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

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS TUESDAY, THE 16TH DAY OF MARCH 2021 / 25TH PHALGUNA, 1942 ITA.No.72 OF 2019 AGAINST THE ORDER IN ITA 420/2018 DATED 25-10-2018 OF I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAX THIRUVANANTHAPURAM. BY ADV. SRI.CHRISTOPHER ABRAHAM RESPONDENT/S: M/S.CHIRAYINKEEZHU SERVICE CO-OPERATIVE BANK LTD. CHIRAYINKIL.P.O,THIRUVANANTHAPURAM-14. R1 BY ADV. DR.K.P.PRADEEP R1 BY ADV. SRI.SANAND RAMAKRISHNAN R1 BY ADV. SMT.NEENA ARIMBOOR R1 BY ADV. SRI.T.T.BIJU R1 BY ADV. SMT.T.THASMI THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16.03.2021, ALONG WITH ITA.126/2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

I T A Nos.72 & 126/2019 -2- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS TUESDAY, THE 16TH DAY OF MARCH 2021 / 25TH PHALGUNA, 1942 ITA.No.126 OF 2019 AGAINST THE ORDER IN ITA 421/2018 DATED 25-10-2018 OF I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAX THIRUVANANTHAPURAM. BY ADV. CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: M/S. CHIRAYINKEEZHU SERVICE CO-OPERATIVE BANK LTD CHIRAYINKEEZHU P.O., THIRUVANANTHAPURAM - 14. R1 BY ADV. DR.K.P.PRADEEP R1 BY ADV. SMT.T.THASMI THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16.03.2021, ALONG WITH ITA.72/2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

I T A Nos.72 & 126/2019 -3- J U D G M E N T [ ITA.72/2019, ITA.126/2019 ] Dated this the 16th day of March 2021 S.V. Bhatti, J. Revenue is the appellant. The appeals are filed challenging the orders, for the Assessment Years 2012-13 and 2015-16, of Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal, in Annexure B dated 13.07.2018 and Annexure C dated 25.10.2018, respectively. 2. The respondent is a registered Primary Agricultural Credit Society under Kerala Co-operative Societies Act, 1969. The respondent claims to be providing credit facilities to its members. The Assessing Officer rejected the entire claim of deduction made under Section 80P(2)(a)(i) by invoking Section

I T A Nos.72 & 126/2019 -4- 80P(4) of the Income Tax Act. The Assessing Officer rejected the claim for exemption of interest income earned by the assessee, on interest earned from surplus fund deposited with the District Co-operative Bank, and assessing the same as income from other sources. The assessee filed appeal and the Commissioner of Income Tax (Appeals), vide Annexure B order, referring to the judgments of this Courts in Chirakkal Service Co-operative Bank Ltd. v. CIT1 and Ottoor Service Co-operative Bank Ltd. v. ITO2 allowed the appeal filed by the assessee. The Revenue filed appeal before the Income Tax Appellate Tribunal, and through the order in Annexure C dismissed the appeal. Hence, the Income Tax Appeals. 3. Before proceeding further, it is contextual and hence briefly stated that the Full Bench judgment Mavilayi Service Co- operative Bank Ltd. v. Commissioner of Income Tax3 was questioned 1 (2016) 384 ITR 490 (Ker.) 2 Judgment dated 21.12.2017 in W.P.(C) No.38566 of 2017 3 2019 (2) KLT 597 (FB)

I T A Nos.72 & 126/2019 -5- before the Supreme Court and in the judgment reported in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax4, the apex Court has considered the scope of Sections 80P(2) and 80P(4), including the deducted income and other incomes derived by a Society. In this case, the relevant portion of the judgment, which has bearing for appreciating the challenge now laid against the order impugned, reads thus: “21. An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment: (I) That S.80P of the I.T. Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee; (II) That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub- section (2) of S.80P must be given by way of deduction; 4 2021 (1) KLT 485 (SC)

I T A Nos.72 & 126/2019 -6- (III) That this Court in Kerala State Co-operative Marketing Federation Ltd. And Ors. (supra) has construed S.80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied; (IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from S.80P(2)(b) qua milk co- operative societies, the legislature expressly says so – which is not the case with S.80P(2)(a)(i); (V) That S.80P(4) is in the nature of a proviso to the main provision contained in S.80P(1) and (2). This proviso specifically excludes only co-operative banks, which are co-operative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of S.80P(4)". Xxx xxx xxx xxx xxx xxx "27. However, …............{ Firstly, the marginal note to S.80P which reads “Deduction in respect of income of co-operative societies” is important, in that it indicates the general “drift” of the provision. This was so held by this Court in K.P.Varghese

I T A Nos.72 & 126/2019 -7- v. Income Tax Officer, Ernakulam & Anr. (1981 KLT SC SN 91 (C.No.163) = (1981) 4 SCC 173) as follows: “9. This interpretation of sub-s.(2) is strongly supported by the marginal note to S.52 which reads “Consideration for transfer in cases of understatement”. It is undoubtedly true that the marginal note to a Section cannot be referred to for the purpose of construing the Section but it can certainly be relied upon as indicating the drift of the Section or, to use the words of Collins, M.R. in Bushel v. Hammond ((1904) 2 KB 563) to show what the Section is dealing with. It cannot control the interpretation of the words of a Section particularly when the language of the Section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the Section (vide Bengal Immunity Company Limited v. State of Bihar (1955 KLT OnLine 1007 (SC) = (1955) 2 SCR 603)).” 28. Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”. A co-operative society is defined in S.2(19) of the IT Act, as being a co- operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any

I T A Nos.72 & 126/2019 -8- further as to whether the co-operative society is classified as X or Y. 29. Thirdly, the gross total income must include income that is referred to in sub-section (2). 30. Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being “engaged in” carrying on the business of banking or Mavilayi S.C.B. Ltd. v. Commr.of Income Tax (R.F. Nariman, J.) (SC) providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co-operative society must be “engaged in” the providing credit facilities to its members. As has been rightly pointed out by the learned Additional Solicitor General, the expression “engaged in”, as has been held in Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Ltd. (2008 (3) KLT OnLine 1133 (SC)= (2008) 9 SCC 337), would necessarily entail an examination of all the facts of the case. This Court in Ponni Sugars and Chemicals Ltd. (supra) held: “20. In order to earn exemption under S.80-P(2) a co-operative society must prove that it had engaged itself in carrying on any of the several businesses referred to in sub-section (2). In that connection, it is important to note that under sub-section (2), in the context of co-operative society, Parliament has stipulated that the society must be engaged in carrying on the business of banking or providing credit facilities to its

I T A Nos.72 & 126/2019 -9- members. Therefore, in each case, the Tribunal was required to examine the memorandum of association, the articles of association, the returns of income filed with the Department, the status of business indicated in such returns, etc. This exercise had not been undertaken at all.” 31. The learned Additional Solicitor General relied upon the second proviso to S.2(oaa) of the Kerala Act, and argued that given the fact that the principal object in most, if not all, of the Appellants before us has not been fulfilled, these Appellants have lost all characteristics of being primary agricultural credit societies. In answer to this submission, learned counsel for the Appellants cited the following judgments, namely, Assistant Commissioner of Income Tax v. A.K. Menon and Ors. (1995 (2) KLT OnLine 1042 (SC) = (1995) 5 SCC 200) (paragraph 4); Titan Medical Systems (P) Ltd. v. Collector of Customs, New Delhi (2002 (3) KLT OnLine 1028 (SC) = (2003) 9 SCC 133) (paragraph 12); and Vadilal Chemicals Ltd. v. State of A.P. and Ors. (2005 (3) KLT OnLine 1117 (SC) = (2005) 6 SCC 292 (paragraphs 20 to 23), for the proposition that it is the RBI alone under the Banking Regulation Act, 1949, and the Registrar alone under the Kerala Act who can look into questions as to whether a primary agricultural credit society is, or is not, a co-operative bank, and whether a society’s classification as primary agricultural credit society ought to continue or be re-classified as a co-operative bank. Neither argument applies to the facts of these cases,

I T A Nos.72 & 126/2019 -10- given that the statutory provision involved does not require the Appellants to be primary agricultural credit societies to claim a deduction under S.80P(2)(a)(i) in the first place. 32. Fifthly, as has been held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT (2009 (3) KLT OnLine 1133 (SC) = (2009) 8 SCC 393) at paragraph 23, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under S.80P. Therefore, the assessing officer under the IT Act cannot be said to be going behind any registration certificate when he engages in a fact-finding enquiry as to whether the co-operative society concerned is in fact providing credit facilities to its members. Such fact finding enquiry (see S.133(6) of the IT Act) would entail examining all relevant facts of the co-operative society in question to find out whether it is, as a matter of fact, providing credit facilities to its members, whatever be its nomenclature. Once this task is fulfilled by the assessee, by placing reliance on such facts as would show that it is engaged in providing credit facilities to its members, the assessing officer must then scrutinize the same, and arrive at a conclusion as to whether this is, in fact, so. 33. Sixthly, what is important to note is that, as has been held in Kerala State Co-operative Marketing Federation Ltd. and Ors. (supra) the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone.

I T A Nos.72 & 126/2019 -11- S.80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and S.80P(2)(a)(i) must be contrasted with S.80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must also further be contrasted with sub-clause (b), which speaks only of a “primary” society engaged in supplying milk etc. thereby defining which kind of society is entitled to deduction, unlike the provisions contained in S.80P(2)(a)(i). Also, the proviso to S.80P(2), when it speaks of sub-clauses (vi) and (vii), further restricts the type of society which can avail of the deductions contained in those two sub-clauses, unlike any such restrictive language in S.80P(2)(a)(i). Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. 34. Seventhly, S.80P(1)(c) also makes it clear that S.80P is concerned with the co-operative movement generally and, therefore, the moment a co-operative society is registered

I T A Nos.72 & 126/2019 -12- under the 1912 Act, or a State Act, and is engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). The reach of sub- clause (c) is extremely wide, and would include co-operative societies engaged in any activity, completely independent of the activities mentioned in sub-clauses (a) and (b), subject to the cap of INR 50,000/- to be found in sub-clause (c)(ii). This puts paid to any argument that in order to avail of a benefit under S.80P, a co-operative society once classified as a particular type of society, must continue to fulfil those objects alone. If such objects are only partially carried out, and the society conducts any other legitimate type of activity, such co- operative society would only be entitled to a maximum deduction of ` 50,000/- under sub-clause (c). 35. Eighthly, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies, are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co-operative movement as a whole.}" xxx xxx xxx

I T A Nos.72 & 126/2019 -13- xxx xxx xxx "39. The above material would clearly indicate that the limited object of S.80P(4) is to exclude co-operative banks that function at par with other commercial banks i.e.which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from S.3 read with S.56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by S.5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under S.22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities." xxx xxx xxx xxx xxx xxx "45. To sum up, therefore, the ratio decidendi of Citizen Co- operative Society Ltd.(supra), must be given effect to. S.80P of

I T A Nos.72 & 126/2019 -14- the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into S.80P(2)(a)(i) when it is not there. Further, S.80P(4) is to be read as a proviso, which proviso now Mavilayi S.C.B. Ltd. v. Commr.of Income Tax (R.F. Nariman, J.) (SC) specifically excludes co-operative banks which are co- operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Co-operative Society Ltd. (supra). Clearly, therefore, once S.80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in S.80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted." xxx xxx xxx

I T A Nos.72 & 126/2019 -15- xxx xxx xxx "48. Resultantly, the impugned Full Bench judgment is set aside. The appeals and all pending applications are disposed of accordingly. These appeals are directed to be placed before appropriate benches of the Kerala High Court for disposal on merits in the light of this judgment." 4. In the above excerpted portion, the extent to which a Society is entitled to claim exemption of income under Section 80P(2) is considered and also the extent of exemption available to a Society, which merits consideration under section 80P(2) for the income received from investments made and income received therefrom has been specifically dealt with in paragraph 30. For convenience, the same is excerpted hereunder at the cost of repetition. “30. Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being “engaged in” carrying on the business of banking or Mavilayi S.C.B. Ltd. v. Commr.of Income Tax (R.F. Nariman, J.) (SC) providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co-operative society

I T A Nos.72 & 126/2019 -16- must be “engaged in” the providing credit facilities to its members. As has been rightly pointed out by the learned Additional Solicitor General, the expression “engaged in”, as has been held in Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Ltd. (2008 (3) KLT OnLine 1133 (SC)= (2008) 9 SCC 337), would necessarily entail an examination of all the facts of the case. This Court in Ponni Sugars and Chemicals Ltd. (supra) held: “20. In order to earn exemption under S.80-P(2) a co-operative society must prove that it had engaged itself in carrying on any of the several businesses referred to in sub-section (2). In that connection, it is important to note that under sub-section (2), in the context of co-operative society, Parliament has stipulated that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. Therefore, in each case, the Tribunal was required to examine the memorandum of association, the articles of association, the returns of income filed with the Department, the status of business indicated in such returns, etc. This exercise had not been undertaken at all.” 5. The assessee is entitled to deduction of income earned from surplus fund deposited with the District Co- operative Bank, while computing the total income of the

I T A Nos.72 & 126/2019 -17- assessee. The issue since is no more res integra we are satisfied that the grounds raised in the appeals do not merit consideration. Accordingly, the appeals fail and dismissed. No order as to costs. Sd/- S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj

I T A Nos.72 & 126/2019 -18- APPENDIX OF ITA 72/2019 PETITIONER'S/S EXHIBITS: ANNEXURE A TRUE COPY OF THE ORDER U/S 143(3)OF THE INCOME TAX ACT,1961 OF THE ASSESSING OFFICER DATED 13/12/2O17. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OFINCOME TAX (APPEALS), TRIVANDRUM DATED 13/07/2018. ANNEXURE C TRUE COPY OF THE ORDER OF THE ITAT IN ITA NO.420/COCH/2018,FOR THE ASST.YEAR 2012-13 DTAED 25/10/2018.

I T A Nos.72 & 126/2019 -19- APPENDIX OF ITA 126/2019 PETITIONER'S/S EXHIBITS: ANNEXURE A TRUE COPY OF THE ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 OF THE ASSESSING OFFICER DATED 7.12.2017. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), TRIVANDRUM DATED 13.7.2018. ANNEXURE C TRUE COPY OF THE ORDER OF THE ITAT IN ITA NO.420/COCH/2018, FOR THE AAST.YEAR 2012-13 DATED 25.10.2018.