THE PRINCIPAL COMMISSIONER OF INCOME TAX, vs. THE PONKUNNAM 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.43 OF 2019 AGAINST THE ORDER IN ITA 118/2018 DATED 14-08-2018 OF I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI (TAXES) RESPONDENT/S: THE PONKUNNAM SERVICE CO-OPERATIVE BANK LTD PONKUNNAM, KOTTAYAM 686 506 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 R1 BY ADV. SMT.ANJANA KANNATH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16.03.2021, ALONG WITH ITA.114/2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

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-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.114 OF 2019 AGAINST THE JUDGMENT IN ITA 121/2018 DATED 14-08-2018 OF I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: M/S.THE CHIRAKKADAVU SERVICE CO-OPERATIVE BANK LTD. CHIRAKKADAVU, KANJIRAPPALLY, KOTTAYAM- 686520. 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.43/2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

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-3- J U D G M E N T [ ITA.43/2019, ITA.114/2019 ] Dated this the 16th day of March 2021 S.V. Bhatti, J. Heard learned Senior Advocate P K R Menon for appellant and Dr K P Pradeep for respondent. 2. The Revenue is the appellant. The appeals are filed questioning the order dated 14.08.2018 of Income Tax Appellate Tribunal, Cochin Bench, Cochin in ITA Nos.118/COCH/2048 and ITA No.121/COCH/2018. The subject matter deals with the returns filed by the respondent for the Assessment Years 2013- 14 and 2012-13 respectively.

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-4- 3. The assessee/respondent claims to be a Primary Agricultural Credit Society registered under the Kerala Co- operative Societies Act, 1969 and providing financial assistance/credit facility to its members for both agricultural or allied activities. The assessee claimed deduction under Section 80P(2) of Income Tax Act, 1961 (for short 'the Act'), and the deduction claimed by the assessee was disallowed by the assessing officer on the ground that the assessee is primarily engaged in the business of banking. Having regard to such a finding, it was recorded that by operation of Section 80P(4), the assessee is not entitled to deduction under Section 80P(2) of the Act. The assessee aggrieved by the said order filed appeal before the Commissioner of Appeals and the appeal was allowed in Annexure B order dated 31.01.2018. The Commissioner of Appeals held that the assessee is eligible to claim deduction as a primary agricultural credit society, having been registered as a

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-5- Society under Kerala Societies Registration Act, 1860. 4. The Revenue filed ITA No.118/COCH/2048 and ITA No.121/COCH/2018 and the Appellate Tribunal, by taking note of the dictum of the judgment reported in Chirakkal Service Co- operative Bank Ltd. v. CIT1 dismissed the appeals. Hence, the instant Income Tax Appeals at the instance of Revenue. 5. A Full Bench of this Court in Mavilayi Service Co- operative Bank Ltd. v. Commissioner of Income Tax2 held thus: “31. In view of the law laid down by the Apex Court in Citizen Co-operative Society (2017 (4) KLT OnLine 2013 (SC) = 397 ITR 1) 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 1 2016 (2) KHC 726 2 2019 (2) KLT 597 (FB)

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-6- 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. 32. In Chirakkal (2016 (2) KLT 535 = 384 ITR 490) the Division Bench held that the appellant societies 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 to be 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 and as such, they are entitled for the benefit of sub-section (4) of Section 80P of the IT Act to ease themselves out from the coverage of Section 80P and that, the authorities under the IT Act cannot probe into any issues or such matters relating to such societies and that, 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. 33. In Chirakkal (2016 (2) KLT 535 = 384 ITR 490) the Division Bench expressed a divergent opinion, without noticing the law

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-7- laid down in Antony Pattukulangara (2012 (3) KLT SN 123 (C.No.129) = 2012 (3) KHC 726) and Perinthalmanna (2014 (1) KLT OnLine 1117 = 363 ITR 268). Moreover, the law laid down by the Division Bench in Chirakkal (2016 (2) KLT 535 = 384 ITR 490) is not good law, since, in view of the law laid down by the Apex Court in Citizen Co-operative Society (2017 (4) KLT Online 2013 (SC) = 397 ITR 1), 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 view of the law laid down by the Apex Court in Citizen Co-operative Society (2017 (4) KLT OnLine 2013 (SC) = 397 ITR 1) the law laid down by the Division Bench Perinthalmanna (2014 (1) KLT OnLine 1117 = 363 ITR 268) has to be affirmed and we do so. 34. In view of the law laid down by the Apex Court in Ace Multi Axes Systems’ case (supra), since each assessment year is a separate unit, the intention of the legislature is in no manner defeated by not allowing deduction under Section 80P of the IT Act, by reason of sub-section (4) thereof, if the assessee society ceases to be the specified class of societies for which the

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-8- deduction is provided, even if it was eligible in the initial years. The question referred to the Full Bench is answered as above. Registry shall list the appeals before appropriate Bench as per roster.” 6. The judgment of the Full Bench is the subject matter of Civil Appeal Nos.7343-7350 of 2019 & connected cases before the Supreme Court. The Supreme Court in the judgment reported in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax3 reversed the view taken by the Full Bench and the operative portion of the Apex Court judgment needs to be excerpted for appreciating the limited contentions canvassed by the counsel appearing for both the parties. "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 3 2021 (1) KLT 485 (SC)

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-9- 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; (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

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-10- 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 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

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-11- 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 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

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-12- 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.” 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)

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-13- 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, 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

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-14- 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. 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

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-15- 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 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

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-16- 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 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

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-17- 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 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.

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-18- (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 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." 7. It is in the above background, learned Senior Advocate Sri P K R Menon by drawing our attention to orders in Annexure A dated 19.03.2015 argues that even by applying the binding precedent of Apex Court dealing with Section 80P(2) read with Section 80P(4) of the Act, a few verifiable facts ought to be proved and established by the assessee for claiming

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-19- deduction of income under Section 80P(2). The verification, however, shall not get into whether the assessee is a Primary Agricultural Credit Society or not, for, admittedly, the Society is registered under Kerala Societies Registration Act. The Appellate Authority and the Tribunal have considered the extent to which Section 80P(2) is operative or applicable to the case on hand and have not examined that portion of income to which exemption is attracted and the other portion of income which could be included in the income of the assessee. The assessee failed to produce the books of account and income earned from non-members, therefore, the assessee is not entitled to exemption under Section 80P(2) of total income. The benefit must strictly be confined now to the four corners of law laid down by the Supreme Court in Mavilayi Service Co-operative Bank Ltd case and permissible deduction is given.

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-20- 8. Dr K P Pradeep admits that the assessee is under obligation to produce the books of accounts. The Department is entitled to examine the accounts and decide the issue both under Sections 80P(2) and 80P(4). But, in the case on hand, the Department is insisting on presentation of abstract on the numbers' details, loans lent to members/non-members etc. The assessee produced the Books maintained and the Department could have passed an order from the accounts already produced in this behalf. But the Assessing Officer chose to ignore the Books produced by the assessee. As per his submission the remand to primary authority is not warranted. 9. We have perused the orders on one hand made by the Assessing Officer and on the other hand the orders of the Commissioner of Appeal and the Appellate Tribunal. In the case on hand, the observation of the Assessing Officer that books are not produced has not been expressly considered by the

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-21- Appellate Authority and the Tribunal. Further, the paragraphs excerpted from the judgment of the Supreme Court in Mavilayi Service Co-operative Bank Ltd case (supra) leaves no doubt that a Society registered under Kerala Co-operative Societies Act is entitled to claim deduction and the assessing authority determines the other incomes earned or derived by the assessee after according to assessee all the eligible deductions in this behalf. We are of the view that, in the case on hand, the matter requires reconsideration by the primary authority, for, the return filed by the assessee is examined in the light of decision of the Apex Court in Mavilayi Service Co-operative Bank Ltd case and fresh assessment orders are made. Hence, the orders in Annexures A, B, and C are set aside, case remitted to the Income Tax Officer for examination of books of accounts and verification of the return filed by the assessee for the subject year, strictly within the four corners of the dictum laid down by

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-22- the Supreme Court in Mavilayi Service Co-operative Bank Ltd case and make a fresh assessment order. The assessee is entitled to file a fresh reply, if so advised, and the assessee is afforded an opportunity in accordance with law. The Income Tax Appeals are allowed and remanded back. Sd/- S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj

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-23- APPENDIX OF ITA 43/2019 PETITIONER'S EXHIBITS: ANNEXURE -A ASSESSMENT ORDER U/S 143(3) DTD. 14/03/2016 ANNEXURE - B CIT(A)'S ORDER NO. ITA NO. K-12/CIT (A)/KTM/16- 17:31/01/2018. ANNEXURE - C ITAT'S ORDER IN ITA NO. 118/COCH/2018, DTD. 14/08/2018.

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-24- APPENDIX OF ITA 114/2019 PETITIONER'S EXHIBITS: ANNEXURE A ASSESSMENT ORDER U/S.143(3) DATED 19.03.2015. ANNEXURE B CIT (A)'S ORDER NO.ITA NO.14/KTM CIT (A)/KTM/15-16 DATED 31.01.2018. ANNEXURE C ITAT'S ORDER IN ITA NO.121/COCH/2018 DATED 14.08.2018.