2018 (7) TMI 1557 - AT - Income Tax

Entitled to deduction u/s 80P(2)(a)(i) - Held that - We hold that the CIT(A) was justified in directing the A. O. to grant deduction u/s 80P(2)(a)(i) of the I. T. Act. THE CHIRAKKAL SERVICE CO-OPERATIVE BANK LTD. VERSUS THE COMMISSIONER OF INCOME TAX 2016 (4) TMI 826 - KERALA HIGH COURT Denying the benefit of deduction u/s 80P(2)(a) as regards the trade income earned - Held that - The specific case of the assessee was that the trade income that it had earned is on account of purchase of agricultural implements seeds livestock or other articles intended for agriculture for the purpose of supplying them to its members. Therefore such income was entitled to deduction u/s 80P(2)(a)(iv) of the I. T. Act. Since the AO nor the CIT(A) had not given any specific reasons for denying the benefit of deduction u/s 80P(2) of the I. T. Act as regards the claim of the assessee on the trade income we deem it appropriate to remand the matter to the A. O. for fresh consideration. The assessee shall prove with necessary evidence the trade income it had earned was entitled to deduction u/s 80P(2)(a)

Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Application of the Supreme Court judgment in the case of The Citizens Co-Operative Society Limited.
3. Treatment of interest on treasury deposits under Section 80P(2)(a)(i).
4. Treatment of trade income under Section 80P(2)(a)(iv).

Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):
The primary issue was whether the assessee, a primary agricultural credit society, was entitled to deduction under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer denied the deduction on the grounds that the assessee was engaged in banking activities, invoking Section 80P(4). 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, which stated that primary agricultural credit societies registered under the Kerala Co-operative Societies Act are entitled to the deduction.

2. Application of the Supreme Court Judgment in The Citizens Co-Operative Society Limited:
The Revenue argued that the CIT(A)'s decision contradicted the Supreme Court's ruling in The Citizens Co-Operative Society Limited case, which emphasized examining the actual activities of the society rather than just its registration status. The Tribunal, however, distinguished this case by noting that the Supreme Court's decision pertained to a credit cooperative society and not a primary agricultural credit society. The Tribunal upheld that primary agricultural credit societies registered under the Kerala Co-operative Societies Act are entitled to the deduction, as per the Kerala High Court's judgment.

3. Treatment of Interest on Treasury Deposits:
The assessee claimed that interest earned from investments with sub-treasuries should be eligible for deduction under Section 80P(2)(a)(i). The Tribunal referenced previous decisions, including Padne Service Co-operative Bank Limited v. ITO, Kizhathadiyoor Service Cooperative Bank, and Mundakkayam Service Co-operative Bank Ltd. vs. ITO, where it was held that interest from sub-treasuries is part of banking activities and thus eligible for deduction. Following these precedents, the Tribunal directed the Assessing Officer to grant the deduction for interest earned on treasury deposits.

4. Treatment of Trade Income:
The issue was whether trade income, derived from activities such as the purchase of agricultural implements, seeds, and livestock for supplying to members, was eligible for deduction under Section 80P(2)(a)(iv). The CIT(A) had disallowed the deduction without specific reasoning. The Tribunal remanded the matter back to the Assessing Officer for fresh consideration, instructing the assessee to provide necessary evidence to support the claim that the trade income was eligible for deduction under Section 80P(2)(a)(iv).

Conclusion:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction under Section 80P(2)(a)(i) for primary agricultural credit societies.
- The Supreme Court's decision in The Citizens Co-Operative Society Limited was deemed not applicable to primary agricultural credit societies.
- The Tribunal directed the Assessing Officer to grant the deduction for interest on treasury deposits.
- The issue of trade income was remanded for fresh consideration with instructions for the assessee to provide evidence supporting the deduction claim under Section 80P(2)(a)(iv).

Final Order:
The Revenue's appeals were dismissed, the assessee's cross objections were dismissed as infructuous, and the assessee's appeals were partly allowed for statistical purposes.

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