THE VALLAPUZHA SERVICE CO-OP BANK LTD,PALAKKAD vs. THE ITO WARD 3, PALAKKAD

The background facts of the case leading to the instant appeals, in brief, are that the assessee, a cooperative society in existence since 1961, and registered under the Kerala Cooperative Societies Act, 1969 (Kerala Act) as a primary agricultural credit society (PACS), returned it’s income for the relevant years at nil, claiming deduction u/s. 80P of the Act on the entirety of it’s profits and gains from business. & 328/Coch/2023 (AYs : 2012-13& 13-14) Vallapuzha Service Co-op. Bank Ltd. v. ITO 3. The issue arising in the appeals is the denial of deduction u/s. 80P of the Act, claimed u/s. 80P(1) r/w s. 80P(2)(a)(i). The basis for the said denial is that even as the assessee is registered as a PACS, it is actually undertaking banking business, providing the following services, with in fact only a small fraction (close to 10%) of it’s lending being to the agricultural sector, so that it is not a PACS by definition: i) providing various kinds of loans (Gold loan, Mortgage loan, etc.) ii) maintaining saving bank A/c, current A/c, day deposit etc. iii) providing cheque facility iv) providing demand draft facility v) providing locker facility That is, it being registered as PACS is thus a ruse, with a view to avoid tax, with in fact the Kerala Act being amended in 2010 to provide that if the principal object of the PACS is not fulfilled, the assessee shall loose all the characteristics of a PACS as specified in the Act, rules and byelaws, except qua the existing staff strength (s. 2(oaa). The bye-laws clearly permit the assessee to accept deposits from members as well as non-members. Adverting to the defining provisions of the Banking Regulation Act, 1949 (BRA), the assessee, it is claimed, is a cooperative bank. The disallowance, on that basis, being confirmed in first appeal, and for the same reasons, the assessee, aggrieved, is in second appeal. 4. Before us, the assessee’s stand was of being a PACS. With reference to it’s bye-laws, i.e., in the relevant part (copy on record), bearing it’s object clause and working area, it was claimed by Shri Narayanan, the learned counsel for the assessee, that the assessee cannot in view of the said area restrictions be regarded as in banking business, with it further being not licensed by RBI. The Revenue reiterated it’s case. 5. We have heard the parties, and perused the material on record. 5.1 The Assessing Officer (AO) has, on a perusal of the bye-laws, given a clear finding at para 12 of his order (for AY 2013-14) that the assessee is authorized Page | 2 & 328/Coch/2023 (AYs : 2012-13& 13-14) Vallapuzha Service Co-op. Bank Ltd. v. ITO thereby to accept deposits from members as well as non-members. This has not been disputed by the assessee at any stage. Acceptance of deposits from members and non-members implies deposits from public at large. The area restriction, on which the assessee relies, is applicable only for it’s members, while it can admittedly, both accept as well as lend to non-members as well. To what effect, then, one may ask, the said area restrictions? The assessee’s entire income arises only from lending activity, of course investing funds deemed surplus for the time being, or as required by it’s governing statute (Kerala Act). If that does not translate into it being in the business of banking, what we wonder does, and toward which we also advert to s. 5(b) of BRA – which regulates the business of banking in India, defining ‘banking’ as under: 5. Interpretation. In this Act, unless there is anything repugnant in the subject or context,- (a).......... (b)"banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise; 5.2 The assessee’s lending being admittedly not primarily for agricultural purposes, it is not a PACS by definition and, two, is a cooperative bank, i.e., a cooperative society in the business of banking, even as clarified by the Hon'ble Courts time and again, as in Mavilayi SCB Ltd. v. CIT [2021] 431 ITR 1 (SC); Citizen Cooperative Society Ltd. v. Assst. CIT [2017] 397 ITR 1 (SC); Pr. CIT v. Peroorkada Service Co-operative Bank Ltd. [2022] 442 ITR 141 (Ker); Mohammed Usman v. Registrar of Co-operative Societies, AIR 2003 (Ker) 299, to cite some. Why, the provision itself recognizes ‘banking’ as an eligible activity for a cooperative society, entitling it to deduction of the profits derived therefrom (s. 80P(2)(a)(i)). It being not a PACS would thus not carry the Revenue’s case far. Firstly, for the reason that exemption u/s. 80P(1) r/w s. 80P(2)(a)(i) is, as afore-noted, equally applicable to income derived from the business of banking, even as that from credit to members is not confined to that for agricultural purposes only. Two, inasmuch as the tax statutes Page | 3 & 328/Coch/2023 (AYs : 2012-13& 13-14) Vallapuzha Service Co-op. Bank Ltd. v. ITO are to be strictly construed (Banarsi Debi v. ITO [1964] 53 ITR 100 (SC); Ajmera Housing Corp. v. CIT [2010] 326 ITR 642 (SC)), the term ‘cooperative bank’ is it be, for the purpose of s. 80P(4), excluding cooperative banks from the benefit of s. 80P, strictly construed, i.e., as defined therein. The said definition would have to be satisfied strictly in terms of the said provision for the assessee to be regarded as a cooperative bank and, thus, excluded from the purview of s. 80P(1) of the Act. 5.3 Section 5 (cci) of the BRA, which stands adopted in s. 80P(4), defines a ‘cooperative bank’ as under: “5 (cci) 'co-operative bank' means a state co-operative bank, a central co-operative bank and a primary co-operative bank;” Section 5 (ccv) of BRA defines 'primary co-operative bank' as under: “5 (ccv) 'primary co-operative bank' means a co-operative society, other than a primary agricultural credit society,— (1) the primary object or principal business of which is the trans action of banking business; (2) the paid-up share capital and reserves of which are not less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose; 5.4 The assessee, per it’s Ground 4 before the first appellate authority, has made a specific claim as to it’s bye-laws permitting admission of other cooperative societies as members and, therefore, of not being a primary cooperative bank in terms of s. 56 r/w s. 5(ccv) of BRA. There is no finding by the ld. CIT(A) thereon, which clearly has a direct bearing on the assessee being, or not being, a primary cooperative bank and, thus, a cooperative bank for the purposes of s. 80P of the Act. Copy of the bye- laws is not on record. Even the two pages (in English) thereof, forming part of the paper-book, to which Shri Narayanan would refer during hearing, are not by an & 328/Coch/2023 (AYs : 2012-13& 13-14) Vallapuzha Service Co-op. Bank Ltd. v. ITO authorized translator for us to place reliance thereon; the original, as explained, being in vernacular. The matter, accordingly, is restored to the file of the AO to examine if the assessee falls under the definition of a ‘cooperative bank’ under BRA, construed strictly, which definition stands adopted for the purpose of s. 80P(4) of the Act, i.e., whether as a primary cooperative bank or district/state cooperative bank. We make it clear that the assessee, despite being registered as such, is not PACS for the purposes of s. 80P, which, again, defines the said term w.r.t. the provisions of BRA, in view of it’s lending profile – not in dispute, so that it’s principal business is not of lending for agriculture. On the contrary, it is in the business of banking. However, as afore-noted, it being in the business of banking or not a PACS is not detrimental to it’s claim u/s. 80P(1) r/w s. 80P(2)(i)(a). The AO shall, upon hearing the assessee and examining such material as it may adduce in substantiation of it’s claim/s, and causing such verification as he may deem fit, issue a definite finding as to if it is, or is not, a cooperative bank as defined under BRA, determining it’s entitlement to exemption u/s. 80P(1) r/w s.80P(2)(a)(i) accordingly. We make it further clear that despite being not a PACS under the Act, it is yet a cooperative society under the Kerala Act, satisfying thus the requirement of s. 2(19) of the Act, which only is relevant for claiming deduction u/s. 80P(1). We decide accordingly. 6. In the result, the assessee’s appeals are allowed for statistical purposes. Order pronounced on March 26, 2024 under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963 Sd/- Sd/- (Kavitha Rajagopal) (Sanjay Arora) Judicial Member Accountant Member Cochin, Dated: March 26, 2024 n.p.