VILLAPPALLY PANCHAYATH SERVICE CO-OPERATIVE BANK LTD.NO.D-2342 vs. COMMISSIONER OF INCOME TAX

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WP(C)/37761/2015HC KeralaKLHC01083596201509 February 2018Author: HONOURABLE MR. JUSTICE P.B.SURESH KUMAR11 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the interest income earned by the assessee co-operative banks on deposits made with other co-operative banks is indeed income derived from the business of banking and is eligible for deduction under Section 80P(1)(a) of the Income Tax Act, 1961. The Court reasoned that accepting deposits and earning interest thereon is a fundamental aspect of the banking business, irrespective of whether the deposits are placed with other banks or lent to members. The Court found support in the Supreme Court's decision in The Commissioner of Income-tax v. The Karnataka State Co-operative Apex Bank Ltd. (2002) 254 ITR 501 (SC), which held that interest earned by a co-operative bank on its surplus funds deposited with other banks is part of its business income. The Court allowed the writ petitions, quashing the orders of the revenue authorities that had disallowed the deduction. The operative direction was to grant the relief sought by the petitioners, i.e., to allow the deduction under Section 80P.

What were the facts?

The petitioners are various Service Co-operative Banks and Co-operative Rural Banks in Kozhikode District. They are challenging the orders passed by the Income Tax Officer (TDS) and the Commissioner of Income Tax. The core of the dispute revolves around the taxability of interest income earned by these banks on deposits made with other co-operative banks. The assessment years are not explicitly stated but are implied to be those for which the impugned orders were passed. The banks contend that this interest income should be treated as income from business and profession, eligible for deduction under Section 80P of the Income Tax Act, 1961. The revenue authorities, however, have treated this interest as income from other sources, thereby disallowing the deduction.

What were the issues?

1. Whether the interest income earned by the assessee co-operative banks on deposits made with other co-operative banks is income derived from the business of banking, and thus eligible for deduction under Section 80P(1)(a) of the Income Tax Act, 1961, or if it is income from other sources, not eligible for such deduction. Assessee's Contentions: - The assessee banks argued that their primary business is banking, which includes accepting deposits and lending money. The interest earned on deposits placed with other co-operative banks is an integral part of their banking operations and should be treated as business income. - They relied on the decision in The Commissioner of Income-tax v. The Karnataka State Co-operative Apex Bank Ltd. (2002) 254 ITR 501 (SC) and other High Court judgments that have held similar interest income to be eligible for deduction under Section 80P. Revenue's Contentions: - The revenue authorities contended that the interest income earned from deposits with other co-operative banks is not directly related to the primary activity of providing credit facilities to their members. Therefore, it should be classified as income from other sources and not eligible for deduction under Section 80P. - They argued that Section 80P(2)(a)(i) specifically refers to income from the business of banking, which implies lending to members, and that interest on inter-bank deposits falls outside this scope.

Which sections of the Income-tax Act were involved?

Section 80P

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR. JUSTICE P.B.SURESH KUMAR FRIDAY, THE 9TH DAY OF FEBRUARY 2018 / 20TH MAGHA, 1939 WP(C).No. 37761 of 2015 ----------------- PETITIONERS --------------- 1 VILLIAPPALLY PANCHAYATH SERVICE CO-OPERATIVE BANK LTD.NO.D-2342 VATAKARA, KOZHIKODE DISTRICT - 673 542, REPRESENTED BY ITS 2 NADAKKUTHAZHA SERVICE CO-OPERATIVE BANK LTD NO. D 2668 NEAR GOVERNMENT DISTRICT HOSPITAL, VATAKARA, KOZHIKODE DISTRICT - 673 001, REPRESENTED BY ITS SECRETARY. 3 THE CHEKKIAD SERVICE CO-OPERATIVE BANK LTD. NO. F 1657 P.O.CHEKKIAD, PARAKADAVU VIA, KOZHIODE DISTRICT - 673 509, 4 THE VALAYAM SERVICE CO-OPERATIVE BANK LTD NO. LL 120 VIA KALLACHI, P.O.VALAYAM - 673 517, REPRESENTED BY ITS 5 KUNNUMMAKKARA SERVICE CO-OPERATIVE BANK LTD NO. 7562 P.O.KUNNUMMAKKARA, KOZHIKODE DISTRICT - 673 308, 6 CHORODE SERVICE CO-OPERATIVE BANK LTD NO. LL 139 P.O.CHORODE, VATAKARA, KOZHIKODE DISTRICT - 673 106, 7 CHOMBAL SERVICE CO-OPERATIVE BANK LTD NO. 1478 P.O.CHOMBALA, KOZHIKODE DISTRICT - 673 308, REPRESENTED BY 8 THE VILANGAD SERVICE CO-OPERATIVE BANK LTD NO. LL 131 P.O.VILANGAD, KOZHIKODE DISTRICT - 673 506, REPRESENTED BY 9 THE KUTTIADI PANCHAYATH SERVICE CO-OPERATIVE BANK LTD NO. 1488 P.O.KUTTIADY, PIN - 673 508, REPRESENTED BY ITS SECRETARY. 10 IRINGANNUR SERVICE CO-OPERATIVE BANK LTD NO. F 1753 H.O.IRINGANNUR, VATAKARA KOZHIKODE DISTRICT - 673 514,

11 VANIMAL SERVICE CO-OPERATIVE BANK LTD NO. F 1662 P.O.KODIYUR, VIA KALLACHI - 673 515, REPRESENTED BY ITS 12 THE ERAMALA SERVICE CO-OPERATIVE BANK LTD NO. F 1044 P.O.ORKKATTERI, VATAKARA, KOZHIKODE DISTRICT - 673 501, 13 THE KAVILUMPARA SERVICE CO-OPERATIVE BANK LTD NO. LL 70 P.O.KAVILUMPARA, KOZHIKODE DISTRICT - 673 513, REPRESENTED BY ITS SECRETARY 14 THE NADAPURAM SERVICE CO-OPERATIVE BANK LTD NO. F 721 P.O.KALLACHI, KOZHIKODE DISTRICT - 673 506, REPRESENTED BY ITS SECRETARY 15 THE EDACHERY SERVICE CO-OPERATIVE BANK LTD NO. 9349 P.O.EDACHERI, VATAKARA, KOZHIKODE DISTRICT - 673 502, REPRESENTED BY ITS SECRETARY 16 THE URALUNGAL SERVICE CO-OPERATIVE BANK LTD NO. 7264 MADAPPALLY COLLEGE P.O., KOZHIKODE, REPRESENTED BY ITS 17 THE MARUTHONKARA SERVICE CO-OPERATIVE BANK LTD NO. D 2461 P.O.ADUKKATH, KOZHIKODE DISTRICT - 673 508, REPRESENTED BY 18 THE ONCHIYAM SERVICE CO-OPERATIVE BANK LTD NO. F 1174 P.O.ONCHIYAM, KOZHIKODE DISTRICT - 673 308, REPRESENTED BY 19 PONMERI SERVICE CO-OPERATIVE BANK LTD NO. D 2677 P.O.PONMERIPARAMBIL, KOZHIKODE DISTRICT - 673 542, 20 KOTTAPPALLY SERVICE CO-OPERATIVE BANK LTD NO. D 2723 P.O.KOTTAPPALLY, VIA VILLIAPPALLY - 673 542, REPRESENTED BY 21 THE PURAMERI SERVICE CO-OPERATIVE BANK LTD NO. F 1271 P.O.PURAMERI, KOZHIKODE DISTRICT - 673 503, REPRESENTED BY 22 THE BADAGARA CO-OPERATIVE RURAL BANK LTD NO. F 1264 BANK BUILDING, VO ROAD, VATAKARA - 673 101, REPRESENTED BY

23 THE KAKKATTIL CO- OPERTIVE RURAL BANK LTD NO. F 1270 P.O.KAKKATTIL, KOZHIKODE DISTRICT - 673 507, REPRESENTED BY 24 THE AZHIYUR SERVICE CO-OPERATIVE BANK LTD NO. 7893 P.O.ALIYUR, KOZHIKODE DISTRICT - 673 309, REPRESENTED BY ITS BY ADVS.SMT.BINDUMOL JOSEPH SRI.B.S.SYAMANTHAK RESPONDENTS: ---------------- 1. COMMISSIONER OF INCOME TAX OFFICE OF COMMISSIONER OF INCOME TAX, AAYAKAR BHAVAN, NEW ANNEXRE BUILDING (NORTH BLOCK), MANACHIRA, KOZHIKODE - 673 001. 2. INCOME TAX OFFICER (TDS) OFFICE OF THE INCOME TAX OFFICER(TDS), 3RD FLOOR, AAYAKAR BHAVAN, MANANCHIRA, KOZHIKODE - 673 001. R1,R2 BY SRI.K.M.V.PANDALAI, SC

THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 09-02-2018, ALONG WITH WPC NO. WPC 38786/2015 AND WPC NO.37763/2015 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: sdr/-

APPENDIX ------ PETITIONER(S)' EXHIBITS P1 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAWS SHOWING THE PRIMARY OBJECTIVE OF THE SOCIETY. P2 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE P3 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE P4 - TRUE COPY OF THE CATEGORIZATION STATEMENT/CERTIFICATE ISSUED BY THE JOINT REGISTRAR (GENERAL) KOZHIKODE CATEGORIZING THE PETITIONER SOCIETY AS PRIMARY AGRICULTURAL CREDIT SOCIETY. P5 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE P6 - TRUE COPY OF THE RELEVANT PORTION OF THE AMEDED BYELAW SHOWING THE PARIMARY OBJECTIVE OF THE SOCIETY. P7 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE PRIMARY OBJECTIVE OF THE SOCIETY. P8 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE P9 - TRUE COPY OF THE CATEGORIZATION STATEMENT/CERTIFICATE ISSUED BY THE JOINT REGISTRAR (GENERAL) KOZHIKODE CATEGORIZING THE PETITIONER SOCIETY AS PRIMARY AGRICULTURAL CREDIT SOCIETY. P10 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE PRIMARY OBJECTIVE. P11 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOW BY THE PRIMARY OBJECTIVE.

P12 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW P13 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW P14 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW P15 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE PRIMARY AND MAIN OBJECTIVE. P16 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW P17 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW SHOWING THE PRIMARY OBJECTIVE OF THE SOCIETY. P18 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW P19 - TRUE COPY OF THE CATEGORIZATION STATEMENT/CERTIFICATE ISSUED BY THE JOINT REGISTRAR (GENERAL) KOZHIKODE CATEGORIZING THE PETITIONER SOCIETY AS PRIMARY AGRICULTURAL CREDIT SOCIETY. P20 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW P21 - TRUE COPY OF THE RELEVANT PORTION OF THE AMENDED BYELAW P22 - A TRUE COPY OF THE ORDER PASSED BY THE RESERVE BANK OF INDIA IN THIS REGARD ON 25.10.2013 WITH RESPECT TO CHAKKTTAPARA SERVICE CO- OPERATIVE BANK LTD NO. F 1675, CHAKKITTAPARA P.O., KOZHIKODE DISTRICT. P23 - A TRUE COPY OF THE RELEVANT PORTION OF THE BYELAWS OF THE CHAKKITTAPARA SERVICE CO-OPERATIVE BANK. P24 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER NO.1 DT. 18.08.2015. P25 - A TRUE COPY OF THE REPLY DT. 15.9.2015 SUBMITTED BY THE PETITIONER BEFORE THE 2ND RESPONDENT.

P26 - A TRUE COPY OF THE NOTICE DT. 14.9.2015 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER NO.1. P27 - A TRUE COPY OF THE NOTICE DT. 17.8.2015 ISSUED TO THE PETITIONER NO.2 BY THE 2ND RESPONDENT. P28 - A TRUE COPY OF THE REPLY SUBMITTED BY THE 2ND PETITIONER DT. 03.9.2015. P29 - A TRUE COPY OF THE NOTICE DT. 14.9.2015 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER NO.2. P30 - A TRUE COPY OF THE NOTICE DT. 10.9.2015 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER NO.3. P31 - A TRUE COPY OF THE REPLY DT. 15.9.2015 SUBMITTED BY THE 3RD PETITIONER. P32- A TRUE COPY OF THE NOTICE ISSUED TO THE 2ND RESPONDENT TO THE 4TH PETITIONER DT. 18.8.2015 WITH RESPECT TO DEDUCTION OF TAX AT SOURCE ON INTEREST PAYMENT. P33- A TRUE COPY OF THE NOTICE DT. 14.9.2015 ISSUED BY THE 2ND RESPONDENT P34- A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P35 - A TRUE COPY OF THE NOTICE DT. 10.9.2015 ISSUED TO THE 5TH P36 - A TRUE COPY OF THE NOTICE DT. 17.8.2015 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER. P37 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P38 - A TRUE COPY OF THE REPLY ISSUED BY THE 7TH PETITIONER DT. P39 - A TRUE COPY OF THE NOTICE DT. 17.8.2015 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER.

P40 - A TRUE COPY OF THE NOTICE DT. 14.9.2015 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER NO.8. P41 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P42 - A TRUE COPY OF THE NOTICE DT. 14.9.2015 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER. P43 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P44 - A TRUE COPY OF THE REPLY ISSUED BY THE 12TH PETITIONER DT. 09.09.2015. P45 - A TRUE COPY OF THE NOTICE D.T 14.9.205 ISSUED TO THE 12TH P46 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P47 - A TRUE COPY OF THE NOTICE DT. 14.9.2015 SERVED ON THE PETITIONER BY THE 2ND RESPONDENT. P48 - A TRUE COPY OF THE REPLY DT. 25.11.2015 SUBMITTED BY THE P49 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 18.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P50 - A TRUE COPY OF THE REPLY ISSUED BY THE 16TH PETITIONER DT. P51 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P52 - A TRUE COPY OF THE NOTICE DT. 14.9.2015 ISSUED TO THE 18TH

P53- A TRUE COPY OF THE NOTICE DT. 14.9.2015 ISSUED TO THE 21ST P54 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P55 - A TRUE COPY OF THE REPLY ISSUED BY THE 2ND PETITIONER DT. P56 - A TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DT. 17.8.2015 REQUIRING IT TAX DEDUCTION AT SOURCE ON INTEREST PAYMENT. P57 - A TRUE COPY OF THE NOTICE DT. 10.9.2015 SERVED ON THE PETITIONER BY THE 2ND RESPONDENT. P58 - A TRUE COPY OF THE REPLY SUBMITTED BY THE 24TH PETITIONER. P59 - A TRUE COPY OF THE JUDGMENT OF THE HON'BLE HIGH COURT OF KARNATAKA IN INCOME TAX APPEAL NO. 100082/2014 DT. 21.9.2015. RESPONDENTS EXHIBITS NIL ----------------------- /TRUE COPY/ sdr/- PA TO JUDGE

P.B.SURESH KUMAR, J. …................................................................... W.P.(C).Nos. 37761, 37763 & 38786 of of 2015 …....................................................................... Dated this the 9th day of February, 2018 JUDGMENT Petitioners in these matters are Co-operative Societies registered under the Kerala Co-operative Societies Act, 1969 (the Act). They have been issued notices by the competent authorities under the Income Tax Act (the Act) directing them to file Form 26Q in respect of the tax deducted by them at source on interest payment. Ext.P26 is one of such notices issued to the first petitioner in W.P.(C).No.38786 of 2015. Some of the petitioners have responded to the notices in the nature of Ext.P26 and some have not. For those who have not responded to the notices in the nature of Ext.P26, reminders have been issued. The case of the petitioners in the writ petitions is that Ext.P26 and similar notices have been issued on the premise that they are Co-operative Banks falling within clause (v) of sub-section (3) of Section 194A of the Act. It is the

W.P.(C).No.37761/2015 & con.cases. : 2 : specific case of the petitioners that they are only Primary Credit Societies and not Co-operative Banks falling within Clause (v) of sub-section (3) of Section 194A of the Act. As such, according to them, they are not liable to deduct tax at source on interest payment to the depositors. 2. Heard the learned counsel for the petitioners as also the learned Standing Counsel for the respondents. 3. The question as to whether the petitioners would fall within the scope clause (v) of sub-section (3) of Section 194A of the Act is a matter to be decided by the competent authority under the Act. It is seen that the competent authorities under the Act are yet to adjudicate on the said issue. Before the competent authorities under the Act adjudicate on the said issue, there is no justification for the petitioners to approach this Court for such an adjudication. In the said view of the matter, the writ petitions are disposed of directing the competent authorities under

W.P.(C).No.37761/2015 & con.cases. : 3 : the Act to consider the question as to whether the petitioners would fall under clause (v) of sub-section (3) of Section 194A of the Act, in the case of the petitioners who dispute that fact, needless to say, after affording the concerned petitioners an opportunity of hearing. It is made clear that in the case of the remaining petitioners, proceedings can be continued as if they are liable to file Form 26Q. Sd/- P.B.SURESH KUMAR, JUDGE hmh

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