2020 (10) TMI 295 - AT - Income Tax

Assessing Officer to Review Loans for Section 80P Deductions

M/s. Aloor Service Co-operative Bank Limited, M/s. Puthenchira Service Cooperative Bank Limited Versus The Income Tax Officer Ward 2 (1), Range-2 Thrissur

The Tribunal directed the Assessing Officer to re-examine each loan disbursement to determine if the assessees qualify for deductions under Section 80P, ... Deduction u/s 80P(2)(a)(i) - assessee were 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:- Judgment of the Hon’ble jurisdictional High Court in the case 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 assessees as a primary agricultural credit society would be sufficient for grant of deduction u/s 80P of the I.T.Act. I 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. A.O. shall list out the instances where loans have disbursed for non-agricultural purposes etc. and accordingly conclude that the assessees’ 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) - AO shall examine the activities of the assessees-society by following the dictum laid down in the case of The Mavilayi Service Co-operative Bank Ltd. v. CIT [2019 (3) TMI 1580 - KERALA HIGH COURT]and shall take a decision in accordance with law. Appeals filed by the assessees are allowed for statistical purposes Issues Involved:1. Denial of deduction under Section 80P(2)(a)(i) of the Income Tax Act.2. Classification of the assessee as a co-operative society or a banking entity.3. Requirement for a detailed examination of loan disbursements to determine the eligibility for deduction under Section 80P.Detailed Analysis:Issue 1: Denial of Deduction under Section 80P(2)(a)(i)The primary issue in these appeals is whether the CIT(A) was justified in confirming the Assessing Officer's (AO) decision to deny the claim of deduction under Section 80P(2)(a)(i) of the Income Tax Act. The assessees, registered as co-operative societies under the Kerala Co-operative Societies Act, 1969, claimed deductions under Section 80P. The AO disallowed these claims, reasoning that the assessees were essentially engaged in the business of banking, and thus, ineligible for the deduction due to the insertion of Section 80P(4) effective from April 1, 2007.Issue 2: Classification of the AssesseeThe CIT(A) upheld the AO's decision, relying on the Full Bench judgment of the Hon'ble Kerala High Court in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The judgment emphasized that the AO must conduct a factual inquiry into the activities of the assessee to determine eligibility for the deduction under Section 80P. The CIT(A) noted that the agricultural credit provided by the assessees was minimal, and thus, they could not be classified as primary agricultural credit societies, leading to the disallowance of the deduction.Issue 3: Requirement for Detailed Examination of Loan DisbursementsThe Tribunal noted that the AO's decision was based on the observation that only a small portion of the loans disbursed by the assessees was for agricultural purposes. However, the Tribunal highlighted that the mere narration of loan extracts in audit reports is not conclusive proof of whether the loans were for agricultural or non-agricultural purposes. The Tribunal emphasized the need for a detailed examination of each loan disbursement to determine its purpose. The AO must list instances where loans were disbursed for non-agricultural purposes and conclude whether the assessees' activities align with those of a primary agricultural credit society as defined under the Kerala Co-operative Societies Act, 1969.Conclusion:The Tribunal restored the issue to the files of the AO for a fresh examination of the nature and purpose of each loan disbursement, in line with the Full Bench judgment of the Hon'ble Kerala High Court in The Mavilayi Service Co-operative Bank Ltd. v. CIT. The AO is directed to follow the legal dictum and take a decision in accordance with the law. Consequently, the appeals filed by the assessees were allowed for statistical purposes, and the stay applications were dismissed as infructuous.Order pronounced on October 6, 2020.