2024 (5) TMI 54 - AT - Income Tax

Cooperative society denied section 80P deduction despite PACS registration due to only 10% agricultural lending

Vallapuzha Service Co-op. Bank Ltd. Versus Income Tax Officer Palakkad

ITAT Cochin held that a cooperative society registered as primary agricultural credit society (PACS) under Kerala Cooperative Societies Act, 1969 was ... Deduction u/s. 80P - assessee, a cooperative society in existence since 1961, and registered under the Kerala Cooperative Societies Act, 1969 (Kerala Act) as a primary agricultural credit society (PACS) - denial of deduction even as the assessee is registered as a PACS, it is actually undertaking banking business, providing the services, with in fact only a small fraction (close to 10%) of it’s lending being to the agricultural sector, so that it is not a PACS - HELD THAT:- The assessee’s lending being admittedly not primarily for agricultural purposes, it is not a PACS by definition and, two, is a cooperative bank, i.e., a cooperative society in the business of banking, even as clarified by the Hon'ble Courts time and again, as in Mavilayi SCB Ltd. [2021 (1) TMI 488 - SUPREME COURT], THE CITIZEN CO-OPERATIVE SOCIETY LIMITED [2017 (8) TMI 536 - SUPREME COURT] AND MUHAMMED USMAN [2002 (11) TMI 686 - HIGH COURT OF KERALA] Why, the provision itself recognizes ‘banking’ as an eligible activity for a cooperative society, entitling it to deduction of the profits derived therefrom (s. 80P(2)(a)(i)). It being not a PACS would thus not carry the Revenue’s case far. Firstly, for the reason that exemption u/s. 80P(1) r/w s. 80P(2)(a)(i) is, as afore-noted, equally applicable to income derived from the business of banking, even as that from credit to members is not confined to that for agricultural purposes only. Two, inasmuch as the tax statutes are to be strictly construed, the term ‘cooperative bank’ is it be, for the purpose of s. 80P(4), excluding cooperative banks from the benefit of s. 80P, strictly construed, i.e., as defined therein. The assessee, per it’s Ground 4 before the first appellate authority, has made a specific claim as to it’s bye-laws permitting admission of other cooperative societies as members and, therefore, of not being a primary cooperative bank in terms of s. 56 r/w s. 5(ccv) of BRA. There is no finding by the ld. CIT(A) thereon, which clearly has a direct bearing on the assessee being, or not being, a primary cooperative bank and, thus, a cooperative bank for the purposes of s. 80P of the Act. Copy of the byelaws is not on record. Even the two pages (in English) thereof, forming part of the paper-book, to which Shri Narayanan would refer during hearing, are not by an authorized translator for us to place reliance thereon; the original, as explained, being in vernacular. The matter, accordingly, is restored to the file of the AO to examine if the assessee falls under the definition of a ‘cooperative bank’ under BRA, construed strictly, which definition stands adopted for the purpose of s. 80P(4) of the Act, i.e., whether as a primary cooperative bank or district/state cooperative bank. As afore-noted, it being in the business of banking or not a PACS is not detrimental to it’s claim u/s. 80P(1) r/w s. 80P(2)(i)(a). The AO shall, upon hearing the assessee and examining such material as it may adduce in substantiation of it’s claim/s, and causing such verification as he may deem fit, issue a definite finding as to if it is, or is not, a cooperative bank as defined under BRA, determining it’s entitlement to exemption u/s. 80P(1) r/w s.80P(2)(a)(i) accordingly. We make it further clear that despite being not a PACS under the Act, it is yet a cooperative society under the Kerala Act, satisfying thus the requirement of s. 2(19) of the Act, which only is relevant for claiming deduction u/s. 80P(1) - Assessee’s appeals allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee, though registered as a primary agricultural credit society (PACS), is in fact carrying on the business of banking by accepting deposits from the public and thereby excluded from deduction under section 80P(1) read with section 80P(2)(a)(i) of the Income Tax Act. 2. Whether the assessee qualifies as a 'co-operative bank' within the meaning of the Banking Regulation Act, 1949 (as adopted for section 80P(4)), specifically as a 'primary co-operative bank' under the statutory definition, and if so whether that status excludes it from the benefit of section 80P(1). 3. Whether the assessee's bye-laws permitting admission of other co-operative societies as members preclude its classification as a 'primary co-operative bank' under the Banking Regulation Act and thereby affect entitlement to section 80P benefit. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterization as banking business and entitlement to deduction under section 80P Legal framework: Section 80P(1) grants deduction for profits of specified co-operative societies; section 80P(2)(a)(i) contemplates income from the business of banking as an eligible head; the Banking Regulation Act defines 'banking' as accepting deposits from the public for lending or investment, withdrawable by cheque, draft or otherwise. Precedent treatment: The Court references settled decisions recognizing that a co-operative society may carry on banking business and that income from banking may fall within section 80P(2)(a)(i) where the statutory definitions are satisfied. Interpretation and reasoning: The assessee's bye-laws explicitly permit acceptance of deposits from members and non-members, which the Tribunal treats as acceptance of deposits from the public. The assessee's lending profile shows that only a small fraction is to agricultural purposes and that its entire income arises from lending/investment activity. Under the BRA definition, accepting deposits from the public for lending/investment constitutes banking. Thus, on material admitted before the authorities, the assessee is not a PACS for the purposes of section 80P insofar as its principal business is not agricultural credit. Ratio vs. Obiter: Ratio - Acceptance of deposits from non-members and lending primarily for non-agricultural purposes constitute banking under the BRA definition and are relevant to the applicability of section 80P; Obiter - general observations about legislative amendments to the Kerala Act and the purpose of member-area restrictions. Conclusions: The Tribunal concludes that the assessee's activities amount to banking business for the purposes of the statutory definition, but this characterization alone does not ipso facto deny section 80P relief because income from the business of banking is expressly covered by section 80P(2)(a)(i) unless the assessee qualifies as a 'co-operative bank' excluded by section 80P(4). Issue 2: Whether the assessee is a 'co-operative bank' (primary/district/state) under the BRA and implication for section 80P(4) Legal framework: Section 80P(4) adopts the BRA definitions of 'co-operative bank'; BRA sections define 'co-operative bank' to include state, central and primary co-operative banks, and set out criteria for a 'primary co-operative bank' - principal object being banking, minimum paid-up capital/reserves threshold, and bye-law restriction on admission of other co-operative societies as members. Precedent treatment: The Tribunal cites authorities that clarify that cooperative societies carrying on banking are subject to the BRA definitions and that those definitions control the applicability of section 80P(4). Interpretation and reasoning: The Tribunal emphasizes strict construction of tax statutes and the need to satisfy the BRA definition strictly to treat a society as a 'co-operative bank' for exclusion under section 80P(4). Two limbs are critical: (a) whether the society's principal object or principal business is the transaction of banking business; and (b) whether other statutory conditions (capital threshold; bye-law membership restriction) are satisfied. The Tribunal finds that the assessee's lending profile demonstrates its principal business is banking; however, the determination whether it falls within the statutory category of a 'primary co-operative bank' requires examination of bye-laws and capital/reserve particulars which are not conclusively on record or found upon by the first appellate authority. Ratio vs. Obiter: Ratio - A co-operative society's classification as a 'co-operative bank' for section 80P(4) must be strictly determined by the BRA definitions; Obiter - remarks on the interplay between registration as PACS under state law and functional banking activity. Conclusions: The Tribunal holds that while functionally the assessee is in the business of banking (and thus not a PACS for section 80P purposes), a definitive determination whether it is a 'co-operative bank' (and hence excluded from section 80P) cannot be made without strict application of BRA definitions to factual material - notably bye-laws and capital/reserve figures - and therefore remits the matter to the Assessing Officer for fresh determination after appropriate examination and verification. Issue 3: Effect of bye-laws permitting admission of other co-operative societies as members on 'primary co-operative bank' status Legal framework: The BRA provision requires that the bye-laws of a primary co-operative bank do not permit admission of any other co-operative society as a member (subject to a specified proviso). Precedent treatment: The Tribunal notes the absence of a conclusive finding by the lower appellate authority on this point and refers to the necessity of applying the BRA criterion strictly. Interpretation and reasoning: The assessee asserted (Ground 4 before the first appellate authority) that its bye-laws allow admission of other co-operative societies as members, which, if established, would disqualify it from being a 'primary co-operative bank' under the BRA definition. The Tribunal notes that the relevant bye-laws in original vernacular were not placed on record in a form admissible to the Tribunal and that there was no finding by the CIT(A) on this specific contention. Ratio vs. Obiter: Ratio - The presence or absence in bye-laws of a prohibition on admission of other co-operative societies is a determinative criterion for 'primary co-operative bank' status and must be adjudicated on admissible evidence; Obiter - procedural observations regarding translation and record production. Conclusions: The Tribunal remands the issue to the Assessing Officer to examine the bye-laws (in admissible form), hear the assessee, verify capital/reserve figures and other relevant facts, and issue a definite finding on whether the assessee satisfies the BRA definition of a 'co-operative bank' (primary or otherwise) and thereby determine entitlement to deduction under section 80P(1) read with section 80P(2)(a)(i). Overall Disposition and Principle of Decision The Court determines as a matter of law that the assessee's admitted acceptance of deposits from non-members and lending predominantly for non-agricultural purposes constitutes banking activity; however, because exclusion from section 80P(1) turns on a strict statutory definition of 'co-operative bank' under the BRA, and material on essential statutory criteria (bye-laws and capital/reserve position) was not conclusively considered or admissibly on record, the matter is restored to the file of the Assessing Officer for fresh determination on those discrete factual-legal questions. The appeals are allowed for statistical purposes to enable that adjudication.