2018 (2) TMI 866 - AT - Income Tax

Eligibility for claiming deduction u/s 80P - denial of claim as assessee failed to fulfil the principal objective of providing agricultural credits to members and it was engaged in the business of banking and only negligible percentage of loans disbursed by the assessee was for agricultural purposes - Held that - An identical issue was considered by this Tribunal in the case of Edanad-Kannur Service Co-operative Bank Ltd 2018 (1) TMI 848 - ITAT COCHIN wherein held that the Reserve Bank of India, which is the competent authority as per the Banking Regulation Act, treats assessee society and similar societies as only Primary Agricultural Credit Society not falling within the ambit of Banking Regulation Act. The Reserve Bank of India has given letters to the societies similar to assessee stating that they are Primary Agricultural Credit Societies and therefore in terms of section 3 of the Banking Regulation Act are not entitled for banking license. That being the case, the assessing officer was not competent and did not possess the jurisdiction to resolve / decide the issue as to whether the assessee was a Primary Agricultural Credit Society or a Co-operative bank , within the meaning assigned to it under the provisions of the Banking Regulation Act and to take a contrary view especially in view of the Explanation provided after the clause (ccvi) of section 5 r.w.s Section 56 of the Banking Regulation Act. The assessee had extended credit facilities only to the members. The Revenue does not have a case that such credit facilities are extended to the outsiders. Therefore the income generated in the instant case is only out of the transaction with the members. Deduction u/s. 80P is allowed only for the said income. The assessee had claimed deduction u/s. 80P only in respect of net income which is derived by extending credit facilities to the members. - Decided against revenue

Issues Involved:
1. Eligibility of the assessee for claiming deduction under Section 80P of the Income Tax Act.
2. Compliance with the principal objective of providing agricultural credits to members under the Kerala Co-operative Societies Act.
3. Applicability of judicial precedents and conflicting judgments from the Kerala High Court.
4. Impact of the Supreme Court's decision in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT on the assessee's eligibility for deduction.

Detailed Analysis:

1. Eligibility for Deduction under Section 80P:
The primary issue in these appeals is whether the assessee, a primary agricultural credit society, is eligible for claiming deduction under Section 80P of the Income Tax Act. The Assessing Officer denied the deduction on the grounds that the society was engaged in the business of banking and only a negligible percentage of loans were disbursed for agricultural purposes. The CIT(A) reversed this decision, relying on the Kerala High Court's judgment in Chirakkal Service Co-operative Bank Ltd. vs. CIT, which held that once a society is registered and classified as a primary agricultural credit society by the competent authorities under the Kerala Co-operative Societies Act, it is entitled to the deduction under Section 80P(2).

2. Compliance with Principal Objective:
The Revenue argued that the assessee failed to fulfill its principal objective of providing agricultural credits to members, as required by the Kerala Co-operative Societies Act (Amendment) Act, 2010. The Tribunal noted that the competent authority of the Co-operative Department of the Government of Kerala had classified the assessee as a primary agricultural credit society, and the income tax authorities do not have the right to probe further into this classification.

3. Judicial Precedents and Conflicting Judgments:
The Tribunal considered the conflicting judgments from the Kerala High Court. The Revenue relied on the decision in Perinthalmanna Service Co-operative Bank Ltd. vs. CIT, which emphasized the need for an enquiry into whether a cooperative bank is conducting business as a primary agricultural credit society. However, the Tribunal followed the decision in Chirakkal Service Co-operative Bank Ltd., which categorically held that the authorities under the Income Tax Act cannot probe into the classification once it is registered under the Kerala Co-operative Societies Act.

4. Supreme Court's Decision in Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT:
The Revenue also argued that the CIT(A) failed to consider the Supreme Court's decision in Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT, which held that the deduction under Section 80P should be limited to the profits generated from agricultural activities alone. The Tribunal noted that in the instant case, the assessee had extended credit facilities only to the members and not to outsiders. Therefore, the income generated was solely from transactions with members, making the Supreme Court's decision inapplicable.

Conclusion:
The Tribunal upheld the CIT(A)'s order, granting the deduction under Section 80P(2) to the assessee. It dismissed the Revenue's appeals and the additional grounds raised, concluding that the assessee was entitled to the deduction as a primary agricultural credit society registered under the Kerala Co-operative Societies Act. The Tribunal also dismissed the cross-objections filed by the assessee as infructuous, given the dismissal of the Revenue's appeals.

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