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Facts
The assessee, a cooperative society classified as a Primary Agricultural Credit Society, claimed deduction under Section 80P of the Income-tax Act. The Assessing Officer (AO) denied this deduction, considering the assessee's business as banking, not primarily agricultural credit, and citing the principle of mutuality and the Supreme Court's decision in Citizen Cooperative Society Ltd. The assessee's appeal to the CIT(A) was also rejected.
Held
The Tribunal held that the issue is covered by the Supreme Court's decision in Mavilayi Service Cooperative Bank Ltd., which clarified that Section 80P is a benevolent provision to be read liberally. The court emphasized that deductions cannot be restricted by implication, and Section 80P(4) specifically excludes only those cooperative banks engaged in banking business with a license from the RBI.
Key Issues
Whether the assessee, a cooperative society, is eligible for deduction under Section 80P of the Income Tax Act, considering its business activities and the interpretation of "Primary Agricultural Credit Society" versus "cooperative bank" in light of Supreme Court judgments.
Sections Cited
80P(2)(a)(i), 80P(4), 143(3), 250, 139(1)
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO & SHRI ANIKESH BANERJEE
O R D E R Per Anikesh Banerjee, JM:
The Instant appeal of the assessee was filed against the order of the Learned National Faceless Appeal Centre, Delhi [for brevity, ‘ Ld.CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, the Act’) for Assessment Year 2017-18, date of order 30/07/2025. The impugned order emanated from the order of the Ld. Income Tax Officer, Ward-3, Tripur (in short, ‘Ld.AO’) passed under section 143(3) of the Act, date of order 16/12/2019.
2 Vazhakkad Service Cooperative Bank Ltd 2. The brief facts of the case are that the assessee is a Co-operative society registered under the Kerala Co-operative Societies Act, 1969 and classified as a “Primary Agricultural Credit Society” as per the relevant rules. The assessee claimed that the assessee is not a cooperative bank within the meaning of Banking Regulation Act, 1949. The assessee is engaged in business of making advances to its members and charges the interest for the amount advanced. For the above purpose the assessee utilise the share capital, entrance fee and reserve. If that said amount is not sufficient the assessee also accepts the deposit and pays interest for the same. The assessee filed the return under section 139 (1) of the Act. The assessee declared the gross total income in the return of income Rs 1,89,01,249/-. Also claim deduction under section 80P of the Act and declared the total income NIL. The assessee’s case was taken up for scrutiny under CASS and the Ld. AO rejected the deduction under section 80P considering that the claim is contravening the provision U/s 80P(4) of the Act. The Ld. AO observed that the principal business carried out by the assessee is the banking business not the “Primary Agricultural Credit Society” (in short “PACS”). The Ld. AO respectfully followed the order of the Apex Court in Citizen Cooperative Society Ltd, 397 ITR 1 (SC). He observed that the PACS in Kerala having different categories of membership such as A,B,C & D. In this category only class of member has voting right. Others are nominal or associates member who have no voting right. The Ld. AO considered that the deposit received by the assessee from nominal member. So, the interest earned in advance is not eligible the deduction U/s 80P(2)(a)(i) of the Act. The aggrieved assessee filed an appeal before the Ld. CIT(A) and the Ld. CIT(A) by considering the order of Citizen Cooperative Society Ltd. (supra)accepted the view taken by the Ld. AO and accordingly rejected the appeal of the assessee. Aggrieved assessee filed an appeal before us.
3 Vazhakkad Service Cooperative Bank Ltd 3. The Ld. AR defends the view taken by the revenue authorities. He argued that the requirement of predominant lending to agricultural sector is not stipulated by the Act. It is only the imagination of the department. The revenue was only trying to read the concept of mutuality based on its perception of the decision of Citizen Cooperative Society Ltd (supra). The Income Tax Act had never defined the word member. Considering the parent act permits the existence of different classes of members with differential right hence the classification of member was made. The Ld. AR respectfully relied on the order of the Hon’ble Supreme Court in Mavilayi Service Cooperative Bank Ltd vs Commissioner of Income Tax, Calicut [2021] 123 taxmann.com 161 (SC) has taken the view as follows:- “45. To sum up, therefore, the ratio decidendi of Citizen Co-operative Society Ltd. (supra), must be given effect to. Section 80P of 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 section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now 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 Cooperative Society Ltd. (supra). Clearly, therefore, once section 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 section 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.”
The Ld. DR argued and stands in favour of the order of revenue authorities.
4 Vazhakkad Service Cooperative Bank Ltd 5. We have heard the submissions of the rival parties and carefully considered the material available on record. During the assessment proceedings, the revenue examined the interest income earned by the assessee from advances given to nominal or associate members. While applying the principle of mutuality, the Ld. AO classified the members and, accordingly, denied the assessee’s claim for deduction under Section 80P of the Act. The Ld. AO placed reliance on the decision in Citizen Cooperative Society Ltd. (supra).
Conversely, the Ld. AR relied upon the judgment of the Hon’ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. (supra), wherein the ratio of Citizen Cooperative Society Ltd. (supra) was duly considered. The Ld. AR further referred to the decision of the Coordinate Bench of the ITAT, Cochin, in The Mundur Service Cooperative Bank Ltd. vs ITO(ITA Nos. 158 to 163/Coch/2020, order dated 11.02.2021), wherein an identical issue was adjudicated. The ratio laid down therein squarely applies to the present case. The relevant part of the order of the coordinate bench of ITAT Cochin is reproduced as below:-
7. We have considered the rival submissions. A perusal of the decision of the Hon'ble Supreme Court in the case of The Mavilayi Service Co-operative Bank Ltd. (supra) clearly shows that the Hon'ble Supreme Court has set aside the decision of the Full Bench of the Hon'ble Kerala High Court in the case of The Mavilayi Service Co-operative Bank Ltd. (supra). The Hon'ble Supreme Court has also further explained the decision in the case of Citizen Co- operative Society Ltd. in so far as the deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication. In the circumstances in respectful obedience to the principles laid down by the Hon'ble Supreme Court in the case of The Mavilayi Service Co-operative Bank Ltd. (supra) the AO is directed to grant the assessee the benefit of deduction under Section 80P as claimed.
We find that the issue involved in the assessee’s appeal is already covered by the aforesaid decision of the Coordinate Bench. Respectfully following the 5 Vazhakkad Service Cooperative Bank Ltd same, we set aside the impugned appellate order. The assessee is held eligible for deduction under Section 80P of the Act. Consequently, the addition made by the Ld. AO amounting to Rs.1,89,01,249/- is deleted, and the appeal of the assessee stands allowed.