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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri George George K, JM & Shri Manjunatha G, AM
Per George George K, JM
This appeal at the instance of the Revenue and the Cross Objection filed by the assessee is directed against the CIT(A)’s order dated 02.12.2016. The relevant assessment is 2012- 2013.
Briefly stated the facts of the case are as follow:-
ITA No.02/Coch/2017 2 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. 2.1 The assessee is a Primary Agricultural Co-operative Credit Society, registered under the Kerala Co-operative Society Act, 1969. It is providing credit facilities to its members. For the assessment year 2012-2013, the return of income was filed on 17.06.2013 declaring `nil’ income after claiming deduction u/s 80P of the Income-tax Act, 1961. The assessment was completed u/s 144 vide order dated 23.03.2015 rejecting the claim of deduction u/s 80P(2). Further the assessee had brought to tax interest income received from deposits amounting to Rs.17,71,542 as “income from other sources”, thereby denying the benefit of section 80P of the Act. In denying the benefit of section 80P of the Act, the Assessing Officer held that the assessee was primarily not providing any agricultural loans and hence cannot be characterized as a primary agricultural credit society. It was concluded by the A.O. that the assessee was essentially doing the business of banking and hence, in view of insertion of section 80P(4) of the Income-tax Act, 1961, the assessee was not entitled to the benefit of section 80P of the Act.
Aggrieved by the assessment order by denying the claim of deduction u/s 80P of the I.T.Act, the assessee has preferred the appeal to the first appellate authority. The CIT(A) following the judgment of the Hon’ble jurisdictional High Court in the case of Chirakkal Service Co-operative Bank Limited v. CIT reported in 384 ITR 490 (Ker.), directed the Assessing Officer to grant deduction u/s 80P(2) of the Act.
ITA No.02/Coch/2017 3 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. 3.1 As regard the interest received from FD amounting to Rs.17,71,542, the CIT(A) held that the assessee is entitled to the deduction u/s 80P(2)(a)(i). In allowing the claim of deduction u/s 80P(2)(a)(i) of the Act, the CIT(A) relied on the judgment of the Hon’ble Apex Court in the case of CIT v. Karnataka State Co-operative Apex Bank reported in 251 ITR 194 and the order of the Tribunal in the case of M/s.Puthupally Village Service Co-operative Bank Ltd. in ITA No.279/Coch/2016 dated 31.10.2016. The relevant finding of the CIT(A) in treating the interest amounting to Rs.17,71,542 as “income from business”, reads as follow:-
[Para 6 Page 7 of CIT(A)is order]
“……. Similarly, portion of the interest amounting to Rs.17,71,542/- treated as income from other sources has also not been justified since the major source of income of the appellant as seen both from the assessment order and also from the details filed during the course of appeal proceedings is interest income earned from loans and advances given both for agricultural and non-agricultural purposes and thereby no portion of income could separately be identified as income from other sources. The Hon’ble Supreme Court’s decision in the case of CIT vs. Karnataka State Co-operative Apex Bank (251 ITR 194) relied on by the appellant would squarely apply to them and in view of this, no part of interest income earned by the appellant could be treated as income from other sources. In the above mentioned decision, it was held that “The placement of such funds being imperative for purpose of carrying on the banking business, the income derived therefrom would be income from the assessee’s business. It could not be accepted that only income derived from circulating or
ITA No.02/Coch/2017 4 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital. Thus, deduction was allowable in respect of income derived from the funds placed with the State Bank or the Reserve Bank”. Reliance also placed here to the decision of the Hon’ble ITAT, Cochin Bench in the case of M/s.Puthupally Village Service Cooperative Bank Ltd. in ITA No.279/Coch/2016 dated 31.10.2016 wherein it was held that “In the instant case, the assessee is a cooperative bank. The investment in treasury / banks and earning interest on the same is part of the banking activity of the assessee’s cooperative bank. Therefore, the said income is eligible for deduction u/s 80P(2)(a)(i) of the Act”.”
Aggrieved by the order of the CIT(A), the Revenue has filed the present appeal raising the following grounds:-
“The order of the learned Commissioner of Income tax (Appeals), Kottayam in so far as the points stated below are concerned, is opposed to law on the facts and in the circumstances of the case.
The Ld. Commissioner of Income Tax (Appeals) has erred in allowing deduction u/s 80P(2)(a)(i) of the Act in respect of business income of Rs.1,88,13,979/ - assessed for the year under consideration.
The Ld CIT (A) ought to have considered the decision of the jurisdictional High Court in the case of Perinthalmanna Service Co-operative Bank (363 ITR 268) wherein it has been held that with the introduction of section 80P(4) of the Act, deduction u/s 80P (2) cannot be allowed merely on the strength of certificate of registration as "Primary Agricultural Credit Society" .
ITA No.02/Coch/2017 5 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd.
The Ld. CIT (A) has erred in holding that the interest income of Rs.17,71,542/ - earned on fixed deposit with Federal Bank, Urban Co-operative Bank, etc. cannot be separately assessed under "Income from Other Sources".
The Ld. CIT (Appeals) ought to have considered the decision of the jurisdictional Tribunal in the case of The Mutholy Service Co-operative Bank Ltd in ITA No.11/Coch/2014 wherein the Tribunal has held that interest earned by the Co-operative society on deposits with the Treasury etc. is assessable under the head "Income From Other Sources".
The Ld. CIT (A) ought to have also considered the decision of the Delhi High Court in the case of Mantola Co-operative Thrift & Credit Society Ltd. [[2014] 50 taxmann.com 278 (Delhi) in which it is held that where a co-operative society, engaged in providing credit facilities to its members, deposited surplus funds in fixed deposits and earned interest thereon, said interest would be assessable as 'income from other sources' and, thus, not eligible for deduction under section 80P(2)(a)(i) of the Act.
For these and other grounds that may be advanced at the time of hearing, the order of the learned Commissioner of Income tax (Appeals) on the above points may be set aside and that of the Assessing Officer restored.”
4.1 The Revenue has also filed additional ground, which reads as follow:-
“The order of the learned Commissioner of Income tax (Appeals), Kottayam in so far as the additional points stated below are concerned, is opposed to law on the facts and in the circumstances of the case.
ITA No.02/Coch/2017 6 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. 2. The learned CIT (Appeals) ought to have seen that the Supreme Court in the case of Sabarkhanta Zilla Kharid Vechar Sangh Ltd. Vs. CIT reported in 203 ITR 1027 (SC) had held that eligible deduction under section 80P of the Income tax Act, 1961 in respect of co-operative societies/ banks doing both agricultural and non-agricultural activities should not be 100% of the gross profits of such societies etc. but should be limited to the profits generated from agricultural activities alone performed by such assessees.
The learned CIT (appeals) ought to have seen that the above Apex court's decision is in sharp contrast to the decision of the Kerala High Court in the case of M/s Chirakkal Service Co-operative Bank & others in ITA No. 212 of 2013, that held that the authorities under the Income tax Act cannot probe into question whether the assessee cooperative society is a primary agricultural credit society', once it is registered and classified as 'primary agricultural credit society' by the competent authorities under the provisions of the Kerala Cooperative Societies Act, 1969.
For these and other grounds that may be advanced at the time of hearing, the order of the learned Commissioner of Income tax (Appeals) on the above points may be set aside and that of the Assessing Officer restored.”
4.2 The learned Departmental Representative has also filed a brief written submission, which is reproduced below for ready reference:-
“In the case of the Valavoor Service Co-op Bank Ltd., out of the total loan sanctioned, only the following percentage given for agricultural purpose.
ITA No.02/Coch/2017 7 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. Return A.Y. Percentage filed 17.06.2013 2012- 81.16% (As per 2013 assessee) 55.91% (as per A.O. – refer para 2.13)
Hence the Assessing Officer denied the exemption claimed u/s 80P(2).
The CIT(A) deleted the 80P disallowance relying on the decision of the Hon.Kerala High Court in the case of M/s.Chirakkal Service Co-operative Bank Ltd. vs. CIT.
Reliance is placed on the Hon.Supreme Court judgment reported in 203 ITR 1027 – case of Sabarkantha Zilla Kharid Vechan Sangh vs. CIT (held – what was deductible u/s 80P(1) was only that portion of said amount as can be called total income attributable to activities defined in clause (5) of 80B i.e. deduction from tax available only in relation to net profit and not gross profit).
Further in view of the provisions of 80P(4) of the I.T.Act and amendment made to S-2(v) in the Kerala Co-Op. Societies Act (Amendment) Act, 2010, Ac5 7 of 2010, order of A.O. & CIT(A) be upheld and appeal filed by assessee be dismissed.
In view of the above, especially the judgment in 203 ITR 1027 (SC), order of the Assessing Officer be upheld.”
The learned AR, on the other hand, submitted that the issues raised in the appeal are covered in favour of the
ITA No.02/Coch/2017 8 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. assessee by the judgment of the Hon’ble jurisdictional High Court in the case of Chirakkal Service Co-operative Bank Ltd. (supra) and the orders of the Cochin Bench of the Tribunal in the case of The Kizhathadiyoor SCB v. ITO in ITA No.525/Coch/2016 dated 20.07.2016 and Mutholy SCB v. ITO Ward-4, Kottayam in ITA No.11/Coch/2014.
We have heard the rival submission and perused the material on record. The Hon’ble High Court, in the case of Chirakkal Service Co-op Bank Ltd., reported in 384 ITR 490 has held that a primary agricultural credit society, registered under the Kerala Cooperative Societies Act, 1969, is entitled to the benefit of deduction u/s 80P(2). The Hon'ble High Court was considering the following substantial question of law:
“a) Whether on the facts and in the circumstances of the case under consideration/ the Tribunal is correct in law in deciding against the assessee/ the issue regarding entitlement for exemption under section 80P, ignoring the fact that the assessee is a primary agricultural credit society?”
6.1 In considering the above question of law, the Hon'ble High Court rendered the following findings:
"15. Appellants in these different appeals are indisputably societies registered under the Kerala cooperative societies Act 1969, for sort, KCS Act and the bye-laws of each of them, as made available to this court as part of the paper books, clearly show that they have been classified as primary agricultural credit societies by
ITA No.02/Coch/2017 9 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. the competent authority under the provisions of that Act. The parliament, having defined the term 'co-operative society' for the purposes of the BR Act with reference to, among other thing the registration of a society under any State law relating to co-operative societies for the time being; it cannot but be taken that the purpose of the societies so registered under the State Law and its objects have to be understood as those which have been approved by the competent authority under such State law. This, we visualize as due reciprocative legislative exercise by the Parliament recognizing the predominance of decisions rendered under the relevant State Law. In this view of the matter, all the appellants 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 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. This is the consequence of the definition clause in section 2(oaa) of the KCS Act. The authorities under the IT Act cannot probe into any issue or such matter relating to such applicants.
The position of law being as above with reference to the statutory provisions, the appellants had shown to the authorities and the Tribunal that they are primary agricultural credit societies in terms of clause (cciv) of section 5 of the BR Act having regard to the primary object or principal business of each of the appellants. It is also clear from the materials on record that the bye-laws of each of the appellants do not permit admission of any other co-operative society as member, except may be, in accordance with the proviso to sub-clause 2 of section 5(cciv) of the BR Act. The different orders of the Tribunal which are impeached in these appeals do not contain any finding of fact to the effect that the bye- laws of any of the appellant or its classification by the competent authority
ITA No.02/Coch/2017 10 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. under the KCS Act is anything different from what we have stated herein above. For this reason, it cannot but be held that the appellants are entitled to exemption from the provisions of section 8OP of the IT Act by virtue of sub- section 4 of that sect; on. In this view of the matter, the appeals succeed.
In the light of the aforesaid, we answer substantial question: `A’ in favour of the appellants and hold that the Tribunal erred in law in deciding the issue regarding the entitlement of exemption under section BOP against the appellants. We hold that the primary agricultural credit societies, registered as such under the KCS Act; and classified so, under that Act including the appellants are entitled to such exemption.”
6.2 In the instant case, the assessee is a primary agricultural credit society registered under the Kerala Cooperative Societies Act, 1969. The certificate has been issued by the Registrar of Cooperative Societies to the above said effect and the same is on record. The Hon’ble High Court, in the case cited supra, had held that primary agricultural credit society, registered under the Kerala Cooperative Societies Act, 1969, is entitled to the benefit of deduction u/s 80P(2). Since there is a certificate issued by the Registrar of Cooperative Societies, stating that the assessee is a primary agricultural credit society, we hold that the assessee is entitled to the benefit of deduction u/s 80P(2) of the Act. Therefore, we see no reason to interfere with the order of the CIT(A) and we uphold the same. It is ordered accordingly.
ITA No.02/Coch/2017 11 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd. 63. As regards interest received on FD whether it is to be assessed as `income from other sources’ or `income from business’, the Cochin Bench of the Tribunal in the case of The Kizhathadiyoor Service Co-operative Bank v. ITO in ITA No.525/Coch/2016 dated 20.07.2016 and in the case of Mutholy Service Co-operative Bank Limited, had held that the investment in treasury / bank and earning interest on the same is part of banking activity and the said income is eligible for deduction u/s 80P of the Act.
6.4 The case law relied upon by the Revenue in the grounds is distinguishable on facts. In the cae of Mantola Cooperative Thrift And Credit Society, as per the bye laws of the Society, only 50% of the thrift mobilized / collected shall be given to the members. In the instant case, there is no such restriction or compulsion to put the circulating working capital to earn interest. The judgment of the Hon’ble Apex Court relied on by the Revenue in the additional ground is also distinguishable on facts as it was a case concerning 81(i)(d) of the Act and not 80P of the Act. The ratio of the judgment of the Hon’ble Apex Court was that deduction u/s 81(i)(d) is not with respect to the amount of gross profits and gains but only with respect to the amount of net profit and gains. Therefore, the judgment of the Hon’ble Apex Court does not apply to the facts of the instant case. For the aforesaid reasons, we hold that the CIT(A) is justified in passing the impugned order and we uphold the same as correct and in accordance with law.
ITA No.02/Coch/2017 12 CO No.08/Coch/2017. M/s.Valavoor Service Co-op Bank Ltd.
The Cross Objection is only supportive of the order of CIT(A). Since we have already dismissed the appeal of the Revenue, the cross objection has become infructuous and we dismiss the same.
In the result, the appeal filed by the Revenue as well as the Cross Objection filed by the assessee are dismissed.
Order pronounced on this 4th day of January, 2018.
Sd/- Sd/- (Manjunatha G.) (George George K.) JUDICIAL MEMBER ACCOUNTANT MEMBER
Cochin ; Dated : 4th day of January, 2018. Devdas* Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT, Kottayam. CIT(A), Kottatam. 4. 5. DR, ITAT, Cochin 6. Guard file. By order (Asstt. Registrar) ITAT, Cochin