2018 (4) TMI 1206 - AT - Income Tax

Entitlement to deduction u/s 80P(2) - assessee is a primary agricultural credit society - Held that - As relying on case of Chirakkal Service Co-Operative Bank Ltd. Versus CIT 2016 (4) TMI 826 - KERALA HIGH COURT CIT(A) was justified in directing the A.O. to grant deduction u/s 80P(2) of the I.T.Act to the assessee wherein held Tribunal erred in law in deciding the issue regarding the entitlement of exemption under section 80P against the appellants. We hold that the primary agricultural credit societies, registered as such under the KCS Act; and classified so, under that Act, including the appellants are entitled to such exemption. - Decided in favour of assessee

Summary

Issues Involved:
1. Deduction under Section 80P(2) of the Income-tax Act, 1961.
2. Disallowance of interest expenditure.
3. Deduction for interest earned on fixed deposits with cooperative banks.

Detailed Analysis:

1. Deduction under Section 80P(2) of the Income-tax Act, 1961:
The primary issue was whether the assessee, a primary agricultural credit society, was entitled to deduction under Section 80P(2) after the insertion of Section 80P(4). The Assessing Officer denied this deduction, arguing that the assessee was engaged in banking activities. However, the CIT(A) allowed the deduction, relying on the Kerala High Court's judgment in the case of The Chirakkal Service Co-operative Bank Ltd. and Others vs. CIT, which held that primary agricultural credit societies registered under the Kerala Co-operative Societies Act are entitled to such deductions. The Tribunal upheld the CIT(A)’s decision, emphasizing that the assessee was classified as a primary agricultural credit society by the competent authority and thus eligible for the deduction. The Tribunal also noted that the Supreme Court's decision in Citizens Co-Operative Society Limited vs. Assistant Commissioner of Income Tax did not apply to this case, as it dealt with a different context.

2. Disallowance of Interest Expenditure:
The Assessing Officer disallowed 5% of the total interest expenditure (?60,83,552) on the grounds that the assessee failed to provide detailed information about the depositors. The CIT(A) deleted this disallowance after examining the details and evidence provided by the assessee, concluding that the interest expenditure was genuinely incurred. The Tribunal confirmed the CIT(A)'s findings, noting that the Assessing Officer did not provide specific evidence to prove that the interest expenditure was bogus.

3. Deduction for Interest Earned on Fixed Deposits with Cooperative Banks:
The Assessing Officer denied the benefit of Section 80P for interest earned on fixed deposits (?17,06,876) with cooperative banks, arguing that such interest should be assessed under "Income from Other Sources." The CIT(A) allowed the deduction, but the Tribunal found that the CIT(A) did not properly examine whether the interest was earned from investments with cooperative societies or cooperative banks. The Tribunal restored the issue to the Assessing Officer to verify if the interest was from cooperative societies, which would qualify for deduction under Section 80P(2)(d).

Conclusion:
The Tribunal upheld the CIT(A)'s decision regarding the deduction under Section 80P(2) for the primary agricultural credit society and the deletion of the disallowance of interest expenditure. However, it remanded the issue of interest earned on fixed deposits to the Assessing Officer for further verification. The Cross Objection filed by the assessee was dismissed as infructuous since the Revenue's appeal on the main issue was dismissed. The appeal filed by the Revenue was partly allowed for statistical purposes.