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

The Assessing Officer treated the income derived by the assessee by way of interest from loans and advances made by it as not eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') on the ground that the assessee is not a society as envisaged under Section 80P(4) of the Act and passed assessment order accordingly.

The assessee challenged the aforesaid order of the Assessing Officer by filing appeal before the Commissioner of Income Tax (Appeals). The Appellate Authority allowed the appeal filed by the assessee and deleted the amount of income earned by it as interest from loans and advances from the taxable income by granting deduction under Section 80P(2)(a) (i) of the Act.

Aggrieved by the aforesaid order of the Commissioner of Income Tax (Appeals), the revenue filed appeal before the Income Tax Appellate Tribunal, Cochin Bench. The Tribunal held that the assessee is entitled to the benefit of deduction under Section 80P(2) of the Act and dismissed the appeal filed by the revenue. The aforesaid order of the Tribunal is challenged in this appeal.

The substantial question of law that arises for consideration in this appeal is whether the Tribunal is justified in holding that the classification of "Primary Agricultural Credit Society" made by the competent authority under Kerala Co- operative Societies Act, 1969 is binding on the authorities under the Income Tax Act for determining the eligibility for deduction under section 80P(4) of the Income Tax Act.

Heard learned counsel for the revenue as well as the assessee.

The Assessing Officer has declined to treat the income derived by the assessee by way of interest from loans and advances made by it as eligible for deduction under Section 80P(2)(a)(i) of the Act on the ground that the assessee is not a society as envisaged under Section 80P(4) of the Act. The Assessing Officer has found that enquiry can be conducted into the factual situation whether the assessee is conducting business as a Primary Agricultural Credit Co-operative Society and that the benefit under Section 80P(2) of the Act cannot be granted merely on the basis of the registration certificate issued to the assessee under the Kerala Co-operative Societies Act, 1969. The Appellate Authority relied upon the decision of this Court in Chirakkal Service Co-operative Bank Ltd v. Commissioner of Income Tax : 2016(2) KLT 535 and found that the assessee being a Primary Agricultural Credit Co- operative Society registered under the Kerala Co-operative Societies Act is entitled for deduction under Section 80P(2)(a)(i) of the Act and that the assessee cannot be treated as a Primary Co-operative Bank. The order of the Appellate Authority is confirmed by the Income Tax Appellate Tribunal on the basis of the decision of this Court in Chirakkal Service Co-operative Bank Ltd (supra).

Section 80P of the Act deals with deduction in respect of income of co-operative societies. Sub-section (1) of that section provides that where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2) of that section, there shall be deducted, in accordance with and subject to the provisions of Section 80P, the sums specified in sub-section (2) thereof, in computing the total income of the assessee. Sub- section (4) of Section 80P provides that the provisions of Section 80P 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.

In Chirakkal Service Co-operative Bank v. Commissioner of Income Tax : 2016 (2) KLT 535, a Division Bench of this Court had held that societies having been classified as Primary Agricultural Credit Societies by the competent authority under the Kerala Co-operative Societies 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 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 Act to ease themselves out from the coverage of Section 80P and that the authorities under the Act cannot probe into any issues or such matters relating to such societies and that the Primary Agricultural Credit Societies registered as such under the Kerala Co- operative Socities Act and classified so under that statute, are entitled to such exemption.

Chirakkal (supra) now stands overruled by the decision of the Full Bench of this Court in Mavilayi Service Co- operative Bank Limited v. Commissioner of Income Tax : 2019 (2) KHC 287, in which it has been held as follows: “In view of the law laid down by the Apex Court in Citizen Co-operative Society v. Assistant Commissioner of Income Tax: AIR 2017 SC 5147, 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”. The Full Bench has further held as follows: “ Moreover, the law laid down by the Division Bench in Chirakkal is not good law, since, in view of the law laid down by the Apex Court in Citizen Co-operative Society, 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 the light of the law laid down by the Full Bench of this Court in Mavilayi Service Co-operative Bank (supra), the matter has to be remitted to the Income Tax Appellate Tribunal for fresh consideration by it in the light of the aforesaid decision. The legal position with regard to the substantial question of law raised in this appeal is covered by the decision in Mavilayi Service Co-operative Bank (supra) and the substantial question of law is answered in favour of the revenue.

Consequently, the appeal is allowed and the order dated 23.07.2018 of the Income Tax Appellate Tribunal, Cochin Bench in I.T.A.No.144/Coch/2018 is set aside. The aforesaid appeal is remanded for fresh consideration and disposal by the Tribunal in the light of the decision of the Full Bench of this Court in Mavilayi Service Co-operative Bank (supra). No costs in the present appeal. (sd/-) C.K.ABDUL REHIM, JUDGE (sd/-) R.NARAYANA PISHARADI, JUDGE jsr/15/05/2019