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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Sanjay Arora & Shri Manomohan Das
O R D E R
Per Sanjay Arora, AM
This is an Appeal by the Assessee agitating the dismissal of it’s appeal contesting it’s assessment under section 143(3) r/ws. 144B of Income Tax Act, 1961 (the Act) dated 29.9.2021 for Assessment Year (AY) 2018-19, by the Commissioner of Income Tax (Appeals), IT Department [CIT(A)], vide it’s Order dated 25.11.2022.
The facts of the case in brief are that the assessee, registered as a primary agricultural credit society (PACS) under the Kerala Co-operative Societies Act, 1969 (Kerala Act), returned it’s income for the year on 25.10.2018 at nil income, claiming deduction u/s. 80P(1) r/w s. 80P(2)(a)(i) of the Act in the sum of Rs.1,21,95,123. The same was found inadmissible by the Revenue inasmuch as it included interest and dividend income on investments with co-operative banks; commercial banks; and financial institutions, as well as commission income (GDCS Thalayal commission),
ITANo. 73/Coch/ 2023 (AY 2018-19) Mundakkayam Service Co-operative Bank Ltd. vs. ITO besides dividend from unlisted equities. Reliance for the purpose was placed by it on the decision in Totgar’s Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283 (SC). The assessee’s claim, on the other hand, is based on the fact of it forming part of the banking business, and toward which reliance stands placed by it on the decisions in CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC); Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522 (SC);CIT v. Ramanathapuram Distt. Co-op. Central Bank Ltd. [2002] 255 ITR 423 (SC); and CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 289 ITR 6 (SC),wherein such investments are held to be as a part of the business of banking. The Thalayal commission is only a foreman commission on the Chitties being run by the assessee-society for the benefit of it’s members, and which has been held in CIT v. Kottayam Co-operative Bank Ltd. [1974] 96 ITR 181 (Ker) as only a manner of providing credit to it’s members and, thus, entitled for deduction u/s. 80P(2)(a)(i).
Before us, the assessee made an alternate plea of the impugned disallowance, to the extent not deductible u/s. 80P(2)(a)(i) of the Act, would stand to be deductible u/s. 80P(2)(d), and toward which reliance is placed on the decision in Pr. CIT v. Perroorkada SCB Ltd. [2022] 442 ITR 141 (Ker).
We have heard the parties, and perused the material on record. 4.1 The assessee, as is the admitted position, is not a co-operative bank, i.e., within the meaning of the term u/s. 80P(4), which restricts the benefit of deduction u/s. 80P(1) to cooperative societies other than cooperative banks. The next question is if it is in the business of banking, which in fact is again an admitted position, with either side relying thereon. Section 59 r/ws. 60 of the Kerala Act makes it abundantly clear that the transactions with, including acceptance of deposits from, non-members, is not proscribed, but only regulated under the Kerala Act. The assessee thus satisfies the test of undertaking the business of banking as defined u/s. 5(b) of the Banking Regulation Act, 1949 (BRA). In fact, the Kerala Act provides for admission of Page 2
ITANo. 73/Coch/ 2023 (AY 2018-19) Mundakkayam Service Co-operative Bank Ltd. vs. ITO nominal members, i.e., who have no rights and privileges of a regular member, viz., voting rights; participation in surplus, etc. Any member of the public can, therefore, become a ‘member’ on paying a nominal sum, which in fact is insisted upon as a practice, making co-operative societies, as the assessee, essentially public institutions, the restriction on area of operation being also not applicable to those formed prior to the commencement of the Amendment Act of 1999 (s. 2(oaa)). The assessee is, thus, for all intents and purposes, a co-operative bank, i.e., a co-operative society in the business of banking, even as explained in several decisions, including by the Hon'ble jurisdictional High Court in Mohammed Usman v. Registrar of Co-operative Societies, AIR 2003 (Ker) 299/[2003] 116 Comp. Cases 505 (Ker). We are conscious of it being not licenced with RBI, as required under BRA, as aspect considered in Mohammed Usman (supra). Further, it may, by virtue of its bye-laws, consistent with the Kerala Act, been titled to be so licenced, as was found by the Tribunal in Sivapuram SCB Ltd. v. ITO (in & 62/Coch/2023, dated 13.12.2023), wherein the matter stands discussed in detail, further explaining that being unlicenced would imply it operating outside RBI’s regulatory control, but not alter the nature of income arising. And which to our mind is only relevant insofar as the activity of business of banking, an eligible activity u/s. 80P(2)(a)(i) of the Act, is concerned. Continuing further, the Hon'ble Apex Court has per a series of decisions cited supra, clarified that interest earned on investment of reserve funds by a co-operative bank would be a part of the income of the banking business. True, the decisions are with reference to cooperative banks, and the investment in the instant case is not out of statutory reserves, but the same is only for the reason that the provisions of BRA have not been invoked. They shall apply in principle, i.e., where an entity, otherwise eligible, is undertaking banking business. The investment of funds would in any case only be in terms of it’s bye-laws read with the Kerala Act; it’s accounts being subject to statutory audit there-under. The commission income, being in respect of credit to ITANo. 73/Coch/ 2023 (AY 2018-19) Mundakkayam Service Co-operative Bank Ltd. vs. ITO it’s members, again falls to be considered as part of its main activity, i.e., business of banking, and, in any case, from provision of credit to it’s members. The impugned income, including from chitty business, would thus fall to be covered u/s. 80P(2)(a)(i), which regards the activity of the business of banking and of provision of credit to it’s members by a cooperative society, at par.
4.2 Without prejudice to the foregoing, where and to the extent any interest or dividend income does not fall to be regarded as of a banking business, the same, to the extent it arises from investments with co-operative banks, would stand to be deducted u/s. 80P(2)(d) of the Act, as clarified in Perroorkada SCB Ltd. (supra), which is again premised on the same understanding, i.e., of co-operative banks being co-operative societies in the business of banking. Surely, cooperative banks, in contradistinction to cooperative societies, are public institutions, meant for public at large, and, thus, cannot be regarded as cooperative societies meant for it’s members, which is explained as the rationale of the provision, as indeed the exclusion of cooperative banks w.e.f. 01/4/2007 from the purview of s. 80P, by the Apex Court in The Citizen Co-operative Society Ltd. v. Asst. CIT [2017] 397 ITR 1 (SC).So, however, as explained in Mavilayi Service Co-operative Bank Ltd. v. CIT [2021] 431 ITR 1 (SC), taxing statutes are to be strictly read, construing the benevolent provisions liberally. Section 80P(2)(a)(i) itself regards the business of banking as an eligible activity for the purpose of deduction thereunder, with s. 80P(4) being in the nature of proviso. It is perhaps these aspects, i.e., reading it in consistence therewith; that prevailed with the Hon’ble Court in Perroorkada SCB Ltd. (supra) in construing the mandate of s. 80P(2)(d) thus, even as the prescription of s. 80P(4) is applicable for the entire provision. The said decision is even otherwise binding on this Tribunal.
4.3 As regards dividend income on unlisted securities, the same is not shown by the assessee to be forming an integral part of the business of banking, only where- upon would it stand to be covered u/s. 80P(2)(a)(i), as explained in Totgar’s Co- Page 4
ITANo. 73/Coch/ 2023 (AY 2018-19) Mundakkayam Service Co-operative Bank Ltd. vs. ITO operative Sale Society Ltd. (supra), confining the benefit there-under to operational income, and not on investment of funds deemed surplus for the time being. The said income, or any other income falling under the same category, would though stand to be covered u/s. 80P(2)(c) of the Act.
The assessee, though undertaking banking business, is not a co-operative bank, i.e., as defined u/s. 5(cci) of the BRA, which stands excluded for the benefit of s. 80P, u/s. 80P(4) of the Act. Accordingly, income in respect of which deduction u/s. 80P(2)(a)(i) stands claimed and disallowed, which does not fall to be considered as part of the income of the banking business, including provision of credit to it’s members, as afore-discussed; or on investment with co-operative banks, to the extent it exceeds the limit u/s. 80P(2)(c) of the Act, would only be liable to be disallowed. We direct accordingly.