2017 (4) TMI 181 - HC - Income Tax

Deduction under section 80P(2)(a)(i) - Held that - The appellate authority, namely, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal has clearly perceived that the assessee is not a co-operative bank and that the activities of the bank are in the nature of accepting deposits, advancing loans, etc., carried on by the assessee, but are confined to its members only and that too in a particular geographical area. Therefore, the respondent society is eligible for deduction under section 80P(2)(a)(i) of the Act. The contention of the appellant that the members of the assessee-society are not entitled to receive any dividend or having any voting right or no right to participate in the general administration or to attend any meeting, etc., because they are admitted as associate member for availing of loan only and was also charging a higher rate of interest at the rate of 14 per cent., is not a ground to deny the exemption granted under section 80P(2)(a)(i) of the Act. - Decided in favour of assessee

Issues Involved:

1. Entitlement of the assessee to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.
2. Classification of Class B members as "members" for the purpose of section 80P(2)(a)(i).
3. Applicability of section 80P(4) and section 2(24)(viia) concerning non-agricultural loans.

Issue-wise Detailed Analysis:

1. Entitlement of the assessee to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961:

The assessee, a co-operative society engaged in banking and trading activities, claimed a deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. The Assessing Officer disallowed this claim, arguing that the loans were given for non-agricultural purposes and the interest received was comparable to that of commercial banks. The Commissioner of Income-tax (Appeals) initially upheld this view but later allowed the appeal based on a Tribunal decision. The Tribunal ruled that the assessee was entitled to the deduction, interpreting "members" to include Class B members under section 2(16) of the State Cooperative Societies Act, 1983. The Tribunal also noted that the assessee would be entitled to the deduction under section 80P(2)(a)(iv), even though this issue was not directly raised.

2. Classification of Class B members as "members" for the purpose of section 80P(2)(a)(i):

The Revenue contended that Class B members, who do not have voting rights or the ability to participate in meetings, should not be considered "members" for the purposes of section 80P(2)(a)(i). However, the Tribunal found that the definition of "member" under section 2(16) of the State Cooperative Societies Act includes associate members, which encompasses Class B members. The Tribunal and the appellate authority concluded that denying the deduction based on the classification of members would be beyond the purview of the tax statute unless explicitly provided by the Legislature. This interpretation was supported by previous decisions, including those of the Punjab and Haryana High Court and the Kerala High Court, which recognized that primary agricultural credit societies are entitled to such exemptions.

3. Applicability of section 80P(4) and section 2(24)(viia) concerning non-agricultural loans:

Section 80P(4) excludes co-operative banks from the benefits of section 80P, except for primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Revenue argued that since the assessee lent money for non-agricultural purposes, it should be classified as a co-operative bank and thus not eligible for the deduction. However, the Tribunal and the appellate authority determined that the assessee's activities were confined to its members within a specific geographical area and did not constitute a co-operative bank's principal business. The courts found that the assessee's primary objective was to provide financial accommodation to its members for agricultural purposes, aligning with the definition of a primary agricultural credit society. Consequently, the exception in section 80P(4) did not apply, and the assessee was entitled to the deduction under section 80P(2)(a)(i).

Conclusion:

The appellate authority and the Tribunal concluded that the assessee, being a primary agricultural credit society, is eligible for the deduction under section 80P(2)(a)(i). The classification of Class B members as non-members was rejected, and the activities of the assessee were found to be in line with the objectives of a primary agricultural credit society. The substantial questions of law raised by the Revenue were answered against them, leading to the dismissal of the appeal.

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