2020 (12) TMI 843 - AT - Income Tax

Deduction u/s. 80P(2) - CIT(A) passed order u/s. 154 wherein the claim of deduction u/s. 80P was denied, by relying on the judgment of the Larger Bench of the Hon'ble Jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. 2019 (3) TMI 1580 - KERALA HIGH COURT . - HELD THAT - Full Bench of the Hon'ble Jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. vs. CIT (supra) 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 of the I.T. Act. 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. The Assessing Officer shall examine the activities of the assessee and determine whether the activities are in compliance with the activities of a cooperative society functioning under the Kerala Co-operative Societies Act, 1969 and accordingly grant deduction u/s. 80P(2) of the I.T. Act. Disallowance of claim for deduction u/s. 80P made in respect of income from banking and credit business with members - HELD THAT - Tribunal in the case of Kizhathadiyoor Service Co-operative 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'. As regards the grant of deduction u/s. 80P of the I.T. Act on such interest income, the Assessing Officer 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. vs. CIT 2019 (3) TMI 1580 - KERALA HIGH COURT 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. Thus, the appeal filed by the assessee is allowed for statistical purposes.

Issues Involved:
1. Eligibility for deduction under Section 80P of the Income Tax Act.
2. The necessity of an inquiry into the activities of the co-operative society.
3. Disallowance of claim for deduction under Section 80P in respect of income from banking and credit business with members.
4. Rectification of the CIT(A)'s order under Section 154 of the Income Tax Act.
5. The impact of various judicial precedents and CBDT clarifications on the eligibility for deduction under Section 80P.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P:
The main issue is whether the CIT(A) was justified in confirming the Assessing Officer's (AO) order denying the claim of deduction under Section 80P(2)(a)(i) of the Income Tax Act. The assessee, a co-operative society, claimed deduction under Section 80P for the assessment year 2009-10. The AO disallowed this claim, reasoning that the assessee was engaged in the business of banking, and hence, Section 80P(4) applied, which excludes co-operative banks from availing deductions under Section 80P.

2. Necessity of Inquiry into Activities:
The CIT(A) initially allowed the appeal, granting the deduction based on the judgment in Chirakkal Service Co-operative Bank Ltd. v. CIT, which held that a certificate from the Registrar of Co-operative Societies suffices to grant the deduction. However, the Full Bench of the Kerala High Court in The Mavilayi Service Co-operative Bank Ltd. v. CIT reversed this, stating that the AO must conduct an inquiry into the factual activities of the society to determine eligibility for deduction under Section 80P. The AO is not bound by the registration certificate and must verify eligibility for each assessment year separately.

3. Disallowance of Claim for Banking and Credit Business Income:
The assessee argued that even if it is not a Primary Agricultural Credit Co-operative Society, it is not a Co-operative Bank and thus eligible for deduction under Section 80P. Various judicial precedents across the country support this view. The Tribunal noted that interest income from investments with treasuries and banks is part of the banking activity and should be assessed as 'income from business.' However, the AO must follow the law laid down in The Mavilayi Service Co-operative Bank Ltd. v. CIT and examine the activities before granting the deduction.

4. Rectification under Section 154:
The CIT(A) initially allowed the deduction but later issued a notice under Section 154 to rectify the order based on the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The CIT(A) subsequently disallowed the claim, which the assessee contested. The Tribunal held that the CIT(A) should not have rejected the claim without examining the society's activities and restored the issue to the AO for a detailed inquiry.

5. Judicial Precedents and CBDT Clarifications:
The assessee cited various High Court and ITAT decisions supporting the eligibility for deduction under Section 80P. The Tribunal acknowledged these precedents but emphasized the necessity of an inquiry into the factual situation as mandated by the Full Bench judgment. The CBDT Clarification No. 133/06/2006-07 was also considered, which supports the assessee's claim but must be reconciled with judicial rulings.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remitting the matter to the AO to examine the activities of the assessee-society and determine eligibility for deduction under Section 80P. The Stay Petition filed by the assessee was dismissed as infructuous. The AO is directed to follow the Full Bench judgment and conduct a thorough inquiry into the society's activities before granting the deduction. The Tribunal's order emphasizes the importance of a factual inquiry and adherence to judicial precedents in determining eligibility for tax deductions.

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