INCOME TAX OFFICER, INCOME TAX MUMBAI vs. STATE BANK OF INDIA EMPLOYEES M.S. PATEL CO-OP CREDIT SOCIETY LTD, MUMBAI

"Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in allowing deduction u/s.80P(2,(@) of the Income Tax Act in respect of interest earned from deposits, though Hon'ble Karnataka High Court in a detailed judgment discussing the law and various related issues in the case of Pr. CIT vs Totagars co-operative Sale Society (2017) 395 TR 611 (Karn) has specifically decided the Question of Law about the allowability of interest earned from deposits with Cooperative Bank u/s. 80P(2)(d) of the Income Tax Act in favour of the Revenue.

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in allowing deduction u/s.80P(2)(d) of the Income Tax Act in respect of interest earned from deposits of surplus funds with scheduled bank though the Hon'ble Supreme Court in the case of Totgar's Cooperative Society Ltd. Vs ITO (322 ITR 283) held that the scope of special deduction must relate to the operational income of the Cooperative Society providing credit facility to its members and the interest earned on investments in short term deposits and securities out of surplus funds, not immediately required for business activity, is not business income but income from other sources u/s. 56 of the Income tax Act, 196l and the Society is not entitled to special deduction u/s. 80P on such interest etc. earned.

Fact in brief is that assessee is a co-operative society and filed its return of income on 01.10.2016. The case was subject to scrutiny State Bank of India Employees M.S. Patel Co-op Credit Society Ltd. A.Y. 2016-17 assessment and the assessing officer has disallowed the claim of deduction u/s 80P(2)(a)(i) in respect of interest received from State Bank of India to Rs. 3,00,01,960/- and interest on income tax refund of Rs. 3,76,533/-.

This Court has further observed that in terms of Section 80P of the Act, the meaning of the words Cooperative Bank is as assigned in Chapter V of the Banking Regulation Act, 1949 A cooperative bank is defined in section 5(cci) of Banking Regulation Act to mean a State Cooperative Bank, a Central Cooperative Bank, and a primary cooperative bank. Admittedly, the Assessee is not a State Cooperative Bank or a Central Cooperative Bank. Thus what has to be examined, according this Court, is whether the Assessee is a primary Cooperative Bank as defined in Para V of the Banking Regulation Act.

As we may note, section 5(ccv) of the Banking Regulation Act defines a primary cooperative bank to mean a cooperative society which cumulatively satisfies the following three conditions

It is an accepted position that condition No (2) is satisfied as the share capital is in excess of one lakh rupees. But, as the Assessee has contended, the conditions Nos (1) and (3) have not been satisfied.

That apart, the fact remains that the Assessee dues deal with non- members in a few cases, it accepts deposits from them. This activity, taken with its Bye law 43, allowed the Revenue to conclude that the State Bank of India Employees M.S. Patel Co-op Credit Society Ltd. A.Y. 2016-17 Assessee is carrying on banking business Before the Tribunal also the Assessee did not dispute that in a few cases it had dealt with non- members That said, the Assessee contended that the Bye-law 43 only permits the society to accept deposits from its members In other words, Bye-law 43 does not permit deposits from persons other then members, the word "any person", the Assessee asserted, is a gloss the Tribunal added in the impugned order, though it is not found in Bye-law 43.

Then, this Court has held that indisputably the transactions with non-members are insignificant or miniscule. So it has refused to conclude that the Assessee's principal business is of accepting deposits from public and that it is in banking business. At any rate, the Assessee's principal business is not banking.

In the end, this Court has noted that Section 80P(1) of the Act restricts the benefits of deduction of Co-operative Society's income to the extent it earns by providing credit facilities to its members On the converse, to the extent of the income it earns by its dealings with the non- members, the benefit of Section 80P of the Act would not be available. So, the Court has concluded that the authorities under the IT Act would restrict the benefit of deduction under section 80P of the Act only to the extent that the same is earned by the Assessee by carrying on its business of providing credit facilities to its members, but not non- members.

In Mavilayı Service Co-operative Bank Ltd. v CIT (2021] 123 taxmann.com 161/279 Taxman 75 (SC). the question concerns the deductions a primary agricultural credit society can claim under section 80P(2)(a) (1) of the Income-tax Act, 1961 ("IT Act") after the introduction of section 80P(4) of that Act.

To provide the background for Mavilayi (SC), we may examine how the dispute reached the Supreme Court. To begin with a Division Bench of the Kerala High Court has answered the above issue in Chirakkal Service Co-operative Bank Ltd. v. CIT [2016] 68 taxmann.com 298/239 Taxman 417/384 ITR 490 (Ker.). It has held that once a Co-operative Society is classified by the Registrar of Co-operative Societies under the Kerala Act as being a primary agricultural credit society, the authorities under the IT Act cannot go behind the certificate so granted That is, the certified credit society can claim the benefit under section 80P(2)(a) (i) of the IT Act.

But Chirakkal Service Co-operative Bank Ltd.'s case (supra) was said to be in ignorance of Perinthalmanna Service Co-operative Bank Lid. v. ITO (2014) 49 taxmann.com 438/363 ITR 268 (Ker.) a co-equal Bench decision. This judgment, on the contrary, permits an inquiry by the IT authorities into the factual situation whether a society is in fact conducting business as a co-operative bank but not as a primary agricultural credit society.

In fact, these divergent views compelled the Kerala High Court to refer the matter to a Full Bench Then, in Mavilayi Service Co-operative Bank Ltd v CIT 2019 (2) KHC 287, ("Mavilayi HC") the Full Bench has endorsed Perinthalınanna Service Co-operative Bank's Ltd's case (supra) view that the IT Authority can go behind the certificate granted by the Registrar of Co-operative Societies. To hold thus, the Full Bench has relied on the Supreme Court's Citizen Cooperative Society Ltd. v. Asstt. CIT [2017] 84 taxmann.com 114/250 Taxman 78. The Full Bench decision taken in further appeal, the Supreme Court, finally, in Mavilayi Service Co-operative Bank Ltd 's case (supra) SC considered the controversy threadbare and reversed the Kerala High Court's Full Bench decision. It has thus, endorsed Chirakkal Service Co-operative Bank's case (supra) view.

Here, before us, an identical question of law has arisen. It will suffice if we examine the case holding of Mavilayi Service Co-operative Bank Ltd's case (supra) (SC) and see whether it applies on all four. For here, too, the Revenue relies on Citizen Cooperative Society Ltd's case (supra), as did Mavilayi Service Co-operative Bank Ltd 's case (supra) (HC).

To begin with, a three-Judge Bench of the Apex Court in Mavilayi Service Co-operative Bank Ltd.'s case (supra) (SC) has noted that though the main object of the primary agricultural society is to provide financial assistance in the form of loans to its members for agricultural and related purposes, yet some of the objects go well beyond, and include banking operations 'as per rules prevailing from time to time' Then, Mavilayi Service Co-operative Bank Ltd.'s case (supra) SC has examined the case holding of Citizen Co-operative Society case (supra). In fact, Mavilayi SC underlines the fact that even Citizen Co-operative Society case (supra) acknowledges that section 80-P of the IT Act is a benevolent provision, it was enacted by Parliament to encourage and promote growth of cooperative sector in the country. Citizen Co-operative Society case (supra), as noticed by Mavilayi SC, has further accepted that once the assessee is entitled to avail itself of deduction, the entire amount of profits and gains of business that are attnbutable to any one or more activities mentioned in sub-section (2) of section 80P must be given by way of deduction Further, Citizen Co-operative Society case (supra) also accepts that section 80P(4) is in the nature of a proviso to the main State Bank of India Employees M.S. Patel Co-op Credit Society Ltd. A.Y. 2016-17 provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks which are cooperative societies that must possess a license from the RBI to do banking business. In this backdrop, on facts, Citizen Co-operative Society case (supra) concludes that the appellant assessee did not have RBI licence, so it would "not fall within the mischief of section 80P(4).

Mavilayi SC points out that in Citizen Co-operative Society case (supra) the counsel for the assessee advanced no argument that "the assessing officer and other authorities under the IT Act could not go behind the registration of the co-operative society to discover whether it was conducting business in accordance with its bye-laws. Without that question in the Court's contemplation, Citizen Co-operative Society case (supra), according to Mavilayi Service Co-operative Bank Ltd's case (supra) SC, stands robbed of its precedential on a point that has never been raised and, thus, never discussed. For a decision binds not because of its conclusion but because of the ratio and the principle it lays down. In other words, a decision is only an authority for what it actually decides. What matters in a decision is its ratio and not every observation found in it or what logically follows from the various observations made in it

Then, Mavilayi Service Co-operative Bank Ltd.'s case (supra) SC turns to the proper interpretation of Section 80P of the IT Act In interpreting that provision, it refers, among other things, to (a) the marginal note to Section 80P to ascertain the general "drift" of the provision, to the Finance Minister's speech, dated 28-2-2006, on the floor of Parliament, to a Circular dated 28-12-2006, explaining the provision as found in the Finance Act. 2006. Eventually, Mavilayi SC holds that to earn eligibility for deduction, the assessee must be a "co-operative society", it is unnecessary to probe any further whether the co-operative society is classified as X or Y. Besides, the gross total income must include income that is referred to in sub-section (2) of section 80P of IT Act.

Mavilayi Service Co-operative Bank Ltd 's case (supra) (SC) has referred to sub-section (4) of section 80P, which, according to it is in the nature of a proviso to that section This sub-section clarifies that no deduction shall be admissible for a cooperative bank But, if it is a primary agricultural credit society or a primary cooperative agricultural and rural development bank, the deduction will still be provided. Thus, only cooperative banks now specifically stand excluded from the ambit of Section 80P of the Act.

On the facts, Mavilayi Service Co-operative Bank Ltd. 's case (supra) (SC) has noted that the appellant cannot be termed a cooperative bank. It is also a matter of common knowledge that in order to do the business of a cooperative bank, it is imperative for that bank to have a licence from Reserve Bank of India. And, admittedly, the appellant does not have it. In State Bank of India Employees M.S. Patel Co-op Credit Society Ltd. A.Y. 2016-17 Mavilayı Service Co-operative Bank Ltd 's case (supra) (SC), as is the case here, the main reason for the Revenue to disentitie the appellant from getting the deduction under section 80P of the Act is not sub-section (4). It is the appellant's alleged activities in violation of the Cooperative Societies Act, under which it is formed. The AO has pointed out that the appellant has been catering to two distinct categories of people: the first category is the resident members or ordinary members; the second category is the "nominal members". These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. And, in fact, they are not members in real sense."

It is evident that similar issue on identical fact has been adjudicated in favour of the assessee in the earlier years as referred supra in this order. Since there is no change in the fact of the case State Bank of India Employees M.S. Patel Co-op Credit Society Ltd. A.Y. 2016-17 during the year under consideration therefore following decision of the ITAT in the case of the assessee as discussed above we do not find any reason to interfere in the decision of ld. CIT(A). Therefore, the appeal filed by the revenue is dismissed.

In the result, appeal of the revenue is dismissed.