2018 (12) TMI 63 - AT - Income Tax

Entitled to deduction u/s. 80P(2)(a)(i) - Assessee are primary agricultural credit societies registered under the Kerala Cooperative Societies Act, 1969 - Held that - The Hon ble High Court of Kerala in the case of Chirakkal Service Co-op Bank Ltd. (2016 (4) TMI 826 - KERALA HIGH COURT) had held that a primary agricultural credit society, registered under the Kerala Cooperative Societies Act, 1969 is entitled to the benefit of deduction u/s. 80P(2). TDS u/s 194A - Disallowance of interest u/s 40(a)(ia) - TDS liability - Held that - The issue is covered in favour of the assessee by the ITAT order in case of Kadachira Service Co-op Bank Ltd. 2013 (2) TMI 208 - ITAT COCHIN as held for the purpose of understanding the cooperative society, the meaning that is given in section 2(19) of the Income-tax Act has to be considered and not otherwise. The co-operative societies are not controlled and governed by RBI and they are registered under the provisions of the State Co-operative Societies Act. Therefore, the Kerala High Court found that the co-operative societies are exempt from provisions of section 194A - addition u/s 40(a)(ia) is deleted - Decided in favour of assessee.

Summary

Issues:
1. Whether the assessee is entitled to deduction u/s. 80P(2)(a)(i) of the I.T.Act?
2. Whether interest expenditure is liable for disallowance u/s 40(a)(ia) of the I.T.Act?

Analysis:

Issue 1: Deduction u/s. 80P(2)(a)(i) of the I.T.Act
The assessees, primary agricultural credit societies, filed returns claiming deduction u/s. 80P of the I.T. Act. The Assessing Officer denied the deduction, citing that the assessees were primarily engaged in banking activities. The CIT(A) referred to the judgment of the Jurisdictional High Court and allowed the deduction u/s. 80P. The High Court held that primary agricultural credit societies registered under the Kerala Cooperative Societies Act are entitled to deduction u/s. 80P(2). The ITAT upheld this decision, stating that the assessees are entitled to the benefit of deduction u/s. 80P of the Act.

Issue 2: Disallowance of Interest Expenditure u/s 40(a)(ia) of the I.T.Act
The Assessing Officer disallowed interest expenditure u/s 40(a)(ia) as the assessees did not deduct tax at source u/s 194A. The CIT(A) relied on the ITAT's decision in a similar case and held that as primary agricultural credit societies, the assessees were not liable for TDS u/s 194A. The ITAT, in line with previous judgments, found that the assessees are exempt from deduction of tax at source u/s 194A. The Tribunal referred to the judgments of the Jurisdictional High Court and held that the assessees are not required to deduct TDS on interest paid to their own members, ordering the disallowance under section 40(a)(ia) to be deleted.

In conclusion, the appeals filed by the Revenue and the Cross Objections filed by the assessee were dismissed, affirming the entitlement of the assessees to the deduction u/s. 80P and the exemption from disallowance of interest expenditure under section 40(a)(ia) of the I.T.Act.