2020 (6) TMI 614 - AT - Income Tax

Claim of deduction u/s 80P(2)(a)(i) - reasoning of the AO to disallow the claim of deduction u/s 80P(2)(a)(i) was that the assessee was essentially doing the business of banking, and therefore, in view of insertion of section 80P(4) with effect from 01.04.2007, the assessee will not be entitled to deduction u/s 80P - HELD THAT - In view of the dictum laid down by the Full Bench of the Hon ble Kerala High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT 2019 (3) TMI 1580 - KERALA HIGH COURT we are of the view that there should be fresh examination by the Assessing Officer as regards the nature of each loan disbursement and purpose for which it has been disbursed, i.e., whether it for agricultural purpose or not. A.O. shall list out the instances where loans have disbursed to non-members of assessee-society, for non-agricultural purposes etc. and accordingly conclude that the assessee s activities are not in compliance with the activities of primary agricultural credit society functioning under the Kerala Co-operative Societies Act, 1969, before denying the claim of deduction u/s 80P(2). For the above said purpose, the issue raised in this appeal is restored to the files of the Assessing Officer. Assessing Officer shall examine the activities of the assessee-society by following the dictum laid down by the Full Bench of the Hon ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT (supra) and shall take a decision in accordance with law - Appeal filed by the assessee is allowed for statistical purposes.

Issues Involved:
1. Whether the CIT(A) is justified in confirming the Assessing Officer's order in denying the claim of deduction u/s 80P(2)(a)(i) of the I.T. Act.

Issue-wise Detailed Analysis:

1. Denial of Deduction u/s 80P(2)(a)(i) of the I.T. Act:

The primary issue in this case is whether the assessee, a co-operative society, is entitled to claim deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the claim on the grounds that the assessee was engaged in banking activities, which, following the insertion of Section 80P(4) with effect from 01.04.2007, disqualified it from claiming the deduction. The AO's findings included that the assessee was registered and classified as a Primary Agricultural Credit Society (PACS) but was performing banking activities beyond providing financial accommodation for agricultural purposes to its members.

The AO relied on several judicial pronouncements and statutory provisions to support the disallowance, including:
- The case of The Chirakkal Service Cooperative Bank Ltd. Vs. The CIT, where it was observed that the classification as PACS did not come under scrutiny for banking activities.
- The Kerala High Court's decision in Muhammed Usman vs Registrar Of Co-Operative, which restricted PACS to providing financial accommodation solely for agricultural purposes to its members.
- The Central Board of Direct Tax Circular No. 133/6 of 2007, which clarified that Section 80P(4) would not apply if the entity is not a cooperative bank.
- The Banking Regulation Act, 1949, which states that a cooperative credit society with a share capital exceeding ?1 lakh attains the character of a Cooperative Bank.

The CIT(A), relying on the Full Bench judgment of the Hon’ble Kerala High Court in The Mavilayi Service Co-operative Bank Ltd. v. CIT, upheld the AO's disallowance. The CIT(A) noted that the AO had made elaborate findings and concluded that the agricultural credit provided by the assessee was minimal.

2. Grounds of Appeal by the Assessee:

The assessee argued that even if it is not a PACS, it is not a cooperative bank and thus eligible for deduction under Section 80P, citing CBDT clarification No. 133/06/2006-07. The assessee also referenced several judicial decisions from various High Courts and ITATs supporting the eligibility for deduction under Section 80P, emphasizing that the disallowance by the AO and CIT(A) denied natural justice.

3. Departmental Response:

The Departmental Representative contended that the assessee was functioning as a cooperative bank and not a PACS, thus not entitled to the deduction. It was argued that the statutory provisions of Section 80P(4) override any CBDT Circular and that the assessee failed to prove its status as a PACS. The Department highlighted that the assessee's activities, including non-agricultural loans and transactions with non-members, disqualified it from claiming the deduction.

4. Tribunal's Analysis and Conclusion:

The Tribunal noted the Hon’ble jurisdictional High Court's decision in Chirakkal Service Co-operative Co-operative Bank Ltd. v. CIT, which initially supported the deduction based on the registration certificate issued by the Registrar of Co-operative Societies. However, the Full Bench decision in The Mavilayi Service Co-operative Bank Ltd. v. CIT reversed this, emphasizing that the AO must conduct a factual inquiry into the activities of the assessee to determine eligibility for deduction under Section 80P.

The Tribunal observed that the AO had not conducted a detailed examination of each loan disbursement to ascertain whether they were for agricultural purposes or not. There was also no thorough investigation into the extent of loans disbursed to non-members. Given the Full Bench's directive, the Tribunal remanded the matter back to the AO for a fresh examination, instructing the AO to scrutinize the nature and purpose of each loan disbursement and the membership status of the loan recipients. The Tribunal directed the assessee to cooperate with the AO and provide necessary details without seeking unnecessary adjournments.

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes, with the issue remanded back to the AO for a detailed re-examination in line with the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The AO was instructed to follow the legal principles laid down and make a decision in accordance with the law.

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