KALIKAVU SERVICE CO-OPERATIVE BANK LIMITED,KALIKAVU vs. ITO, WARD-2, TIRUR

The only effective issue raised by the assessee in is that the learned CIT(A) erred in confirming the disallowance of the deduction claimed by the assessee amounting to Rs. 28,38,830.00 under the provisions of section 80 P of the Act.

The necessary facts are that the assessee is registered as a Primary Agricultural Co-op society and claims to be engaged in providing loans to its members for & 375/Coch/2024 Kalikvu Service Co-operative Bank Ltd. agricultural and rural development. The assessee is also operating a fertilizer store for distribution of fertilizers, pesticide, and other agriculture related products to its members. It was also claimed that the loan was disbursed to members only. However, the AO found that assessee disbursed total loan of Rs. 13,05,91,931/- out of which only a sum of Rs. 12,08,493/-, constituting 0.93% of the total loan, was given for agricultural purposes. As such, the assessee is engaged in banking activity as it is providing various kind of loan, gold loan, accepting deposits, saving bank, RD, CD and also issuing cheque book etc. Thus as per the AO, the provisions of section 80P(4) of the Act brought by the Finance Act 2006 denies the benefit to the co-op bank working at par with commercial bank except primary agricultural credit society or primary agricultural and rural development bank.

The primary agricultural credit society is defined as per section 5(cciv) having primary object or principal business to provide financial accommodation to members for agricultural purposes whereas assessee is primarily providing loans other than for agricultural purposes. Likewise, the Kerala Co-operative Act also defines primary agricultural credit society having principal object to undertake agricultural credit activity and provide loan for agricultural purposes, work within village, panchayat, or municipality. However, the activity of the assessee is banking activity rather than primary agricultural credit society. Hence the assessee falls under the purview of section 80P(4) of the Act and therefore not eligible for deduction u/s 80P of the Act. As per section 2(24)(viia) of the Act income earned from member by co-op society engaged in banking activity is also included in the definition of income. Thus, the AO denied the benefit of deduction claimed by the assessee under section 80P of the Act by adding the same to the total income of the assessee.

The ld. AR before us reiterated the submissions as made before the authorities below whereas the ld. DR vehemently supported the order of the lower authorities. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, with note that the benefit of deduction claimed by the assessee under section 80P of the Act has been denied by the AO on the ground that the assessee is not engaged in the activity of agricultural activity which was subsequently confirmed by the ld. CIT(A).

It is a fact on record that the assessee is dealing only with the members, and it has no dealing whatsoever other than the members. Undeniably, the operations of the assessee for extending the loan for agricultural purposes is miniscule but to our understanding the benefit of deduction cannot be denied to the assessee in view of the principles laid down by the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. V. Commissioner of Income Tax, reported in 123 taxmann.com 161 wherein it was held as under: “33. Sixthly, what is important to note is that, as has been held in Kerala State Cooperative Marketing Federation Ltd. (supra) the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and section 80P(2)(a)(i) must be contrasted with section 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 & 375/Coch/2024 Kalikvu Service Co-operative Bank Ltd. section 80P(2)(a)(i). Also, the proviso to section 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 section 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 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.”

A plain reading of the above judgement of the Hon’ble Supreme Court mandates that the benefit of deduction under section 80 P of the Act cannot be denied to the assessee as long as the assessee is earning interest from the financial activities by dealing with the members only. At this juncture, it is also important to note that the AO in the assessment framed under section 143(3) read with section 144B of the Act has allowed the deduction under section 80 P of the Act for the assessment year 2022-23 involving identical fact and circumstances. At the time of hearing the ld. DR has also not brought anything contrary as discussed above. Accordingly, we hold that the assessee is eligible for deduction under section 80P of the Act in the given fact and circumstances. Consequently, we set aside the finding of the ld. CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is hereby allowed. Assessee’s ground is allowed.

Coming to the second appeal the issue is identical with the first appeal. Since we have allowed the first appeal ITA 3474/Coch/2024 the second appeal is allowed on the very terms.

In the combined result, both the appeals filed by the assessee are hereby allowed.