2020 (4) TMI 115 - AT - Income Tax

Appeals granted for review under Section 80P, Assessing Officer to re-examine activities.

M/s. Thaniyam Panchayath Service Co-operative Bank Limited, M/s. Vallachira Service Cooperative Bank Limited, M/s. Varavoor Service Cooperative Bank Limited Versus The Income Tax Officer Ward-2 (3), Thrissur

The Tribunal partly allowed the appeals for statistical purposes, directing the Assessing Officer to re-examine the activities of the assessees, ... Deduction u/s 80P - CIT(A) rejected the objections raised by the assessee and passed orders u/s 154 disallowing the claim of the assessee u/s 80P(2) - HELD THAT:- CIT(A) had initially allowed the appeals of the assessee and granted deduction u/s 80P(2). Subsequently, the CIT(A) passed orders u/s 154 wherein the claim of deduction u/s 80P was denied, by relying on the judgment of The Mavilayi Service Co-operative Bank Ltd. v. CIT [2019 (3) TMI 1580 - KERALA HIGH COURT] - The CIT(A) ought not to have rejected the claim of deduction u/s 80P(2) of the I.T.Act without examining the activities of the assessee-society. 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. In view of the dictum laid we restore the issue of deduction u/s 80P(2) to the files of the AO to 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. Interest on the investments with Co-operative Banks and other Banks - 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 (supra) and examine the activities of the assessee-society before granting deduction u/s 80P of the I.T.Act on such interest income. Appeals filed by the assessee are partly. Issues Involved:1. Eligibility for deduction under Section 80P(2) of the Income Tax Act.2. Validity of rectification under Section 154 of the Income Tax Act.3. Deduction under Section 80P(2)(d) of the Income Tax Act for interest on investments.4. Examination of activities of the assessee society for determining eligibility of deduction.Detailed Analysis:1. Eligibility for Deduction under Section 80P(2) of the Income Tax Act:The assessees, co-operative societies, claimed deductions under Section 80P of the Income Tax Act for the relevant assessment years. The Assessing Officer disallowed these claims, reasoning that the assessees were engaged in banking activities, and thus, ineligible for deductions under Section 80P(2) due to the insertion of Section 80P(4) effective from 01.04.2007.The CIT(A) initially allowed the deductions, following the Hon’ble jurisdictional High Court's judgment in Chirakkal Service Cooperative Co-operative Bank Ltd. v. CIT [(2016) 384 ITR 490 (Ker.)]. However, subsequent to the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT [ITA No.97/2016, order dated 19th March, 2019], the CIT(A) issued notices to rectify the orders and ultimately disallowed the deductions.2. Validity of Rectification under Section 154 of the Income Tax Act:The CIT(A) rectified his previous orders under Section 154, citing the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT, which overturned the earlier decision in Chirakkal Service Cooperative Bank Ltd. The Tribunal upheld this rectification, referencing the Hon’ble Kerala High Court's ruling in Kil Kotagiri Tea & Coffee Estates Co. Ltd. v. ITAT [174 ITR 579], which allows rectification when an authority's decision is based on a High Court judgment that is later reversed.The Tribunal emphasized that the CIT(A) correctly rectified the orders as the subsequent judgment mandated an inquiry into the activities of the assessee to determine eligibility for Section 80P deductions.3. Deduction under Section 80P(2)(d) of the Income Tax Act for Interest on Investments:The assessees claimed deductions under Section 80P(2)(d) for interest earned on investments with cooperative banks and other banks. The Tribunal noted that the CIT(A) should not have rejected these claims without examining the activities of the assessee societies. The Tribunal restored the issue to the Assessing Officer to determine the eligibility for deductions under Section 80P(2)(d) after examining the activities of the assessees.However, the Tribunal rejected the claim for deductions under Section 80P(2)(d) made during the rectification proceedings, as it was not supported by materials on record and was not claimed during the assessment proceedings or initial appellate proceedings.4. Examination of Activities of the Assessee Society for Determining Eligibility of Deduction:The Tribunal highlighted the necessity of examining the activities of the assessee societies to determine their eligibility for deductions under Section 80P, as per the Full Bench judgment in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The Assessing Officer is required to conduct a factual inquiry into the activities of the assessee societies each assessment year to ascertain if they qualify for the deductions.The Tribunal restored the issue to the Assessing Officer to verify if the activities of the assessees align with those of a cooperative society under the Kerala Co-operative Societies Act, 1969, and accordingly determine the allowability of deductions under Section 80P.Conclusion:The appeals were partly allowed for statistical purposes, with the Tribunal directing the Assessing Officer to re-examine the activities of the assessees and determine their eligibility for deductions under Section 80P of the Income Tax Act.