2024 (1) TMI 766 - AT - Income Tax

Deduction u/s. 80P(1) r/w s. 80P(2)(a)(i) - claim inadmissible by the Revenue inasmuch as it included interest and dividend income on investments with co-operative banks; commercial banks; and financial institutions, as well as commission income (GDCS Thalayal commission), besides dividend from unlisted equities - HELD THAT - Any member of the public can, therefore, become a member on paying a nominal sum, which in fact is insisted upon as a practice, making co-operative societies, as the assessee, essentially public institutions, the restriction on area of operation being also not applicable to those formed prior to the commencement of the Amendment Act of 1999 (s. 2(oaa)). Assessee is, thus, for all intents and purposes, a co-operative bank, i.e., a co-operative society in the business of banking, even as explained in several decisions, including in Mohammed Usman v. Registrar of Co-operative Societies 2002 (11) TMI 686 - HIGH COURT OF KERALA We are conscious of it being not licenced with RBI, as required under BRA, as aspect considered in Mohammed Usman (supra). Further, it may, by virtue of its bye-laws, consistent with the Kerala Act, been titled to be so licenced, as was found by the Tribunal in Sivapuram SCB Ltd. 2024 (1) TMI 765 - ITAT COCHIN wherein the matter stands discussed in detail, further explaining that being unlicenced would imply it operating outside RBI s regulatory control, but not alter the nature of income arising. And which to our mind is only relevant insofar as the activity of business of banking, an eligible activity u/s. 80P(2)(a)(i) of the Act, is concerned. Continuing further, the Hon'ble Apex Court has per a series of decisions cited supra, clarified that interest earned on investment of reserve funds by a co-operative bank would be a part of the income of the banking business. True, the decisions are with reference to cooperative banks, and the investment in the instant case is not out of statutory reserves, but the same is only for the reason that the provisions of BRA have not been invoked. They shall apply in principle, i.e., where an entity, otherwise eligible, is undertaking banking business. The investment of funds would in any case only be in terms of it s bye-laws read with the Kerala Act; it s accounts being subject to statutory audit there-under. The commission income, being in respect of credit to it s members, again falls to be considered as part of its main activity, i.e., business of banking, and, in any case, from provision of credit to it s members. The impugned income, including from chitty business, would thus fall to be covered u/s. 80P(2)(a)(i), which regards the activity of the business of banking and of provision of credit to it s members by a cooperative society, at par. Without prejudice to the foregoing, where and to the extent any interest or dividend income does not fall to be regarded as of a banking business, the same, to the extent it arises from investments with co-operative banks, would stand to be deducted u/s. 80P(2)(d) of the Act, as clarified in Perroorkada SCB Ltd. 2021 (12) TMI 1084 - KERALA HIGH COURT which is again premised on the same understanding, i.e., of co-operative banks being co-operative societies in the business of banking. Surely, cooperative banks, in contradistinction to cooperative societies, are public institutions, meant for public at large, and, thus, cannot be regarded as cooperative societies meant for it s members, which is explained as the rationale of the provision, as indeed the exclusion of cooperative banks w.e.f. 01/4/2007 from the purview of s. 80P, by the Apex Court in The Citizen Co-operative Society Ltd. 2017 (8) TMI 536 - SUPREME COURT So, however, as explained in Mavilayi Service Co-operative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT taxing statutes are to be strictly read, construing the benevolent provisions liberally. Section 80P(2)(a)(i) itself regards the business of banking as an eligible activity for the purpose of deduction thereunder, w/s. 80P(4) being in the nature of proviso. It is perhaps these aspects, i.e., reading it in consistence therewith; that prevailed with the Hon ble Court in Perroorkada SCB Ltd. 2021 (12) TMI 1084 - KERALA HIGH COURT in construing the mandate of s. 80P(2)(d) thus, even as the prescription of s. 80P(4) is applicable for the entire provision. The said decision is even otherwise binding on this Tribunal. Assessee appeal allowed. Dividend income on unlisted securities , the same is not shown by the assessee to be forming an integral part of the business of banking, only whereupon would it stand to be covered u/s. 80P(2)(a)(i), as explained in Totgar s Co operative Sale Society Ltd. 2010 (2) TMI 3 - SUPREME COURT , confining the benefit there-under to operational income, and not on investment of funds deemed surplus for the time being. The said income, or any other income falling under the same category, would though stand to be covered u/s. 80P(2)(c) of the Act. Assessee, though undertaking banking business, is not a co-operative bank, i.e., as defined u/s. 5(cci) of the BRA, which stands excluded for the benefit of s. 80P, u/s. 80P(4) of the Act. Accordingly, income in respect of which deduction u/s. 80P(2)(a)(i) stands claimed and disallowed, which does not fall to be considered as part of the income of the banking business, including provision of credit to it s members, as afore-discussed; or on investment with co-operative banks, to the extent it exceeds the limit u/s. 80P(2)(c) of the Act, would only be liable to be disallowed. We direct accordingly.

Summary

Issues:
The judgment deals with the dismissal of the appeal by the Assessee contesting its assessment under section 143(3) r/ws. 144B of the Income Tax Act, 1961 for Assessment Year 2018-19. The main issue revolves around the eligibility of the Assessee, a primary agricultural credit society, for deduction under section 80P of the Act.

Details of the Judgment:

Issue 1: Eligibility for Deduction under Section 80P(2)(a)(i):
The Assessee, a primary agricultural credit society, claimed deduction under section 80P(1) r/w s. 80P(2)(a)(i) of the Act for the income returned for the year. The Revenue found the deduction inadmissible as it included various types of income such as interest, dividend income, and commission income. The Assessee argued that its activities fall under the business of banking, citing relevant case laws. The Tribunal examined the nature of the Assessee's business and concluded that it indeed falls within the definition of a cooperative society in the business of banking. The Tribunal also considered the provisions of the Kerala Act and the Banking Regulation Act, 1949 to support its decision. The Tribunal held that the income, including commission income, falls under the scope of section 80P(2)(a)(i) as part of the business of banking.

Issue 2: Alternate Claim under Section 80P(2)(d):
The Assessee made an alternate plea that the disallowed income, not deductible under section 80P(2)(a)(i), should be considered for deduction under section 80P(2)(d). The Tribunal referred to a relevant decision to support this claim and analyzed the nature of the income in question. It concluded that to the extent interest or dividend income does not qualify as banking business income, it can be considered for deduction under section 80P(2)(d) if it arises from investments with cooperative banks.

Issue 3: Treatment of Dividend Income on Unlisted Securities:
The Tribunal addressed the dividend income on unlisted securities and clarified that such income must be integral to the business of banking to qualify for deduction under section 80P(2)(a)(i). Since the Assessee failed to demonstrate that this income was part of its banking business, the Tribunal ruled that it falls under section 80P(2)(c) of the Act.

Conclusion:
The Tribunal allowed the Assessee's appeal in part, directing the disallowance of income not falling within the scope of section 80P(2)(a)(i) or exceeding the limit under section 80P(2)(c). The judgment emphasized the Assessee's eligibility as a cooperative society in the business of banking for specific deductions under the Income Tax Act.

Separate Judgment:
No separate judgment was delivered by the judges in this case.