THALORE SERVICE CO-OP BANK LTD NO 435,THRISSUR vs. ITO WARD 2(1), THRISSUR

The facts being similar and the issue being the same, the appeals are decided together and the lead case is taken as AY 2009-10, so the facts pertaining to the AY 2009-10 is considered and the decision of it will be followed for AY 2014-15.The main grievance of the assessee is against the action of the Ld. CIT(A) in confirming the action of the AO denying deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961 (hereinafter “the Act”). The assessee society claims to be a Primary Agricultural Credit Society (hereinafter “PACS”) on the strength of a certificate issued by the Registrar of the Co-operative Societies as PACS. According to the assessee society it provides credit only to its members and consequently it claimed that the credit facility provided to the members amounting to Rs.1,00,08,043/- are eligible for deduction u/s 80P(2)(a)(i) of the Act. However, the AO denied the claim of the assessee inter-alia on the reason that the Primary Agricultural Credit Societies are permitted only to provide financial accommodation to its members and that also for agriculture purposes; and for purposes connecting with agriculture activity only. According & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd. to AO, since the assessee provides banking facilities to general public it is a Co-operative Bank, and therefore, by virtue of section 80P(4) of the Act, deduction under section 80P of the Act is not available; and thus he denied the claim of deduction u/s 80P of the Act to the tune of Rs.1,00,08,043/- which was added to the total income of the assessee. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the same by stating that merely because certificate has been issued by Registrar of Co-operative Societies, it cannot be the only factor for being eligible for the benefit u/s 80P of the Act and observed the principle that substance over form needs to be examined to find out whether assesse society was PACS and he accepted the view of AO that assesse is not a PACS; and he also found fault with the assessee for not filing of return of income u/s 139(1) within time for AY. 2009-10; and found that assesse had filed the return only in response to the Department notice u/s 148 of the Act on 15.06.2016, which is belated. And therefore, he upheld the action of the AO. Aggrieved by the aforesaid action of the Ld. CIT(A), the assessee has preferred the appeal before us for both AY 2009-10 as well as AY. 2014-15.

We have heard both the parties and perused the records. One of the reasons given by the Ld. CIT(A) while confirming the action of the AO to deny the claim of deduction u/s 80P of the Act was that the assessee society did not file its return of income within the due time as prescribed u/s 139(1) of the Act; and had filed the same only in response to notice u/s 148 of the Act on 15.06.2016. In this regard, we note that the Hon’ble jurisdictional High Court had an occasion to & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd. examining this precise issue in respect of claim of deduction under section 80P of the Act wherein the issue of filing of return belatedly beyond the period stipulated in section 139(1) or section 139(4) of the Act as the case may be, as well as section 142(1) or section 148 of the Act as the case may be was considered at length by even considering section 80A(5)/80AC of the Act and the Hon’ble Kerala High Court (DB) decided the same in the case of Chirakkal Service Co-operative Bank Ltd. Vs. CIT (384 ITR 490) wherein it has held that the return filed by the assessee beyond the period stipulated u/s 139(1) or 139(4) of the Act was u/s 142(1) or section 148 of the Act need to be accepted by the AO and acted upon in accordance to law. The Hon’ble Kerala High Court held on this issue as under: - “18. “Questions B and C relate to denial of exemption on ground referable to belated filing of return, that is to say, returns filed beyond the period stipulated under section 139(1) or section 139 (4), as the case may be, as well as section 142 (1) or section 148, as the case may be. There are no cases among these appeals where returns were not filed. There are cases where claims have been made along with the returns and the returns were filed within time. Still further, there are cases where returns were filed belatedly, that is to say, beyond the period stipulated under subsection 1 or 4 of section 139; and, there are also returns filed after the period with reference to sections 142(1) and 148 of the IT Act.

Section 80A(5) provides that where the assessee fails to make a claim in his return of income for any deduction, inter alia, under any provision of Chapter VIA under the heading "C.- Deductions in respect of certain incomes", no deduction shall be allowed to him thereunder. Therefore, in cases where no returns have been & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd. filed for a particular assessment year, no deductions shall be allowed. This embargo in section 80A(5) would apply, though section 80P is not included in section 80AC. This is so because, the inhibition against allowing deduction is worded in quite similar terms in sections 80A(5) and 80AC, of which section 80A (5) is a provision inserted through the Finance Act 33/2009 with effect from 1.4.2013 after the insertion of section 80AC as per the Finance Act of 2006 with effect from 1.4.2006. This clearly evidences the legislative intendment that the inhibition contained in subsection 5 of section 80A would operate by itself. In cases where returns have been filed, the question of exemptions or deductions referable to section 80P would definitely have to be considered and granted if eligible.

Here, questions would arise as to whether belated returns filed beyond the period stipulated under section 139(1) or section 139(4) as well as following sections 142(1) and 148 proceedings could be considered for exemption. If those returns are eligible to be accepted in terms of law, going by the provisions of the statute and the governing binding precedents, it goes without saying that the claim for exemption will also stand effectuated as a claim duly made as part of the returns so filed, for due consideration.

When a notice under section 142(1) is issued, the person may furnish the return and while doing so, could also make claim for deduction referable to section 80P. Not much different is the situation when pre-assessment enquiry is carried forward by issuance of notice under section 142 (1) or when notice is issued on the premise of escaped assessment referable to section 148 of the IT Act. This position notwithstanding, when an assessment is subjected to first appeal or further appeals under the IT Act or all questions germane for concluding the assessment would be & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd. relevant and claims which may result in modification of the returns already filed could also be entertained, particularly when it relates to claims for exemptions. This is so because the finality of assessment would not be achieved in all such cases, until the termination of all such appellate remedies. Under such circumstances, the Tribunal was not justified in denying exemption under section 80P of the IT Act on the mere ground of belated filing of return by the assessee concerned. A return filed by the assessee beyond the period stipulated under section 139(1) or 139(4) or under section 142(1) or section 148 can also be accepted and acted upon provided further proceedings in relation to such assessments are pending in the statutory hierarchy of adjudication in terms of the provisions of the IT Act. In all such situations, it cannot be treated that a return filed at any stage of such proceedings could be treated as non est in law and invalid for the purpose of deciding exemption under section 80P of the IT Act. We thus answer substantial questions of law B and C formulated and enumerated above.”

In the light of the Hon’ble High Court decision (supra), the reasons given by Ld. CIT(A) about the omission on the part of assessee in filing the return of income u/s 139(1)/142(1)/148 of the Act cannot be a ground for these AY’s before us. So the action of Ld. CIT(A) cannot be sustained in the light of the Hon’ble High Court decision (supra).

Coming to the other reason given by the Ld. CIT(A) to deny the claim of deduction under section 80P of the Act claim was that the assessee society cannot be termed as Primary Agricultural Credit & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd. Society [PACS] even though, there was a certificate of the Registrar of Co-operative Societies. According to him (as well as the AO), the assessee society terming itself to be a Primary Agricultural Credit Society was unsustainable because according to them, a Primary Agricultural Credit Society only provides financial accommodation to its members; and also for agriculture purposes; and purposes connected with agriculture activity and since assesse society is not fulfilling this criteria it cannot be said to be a PACS, . We note that such a contention of the revenue has not been accepted by the Hon’ble Apex Court in the case of Malvilayi Service Co-operative Bank Ltd. & Ors Vs. CIT (431 ITR 1) while reversing the full bench decision of the Hon’ble Kerala High Court the Hon’ble Supreme Court held as under: - “45. To sum up, therefore, the ratio decidendi of Citizen Co- operative Society Ltd. (supra), must be given effect to. Section 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 section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now 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 & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd. is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 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 section 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. 46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, 'nominal members' are 'members' as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions' Federation Ltd. v. CIT [1997] 11 SCC 287 referred to section 80P of the IT Act and then held: "8. The expression "members" is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression "members" in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression "members" in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under: "2. (n) 'Member' means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to 'members' anywhere in this Act in connection with the & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd. possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;"" Considering the definition of 'member' under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i). 47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non- members under section 59(2) and (3), which reads as follows: "59. Restrictions on loans.— (1) A society shall not make a loan to any person or a society other than a member: Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank. Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society. (2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit. (3) Granting of loans to members or to non-members under sub- section (2) and recovery thereof shall be in the manner as may be specified by the Registrar." Thus, the giving of loans by a primary agricultural credit society to non-members is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra). 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.” & 33/Coch/2023 SP. NO. 08 & 09/Coch/2023 A.Ys. 2009-10 & 2014-15 Thalore Service Co-op Bank Ltd.

We note that the AO/Ld. CIT(A) had no benefit of the decision rendered by the Hon’ble Apex Court in the case of Malvilayi Service Co-operative Bank Ltd (supra). Therefore, in the interest of justice and equity, the issue of claim for deduction u/s 80P(2)(a)(i) of the Act is restored back to file of AO who is directed to examine afresh the claim of assessee in the light of the Hon’ble Apex Court decision in Malvilayi Service Co-operative Bank Ltd (supra). Therefore, the impugned order of Ld. CIT(A) is set aside, and issue is restored back to the file of the AO; and the AO is directed to decide the claim of the assessee in respect of deduction claimed u/s 80P(2)(a)(i) of the Act as per the ratio laid by the Hon’ble Apex Court Malvilayi Service Co- operative Bank Ltd (supra). SP Nos. 08 & 09/Coch/2023 for AY. 2009-10 & AY. 2014-15 7. Since we have disposed of the appeals, the Stay Petitions have become infructuous and they are dismissed as infructuous.

In the result, the appeals of the assessee are allowed for statistical purposes and Stay Petitions are dismissed. Order pronounced in the open court on this 19/05/2023.