2022 (7) TMI 679 - AT - Income Tax

Deduction u/s.80P(2)(a)(i) - AO noted that the assessee s society is not only advancing loans to members but also advancing loans to associated members in contravention of the provisions of section 80P(2)(a)(i) - According to AO, the assessee co-operative society is doing finance business, therefore, the AO disallowed the claim of deduction u/s.80P(2)(a)(i) - HELD THAT - Admitted facts are that the assessee is a co-operative society engaged in the business of development of agricultural activities, milk products etc., and also financing to its members i.e., accepting and providing loans to its members, whether associate members or members. We noted that the AO disallowed the claim of deduction on the ground that the assessee had lent money to the members who are associate members and have received the interest at par with the commercial banks. According to AO, the assessee is not eligible for claim of deduction u/s.80P(2)(a)(i) of the Act and according to him, the assessee s activities are purely in the nature of commercial banking activity and therefore hit by provisions of section 80P(4). As the issue is squarely covered and the facts are identical to the above referred case laws, respectfully following the Hon ble Supreme Court decision in the case of Mavilayi Service Cooperative Bank Limited 2021 (1) TMI 488 - SUPREME COURT , Hon ble Madras High Court decision in the assessee s own case 2021 (1) TMI 1087 - MADRAS HIGH COURT S-1308, Ammapet Primary Agricultural Co-operative Bank Ltd., 2015 (9) TMI 1540 - ITAT CHENNAI and the Co-ordinate Bench decision in the case of Tamilnadu Co-operative State Agriculture and Rural Development Bank Limited 2022 (6) TMI 770 - ITAT CHENNAI we dismiss the appeal of Revenue. Consequently, all the three appeals of Revenue are dismissed.

Issues Involved:
1. Entitlement of the assessee to claim deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Classification of members for the purpose of deduction under Section 80P(2)(a)(i).
3. Compliance with the Tamil Nadu Co-operative Societies Act, 1983.
4. Application of Section 80P(4) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement of the assessee to claim deduction under Section 80P(2)(a)(i):
The core issue revolves around whether the assessee, a co-operative society, is eligible for deductions under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Revenue contended that the society's activities were akin to commercial banking, thus disqualifying it from such deductions. The Assessing Officer (AO) disallowed the deduction, arguing that loans were extended to associate members at commercial interest rates, which he deemed as finance business. However, the Income Tax Appellate Tribunal (ITAT) upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision, which allowed the deduction, emphasizing that the society's primary activity was to provide financial accommodation to its members for agricultural purposes.

2. Classification of members for the purpose of deduction under Section 80P(2)(a)(i):
A significant point of contention was whether associate members could be classified as members under the Act. The AO argued that only full members should be considered, excluding associate members who do not have voting rights or dividend claims. The CIT(A) and the ITAT disagreed, citing various judicial precedents, including the Hon'ble Madras High Court's affirmation that associate members are recognized under the Tamil Nadu Co-operative Societies Act, 1983, and thus should be included for the purpose of Section 80P(2)(a)(i) deductions. This interpretation aligns with the definition of 'members' in the State Co-operative Societies Act, which includes associate members.

3. Compliance with the Tamil Nadu Co-operative Societies Act, 1983:
The Revenue argued that the statutory auditor's report only included shareholder members, not associate members, and thus, the society's activities did not comply with the Tamil Nadu Co-operative Societies Act, 1983. However, the CIT(A) and ITAT found that the society's operations were in line with the Act, which recognizes associate members. The Tribunal reiterated that the objections regarding the classification of members as 'A' or 'B' class were beyond the purview of the tax statute unless explicitly stated by the legislature.

4. Application of Section 80P(4) of the Income Tax Act, 1961:
The AO invoked Section 80P(4) to argue that the society was engaged in banking activities and thus ineligible for deductions under Section 80P(2)(a)(i). However, the ITAT referred to the Hon'ble Supreme Court's decision in the case of Mavilayi Service Co-operative Bank Limited vs. CIT, which clarified that Section 80P(4) applies to co-operative banks engaged in public banking activities, not to primary agricultural credit societies. The Tribunal concluded that the assessee's activities did not fall under the purview of Section 80P(4) as it was not engaged in public banking but in providing financial services to its members, including associate members, for agricultural purposes.

Conclusion:
The ITAT dismissed the Revenue's appeals and allowed the assessee's appeals, affirming the CIT(A)'s decision that the assessee was entitled to deductions under Section 80P(2)(a)(i). The Tribunal's decision was based on the interpretation that associate members qualify as members under the relevant co-operative societies act, and the society's activities were not commercial banking but aimed at agricultural development for its members. The Tribunal also condoned the delay in filing the appeals by the assessee, considering the reasonable cause presented.

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