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2020 (1) TMI 295 - AT - Income TaxDeduction u/s 80P(2) - CIT(A) passed order u/s 154 wherein the claim of deduction u/s 80P was denied - HELD THAT - In the case of Chirakkal Service Co-operative Co-operative Bank Ltd. v. CIT 2016 (4) TMI 826 - KERALA HIGH COURT had held that when a certificate has been issued to an assessee by the Registrar of Co-operative Societies characterizing it as primary agricultural credit society necessarily the deduction u/s 80P(2) has to be granted to the assessee. Full Bench of the Hon ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT 2016 (4) TMI 826 - 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 Assessing Officer. 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. 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 the Assessing Officer shall follow the law laid down 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. Disallowance of deduction under section 80P(2) of the Income Tax Act. 2. Rectification under section 154 of the Income Tax Act. 3. Allowability of interest income deduction under section 80P(2)(d). 4. Principles of mutuality in co-operative societies. Detailed Analysis: 1. Disallowance of Deduction under Section 80P(2): The assessee, a co-operative society, claimed deductions under section 80P(2) for the assessment years 2010-2011 to 2015-2016. The Assessing Officer disallowed these claims, reasoning that the assessee was engaged in banking activities and thus not eligible for the deduction due to the insertion of section 80P(4) effective from 01.04.2007. The CIT(A) initially allowed the deduction based on the jurisdictional High Court's judgment in Chirakkal Service Co-operative Co-operative Bank Ltd. v. CIT, but later reversed this decision following the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT, which mandated an inquiry into the factual activities of the society to determine eligibility. 2. Rectification under Section 154: The CIT(A) issued a notice under section 154 proposing to rectify his earlier orders allowing the deduction, based on the subsequent judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The assessee objected, but the CIT(A) proceeded with the rectification, disallowing the deduction. The Tribunal noted that the CIT(A) should not have rejected the deduction claim without examining the society's activities. The Full Bench judgment required the Assessing Officer to conduct an inquiry into the factual situation of the society's activities for each assessment year to determine eligibility. 3. Allowability of Interest Income Deduction under Section 80P(2)(d): The assessee claimed deductions for interest income earned from investments with District Co-operative Banks and other banks. The Tribunal referred to its earlier decision in Kizhathadiyoor Service Cooperative Bank Limited, which held that such interest income is part of the banking activity and should be assessed as 'income from business.' However, the Tribunal emphasized that the Assessing Officer must follow the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT and examine the society's activities before granting the deduction under section 80P for such interest income. 4. Principles of Mutuality: The assessee argued that the principles of mutuality should apply as the society deals only with its members. The Tribunal acknowledged the importance of mutuality in co-operative societies, as long as the society deals exclusively with its members. The Tribunal referred to the Supreme Court's decision in Citizen Co-operative Society Ltd. v. Asstt. CIT, which emphasized that mutuality is missing if the society engages in activities with the general public without approval from the Registrar of Co-operative Societies. Conclusion: The Tribunal restored the issue of deduction under section 80P(2) to the files of the Assessing Officer, instructing a thorough examination of the society's activities to determine compliance with the Kerala Co-operative Societies Act, 1969. The Tribunal also held that the interest income from investments should be assessed as 'income from business,' but the eligibility for deduction under section 80P must be verified based on the society's activities. The Tribunal dismissed the stay applications as infructuous and allowed the appeals for statistical purposes. The rectification under section 154 was deemed appropriate due to the reversal of the earlier High Court judgment.
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