2018 (12) TMI 127 - HC - Income Tax

Deduction under Section 80P(2) - income from the sale of public distribution system sales as directed by the Government of Tamil Nadu - Held that - In the instant case, the Revenue has not disputed the fact that the fair price shops were opened based on the directions issued by the Government of Tamil Nadu as communicated by the Registrar of Cooperative Societies and the District Collector. We find that in the decision in Citizen Cooperative Society Limited 2017 (8) TMI 536 - SUPREME COURT the assessee was engaged in granting loans to general public without any approval from the Registrar of Societies. Therefore, the Court held that the assessee could not be treated as a cooperative society meant only for providing credit facilities to its members and accordingly, would not be entitled to claim the benefit under Section 80P of the IT Act. This decision can, in no manner, advance the case of the Revenue, as factually we found that the assessee herein is entitled to distribute the items under the PDS, as it is one of the allied activities of the society and is bound by the directives of the Government. Apart from that, the definition of credit society is wider in import to include any activity that the Government may, by Notification, specify. As find from By-law No.12(a) that if the society carries on an activity, which is not authorized under the By-laws or with the approval of the Registrar, the society is liable to strike off the Rules and the members engaged in the same are liable to be removed. Furthermore, in terms of Bylaw No.51, the society is entitled to purchase, in bulk, articles and materials required for its members and distribute the same. Therefore, viewed from any angle, the activity done by the appellant society cannot be truncated from the activity as a credit society and we are of the considered view that the Authorities below as well as the Tribunal committed an error in rejecting the stand taken by the appellant/ assessee - AO is directed to extend the benefit of deduction under Section 80P(1) read with Section 80P(2)(a)(i) of the IT Act to the appellant/assessee. - Decided in favour of assessee.

Summary

Issues:
- Interpretation of Section 80P(2) of the Income Tax Act, 1961 regarding deduction for income from the sale of goods under the Public Distribution System (PDS).
- Determining whether the appellant, a cooperative bank, is entitled to deduction under Section 80P(2) for income earned from PDS sales.

Analysis:
The appellant, a cooperative bank registered under the Tamil Nadu Cooperative Societies Act, challenged an order by the Income Tax Appellate Tribunal regarding the deduction of income from the sale of goods under the PDS. The Assessing Officer disallowed the deduction under Section 80P(2)(a) of the IT Act, stating it was not related to banking activities. The appellant argued that as a credit society, they were entitled to the deduction. The Commissioner of Income Tax (Appeals) rejected the claim, leading to an appeal to the Tribunal.

The Tribunal upheld the CIT (A)'s decision, stating the income from PDS sales did not qualify as banking activities. The appellant contended that the fair price shops were set up based on government directives, aligning with their role as a credit society. They argued for deduction under Section 80P(2)(iv) of the IT Act, emphasizing their activities were authorized under the Tamil Nadu Cooperative Societies Act.

The Court analyzed the appellant's By-laws, government directives, and sample sales bills to establish that the PDS sales were within the scope of a credit society's activities. They cited a Bombay High Court case to support the broad interpretation of banking activities, including income from public sector undertakings. The Court found the appellant's case factually stronger, as the By-laws explicitly allowed such activities and the government directives were binding.

The Revenue's reference to another case was dismissed, as it did not align with the appellant's situation. The Court highlighted the wide definition of a credit society and the appellant's compliance with By-laws and government directives. They concluded that the appellant was entitled to the deduction under Section 80P(2)(a)(i) of the IT Act. The appeal was allowed, orders set aside, and the appellant directed to receive the benefit of the deduction.