2020 (3) TMI 597 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) denied - A.O. allowed deduction u/s 80P only proportionately to the extent of agricultural loan disbursed by the assessee - assessee will not be entitled to deduction u/s 80P in respect of disbursement of non-agricultural loan - HELD THAT - In the instant case, AO had denied a portion of claim of deduction u/s 80P for the reason that assessee was essentially doing the business of banking and disbursement of agricultural loans by the assessee was only minuscule. AO concluded to the extent of the disbursement of agricultural loan alone, assessee is entitled to deduction u/s 80P(2) - AO after perusing the narration of the loan extracts for the financial period 2009-2010 and 2013-2014, came to the conclusion that out of the total loan disbursement, only a minuscule portion has been advanced for agricultural purposes. The narration in loan extracts / audit reports by itself may not conclusive to prove whether loan is a agricultural loan or a non-agricultural loan. The gold loans may or may not be disbursed for the purpose of agricultural purposes. A.O. had to examine the details of each loan disbursement and determine the purpose for which the loans were disbursed, i.e., whether it is for agricultural purpose or non-agricultural purpose. In these cases, such a detailed examination has not been conducted by the A.O. A.O. has not examined to what extent loans, if any, has been disbursed to non-members. There is a passing statement of the assessment order that there has been disbursement of non-agricultural loans to non-members as well. There has been no detailed examination of these aspects by the A.O. At the time of assessment, the judgment of Chirakkal Service Cooperative Bank Ltd. 2016 (4) TMI 826 - KERALA HIGH COURT was ruling the roost and the certificate issued by the Registrar of Co-operative Society terming the assessee as a primary agricultural credit society would be sufficient for grant of deduction u/s 80P. Therefore, in view of the dictum laid down in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT (supra), we are of the view that there should be fresh examination by the Assessing Officer as regards the nature of each loan disbursement and purpose for which it has been disbursed, i.e., whether it for agricultural purpose or not. The A.O. shall list out the instances where loans have disbursed to non-members of assessee-society, for non-agricultural purposes etc. and accordingly conclude that the assessee s activities are not in compliance with the activities of primary agricultural credit society functioning under the Kerala Co-operative Societies Act, 1969, before denying the claim of deduction u/s 80P(2).

Summary

Issues Involved:
1. Whether the CIT(A) is justified in confirming the Assessing Officer’s order in proportionately denying the claim of deduction u/s 80P(2)(a)(i) of the I.T. Act.
2. Whether the activities of the assessee-society qualify it for deduction u/s 80P(2) of the I.T. Act.

Detailed Analysis:

Issue 1: Justification of CIT(A) in Confirming the AO's Order
The core issue in these appeals is whether the CIT(A) was justified in confirming the Assessing Officer's (AO) decision to proportionately deny the claim of deduction under section 80P(2)(a)(i) of the Income Tax Act. The assessee, a co-operative society registered under the Kerala Co-operative Societies Act, 1969, filed 'Nil' returns for the assessment years 2010-2011 and 2014-2015 after claiming deductions u/s 80P. The AO disallowed part of the deduction, allowing it only to the extent of agricultural loans disbursed, reasoning that the assessee was essentially engaged in banking activities. The AO cited section 80P(4) of the I.T. Act, which denies deductions to co-operative banks, and various judicial pronouncements to support his decision.

The CIT(A) upheld the AO's decision, relying on the Full Bench judgment of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT, which mandated that the AO must conduct a factual inquiry into the activities of the assessee to determine eligibility for deduction u/s 80P.

Issue 2: Activities of the Assessee-Society and Eligibility for Deduction
The Tribunal examined whether the assessee's activities qualify for the deduction under section 80P(2). The Hon’ble jurisdictional High Court in Chirakkal Service Co-operative Co-operative Bank Ltd. v. CIT had previously held that a certificate from the Registrar of Co-operative Societies characterizing the entity as a primary agricultural credit society suffices for granting the deduction. However, this was overturned by the Full Bench in The Mavilayi Service Co-operative Bank Ltd. v. CIT, which ruled that the AO must independently verify the nature of the society's activities each assessment year.

In the present case, the AO denied a portion of the deduction because the assessee was primarily engaged in banking activities, with only a minuscule portion of loans disbursed for agricultural purposes. The AO’s assessment was based on loan extracts and audit reports, which were deemed insufficient without a detailed examination of each loan’s purpose and the membership status of the borrowers.

The Tribunal noted that the AO must conduct a thorough investigation into the nature of each loan disbursement to determine if it was for agricultural purposes and whether loans were given to non-members. This detailed examination was not performed, and the AO’s decision was influenced by the then-prevailing judgment in Chirakkal, which has since been overturned.

Conclusion:
The Tribunal concluded that the issue requires a fresh examination by the AO. The AO is instructed to investigate the nature of each loan disbursement and the membership status of the borrowers, following the guidelines laid down by the Full Bench in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The appeals were allowed for statistical purposes, and the stay applications were dismissed as infructuous.

Order:
The appeals filed by the assessee are allowed for statistical purposes, and the stay applications are dismissed. The AO is directed to re-examine the activities of the assessee-society in compliance with the Full Bench judgment of the Hon’ble jurisdictional High Court.