2018 (12) TMI 201 - AT - Income Tax

Denying the benefit of deduction u/s 80P(2) - assessee cannot be considered as Primary Agricultural Credit Society as they were engaged in the business of banking and only negligible percentage of loans disbursed by the assessee was for agricultural purposes - Held that - In the present cases, the nominal members are members as provided in law and deposits from such nominal members cannot be considered or treated as from the non-members or from public. 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; (Copies of such letter from RBI are placed on record). 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 Cooperative 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. In view of the aforesaid reasoning, hold that the judgment in Citizen Cooperative Society Ltd. 2017 (8) TMI 536 - SUPREME COURT is not applicable to the facts of the present case. Therefore, hold that the CIT(A) has correctly allowed the claim of deduction - Decided against revenue.

Summary

Issues Involved:
1. Denial of deduction under Section 80P(2) of the Income Tax Act.
2. Classification of the assessee as a Primary Agricultural Credit Society (PACS).
3. Applicability of the Supreme Court judgment in the case of Citizens Co-operative Society Ltd. v. ACIT.

Issue-wise Detailed Analysis:

1. Denial of deduction under Section 80P(2) of the Income Tax Act:
The Assessing Officer denied the deduction under Section 80P(2) to the assessees, who are Primary Agricultural Credit Societies (PACS) registered under the Kerala Co-operative Societies Act, 1969. The denial was based on the assertion that the assessees were engaged in the business of banking and only a negligible percentage of loans disbursed were for agricultural purposes. The CIT(A) overturned this decision, relying on the judgment of the Kerala High Court in Chirakkal Service Cooperative Bank Ltd. vs. CIT (384 ITR 490) and the Cochin Bench of the Tribunal's order in ITO v. M/s. Maruthonkara Service Co-operative Bank Ltd. [ITA No.489/Coch/2017].

2. Classification of the assessee as a Primary Agricultural Credit Society (PACS):
The Tribunal reaffirmed that the assessees are PACS, as they are registered under the Kerala Co-operative Societies Act, 1969, and their classification by the competent authority under this Act is binding. The Kerala High Court in Chirakkal Service Co-operative Bank Ltd. had categorically held that PACS registered under the Kerala Co-operative Societies Act are entitled to the benefit of deduction under Section 80P(2). The Tribunal emphasized that the income tax authorities have no right to probe further into the classification once the competent authority has issued the certificate.

3. Applicability of the Supreme Court judgment in the case of Citizens Co-operative Society Ltd. v. ACIT:
The Tribunal distinguished the Supreme Court's judgment in Citizens Co-operative Society Ltd. v. ACIT (397 ITR 1) from the present case. The Supreme Court's decision was based on the specific facts that the society in question was receiving deposits from nominal members who were not considered members under the relevant law and was conducting business akin to banking. In contrast, under the Kerala Co-operative Societies Act, nominal members are considered members, and the assessees were not found to be conducting banking business. The Tribunal held that the judgment in Citizens Co-operative Society Ltd. does not apply to the assessees' cases, as their activities were in compliance with the Kerala Co-operative Societies Act and they were classified as PACS by the competent authority.

Conclusion:
The Tribunal upheld the CIT(A)'s orders, directing the Assessing Officer to grant the deduction under Section 80P(2) of the Income Tax Act to the assessees. The appeals filed by the Revenue were dismissed, affirming that the assessees, being classified as PACS and engaged in providing credit facilities to members for agricultural purposes, are entitled to the deduction under Section 80P(2). The Tribunal's decision was consistent with the Kerala High Court's judgment in Chirakkal Service Co-operative Bank Ltd. and other relevant judicial pronouncements.