2020 (1) TMI 294 - AT - Income Tax

High Court Alters Deduction Interpretation: Yearly Assessment Emphasized for Co-op Societies

The Full Bench of the High Court altered the interpretation of deduction u/s 80P, emphasizing the need for yearly assessment of a co-operative society's ... Deduction u/s 80P(2) on interest income - CIT(A) had initially allowed the appeal of the assessee and granted deduction u/s 80P(2) - CIT(A) passed order u/s 154 wherein the claim of deduction u/s 80P was denied, by relying on the judgment of Mavilayi Service Co-operative Bank Ltd. v. CIT [2019 (9) TMI 782 - SC ORDER] . HELD THAT:- The Full Bench of the Hon’ble jurisdictional High Court in the case of The Mavilayi Service Co-operative Bank Ltd. V. CIT (supra) 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 of the I.T.Act. In view of the dictum laid down by the Full Bench of the Hon’ble jurisdictional High Court (supra), 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 Co-operative Banks and other Banks, the co-ordinate Bench order of the Tribunal in the case of Kizhathadiyoor Service Co-operative Bank Limited [2016 (7) TMI 1405 - ITAT COCHIN] 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 [2019 (9) TMI 782 - SC ORDER] and examine the activities of the assessee-society before granting deduction u/s 80P of the I.T.Act on such interest income. Issues:1. Eligibility for deduction u/s 80P of the Income Tax Act.2. Disallowance of claim of deduction u/s 80P(2) of the Income Tax Act.3. Impact of subsequent judgment on deduction u/s 80P(2) of the Income Tax Act.4. Treatment of interest income received from investments with Co-operative Banks and other Banks.Issue 1: Eligibility for deduction u/s 80P of the Income Tax Act:The case involved a co-operative society registered under the Kerala Co-operative Societies Act, 1969, seeking deduction u/s 80P of the Income Tax Act for the assessment year 2013-2014. The Assessing Officer disallowed the deduction based on the business activities of the society, particularly banking operations. The CIT(A) initially allowed the deduction, citing the society's eligibility under section 80P. However, the subsequent judgment by the Full Bench of the Hon'ble jurisdictional High Court altered the interpretation, emphasizing the need for the Assessing Officer to investigate the society's activities each assessment year to determine eligibility.Issue 2: Disallowance of claim of deduction u/s 80P(2) of the Income Tax Act:The CIT(A) issued a notice u/s 154 of the Income Tax Act to rectify the initial order, disallowing the deduction u/s 80P(2) based on the Full Bench judgment. The assessee objected to this disallowance, but the CIT(A) upheld the decision and passed an order disallowing the claim. The Tribunal, considering the conflicting judgments and interpretations, decided to restore the issue of deduction u/s 80P(2) to the Assessing Officer for further examination of the society's activities to determine eligibility.Issue 3: Impact of subsequent judgment on deduction u/s 80P(2) of the Income Tax Act:The Full Bench of the Hon'ble jurisdictional High Court's judgment in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT altered the approach to granting deduction u/s 80P(2) by emphasizing the need for an inquiry into the factual activities of the society. This judgment required the Assessing Officer to verify compliance with co-operative society activities under the Kerala Co-operative Societies Act, 1969, for each assessment year before granting the deduction.Issue 4: Treatment of interest income received from investments with Co-operative Banks and other Banks:Regarding interest income earned from investments with Co-operative Banks and other Banks, a co-ordinate Bench order of the Tribunal had previously classified it as part of the banking activity of the assessee. However, the Tribunal directed the Assessing Officer to follow the law laid down by the Full Bench judgment and examine the activities of the society before granting deduction u/s 80P of the Income Tax Act on such interest income.In conclusion, the Tribunal allowed the appeal for statistical purposes and dismissed the Stay Application, emphasizing the need for a detailed examination of the co-operative society's activities each assessment year to determine eligibility for deduction u/s 80P of the Income Tax Act.