2021 (12) TMI 1084 - HC - Income Tax

Deduction u/s 80P(2) - AO claimed inclusion of interest income earned by the assessee from the deposit of idle funds with co-operative bank and treasury treating the said income as business income falling within the admissible ambit of deduction u/s 80P(2) (a)(i) - AO treated the interest income as income from other sources and also that the interest income does not come within the purview of Section 80P(2)(d) - HELD THAT - Substantial question covered by the judgment of the Supreme Court in Mavilayi Service Co-operative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT the assessee since is a registered Co-operative Society and the deduction claimed is interest earned from loans lent to members and amount invested with Co-operative Bank and Treasury, so the threshold eligibility of deduction is admissible to assessee and accordingly the income earned by way of interest from members is eligible for deduction under Section 80P(2)(a)(i) of the Act. Accordingly the questions can be answered against the Revenue and in favour of the assessee. Statement is placed on record. Substantial question nos.1 to 4 are answered in favour of the assessee and against the Revenue. Interest income earned from the deposits the assessee has made with District/State Cooperative Banks and Treasury - Whether the interest income earned by the assessee from the deposits made with District/State Cooperative Banks and Treasury, firstly, would fall as business income of the assessee, and, alternatively, whether the interest income is eligible for deduction under Section 80P(2)(d)? - HELD THAT - Supreme Court in Mavilayi Service Co-operative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT on the construction of Section 80P(2)(a)(i) read with sub-section 4 of Section 80P. Now provision in Section 80P(2)(a)(i) is read without reference to an activity viz. Primary Agriculture etc. It is noted that Section 80P provides for deduction in respect of income of Co-operative Societies and Section 80P(2) allows a straight deduction from the computation of total income of the assessee/Co-operative Society to the extent mentioned in respect of incomes referred therein. Under Section 80P(2)(a)(i) the whole of profits and gains from business of banking or providing credit facilities to the members of the Society is entitled to deduction. Clauses (ii) to (vii) are unnecessary for the purpose of this judgment, hence not included in the narrative. A Division Bench of High Court of Telangana and Andhra Pradesh in Vavveru Co-operative Rural Bank Ltd 2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT has succinctly tabulated the Societies and the benefits to which each one of the category of Societies is entitled to. In the case on hand, there is no dispute that it is not from a Co-operative Society registered under Kerala Co-operative Societies Act. The interest income earned from District Co-operative Bank/State Co-operative Bank, in the facts and circumstances of the case, do come within Section 80P(2)(d). Therefore, the income constitutes income from other sources and the only eligible deduction is covered by Section 80P(2)(d) viz. Interest or dividend derived by the assessee from its investments with any other Co-operative Society. The source of interest income is from Bank and Treasury, interest income received from Treasury be included in the computation of total income of the assessee. In other words, interest earned from Treasury is inadmissible for deduction and interest income from Co-operative Societies registered under the Kerala Co-operative Societies Act are eligible for deduction. The contra consideration of Commissioner of Income Tax (Appeals) and the Tribunal is incorrect and liable to be modified as stated above. Hence, it is held that the interest income earned by the assessee does not come within the ambit of Section 80P(2)(a)(i) and permissible deduction of interest income is limited to Co-operative Societies/Banks registered under Kerala Co-operative Societies Act under clause (d) of the Act and effect order on the above lines is made by the Assessing Officer. The questions are accordingly answered. Deduction u/s 80P(2)(d) - Interest income earned by the Society comes with the category of income from other sources and Section 80P(2)(d) deals with the eligible deduction in this behalf. It has been held in the connected cases that the assessee is entitled to deduction of interest income earned from Co-operative Banks/Societies/ Federation registered under the Co-operative Societies Act and the income earned from Treasury is not included in Section 80P(2)(d) and is not entitled for deduction from computation of income.

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Classification of "Primary Agricultural Credit Society" under the Kerala Co-operative Societies Act and its binding nature on Income Tax authorities.
3. Assessing Officer's authority to probe into the principal objective of providing agricultural credits.
4. Contradiction between ITAT's reliance on the High Court decision in Chirakkal Service Co-op Bank and an earlier case M/s Perinthalmanna Service Co-operative Bank.
5. Limitation of deduction under Section 80P(2)(d) to profits from agricultural activities.
6. Classification of interest income from deposits with banks as "Income from Other Sources" and its eligibility for deduction under Section 80P(2)(a)(i).

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):
The assessee, a Primary Agricultural Credit Society, claimed deductions under Section 80P(2)(a)(i) of the Income Tax Act for income earned from providing credit facilities to its members and from interest on deposits with co-operative banks and treasury. The Assessing Officer rejected these claims, classifying the interest income as "Income from Other Sources." The CIT (Appeals) and the Tribunal, however, allowed the deductions, considering the interest income as business income. The High Court, referencing the Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd., upheld the Tribunal's decision, affirming that the assessee was eligible for the deductions as a registered co-operative society.

2. Classification of "Primary Agricultural Credit Society":
The Revenue questioned whether the classification of the assessee as a "Primary Agricultural Credit Society" under the Kerala Co-operative Societies Act was binding on Income Tax authorities for determining eligibility under Section 80P(4). The High Court, following the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd., held that the classification under the Kerala Co-operative Societies Act is indeed binding for the purposes of Section 80P(4).

3. Assessing Officer's Authority to Probe Objectives:
The Revenue argued that the Assessing Officer should be able to investigate whether the assessee fulfilled its principal objective of providing agricultural credits. The High Court, referencing the Supreme Court's judgment, concluded that the Assessing Officer's probing into the principal objective was unnecessary as long as the society was registered and engaged in providing credit facilities to its members.

4. Contradiction with Previous Judgments:
The Revenue contended that the ITAT's reliance on the High Court decision in Chirakkal Service Co-op Bank was contradictory to an earlier case, M/s Perinthalmanna Service Co-operative Bank. The High Court, however, upheld the ITAT's reliance on Chirakkal Service Co-op Bank, aligning with the Supreme Court's interpretation in Mavilayi Service Co-operative Bank Ltd.

5. Limitation of Deduction to Agricultural Activities:
The Revenue argued that deductions under Section 80P(2)(d) should be limited to profits from agricultural activities, as per the Supreme Court's decision in Sabarkhanta Zilla Kharid Vechan Sangh Ltd. The High Court, however, found that the interest income from investments with co-operative banks and treasury was eligible for deduction under Section 80P(2)(a)(i), provided it was part of the business income earned by providing credit facilities to its members.

6. Classification of Interest Income from Deposits:
The Revenue challenged the classification of interest income from deposits with co-operative banks and treasury as "Income from Other Sources." The High Court, referencing the Supreme Court's decision in M/s. The Totgar's Co-operative Sale Society Ltd., held that such interest income should be treated as "Income from Other Sources" and not as business income. However, it allowed deductions under Section 80P(2)(d) for interest earned from investments with co-operative societies, excluding interest from treasury deposits.

Conclusion:
The High Court concluded that the interest income earned by the assessee from deposits with co-operative banks and treasury should be treated as "Income from Other Sources." Deductions under Section 80P(2)(a)(i) were allowed for interest income from co-operative societies but not for interest from treasury deposits. The appeals were allowed, and the Assessing Officer was directed to pass an effect order accordingly.