2020 (9) TMI 727 - AT - Income Tax

Fresh AO Assessment Needed to Determine Loan Eligibility for Deduction Under Income Tax Act Section 80P(2)(a)(i.

The ITAT concluded that a fresh examination by the AO is required to ascertain the nature and purpose of each loan disbursed by the appellant to determine ... Deduction u/s 80P(2)(a)(i) - Denial of claim as assessee was essentially doing the business of banking, and therefore, in view of insertion of section 80P(4) with effect from 01.04.2007, the assessee will not be entitled to deduction u/s 80P - HELD THAT:- AO after perusing the narration of the loan extracts in the statutory audit report for assessment years under consideration, came to the conclusion that out of the total loan disbursement, only a minuscule portion has been advanced for agricultural purposes. Narration in loan extracts in the audit reports by itself may not conclusive to prove whether loan is a agricultural loan or a non-agricultural loan. The gold loans may or may not be disbursed for the purpose of agricultural purposes. Necessarily, the A.O. had to examine the details of each loan disbursement and determine the purpose for which the loans were disbursed, i.e., whether it is for agricultural purpose or non-agricultural purpose. In these cases, such a detailed examination has not been conducted by the A.O. At the time of assessment, the judgment of Chirakkal Service Cooperative Bank Ltd. [2016 (4) TMI 826 - KERALA HIGH COURT] was ruling the roost and the certificate issued by the Registrar of Co-operative Society terming the assessee as a primary agricultural credit society would be sufficient for grant of deduction u/s 80P. In the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT [2019 (3) TMI 1580 - KERALA HIGH COURT] we are of the view that there should be fresh examination by the Assessing Officer as regards the nature of each loan disbursement and purpose for which it has been disbursed, i.e., whether it for agricultural purpose or not. The A.O. shall list out the instances where loans have disbursed for non-agricultural purposes etc. and accordingly conclude that the assessee’s activities are not in compliance with the activities of primary agricultural credit society functioning under the Kerala Co-operative Societies Act, 1969, before denying the claim of deduction u/s 80P(2). - Appeals filed by the assessee are allowed for statistical purposes Issues Involved:1. Justification of CIT(A) in confirming the Assessing Officer's order denying the claim of deduction under Section 80P(2)(a)(i) of the Income Tax Act.2. Determination of whether the appellant qualifies as a primary agricultural credit society (PACS) eligible for deduction under Section 80P.3. Examination of compliance with the Banking Regulation Act, 1949, in relation to Section 80P.4. Assessment of the nature and purpose of loans disbursed by the appellant.5. Legality of interest levied under Sections 234A and 234B and the demand of tax under Section 156.Detailed Analysis:1. Justification of CIT(A) in Confirming the Assessing Officer's Order:The primary issue raised in these appeals is whether the CIT(A) was justified in confirming the Assessing Officer's decision to deny the claim of deduction under Section 80P(2)(a)(i) of the Income Tax Act. The CIT(A) relied on the judgment of the Full Bench of the Hon’ble jurisdictional High Court in 'The Mavilayi Service Co-operative Bank Ltd. v. CIT' and upheld the Assessing Officer's findings that the agricultural credit provided by the assessee was minimal, thus disqualifying it from being termed as a primary agricultural credit society. Consequently, the disallowance of the deduction claim under Section 80P was upheld for the relevant assessment years.2. Determination of Whether the Appellant Qualifies as PACS Eligible for Deduction:The appellant argued that it is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act and contested the finding that it falls within the definition of a 'Co-operative Bank' ineligible for the deduction. The appellant maintained that it is a primary agricultural credit society (PACS) engaged in providing credit facilities to its members, and the lower authorities' interpretation of Section 80P(4) was incorrect. The appellant also referenced the Hon'ble High Court of Kerala's ruling in 'Chirakkal Service Co-operative Bank's case' which stated that once a certificate classifying a co-operative society as PACS is issued, the Department must accept it. However, this judgment was reversed in 'The Mavilayi Service Co-operative Bank v. CIT,' requiring further inquiry by statutory authorities.3. Examination of Compliance with the Banking Regulation Act, 1949:The appellant challenged the finding that compliance with the Banking Regulation Act, 1949, is necessary for the deduction under Section 80P. The appellant argued that the Act specifies share capital limits only for 'Primary Co-operative Bank and Primary Credit Society,' not PACS. The appellant cited the ITAT ruling in 'ITO, Bangalore v. Yeshwantpur Credit Co-operative Society Ltd.' which distinguished between a co-operative bank and a co-operative society, asserting that Section 80P(4) denies benefits only to co-operative banks, not PACS.4. Assessment of the Nature and Purpose of Loans Disbursed:The Assessing Officer denied the deduction claim, concluding that the appellant was essentially conducting banking business and that only a minuscule portion of loans was for agricultural purposes. The Tribunal noted that the narration in loan extracts in audit reports alone is not conclusive to determine the purpose of loans. The Assessing Officer must examine each loan disbursement's details to ascertain whether it was for agricultural purposes. The Tribunal restored the issue to the Assessing Officer for a fresh examination in light of the Full Bench's judgment in 'The Mavilayi Service Co-operative Bank Ltd. v. CIT.'5. Legality of Interest Levied and Demand of Tax:The appellant argued that the levy of interest under Sections 234A and 234B and the demand of tax under Section 156 were illegal and should be canceled. However, since the primary issue was restored to the Assessing Officer for fresh examination, these ancillary issues were not specifically addressed in the final order.Conclusion:The Tribunal concluded that a fresh examination by the Assessing Officer is necessary to determine the nature and purpose of each loan disbursement and whether the appellant's activities comply with those of a primary agricultural credit society. The appeals were allowed for statistical purposes, and the stay applications were dismissed as infructuous. The Assessing Officer is directed to follow the Full Bench's dictum in 'The Mavilayi Service Co-operative Bank Ltd. v. CIT' and take a decision in accordance with the law.