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TMI Blog2014 (7) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 80P of the Act on any reasoning – Decided against assessee. Deduction of 7.5% provision for bad and doubtful debts u/s. 36(1)(viia) - Held that:- Section 5(cci) of Banking Regulation Act though has brought in definition of co-operative bank, virtually every bank which is not a scheduled bank would fall under the definition of non-scheduled bank. Reading of definition of non-schedule bank along with meaning of rural branch under Explanation to Section 36(1) of the Act, clearly indicate that cooperative bank also falls under the category of non-schedule bank for the purpose of this Section. Therefore, reading of entire Section 36(1)(viia)(a) along with explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision.Therefore, we are of the opinion, authorities below were justified in opining that benefit of deduction of 10% of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts.– Decided against assessee. Disallowance of interest paid without deducting tax to non members u/s. 40(a)(ia) - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4. 134/Coch/2013 5.719/Coch/2013 2009- 10 2010- 11 The Kotacherry Service Cooperative Bank Ltd., Kanhangad, Kasargod-671 315. [PAN: AAAAT 3164F] The Income Tax Officer, Ward-2, Kasargod. 6. 135/Coch/2013 7. 720/Coch/2013 2009- 10 2010- 11 The Nileshwar Service Cooperative Bank Ltd., Nileshwar, Kasargod-671 314. [PAN:AAAAT 3163C] The Income Tax Officer, Ward-2, Kasargod. 8. 325/Coch/2012 2009- 10 The Payyannur Service Cooperative Bank Ltd. Main Road, Payyannur, Kannur-7[PAN:AAEFT 2178E] The Income Tax Officer, Ward-4,Kannur 9. 660/Coch/2013 2008- 09 Mavilayi Service Co-operative Bank Ltd., Moonapalam, Mavilayi P.O., Kannur. [PAN:AAAAM 8091L] The Income Tax Officer, Ward-1,Kannur 10. 680/Coch/2013 11. 681/Coch/2013 12. 682/Coch/2013 2007- 08 2008- 09 2010- 11 The Chirackal Service Cooperative Bank Ltd., P.O. Chirackal, Kannur-670 001. [PAN:AAAAC 0458M] The Income Tax Officer, Ward-1, Kannur 13. 683/Coch/2013 14. 684/Coch/2013 15. 685/Coch/2013 2007- 08 2008- 09 2010- 11 The Kappad Service Cooperative Bank Ltd., P.O. Kappad, Kannur-670 006. [PAN:AABAK 4922D] The Income Tax Officer, Ward-1, Kannur. 16. 739/Coch/2013 17. 740/Coch/2013 18. 741/Coch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in appeal before us. 3. The Ld. AR submitted that in the return of income filed, the assessee had claimed deduction u/s. 80P(2)(a)(i) on income earned by the assessee in the activity of providing credit facility to members. The Assessing officer disallowed the claim of deduction. According to the Assessing officer the assessee is a cooperative bank and at the same time it is not a Primary Agricultural Credit Society and therefore the provisions of sub-section (4) of sec. 80P would apply. Accordingly he denied the benefit of deduction u/s. 80P to the assessee. On appeal CIT(A) confirmed the decision of the Assessing officer. 4. Section 80P as amended by Finance Act 2006 reads as under: "Deduction in respect of income of co-operative societies 80P. (1) where, in the case of an assessee being a cooperative society, the gross total income includes any income referred to in sub-section (2), they shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in subsection (2), in computing the total income of the assessee. (2) The sums referred to in sub-section(1) shall be the following, namely:- (a) in the case of a co-operative soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-operatives, housing cooperatives etc. are still eligible for deduction u/s. 80P(2) (a) (i) for their income from providing credit facility to their members. Now the question is whether the assessee is a bank other than primary agricultural credit society. 6. The assessee is a primary agricultural credit society not a cooperative bank for the following reasons: 7 a) Classified as PACS by the Co-operative department: The assessee is a co-operative society registered under the co-operative society registered under the Co-operative Societies Act, with the Registrar of cooperative societies, Govt of Kerala. The co-operative department has classified the assessee as a Primary Agricultural Credit Society. The area of operation of this society is limited to a Village. This society is formed mainly for providing credit facility to the members for carrying out their agricultural and allied activities. The fund is mobilized mainly through deposits from members. The money is advanced or lent only to members and not to public mostly for agricultural, animal husbandry and other agro based activities as per the objects of the Society. The Co-operative department has classified the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to technical reasons. The observation by the Assessing officer in this regard is that the agricultural finance by the society is only a small percentage of the total loans sanctioned is not true to facts. Though majority of the advances are agricultural in nature, the circumstances under which the assessee society and other societies are forced to classify them as non agricultural should also been considered in the right perspective. The main source of funds of the assessee society is collection of fund by way of fixed deposits, the rate of interest which will come to 8.5% to 10.5%. But for agricultural advances the assessee can collect interest at the rate of 7% only from the borrowers as per law. Since there is no effective mechanism for refinancing the agricultural loans of the societies by the apex banks, the assessee society will not be in a position to lend to agriculturists classifying the loan as agricultural per se, as fund collected at 10% will have to be lent for 7%. This is the situation which compels a primary agricultural society to classify a part of the agricultural loans lend by it as non agricultural. Hence the assessee is a primary agricultural credit society fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t; means a state co-operative bank, a central cooperative bank and a primary Co-operative bank." 14.1 From the definition of Co-operative Bank it is apparent that Cooperative bank means state Co-operative bank, a Central Co-operative bank and a Primary Co-operative Bank. The assessee is not a state Cooperative bank or Central Cooperative bank. So it is to be found out whether the assessee is a primary co-operative bank. The Primary Cooperative Bank is defined u/s. 5 clause (ccv) of Banking Regulation Act, 1949 as under: "(ccv) ":primary co-operative bank" means a cooperative society, other than a primary agricultural credit society". (1) the primary object or principal business of which is transaction of banking business" (2) the paid-up share capital and reserves of which are not less than one lakh of rupees: and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: (4) Provided that this sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such co-operative bank subscribing to the share capital of such co-operative society out of funds provided by the State Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, and the matter of obtaining it being that much difficult, it cannot be said that what the assessee is doing is banking business. According to the Ld. AR banking business has been defined u/s. 5(b) of the Banking Regulation Act as under: "Sec. 5(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise." 21. The Ld. AR contended that from the said definition, it is clear that the banking means accepting the deposits of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft or otherwise and these deposits are accepted for the purpose of lending or investment. In the case of the assessee, the deposits are mostly accepted from the members and the deposits from public individuals are negligible. The money is advanced or lent only to members and not to public mostly for agricultural purposes. Hence the principle of mutuality is applicable in the case of the assessee which means that the activity of the assessee is not of banking but is that of providing credit faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joy any tax benefits. It is, therefore, proposed to amend section 80P by inserting a new subsection (4) so as to provide that the provisions of the said subsection shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank." 27. Thus the Ld. AR submitted that from the above it is very clear that the intention of law was only to tax co-operative banks like District Cooperative Bank, State Co-operative Bank and Urban Co-operative Bank which are functioning at par with other commercial banks. 28. The Ld. AR drew our attention to the interpretation of section 2(24) (viia) of the Act. For denying the claim of deduction u/s. 80P the Assessing officer has also relied on the insertion of clause (viia) of sub section (24) of section 2 by which 'the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members' is included in the definition of income. The Ld. AR submitted that the earned Assessing officer has failed to appreciate the fact that the income referred to in section 2(24) is gross to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the related section to bring into tax net the co-operative societies which are not even banks. The Ld. AR relied on the following case law: (i) The Hon'ble ITAT Panaji Bench in the case of Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd., wherein it was held as under: "From the aforesaid objects, it is apparent that none of the aims and objects allows an assessee co-operative society to accept deposits of money from public for the purpose of lending or investments. In our opinion until and unless that condition is satisfied, it cannot be said that the prime object or principal business of the assessee is banking business Therefore the assessee will not comply with the first condition as laid down in the definition as given under section 5(ccv) of the Banking Regulation Act, 1949 for becoming "primary co-operative bank". The assessee, therefore, cannot be regarded to be a primary co-operative bank and in consequence thereof, it cannot be a co-operative bank as defined under Part V of the Banking Regulation Act, 1949. Accordingly, in our opinion, the provisions of sec. 80P(4) read with explanation thereunder will not be applicable in the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e object of the primary credit society and share limit of the primary credit society so as to classify them as a co-operative bank and remove them out of the purview of the exemption clause. That is a matter to be decided under the Banking Regulation Act. As rightly contended by the petitioner, they are not controlled or governed by the RBI and they are registered and are bound by the provisions of the Cooperative Societies Act." (v) The Hon'ble Madras High Court in 188 ITR 671 (Mad.) has held as under: "U/s. 80P (2)(a)(i) of the Income Tax Act, 1961, in order to claim the benefit of deduction under section 80P(1) of the Act, the cooperative society should be engaged in carrying on the business of banking or providing credit facility to its members. As the provision is intended to encourage cooperative societies, a liberal construction should be given to the language employed in the provision. Hence, if a co-operative society is engaged in carrying on business of providing credit facilities to its members, that would suffice to attract the benefit of deduction u/s. 80P(1) and (2) (a)(i)." 31. Thus the Ld. AR concluded that it is doubtlessly clear that a primar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of the Citizen Co-op Society, Hyderabad, which was authored by the Hon'ble Accountant Member. 36. In this case, the CIT(A)-IV, Kochi having jurisdiction over the files of Kottayam allowed the deduction u/s. 80P(2)(a)(i) of the I.T. Act mistakenly holding that it was admitted by the Assessing officer in the assessment order that 91% percentage of the loans were given for agricultural purposes. The CIT(A) also erred in holding that certificate from the Registrar of Co-operative Societies categorizing the assessee as a primary agricultural credit society is sufficient to claim deduction u/s. 80P. This finding of the CIT(A) is against the finding of the Hon'ble High Court of Kerala in WP(C) No. 14226 of 2012(C) dated 14th September 2012 in the case of Thathamangalam Service Co-operative Bank Ltd. and others, wherein their Lordships have observed as under: "True, some of the petitioners have obtained a certificate as to the classification/registration as Primary Agricultural Credit Societies. But by virtue of the amendment to section 2(oa) of the Kerala Cooperative Societies Act, if the Society does not continue to fulfill the obligation, it will lose the colo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortion of the said order is as follows: "8.10 We have gone through the decision of the Hyderabad bench of this Tribunal in the case of The Citizen Cooperative Society vs. Addl. CIT, 41 305 (Hyd). We notice that this decision is applicable to the facts of the case before us. In that decision, under para 23 the Tribunal has given a finding that the Assessee is carrying on banking business and for all practical purposes it acts like a co-operative bank. The Society is governed by the Banking Regulations Act. Therefore, the society being a co-operative bank providing banking facilities to members is not eligible to claim deduction u/s 80P(2)(a)(i) after the introduction of sub-section (4) to section 80P. In view of this finding, the Assessee was denied deduction u/s 80P(2)(a)(i). We have also gone through the decision of the Bangalore Bench of the Tribunal in the case of ITO vs. Divyajyothi Credit Co-operative Society Ltd. (supra) in ITA No.72/Bang/2013. In this case, we notice that the Hon'ble Tribunal confirmed the order of CIT(A) following the decision of the Tribunal in the case of ACIT, Circle 3(1), Bangalore vs. M/s. Bangalore Commercial Transport Credit Cooperative Soc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociety which is engaged in carrying on banking business facilities to its members if it is not a co-operative bank. We have also gone through the decision of this Bench in the case of DCIT vs. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. in ITA No. 1 to 3/PNJ/2012 dt. 30.3.2012 (supra). While discussing this issue, after analysing the aims and objects of the co-operative society under para 12 of its order, this Tribunal has held as under : "12. From the aforesaid objects, it is apparent that none of the aims and objects allows the assessee cooperative society to accept deposits of money „from public for the purpose of lending or investment. In our opinion until and unless that condition is satisfied, it cannot be said that the prime object or principal business of the assessee is banking business. Therefore, the assessee will not comply with the first condition as laid down in the definition as given u/s. 5(ccv) of the Banking Regulation act, 1959 for becoming "primary cooperative bank". The assessee, therefore, cannot be regarded to be primary cooperative bank and in consequence thereof, it cannot be a cooperative bank as defined under part V of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exemption u/s. clause (a) in respect of the banking activities. The Appellate Assistant Commissioner, in allowing the assessee's appeal, held that exemption under clause (c) is in addition to the exemption allowable under clauses (a) and (b) and directed the Income tax Officer to allow a deduction of ₹ 20,000 separately, taking into consideration the property income earned by the assessee. The Revenue carried the matter in appeal before the Appellate Tribunal. The Tribunal held that the rule of construction of ejusdem generis applies to the construction of clause (c), which results in profits and gains, that the income from house property has been dealt with in sections 22 to 27 as income and not as profits and gains and that the assessee is not, therefore, entitled to any exemption under clause (c). The Tribunal did not accept the alternative contention raised by the assessee for the first time before the Tribunal that the letting out of surplus space should be treated as a business activity under clause (a) of sub-section (2) of section 80P of the Act. The appeals were accordingly allowed. The question of law arises out of the order of the Tribunal. Section 80P of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, the income thus received cannot partake of the character of profits and gains attributable to an activity carried on by the society. The building let out is not a commercial asset or the rent received is not profit or gain arising from the exploitation of a business asset. The word "activity" is wider than the word "business". It connotes a specified form of supervised action or 0field of action. Read in the context of the profit earning activity of a co-operative society, it means the corporate activity of the society, that is to say, whether or not they amount to a business, trade or profession in the ordinary sense. Clause (c) of section 80P(2) is intended to cover receipts from sources other than the actual conduct of the business but attributable to an activity which results in profits and gains. Letting out of surplus space in the building owned and used by the assessee is not such an activity falling under clause (c). The rent thus received by the assessee is not eligible for the exemption provided thereunder. In this view, the Appellate Tribunal was justified in rejecting the assessee's claim." 10. In view of the above discussions, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of clause (viia) to Section 36(1). This clause makes provision for bad and doubtful debts. In other words, deduction could be claimed by banks referred to in clause (viia) in respect of bad and doubtful debts. It provides certain terms and conditions under which such deductions could be claimed by a particular bank. Section 36(1)(viia) commences with following words "in respect of any provision for bad and doubtful debt made by" and sub-clause (a) reads as under: "A scheduled bank not being a bank approved by Central Government for the purposes of clause (viiia) or a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half percent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner." Under explanation to Section 36 for be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsent in the explanation to the said provision would change the position of the appellate banks with reference to the context. 9. Admittedly, appellants/assessees are co-operative banks. With introduction of Finance Act of 2007, coming into effect from 01.04.2007, one has to understand what was the position prior to 01.04.2007 and after 01.04.2007, they were enjoying the benefits provided u/s. 80P. With the introduction of Finance Act 2007 with effect from 01.04.2007, they could claim deductions as provided u/s. 36(1) of the Act. We are concerned with sub-clause(a) of clause (viia) to Section 36(1). Prior to Finance Act of 2007, co-operative bank was not included in subclause (a) so far as provisions for bad and doubtful debts. With effect from 01.04.2007, co-operative bank was included under subclause (a) of clause (viia) of Section 36(1). It is further clarified that only such co-operative bank other than a primary agriculture credit society, etc. is included in sub-clause (a) of clause (viia). The provision is a beneficial one. No doubt, plain reading of main Section 36(1) (viia)(a) and Explanation under said section present certain difficulties, but situation is not without po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of rural or what exactly would constitute rural branch. This Court had an occasion to decide the said controversy pertaining to bad and doubtful debts of a rural branch. While explaining the meaning of 'place' in Explanation (ia) to Section 36(1)(viia), their Lordships opined as under: "Next question raised pertains to the assessee's claim for deduction of provision for bad debts in terms of section 36(1) (viia) of the Income-tax Act. Here the only question raised is as to basis of classifying branches of the bank as rural branches and other branches. Rural branch is defined under Explanation (ia) to section 36(1)(viia) as follows: "rural branch" means a branch of a scheduled bank or a non- schedules bank situated in a place which has a population of nor more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.". What is clear from the above is that the classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. While the assessee's case that found accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r municipality is incorrect and, in our view, a rural branch has to be always in rural areas and the place referred can easily be taken as a village. Several wards may come within a village, whether it be in corporation, municipality or panchayats. There can be no village in a municipal or corporation area where the population is less than 10000. So much so, rural branches are such of the branches located in a village where the population in the village as a unit is less than 10000." It is clear from the above judgment that this Court had already an occasion to consider the meaning of place with reference to above section. Therefore,rural branch is a branch which falls under Explanation (ia) to Section 36(1) (viia). Tribunal had to reverse the judgment of CIT(appeals) in the light of the decision in Lord Krishna Bank's case (supra). 12. Then coming to the controversy whether co-operative bank could claim deduction of 10% of the aggregate average advances while computing the income irrespective of falling under rural branch as per Explanation, in order to consider a company as a banking company it must transact business of banking in India as defined u/s. 5(c) of Banking R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (ia), as opined in the decision of Lord Krishna Bank's case (supra). In the light of above observations and reasoning, none of the contentions raised by appellants are sustainable. Hence, these appeals are dismissed answering substantial questions of law in favour of Revenue." 41.2 In view of the above order of this Tribunal, we are inclined to decide the issue against the assessee. Accordingly, this ground raised by the assessees in all the appeals is dismissed. 42. Next ground No in I.T.A. Nos. 325/Coch/2012, 660/Coch/2013, 680/coch/2013, 681/Coch/2013, 682/Coch/2013, 745/Coch/2013, 746/Coch/2013, 747/Coch/2013, 801/Coch/2013, 123/Coch/2013, 683/Coch/2013, 684/Coch/2013, 685/Coch/2013, 739/Coch/2013, 740/Coch/2013, 742/Coch/2013, 743/Coch/2013 and 744/Coch/2013 is with regard to disallowance of interest paid without deducting tax to non members u/s. 40(a)(ia) of the Act. 42.1 We have heard both the parties. We find a similar issue came up for consideration of the Cochin Bench of Tribunal in the case of Karivelloor Service Co-operative Bank Ltd. vs. ITO in I.T.A. No. 311/Coch/2012 vide order dated 22-03-2013 wherein it was held as under: "11. We have conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have heard the parties. We find a similar issue came up for consideration of this Bench of the Tribunal in the case of Kadachira Service Cooperative Bank in I.T.A. No. 251/Coch/2012 & Ors. dated 31-01-2013 and I.T.A. No. 85/Coch/2013 in the case of The Madai Co-operative Rural Bank Ltd. dated 07-06-2013 wherein the issue was remitted back to the file of the Assessing officer to offer one more opportunity to the assessee to prove that the payment made to approved gratuity fund or LIC Pension Fund was within the time limit for filing return of income u/s. 139(1) of the Act. On the similar line, we are inclined to remit the issue back to the file of the Assessing officer for fresh examination. Being so, this ground is allowed for statistical purposes. 44. The next ground in I.T.A. Nos. 325/Coch/2012, 720/Coch/2013 and 719/Coch/2013 is with regard to disallowance of unrealised interest on overdue loans. In earlier paragraph, we have decided the issue against the assessee which deciding the ground relating to deduction of provision for bad and doubtful debts u/s. 36(1)(viia) of the Act. More so, the judgment of the Delhi High Court in the case of CIT vs. Talangang Co-op Group Housing S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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