs.8,99,40,357/- towards 'interest on various deposits'. The Assessing Officer, after taking note of the -3- circumstances and books of accounts produced by the assessee, disallowed 5% of the interest paid on deposit, amounting to Rs.44,97,018/- and added the said amount as income returned. Through Annexure A, the Assessing Officer determined the income of assessee as Rs.1,31,14,750/- and demanded tax etc on the said amount. The assessee/respondent filed statutory appeal before the Commissioner of Income Tax (Appeals) in ITA No.K-10/CIT(A)/KTM/2015-16/226. By order dated 06.06.2016, the Commissioner of Income Tax (Appeals) upheld the findings of Assessing Officer, disallowing 5% of the total expenditure booked by the assessee towards payment of interest on deposits. However, the Commissioner of Income Tax (Appeals) directed the said addition, as entitled to benefit of deduction under Section 80P(2)(a) of the Income Tax Act. The operative portion of the order of Commissioner of Income Tax (Appeals) reads thus:

Section 80P(2)(d) allows exemption for the whole income by way of interest or dividends derived by a Co-operative Society from its investments with any other Co-operative Society. The appellant in their return has separately shown Rs.2,20,200/- under other sources being dividend from IFFCO. As the same represents dividends received from Indian Farmers Co-operative Society Ltd., [IFFCO] the receipt squarely comes under the eligible clause 80P(2)(d) and accordingly the appellant's claim under this clause is also allowed. Allowability of Deduction u/s 80P for the additions made:

The addition made of Rs.44,97,108/- by the AO has been upheld in paras 6 and 7 of this order. However, the said addition is eligible for deduction u/s 80P. The following case laws are relevant here:- -5- (1) Buldana Urban Co-op.Credit Society Ltd. Vs. ACIT – IT Appeal Nos.151 to 153 and 179 to 181 (ITAT Nagpur) of 2012. (2) Karad Marchant Sah.Credit Sanstha v. ITO – ITA No.159/PN/09 (A.Y. 2005-06) of ITAT, Pune.

In the above referred cases the ITATs, Nagpur and Pune had allowed the issue in favour of assessee. Based on the above cited orders of the ITATs, the argument of the AR is upheld and deduction u/s 80P is allowed for the amount of addition made u/s 68 of the Income Tax Act.”

The Revenue aggrieved by the order in Annexure-B filed ITA No.358/Coch/2016 before the Income Tax Appellate Tribunal, Cochin Bench. Through the order in Annexure C the appeal filed by the Revenue has been dismissed, hence the instant Income Tax Appeal.

The learned Counsel appearing for the parties agree that in view of the recent judgment of the Apex Court in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax1, the assessee is entitled to the benefits of Section 80P(2) of 1 2021 (1) KLT 485 (SC)

Learned Senior Counsel Sri P K R Menon argues that the assessee is not entitled to claim deduction on income received by way of interest from Treasury and Laxmi Vilas Bank. According to him, even as per the judgment of the apex Court in Mavilayi Service Co-operative Bank Ltd case, the Society is entitled to claim deduction of income/interest/dividend earned from investments made in a Co-operative Society. In other words, investments with other Co-operative Society merit deduction and not income received from other sources. The -7- interest received from Treasury Department or a scheduled Bank as Laxmi Vilas Bank, according to him, could not be deducted from the income of the assessee.

Advocate P Arun Raj, per contra, argues that the grounds now raised by the Revenue cannot be taken up for consideration by this Court for two reasons. Firstly, the exemption granted by the Assessing Officer in Annexure A order dated 13.03.2015 to the assessee to the extent of interest earned from Treasury and Laxmi Vilas Bank was not challenged by the Revenue by filing an appeal. Therefore, in the first instance, the said deduction granted by the Assessing Officer was accepted and has become final. The Revenue did not raise any objection to the deduction of interest earned from investment made with Treasury or Laxmi Vilas Bank in ITA No.358/Coch/2016 filed before the Appellate Tribunal. This objection, it is argued as could be appreciated, is raised by -8- referring to the ratio of the apex Court in Mavilayi Service Co- operative Bank Ltd. Case, referred supra. He has, in detail, invited our attention to all the findings, grounds raised on this behalf, and contends that this small amount granted by the Assessing Officer by way of deduction, at this juncture, could not be allowed to be canvassed by the Department.

We have perused the record and noted the arguments of the learned Counsel appearing for the parties on this point. We are of the view that the Revenue has accepted the assessment order to the extent of granting deduction of Rs.69,323/- in the computation of total income of assessee. The Revenue has not challenged the said decision either before the Commissioner of Income Tax (Appeals) or before the Appellate Tribunal, for the first time a ground is canvassed, in this behalf, by the Department. We are of the view that the said objection cannot straightaway be considered by this Court at -9- this juncture without the same being subjected to challenge, as provided by law, and particularly the amount of deduction granted is Rs.69,323/-.

The Commissioner of Income Tax (Appeals), as noted above, confirmed the finding of disallowing 5% of the expenditure booked towards interest paid by the assessee in the subject Assessment Year. However, included the said exclusion as deduction permissible under Section 80P(2) of the Income Tax Act.

The learned Senior Advocate argues that the 5% expenditure excluded does not merit a deduction under Chapter VI A of the Act. The exclusion has to be treated as an occasion falling under Section 68 of the IT Act. Further, the Circular, relied on by the Tribunal, has no application for it is restricted to the sections adverted to in the said circular. Therefore, the 5% now excluded by the Assessing Officer will have be treated -10- as income from other sources and liable to tax.

Advocate Arun contends that the Society has accepted deposits on which interest is paid to the depositors. The Society has advanced loans to its members and has earned interest therefrom. The interest paid by the Society, to the extent of 5% is disallowed by Assessing Officer and Commissioner of Income Tax (Appeals). Once 5% is disallowed from the expenditure, in the natural flow of events and as a consequence to the deletion, the said portion comes back to the business carried on by the assessee as income and is entitled to deduction under Section 80P(2)(i)(a) of the Act. In the above circumstances, the point for consideration is whether the Commissioner of Income Tax (Appeals) and the Tribunal are correct in extending the deduction availed under Chapter VI A to the 5% disallowed by the Income Tax Officer on interest paid to the depositors.

The Society is entitled to claim deduction under Section 80P(2)(i)(a) of the IT Act. The exclusion of 5% from the expenditure disallowed is treated as a deduction permissible under 80P(2)(a)(i) of the Act. The argument of the Department is that the said disallowed portion will have to be treated as 'income earned from other sources'. The foundation for such argument is that the Circular relied by the Tribunal is inapplicable, and secondly the dis-allowance forms part of a situation contemplated by Section 68 of the Act.

Let us first examine the applicability of the Circular to the case on hand. Circular Dated 02.11.2016 refers to Section 32, 40(a)(ia), 40A(3), 43B, etc. The appreciation of Revenue that it is applicable only to the sections stated therein, is unacceptable and stated so without noticing the word 'etc' used in the Circular. Therefore, the objection now raised against the Tribunal that the Tribunal relied on an inapplicable Circular is -12- incorrect and accordingly rejected. The Circular comprehensively sets out the procedure for treating such items of expenditure.

The assessee/Society, in view of the recent Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. Case, is entitled to be treated as a Society satisfying the definition of Section 2(19) of Income Tax Act read with Kerala Societies Registration Act, 1860. The primary business of assessee/Society is accepting deposits and providing benefits to the members of the Society. The income, therefore, received by the Society is from the interest it earns on the amount lent to the members. The Society, likewise, is paying interest on the deposits it has accepted. For a reason recorded and accepted by all the authorities, the 5% of the expenditure booked against interest paid to depositors is disallowed and once disallowed portion is accepted by all the authorities, the said disallowed -13- portion forms part of the interest earned by the Society on the amount lent by the Society to its members, vis-a-vis in other words, income earned from business carried on by the Society. Therefore, the Society is entitled to deduction under Section 80P(2)(i)(a) of the Income Tax Act. Section 68 of the Act in terms is not applicable to an entry warranted consequent to the disallowed expenditure by the Assessing Authority.