2025 (10) TMI 1287 - AT - Income Tax

Primary agricultural credit society entitled to deduction under section 80P(2)(a)(i) for member loan income even if unrelated to agriculture

ITAT Cochin (AT) held that a primary agricultural credit society is entitled to deduction under section 80P(2)(a)(i) for income from loans to its ... Deduction u/s 80P(2)(a)(i) - Assessee was giving loans to its members/nominal members which were not related to agriculture - whether the Assessee (a primary agricultural credit society registered under Kerala Cooperative Society Act, 1969) is entitled to claim deduction u/s 80P(2)(a)(i)? - HELD THAT:- In our view, the aforesaid issue is no longer res integra and stands decided in favour of the Assessee by the judgment of MAVILAYI SERVICE COOPERATIVE BANK LTD. & ORS. [2021 (1) TMI 488 - SUPREME COURT] to hold that the deduction claimed by the Assessee under Section 80P(2)(a)(i) of the Act in respect of income earned by the Assessee from its members/nominal members in the present case cannot be denied and therefore, the Assessing Officer is directed to grant deduction as claimed by the Assessee under Section 80P(2)(a)(i). ISSUES PRESENTED AND CONSIDERED 1. Whether delay in filing the appeal after receipt of an order bearing the expression 'Draft order' can be condoned where the appellant reasonably awaited a final order and files an appeal after a delay once no final order arrives. 2. Whether a primary agricultural credit society (as classified under the State Cooperative Societies Act) is entitled to deduction under Section 80P(2)(a)(i) of the Income-tax Act for income from providing credit facilities to its members, notwithstanding: (a) loans to members that are not strictly agricultural; (b) presence of loans to 'nominal members'; and (c) the interaction of Section 80P(4) with Section 80P(2)(a)(i). 3. Whether, in view of statutory scheme and binding precedent, the assessing authority may go behind the registration/classification issued by the Registrar of Co-operative Societies to deny Section 80P(2)(a)(i) benefit by treating a registered primary agricultural credit society as effectively a co-operative bank. 4. Whether appeals that are duplicates should be dismissed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay where impugned order bore 'Draft order' Legal framework: Requirements for filing time-limited appeals and principles for condonation of delay based on sufficient cause and bonafides of the appellant. Precedent treatment: No conflicting authority applied by the Court; analysis grounded in general principles of equity and bonafide reliance on administrative practice. Interpretation and reasoning: The Tribunal accepted the appellant's explanation that the presence of the phrase 'Draft order' on Page 1 of the NFAC order reasonably led the appellant to expect a further, final order; the appellant waited a reasonable time and then filed the appeal when no final order was received. The explanation was supported by an affidavit of the society's Secretary and found to be bona fide. Ratio vs. Obiter: Ratio - a draft designation on an appellate order can constitute a sufficient cause for delay where the appellant reasonably and bonafidely awaited a final order; such explanation may justify condonation. Conclusion: Delay of approximately eight months in filing the appeal was condoned and the appeal admitted for adjudication. Issue 2 - Entitlement to deduction under Section 80P(2)(a)(i) for a primary agricultural credit society Legal framework: Section 80P(2)(a)(i) grants deduction to co-operative societies 'engaged in' providing credit facilities to their members; Section 80P(4) (inserted by Finance Act 2006) excludes certain co-operative banks from the benefit; the Banking Regulation Act, 1949 defines 'co-operative bank' and prescribes licensing by RBI for carrying on banking business; State Co-operative Societies Acts define 'member' and permit certain loans to non-members or depositors. Precedent Treatment (followed/distinguished/overruled): The Tribunal followed and applied the binding principles of the Supreme Court decision in Mavilayi Services Co-operative Bank Ltd. v. CIT (supra), which interpreted Section 80P and Section 80P(4) as a proviso excluding only those co-operative societies that qualify as co-operative banks under the Banking Regulation Act (i.e., licensed entities accepting public deposits). The Tribunal treated prior Full Bench conclusions that permitted probing behind registration as displaced by the Supreme Court's ruling. The Tribunal also relied on the legal propositions in Citizen Cooperative Society Ltd. (as explained by the Supreme Court) and on statutory definitions under the State Act regarding nominal members. Interpretation and reasoning: Applying the Supreme Court's analysis, the Tribunal held that (i) Section 80P(4) must be read as a proviso specifically aimed at co-operative banks that function equivalently to commercial banks (i.e., accept public deposits and hold RBI license); (ii) where a society is registered/classified by the Registrar as a primary agricultural credit society and does not fall within the Banking Regulation Act definition of a co-operative bank (no RBI licence and not accepting public deposits in the statutory sense), Section 80P(4) does not apply to deprive it of deduction under Section 80P(2)(a)(i); (iii) 'providing credit facilities to its members' is not restricted to agricultural credit alone - once Section 80P(4) is inapplicable, loans to members for non-agricultural purposes do not defeat eligibility; (iv) 'nominal members' are members within the meaning of the State Act, and loans to such nominal members qualify for the deduction; (v) where loans to non-members exist, profits attributable to loans to non-members cannot be deducted, but the mere existence of such loans does not preclude the society's entitlement to the Section 80P(2)(a)(i) deduction for amounts attributable to member credit activity. Ratio vs. Obiter: Ratio - (a) Section 80P(4) is a limited proviso excluding only co-operative banks that are licensed under the Banking Regulation Act; (b) a primary agricultural credit society registered under the State Act and not licensed as a co-operative bank is eligible for deduction under Section 80P(2)(a)(i) even if some loans to members are non-agricultural and even if some loans to non-members exist (subject to attribution rules); (c) 'members' under Section 80P must be construed with reference to the State Act, and nominal members qualify. Observations about administrative circulars and RBI licensing are supportive reasoning (ratio as applied). Conclusions: The Tribunal, following the Supreme Court, held that the Assessing Officer and the CIT(A) erred in denying the Section 80P(2)(a)(i) deduction. The Assessing Officer was directed to grant the deduction claimed by the assessee in respect of income earned from members/nominal members. Grounds challenging classification as a co-operative bank and denial of deduction were allowed (except the ground that the CIT(A)'s order was a draft, which was dismissed as infructuous after condonation). Issue 3 - Permissibility of fact-finding by tax authorities into activities despite registration/classification Legal framework: Burden of proof on the assessee to demonstrate entitlement to deduction; Section 133(6) empowers factual enquiry; precedential guidance that registration is material but authorities may examine facts to determine whether society is 'engaged in' specified activities. Precedent Treatment: The Supreme Court's exposition in Citizen Cooperative Society Ltd. (and its treatment in Mavilayi) clarifies the limits of factual inquiry: assessing officers may examine whether the society is in fact providing credit to members, but cannot, by implication or restrictive construction, read 'agricultural' into Section 80P(2)(a)(i) or treat registration as meaningless. The Tribunal found no material to distinguish Mavilayi and applied its ratio. Interpretation and reasoning: The Tribunal noted that while fact-finding enquiries are permissible to ascertain whether the society is engaged in member credit activity, such enquiries cannot be used to negate the statutory classification where the legislative exclusion (Section 80P(4)) does not apply. The assessing authority's reliance solely on the proportion of alleged agri-loans to deny the deduction was contrary to the governing legal principle that the proviso only targets entities qualifying as co-operative banks under the Banking Regulation Act. Ratio vs. Obiter: Ratio - assessing officers may inquire into factual operations to determine attributable profits and eligibility but cannot override the statutory scheme by importing restrictions not present in Section 80P. Conclusions: The Assessing Officer's factual probing could not sustain denial of the deduction in the absence of material showing the society to be a co-operative bank under the Banking Regulation Act; the deduction must be allowed subject to proper attribution for non-member income. Issue 4 - Duplicate appeal Legal framework and reasoning: Where an appellant states that an appeal is a duplicate, the Tribunal may dismiss the duplicate appeal as redundant. Conclusion: The duplicate appeal was dismissed.