2019 (5) TMI 1190 - AT - Income Tax

Eligibility of deduction u/s 80P - AO denied deduction by treating that its activities are that of a co-operative bank and not a cooperative society - HELD THAT - The assessee is admittedly registered as a primary agricultural society under the Kerala Co-operative Societies Act, 1969 by the Registrar of Societies. The Full Bench of the Hon ble High Court in the case of The Mavilayi Service Co-operative Bank Ltd. 2019 (3) TMI 1580 - KERALA HIGH COURT held that the AO has to conduct an inquiry into the factual situation as to the activities of the assessee society to determine the eligibility of deduction u/s 80P of the I.T.Act. It was held by the Hon ble High Court that the Assessing Officer is not bound by the registration certificate issued by the Registrar of Kerala Co-operative Society classifying the assessee-society as a cooperative society. The Hon ble High Court held that each assessment year is separate and eligibility shall be verified by the Assessing Officer for each of the assessment years. The issue of deduction u/s 80P(2)(a)(i) is restored to the AO. AO shall examine the activities of the assessee and determine whether its activities are in compliance with the activities of a cooperative society functioning under the Kerala Co-operative Societies Act, 1969 and grant deduction u/s 80P(2) in accordance with law. Interest on the investments with Cooperative Banks and other Banks - income from business or income from other sources - HELD THAT - As in the case of Kizhathadiyoor Service Cooperative Bank Limited 2016 (7) TMI 1405 - ITAT COCHIN held that interest income earned from investments with treasuries and banks is part of banking activity of the assessee, and therefore, the said interest income was eligible to be assessed as income from business instead of income from other sources . As regards the grant of deduction u/s 80P(2) on such interest income, the AO shall examine the assessee s activities whether it is in tune with the activities expected of a co-operative society registered under the Kerala Co-operative Societies Act, 1969 and grant deduction on such interest income u/s 80P(2) of the I.T.Act.

Summary

Issues:
1. Entitlement to deduction u/s 80P of the I.T.Act.
2. Treatment of interest income received on investments as 'income from business' and eligibility for deduction u/s 80P of the I.T.Act.

Entitlement to Deduction u/s 80P of the I.T.Act:
The case involved determining if the assessee, classified as a cooperative society, was eligible for deduction u/s 80P of the I.T.Act. The Assessing Officer initially denied the deduction, treating the assessee as a cooperative bank. However, the CIT(A) allowed the deduction based on a judgment of the Hon'ble jurisdictional High Court in a similar case. The Department challenged this decision, arguing that the assessee was essentially a cooperative bank and not solely a primary agricultural credit society. The Department also questioned the reliance on certain judgments and highlighted the need to consider the principle of mutuality in determining eligibility for the deduction. The Tribunal referred to a recent judgment and emphasized that each assessment year requires a separate verification of eligibility for the deduction u/s 80P.

Treatment of Interest Income on Investments:
Regarding the interest income received on investments, the CIT(A) deemed it as 'income from business' since the investments were made in the course of the assessee's business activities. The Department raised concerns about the nature of the interest income and argued that it should be taxed as income from other sources. The Tribunal referred to a previous case where interest income from investments with treasuries and banks was considered part of the banking activity, thus eligible to be assessed as 'income from business.' However, the Tribunal directed the Assessing Officer to reevaluate the activities of the assessee-society before granting any deduction u/s 80P of the I.T.Act on such interest income.

The judgment highlighted the importance of assessing the factual situation of the assessee society to determine eligibility for deductions under the I.T.Act. It emphasized the need for a detailed inquiry into the activities of the cooperative society to ensure compliance with relevant laws. The decision underscored the significance of separate assessments for each year and the requirement to align with the law while granting deductions. Ultimately, the appeal filed by the Revenue was allowed for statistical purposes, with specific instructions for further assessment and verification in accordance with legal precedents and judgments.