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2019 (12) TMI 767 - AT - Income TaxEligibility of deduction u/s 80P - HELD THAT - Full Bench of the Hon ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT 2019 (3) TMI 1580 - KERALA HIGH COURT had held that the A.O. has to conduct an inquiry into the factual situation as to the activities of the assessee society to determine the eligibility of deduction u/s 80P. In view of the dictum laid down by the Full Bench of the Hon ble jurisdictional High Court (supra) we restore the issue of deduction u/s 80P(2) to the files of the AO. AO shall examine the activities of the assessee and determine whether the activities are in compliance with the activities of a co-operative society functioning under the Kerala Co-operative Societies Act 1969 and accordingly grant deduction u/s 80P(2) of the I.T.Act. As regards the interest on the investments with Cooperative Banks and other Banks the co-ordinate Bench order of the Tribunal in the case of Kizhathadiyoor Service Cooperative Bank Limited 2016 (7) TMI 1405 - ITAT COCHIN had held that interest income earned from investments with treasuries and banks is part of banking activity of the assessee and therefore the said interest income was eligible to be assessed as income from business instead of income from other sources . However as regards the grant of deduction u/s 80P on such interest income AO shall follow the law laid down by the Larger Bench of the Hon ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT (supra) and examine the activities of the assessee-society before granting deduction u/s 80P of the I.T.Act on such interest income. It is ordered accordingly.
Issues Involved:
1. Eligibility for deduction under Section 80P(2) of the Income Tax Act. 2. Validity of invoking Section 154 of the Income Tax Act for rectification. 3. Classification and activities of the assessee society. 4. Treatment of interest income from investments with Cooperative Banks and other Banks. Issue-wise Detailed Analysis: 1. Eligibility for Deduction under Section 80P(2) of the Income Tax Act: The primary issue revolves around whether the assessee, a co-operative society, is eligible for deduction under Section 80P(2) of the Income Tax Act. The Assessing Officer initially disallowed the claim, reasoning that the assessee was engaged in banking business and, due to the insertion of Section 80P(4) effective from 01.04.2007, the assessee was not entitled to the deduction. The CIT(A) initially allowed the deduction, referencing the jurisdictional High Court's judgment in Chirakkal Service Cooperative Co-operative Bank Ltd. v. CIT, which held that a certificate from the Registrar of Co-operative Societies classifying the society as a primary agricultural credit society was sufficient for deduction under Section 80P(2). 2. Validity of Invoking Section 154 of the Income Tax Act for Rectification: The CIT(A) later issued a notice under Section 154 proposing to rectify the order based on a subsequent judgment by the Full Bench of the jurisdictional High Court in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The assessee objected, arguing that Section 154 should only be invoked for apparent mistakes and not for changes in law post the original order. The CIT(A) rejected the objections and disallowed the deduction. The Tribunal held that the CIT(A) should not have denied the deduction without examining the activities of the assessee society, as mandated by the Full Bench judgment. 3. Classification and Activities of the Assessee Society: The Full Bench in The Mavilayi Service Co-operative Bank Ltd. v. CIT reversed the earlier judgment, stating that the Assessing Officer must conduct an inquiry into the factual activities of the society to determine eligibility for deduction under Section 80P. The Tribunal restored the issue to the Assessing Officer to examine the activities of the assessee and determine compliance with the Kerala Co-operative Societies Act, 1969, before granting the deduction. 4. Treatment of Interest Income from Investments with Cooperative Banks and Other Banks: The Tribunal referenced a co-ordinate Bench order in Kizhathadiyoor Service Cooperative Bank Limited, which held that interest income from investments with treasuries and banks is part of the banking activity and should be assessed as 'income from business' rather than 'income from other sources.' However, for granting deduction under Section 80P on such interest income, the Assessing Officer must follow the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT and examine the activities of the assessee society. Conclusion: The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to re-examine the activities of the assessee society to determine eligibility for deduction under Section 80P(2) and the treatment of interest income. The stay application was dismissed as infructuous. The order was pronounced on December 9, 2019.
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