2019 (12) TMI 209 - AT - Income Tax

Tribunal overturns disallowance of deduction for cooperative society engaged in banking activities

M/s. Chirakara Service Cooperative Bank Limited Versus The Income Tax Officer Ward 1 Kollam.

The Tribunal set aside the CIT(A)'s order disallowing the deduction u/s 80P for a cooperative society engaged in banking activities. The Tribunal directed ... Deduction u/s 80P - HELD THAT:- Full Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT [2019 (3) TMI 1580 - KERALA HIGH COURT] had held that the A.O. has to conduct an inquiry into the factual situation as to the activities of the assessee society to determine the eligibility of deduction u/s 80P , we restore the issue of deduction u/s 80P(2) to the files of the Assessing Officer. The Assessing Officer shall examine the activities of the assessee and determine whether the activities are in compliance with the activities of a co-operative society functioning under the Kerala Co-operative Societies Act, 1969 and accordingly grant deduction u/s 80P(2) of the I.T.Act. As regards the interest on the investments with Cooperative Banks and other Banks, the co-ordinate Bench order of the Tribunal in the case of Kizhathadiyoor Service Co- operative Bank Limited [2019 (3) TMI 1580 - KERALA HIGH COURT] had held that interest income earned from investments with treasuries and banks is part of banking activity of the assessee, and therefore, the said interest income was eligible to be assessed as `income from business’ instead of `income from other sources’. However, as regards the grant of deduction u/s 80P of the I.T.Act on such interest income, the Assessing Officer shall follow the law laid down by the Larger Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT (supra) and examine the activities of the assessee-society before granting deduction u/s 80P of the I.T.Act on such interest income. Issues involved:1. Disallowance of deduction u/s 80P of the I.T. Act by Assessing Officer.2. Appeal to CIT(A) and subsequent rectification notice u/s 154.3. Applicability of judgment in Chirakkal case and subsequent judgment in Mavilayi case.4. Grounds raised in the appeal before the Tribunal regarding disallowance of deduction u/s 80P.5. Arguments presented by the Assessee and the Departmental Representative.6. Tribunal's decision on the appeal and stay application.Issue 1: Disallowance of deduction u/s 80P of the I.T. Act by Assessing Officer:The Assessing Officer disallowed the claim of deduction u/s 80P(2) of the I.T. Act for the Assessee, a co-operative society, engaged in banking activities, citing the insertion of section 80P(4) of the I.T. Act. Additionally, the interest income received by the Assessee from investments made with District Co-operative Banks was also disallowed.Issue 2: Appeal to CIT(A) and subsequent rectification notice u/s 154:The Assessee appealed to the CIT(A) against the disallowance of deduction u/s 80P(2) of the I.T. Act. The CIT(A) initially allowed the appeal, granting the deduction. However, a notice u/s 154 was issued by the CIT(A) to rectify the order based on a subsequent judgment by the Full Bench of the High Court. The Assessee objected to the notice, but the CIT(A) proceeded to disallow the deduction.Issue 3: Applicability of judgment in Chirakkal case and subsequent judgment in Mavilayi case:The High Court's judgment in the Chirakkal case allowed deduction u/s 80P(2) based on the classification of the Assessee as a primary agricultural credit society. However, the subsequent judgment in the Mavilayi case reversed this decision, emphasizing that the Assessing Officer must conduct an inquiry into the activities of the Assessee to determine eligibility for the deduction.Issue 4: Grounds raised in the appeal before the Tribunal regarding disallowance of deduction u/s 80P:The Assessee raised multiple grounds in the appeal before the Tribunal, challenging the CIT(A)'s decision to disallow the deduction. The grounds included objections to the initiation of proceedings u/s 154, misinterpretation of Sec. 80P(4), and the rejection of the classification certificate issued by the statutory authority.Issue 5: Arguments presented by the Assessee and the Departmental Representative:The Assessee argued that the deduction u/s 80P should be granted, emphasizing the classification as a members' co-operative society engaged in trading activities with members only. The Departmental Representative supported the Income-tax authorities' orders disallowing the deduction.Issue 6: Tribunal's decision on the appeal and stay application:The Tribunal, after considering the arguments and judgments, set aside the CIT(A)'s order and restored the issue of deduction u/s 80P(2) to the Assessing Officer for further examination of the Assessee's activities. The Tribunal also directed the Assessing Officer to follow the law laid down by the High Court in the Mavilayi case regarding interest income from investments. The Tribunal allowed the Assessee's appeal for statistical purposes and dismissed the Stay Application.This detailed analysis covers the issues involved in the legal judgment, including the initial disallowance of deduction, the appeal process, the conflicting judgments, the grounds raised in the appeal, arguments presented, and the Tribunal's final decision on the matter.