2018 (10) TMI 1592 - AT - Income Tax

Agricultural credit societies qualify for tax deductions under Income Tax Act, including interest income from co-operative banks.

The Tribunal upheld that the primary agricultural credit societies are entitled to deduction under section 80P(2) of the Income Tax Act, distinguishing ... Deduction u/s 80P(2) - interest income received from investments with co-operative banks - Held that:- In the case of ITO v. The Chengala Service Co-operative Bank Ltd. [2018 (4) TMI 339 - ITAT COCHIN] after elaborately considering all the judicial pronouncements had decided the issue in favour of the assessee. As regards the interest received on investments with cooperative Banks, we are of the view that the deduction u/s 80P(2)(d) can be granted only if the interest income is received out of investments made with co-operative societies. In the instant case, it is not clear that the interest income was received out of investments made with co-operative societies. Therefore, we are of the view that deduction u/s 80P(2)(d) of the I.T.Act cannot be granted. Further, we find that the investments are made by the assessee-society in the course of its banking business / providing credit facilities to its members and hence such income will form part of banking activities of the assessee and same is entitled to deduction u/s 80P(2)(a)(i) of the I.T.Act. On identical facts, the Cochin Bench of the Tribunal in the case of The Azhikode Service Cooperative Bank Ltd. & Ors.[2017 (7) TMI 1138 - ITAT COCHIN] after considering all the judicial pronouncements had decided the issue in favour of the assessee. Issues Involved:1. Entitlement to deduction under section 80P(2) of the Income Tax Act.2. Entitlement to deduction under section 80P(2)(a)(i) for interest income received from investments with co-operative banks.Issue-Wise Detailed Analysis:1. Entitlement to Deduction under Section 80P(2) of the Income Tax Act:The primary issue was whether the assessees, being primary agricultural credit societies, were entitled to deduction under section 80P(2) of the Income Tax Act. The Assessing Officer denied the deduction, arguing that the assessees were primarily engaged in the business of banking, thus falling under the purview of section 80P(4) which excludes co-operative banks from such deductions. The CIT(A) overturned this decision, citing the Hon’ble jurisdictional High Court's ruling in The Chirakkal Service Co-operative Bank Ltd. & Ors. vs. CIT, which held that primary agricultural credit societies registered under the Kerala Co-operative Societies Act are entitled to the deduction under section 80P(2).The Tribunal upheld the CIT(A)’s decision, referencing the Cochin Bench's previous rulings, which emphasized that the primary agricultural credit societies, as defined and classified under the Kerala Co-operative Societies Act, are entitled to the deduction. The Tribunal noted that the Hon’ble Supreme Court’s decision in Citizen Co-operative Society Ltd. did not apply to primary agricultural credit societies but rather to credit co-operative societies engaged in banking activities with non-members, which violated the mutuality principle.2. Entitlement to Deduction under Section 80P(2)(a)(i) for Interest Income from Investments with Co-operative Banks:The second issue addressed whether the interest income received from investments with co-operative banks qualifies for deduction under section 80P(2)(a)(i). The Assessing Officer treated such interest income as ‘income from other sources’ and denied the deduction. The CIT(A) ruled in favor of the assessees, following the jurisdictional High Court's judgment in The Ottoor Service Co-operative Bank Ltd. v. ITO, which allowed such deductions.The Tribunal supported the CIT(A)’s decision, stating that the interest income from investments made in the course of the assessees' banking business forms part of their banking activities and is thus eligible for deduction under section 80P(2)(a)(i). The Tribunal referred to its previous rulings and the Karnataka High Court’s decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which distinguished the Supreme Court’s ruling in Totgar’s Co-operative Sale Society Ltd. and clarified that interest income from investments made in the course of business activities is eligible for deduction.Conclusion:The Tribunal dismissed the Revenue’s appeals, affirming that:- The assessees, being primary agricultural credit societies, are entitled to deduction under section 80P(2) of the Income Tax Act.- The interest income received from investments with co-operative banks qualifies for deduction under section 80P(2)(a)(i) as it is part of the assessees' banking activities.Order Pronounced on October 25, 2018.