2024 (1) TMI 765 - AT - Income Tax

Denial of deduction u/s.80P - assessee/s having been found to be in the business of banking - Revenue s case was of the assessees, claiming to be primary cooperative societies under the Kerala Act, undertaking the business of banking and, thus, cooperative banks, ineligible for exemption u/s. 80P u/s. 80P(4) - HELD THAT - A society registered as a PACS stands to loose all it s characteristics, i.e., other than existing staff strength, on failing to fulfill, as in the instant case, it s principal object, i.e., providing credit through it s members primarily for agricultural and allied purposes, it yet continues to be, in terms of the said Act, a cooperative society, defined u/s. 2(f) thereof as a society registered or deemed to be registered under the said Act. And on which there can be no quarrel, particularly in view of s. 8 of the said Act, stating the registration certificate to be a conclusive evidence of it s registration, which is, further, on the basis of declared objects (s.7). The appellant-societies, thus, despite loosing all the characteristics of a PACS in view of their activities subsequent to registration, yet continue to be primary agricultural cooperative societies under the Kerala Act. This is again principally for the reason that taxing statutes, and more so the exemption provisions, are to be strictly read. It would be a different matter, we may add, where the benefit u/s. 80P(1), which in the instant case is u/s. 80P(2)(a)(i), was for agricultural credit. Taxing statutes are to be strictly construed; more so, exemption provisions, with the burden to prove it s claims being on the assessee. This, coupled with the mandate that the statute is to be read in a manner so as to effectuate it s object, rather than defeat it, led us to examine the obtaining facts in light of the law as explained by the Hon ble higher courts. The object of s. 80P(4), as explained by the Apex Court in Mavilayi SCB Ltd. 2021 (1) TMI 488 - SUPREME COURT , is not the financing of agriculture per se, as understood by the Hon ble jurisdictional High Court in Poonjar SCB Ltd 2019 (3) TMI 1580 - KERALA HIGH COURT but the exclusion of the cooperative banks from the purview of the beneficial provision of s. 80P. The appellants are, despite the extent of their agricultural financing, found to be engaged in the business of banking, albeit unlicensed, and which is one of the two eligible activities u/s. 80P(2)(a)(i). On the basis of their activities and bye-laws, mutually consistent, they are further found to be a cooperative society in terms of s. 2(19) of the Act, operating in pursuance of their bye-laws, consistent with the Kerala Act. And, two, not a cooperative bank in terms of s. 80P(4) of the Act. The assessees are, accordingly, entitled to deduction in full u/s. 80P(1) r/w s. 80P(2)(a)(i) in respect of income of their banking business, unimpacted by it being of an unlicensed business. As regards the claim for deduction u/s. 80P(2)(d), i.e., in the case of Sivapuram Co-operative Society Ltd, no argument in this regard was made before us, as indeed before the Revenue authorities and, accordingly, their orders are sans any findings in the matter. The assessee s relevant ground speaks of interest on investment with co-operative bank. The same, to the extent not covered as a part of banking business, would stand to be exempt u/s. 80P(2)(d) in view of the decision in Pr. CIT v. Perroorkada SCB Ltd 2021 (12) TMI 1084 - KERALA HIGH COURT The same is accordingly admitted and allowed to that extent.

Summary

Issues Involved:
1. Denial of deduction under section 80P of the Income Tax Act, 1961.
2. Classification of the appellant-assessees as primary agricultural credit co-operative societies (PACS) or co-operative banks.
3. Compliance with the Banking Regulation Act, 1949.
4. Eligibility for deduction under section 80P(2)(d).

Summary:

Issue 1: Denial of Deduction under Section 80P
The appellant-assessees contested the denial of deductions under section 80P(1) read with sections 80P(2)(a)(i) and 80P(2)(d) of the Income Tax Act, 1961. The Revenue's basis for denial included the proportion of non-agricultural advances, loans extended to non-Class A members, absence of specific bye-laws prohibiting admission of other co-operative societies, and paid-up share capital exceeding Rs. 1 lakh.

Issue 2: Classification as PACS or Co-operative Banks
The Tribunal addressed whether the appellant-assessees qualify as PACS under the Kerala Co-operative Societies Act, 1969, or as co-operative banks under the Banking Regulation Act, 1949. The Tribunal found that the objections regarding non-agricultural advances and loans to non-Class A members do not survive in view of the Supreme Court decision in Mavilayi SCB Ltd. The Tribunal also noted that the assessee societies, despite not fulfilling their principal object of agricultural credit, continue to be primary agricultural cooperative societies under the Kerala Act.

Issue 3: Compliance with Banking Regulation Act
The Tribunal examined whether the appellant-assessees are engaged in the business of banking as defined under section 5(b) of the Banking Regulation Act. It was found that the acceptance of deposits from both members and non-members implies a public character, satisfying the test of section 5(b). However, the Tribunal concluded that the appellant-assessees are not "co-operative banks" as defined under section 80P(4) of the Income Tax Act, and hence, are not excluded from the benefits of section 80P.

Issue 4: Eligibility for Deduction under Section 80P(2)(d)
The Tribunal noted that no arguments were made regarding the claim for deduction under section 80P(2)(d) during the hearing. However, it was concluded that interest on investment with a co-operative bank, to the extent not covered as part of the banking business, would be exempt under section 80P(2)(d) based on the decision in Pr. CIT v. Perroorkada SCB Ltd.

Conclusion:
The Tribunal allowed the appeals, granting the appellant-assessees full deductions under section 80P(1) read with section 80P(2)(a)(i) for their banking business income, and under section 80P(2)(d) for interest on investments with co-operative banks. The order was pronounced on December 13, 2023.