2018 (3) TMI 373 - AT - Income Tax

Deduction u/s. 80P(2) - claim denied for the reason that the assessee cannot be considered as Primary Agricultural Credit Society - Held that - As decided in Nannambra Service Co-operative Bank Ltd. 2018 (2) TMI 866 - ITAT COCHIN Reserve Bank of India, which is the competent authority as per the Banking Regulation Act, treats assessee society and similar societies as only Primary Agricultural Credit Society not falling within the ambit of Banking Regulation Act. The Reserve Bank of India has given letters to the societies similar to assessee stating that they are Primary Agricultural Credit Societies and therefore in terms of section 3 of the Banking Regulation Act are not entitled for banking license. The assessee had extended credit facilities only to the members. The Revenue does not have a case that such credit facilities are extended to the outsiders. Therefore the income generated in the instant case is only out of the transaction with the members. Deduction u/s. 80P is allowed only for the said income. The assessee had claimed deduction u/s. 80P only in respect of net income which is derived by extending credit facilities to the members. - Decided against revenue

Issues Involved:
1. Denial of deduction under Section 80P(2) of the Income Tax Act.
2. Applicability of the Supreme Court decision in the case of Citizens Co-operative Society Limited.
3. The distinction between de jure and de facto positions regarding cooperative societies.
4. The role of nominal members in determining the eligibility for deduction under Section 80P.
5. The impact of the Supreme Court decision in Sabarkantha Zilla Kharid Vechan Sangh Ltd. vs. CIT on the current case.
6. The binding nature of the classification by the competent authority under the Kerala Co-operative Societies Act.

Detailed Analysis:

1. Denial of Deduction under Section 80P(2):
The assessees, Primary Agricultural Credit Societies (PACS) registered under the Kerala Co-operative Societies Act, 1969, were denied the benefit of deduction under Section 80P(2) by the Assessing Officer. The denial was based on the assertion that the assessees were engaged in banking activities and only a negligible percentage of loans were for agricultural purposes. The CIT(A), however, ruled in favor of the assessees, referencing the Kerala High Court's judgment in Chirakkal Service Co-operative Bank Ltd. vs. CIT, which held that societies classified as PACS by the competent authority are entitled to such deductions.

2. Applicability of the Supreme Court Decision in Citizens Co-operative Society Limited:
The Revenue argued that the CIT(A) erred by not considering the Supreme Court's decision in Citizens Co-operative Society Limited vs. Assistant Commissioner of Income-tax, which emphasized examining the activities of the society rather than relying solely on registration certificates. The Tribunal, however, distinguished this case, noting that the Supreme Court's decision pertained to a Credit Co-operative Society under different circumstances and did not directly apply to PACS registered under the Kerala Co-operative Societies Act.

3. Distinction Between De Jure and De Facto Positions:
The Revenue contended that the CIT(A) failed to differentiate between de jure (by law) and de facto (in fact) positions, citing the principle of penetrating the corporate veil to determine the true nature of the society's activities. The Tribunal upheld the CIT(A)'s decision, emphasizing that the classification by the competent authority under the Kerala Co-operative Societies Act is binding and that the income tax authorities cannot probe further into the activities of societies classified as PACS.

4. Role of Nominal Members:
The Tribunal examined whether the inclusion of nominal members affected the eligibility for deduction under Section 80P. It was noted that under the Kerala Co-operative Societies Act, nominal members are considered members, and deposits from them cannot be treated as public deposits. The Tribunal referenced the Supreme Court's observation in U.P. Co-operative Cane Union and the Bombay High Court's ruling in Jalgaon District Central, which supported the inclusion of nominal members as valid members for the purposes of Section 80P.

5. Impact of the Supreme Court Decision in Sabarkantha Zilla Kharid Vechan Sangh Ltd. vs. CIT:
The Revenue cited this decision to argue that deductions should be limited to profits from agricultural activities alone. The Tribunal distinguished the present case, noting that the assessees extended credit facilities only to members and not to outsiders, thereby making the income eligible for deduction under Section 80P. The Tribunal concluded that the judicial pronouncements relied on by the Revenue did not apply to the present case.

6. Binding Nature of Classification by Competent Authority:
The Tribunal reiterated that the classification of the assessees as PACS by the competent authority under the Kerala Co-operative Societies Act is binding. The Kerala High Court in Chirakkal Service Co-operative Bank Ltd. had categorically held that once classified as PACS, the society is entitled to the benefits under Section 80P(2). The Tribunal emphasized that the Reserve Bank of India, the competent authority under the Banking Regulation Act, also recognized these societies as PACS, further supporting the CIT(A)'s decision.

Conclusion:
The Tribunal upheld the CIT(A)'s orders, directing the Assessing Officer to grant the deduction under Section 80P(2) to the assessees. The appeals filed by the Revenue were dismissed, affirming that the classification by the competent authority is binding and that the income tax authorities cannot probe further into the activities of societies classified as PACS. The Tribunal's decision was pronounced in the open court on 7th March 2018.

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