Co-op Society Wins Tax Deduction Battle: Court Upholds Eligibility Under Section 80P (of Income Tax Act, 1961)

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Case Name:

Commissioner of Income Tax Vs S-681 Chinnathirupathi Pacb Ltd. (High Court of Madras)

Tax Case Appeal No.272 of 2016

Date: 9th August 2016

Key Takeaways:

1. Co-operative societies that aren’t banks can claim deductions under Section 80P(2)(a)(i) (of Income Tax Act, 1961).
2. The court distinguished between co-operative banks and primary agricultural credit societies.
3. The classification of members (Class A or B) doesn’t affect the society’s eligibility for the deduction.
4. The geographical limitation of the society’s operations was a factor in its favor.

Issue:

The main question here was: Is the assessee (the co-operative society) eligible for a deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961), even though it lends money to members for non-agricultural purposes?

Facts:

• We’ve got a co-operative society that does banking and trading activities.
• They filed a ‘Nil’ tax return, claiming a deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961).
• The society has two types of members: Class A (with voting rights) and Class B (associate members who’ve taken loans).
• They were lending money to members for non-agricultural purposes too, not just farming stuff.
• The Income Tax Department initially denied their deduction claim, saying they were acting like a commercial bank.

Arguments:

The Income Tax Department said:

• The society was lending for non-agricultural purposes, so they shouldn’t get the deduction.
• Class B members aren’t real members because they can’t vote or participate in meetings.
• The society was charging interest rates similar to commercial banks.

The Co-operative Society argued:

• They’re not a co-operative bank, but a primary agricultural credit society.
• Their activities are limited to members and a specific geographical area.
• All members, including Class B, should be considered for the deduction eligibility.

Key Legal Precedents:

1. ITO Vs. M/s. Veerakeralam Primary Agricultural Co-operative Credit Society (ITA No.197/Mds/2013)
2. Chirakkal Service Co-operative Bank Ltd., Kannur vs. the Commissioner of Income Tax ((2016) 68 taxmann.com.298 (Kerala))
3. M/s SL (SPL) 151 Karkudalpatty Primary Agricultural Co-operative Credit Society Ltd. vs. ITO Ward II(2), Salem (ITA No.292/ Mds/2014)

These cases supported the idea that primary agricultural credit societies are eligible for the deduction under Section 80P (of Income Tax Act, 1961).

Judgement:

The court sided with the co-operative society. Here’s the gist:

• The society isn’t a co-operative bank, but a primary agricultural credit society.
• Their activities are limited to members and a specific area, which is crucial.
• The classification of members (A or B) doesn’t matter for the deduction.
• The society is eligible for the deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961).

FAQs:

Q: Does this mean all co-operative societies can claim this deduction?

A: Not exactly. It applies to societies that function as primary agricultural credit societies, not co-operative banks.

Q: Does it matter if the society lends for non-agricultural purposes?

A: In this case, it didn’t affect their eligibility. The court focused more on their overall structure and operations.

Q: What’s the difference between a co-operative bank and a primary agricultural credit society?

A: A co-operative bank accepts deposits from the public for lending, while a primary agricultural credit society typically operates within a limited area and for its members.

Q: Does this decision apply to all states in India?

A: While this was a decision by the Madras High Court, it could be influential in similar cases across India. However, other courts aren’t bound by it.

Q: Can the Income Tax Department appeal this decision?

A: Yes, they could potentially appeal to the Supreme Court if they believe there’s a significant legal question to be addressed.

1. This Appeal has been filed by the Revenue against the order of the Income Tax Appellate Tribunal Madras 'D' Bench dated 17.07.2015 in I.T.A. No.946/Mds/2015.

2. The facts of the case are as follows :-

The Assessee is a co-operative society engaged in banking and trading activities. It admitted 'Nil' return of income after claiming deduction u/s 80P(2)(a)(i) (of Income Tax Act, 1961). The Assessing Officer disallowed the claim of the assessee on the ground that the assessee had lent monies to the members who were undertaking non-agricultural/ non-farm activities and had received the interest on par with commercial banks. The Assessing Officer held that since interest is received on non-farm sector loans, it does not qualify for deduction u/s 80P(2)(a)(i) (of Income Tax Act, 1961) and that the assessee's activity is purely in the nature of commercial banking activities. Further, the Assessing Officer held that as per Section 80P(4) (of Income Tax Act, 1961), deduction is available only if primary agricultural credit societies are engaged with a primary object of providing financial assistance to its members for agricultural activities. Therefore the assessee' claim under Section 80P (of Income Tax Act, 1961) was rejected.

3. Aggrieved by the assessement order, the assessee filed appeal to the Commissioner of Income Tax (Appeal). It is submitted that on identical issue in other cases the Commissioner of Income Tax (Appeal) has found that as per the bye-laws there were two types of members viz., Class A and Class B members. Class A members are normal members who have voting rights and involved in the running of the assessee's business and can become the members of Administrative committee, etc. Class B members are anyone other than Class A members, who had availed loans from the assessee and is necessarily enrolled as Class B member. The Class B member is not recognized by the assessee for the purpose of the records in statute. Further, the majority of jewel loan and other non-farming loan at a higher interest were given to Class B members. Therefore, the Commissioner of Income Tax (Appeal) held that the asseessee cannot claim the benefit of deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961) on the interest received from the Class B non-members of the assessee society. The deduction was also denied on the ground that the non-members did not undertake any agricultural activity as required under Section 80P(4) (of Income Tax Act, 1961). Therefore, the Commissioner of Income Tax (Appeal) held that the assessee had not provided credit facilities to its members to assist agricultural activity and thereby confirmed the Assessment order. But, in the present case the Commissioner of Income Tax (Appeal) followed the decision of the Tribunal and had allowed the appeal.

4. Aggrieved by the order of the Commissioner of Income Tax (Appeal), Revenue filed appeals before the Income Tax Appellate Tribunal. The Tribunal held that as per the definition of a member under Section 2(16) (of Income Tax Act, 1961), the associate member under Section 2(6) (of Income Tax Act, 1961) is also included as per the State Cooperative Societies Act, 1983. Therefore, the Class B members cannot be treated as non- member and consequently held that the assessee is entitled for deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961). The Tribunal held that the assessee will be entitled for deduction under Section 80P(2)(a) (iv) (of Income Tax Act, 1961) eventhough the issue did not arise for consideration. The Tribunal did not consider the issue as to whether the interest on the loan lent for non-agricultural activity could be entitled for deduction as per Section 80P(2)(a)(i) (of Income Tax Act, 1961) read with 80P (4) and the assessee's violation to lend amount on par with commercial banks at higher interest. The Tribunal had followed its own order and allowed the appeal.

5. Aggrieved by the order of the Income Tax Appellate Tribunal, the Revenue has filed this appeal, on raising the following substantial questions of law:-

1. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the assessee is to be treated as primary agricultural society and is carrying on the business of banking or providing credit facilities to its members and is entitled for deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961), 1961 with respect to the interest received from Class B members who were involved in non-agricultural activity.

2. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the Class B members of the assessee society can be treated as a member of the society for the purpose of Section 80P(2) (a)(i) (of Income Tax Act, 1961) when Class B members do not have the right to participate in the voting and meetings of the board of the society.

3. Whether on the facts and in the circumstances of the case the Tribunal was right in not considering the fact that the assessee was lending monies for non-agricultural purpose and the provisions of Section 80P(4) (of Income Tax Act, 1961) and 2(24) (viia).

The contention of the learned counsel for the appellant/ Revenue department, is that Class B members of the respondent society cannot be treated as members of the assessee society, as Class B members were not recognised as per record and bye-laws of the assessee society, for the purpose of voting, attending the board meeting etc. Therefore, as per Section 80P(4) (of Income Tax Act, 1961), the benefit under Section 80P (of Income Tax Act, 1961) cannot be extended to any cooperative Bank other than a primary agricultural credit society. The assessee cannot be treated as a credit society for the loan advanced to non- agricultural purposes and so the assessee societies are not entitled for the benefit under Section 80P(2)(a)(i) (of Income Tax Act, 1961) read with 80P (4).

6. Heard Mr.J. Narayanasamy, learned Senior Standing Counsel for the appellant, Mr. S. Sridhar, learned counsel for the respondent assessee and perused the material available on record.

7. On perusal of the order passed by the Tribunal, it is found that the Assessing Officer while completing the assessment had denied deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961), in respect of interest income towards jewel loan and other loans, on the ground that the purpose of loan issued was for commercial activities and not for agricultural purposes. Hence, the assessee filed appeal in I.T.A.No.72/2013-14 before the Commissioner of Income Tax (Appeal), which was allowed by the Commissioner. Aggrieved by the same, the Revenue filed appeal before the Income Tax Appellate Tribunal, Madras, in I.T.A.No.946/ Mds/2015. The Tribunal dismissed the appeal of the Revenue, based on the decisions of the Co-ordinate Bench of the Tribunal in the case of M/s. SL (SPL) 151 Karkudalpatty Primary Agricultural Co-operative Credit Society Ltd. vs. ITO Ward II(2), Salem in ITA No.292/ Mds/2014 dated 17.03.2014 and an other decision of the Tribunal in the case of the Salem Agricultural Producers Co-operative Marketing Society Ltd. vs. ITO in ITA Nos.730 to 732/Mds/2014 dated 30.06.2014.

8. In the case of ITO Vs. M/s. Veerakeralam Primary Agricultural Co-operative Credit Society in ITA No.197/Mds/2013 dated 11.02.2014, the Tribunal had dismissed the appeal of the Revenue. Against the order of the Income Tax Appellate Tribunal, the aforesaid Veerakeralam Primary Agricultural Co-operative Credit Society filed an appeal under Section 260A (of Income Tax Act, 1961), in T.C.A. Nos. 735, 755 of 2014 and 460 of 2015 before this Court. By judgment dated 05.07.2016, the appeals were dismissed, on the following reasoning:

“13. Sub-section (4) of Section 80P (of Income Tax Act, 1961) is extracted below :

“(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.”

Explanation – For the purposes of this sub- section ---

(a) “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);

(b) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.”

It is seen that the primary object of the society is to provide financial accommodation to its members to meet all the agricultural requirements and to provide credit facilities to the members, as per the bye-laws and as laid down in Section 5(cciv) of the Banking Regulation Act, 1949. Further, from the CPT Circular dated 12.03.2008, it is evident that a credit co-operative society is not a co-operative bank, as defined in Part V of the Banking Regulation Act, 1949. The object of a 'Co- operative bank' is to accept deposits from the public, for lending or investment of money. On perusal of the findings of the Appellate Authority as well as the Appellate Tribunal, it is categorically made clear that the assessee society will not come under the object of the principal business of a co-operative bank, which is a banking business. The benefit of Section 80P (of Income Tax Act, 1961) is excluded for deductions by co-operative banks, whereas the primary agricultural credit societies are entitled for the said deduction.

15. In the recent decision of the Kerala High Court, in the case of Chirakkal Service Co-operative Bank Ltd., Kannur vs. the Commissioner of Income Tax, reported in (2016) 68 taxmann.com.298 (Kerala), the High Court considered similar substantial questions of law (Issue No.A) raised by the assessee, regarding the entitlement for exemption under sub section (4) of Section 80P (of Income Tax Act, 1961). By considering the fact that the assessee is a primary agricultural society, the Kerala High Court has answered the substantial question of law in favour of the assessee and held that the primary agricultural credit societies, registered as such under the KCS Act and classified so under that Act, including the appellants, are entitled to such exemption. Therefore, the aforesaid decisions is applicable to the instant case.

16. In the light of the aforesaid facts and circumstances of the case, we are of the view, that the substantial question of law framed in the instant appeals, is answered against the Revenue. The exception barred out in Section 80P(4) (of Income Tax Act, 1961), 1961, is applicable to the assessee credit society.

Hence, the appeals are accordingly dismissed.”

9. In the instant case, while allowing the appeal filed by the assessee, the Commissioner of Income Tax (Appeal), had relied upon, the following portion of the decision of the Tribunal arrived in ITA No.292/Chny/2014:-

“ 7. We have heard both parties and gone through the case file. As stated in the preceding paragraphs, the CIT (A) has proceeded to enhance the assessment (supra) only on the ground that the assessee's credit and various other loan, facilities have been allowed to be availed by 'B' class 'nominal' members whose liability is limited, at the best; to the extent of loan repayable instead of 'A' class members who have voting rights and dividend claim, and also that the latter members are jointly and severely liable. In this backdrop, when we peruse the relevant provisions of the State Co-operative Societies Act, 1983, governing the assessee-society, it is evident from the definition of 'member' u/s 2(16) (of Income Tax Act, 1961) that the same includes an 'associate member' recognition as per the Act. The net result is that once the 'nominal' members also enjoy statuary condition imposed by the legislature u/s 80P(2)(a)(i) (of Income Tax Act, 1961). We make it clear that we are dealing with the deduction provision to be interpreted liberally. In our considered opinion, the objections of the revenue that the 'members' defined in sub clause (i) of Section 80P (of Income Tax Act, 1961) should only include voting members would amount to a classification within classification which is beyond the purview of tax statute; unless provided specifically by the legislature. Moreover, we find that the case law of Hon'ble Punjab and Haryana High Court (Supra) also supports the assessee's case wherein it has been held under the very provision that for the purpose of impugned deduction, it is irrelevant so far as classification of the members in 'A' or 'B' category is concerned. ”

10. The appellate authority, namely, the Commissioner of Income Tax (Appeal) and the Income Tax Appellate Tribunal has clearly perceived that the assessee is not a co-operative bank and that the activities of the Bank is in the nature of accepting deposits, advancing loans etc., carried on by the assessee, but is confined to its members only and that too in a particular geographical area. Therefore, the respondent Society is eligible for deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961). The contention of the appellant that the members of the assessee society is not entitled to receive any dividend or having any voting right or no right to participate in the general administration or to attend any meeting etc., because they are admitted as associate member for availing loan only and was also charging a higher rate of interest, is not a ground to deny the exemption granted under Section 80P(2)(a)(i) (of Income Tax Act, 1961).

11. In view of the facts and circumstances of the cases and the decision rendered by this Court in T.C.A.Nos.735, 755 of 2014 and 460 of 2015, dated 5/7/2016, which covers the present facts of the case, so far as it relates to the eligibility of the respondent society, under Section 80P(2)(a)(i) (of Income Tax Act, 1961), we are of the view that the substantial questions of law raised by the Revenue in the instant appeals are answered against the Revenue.

12. In view of the above, the T.C.A.No.272 of 2016 is dismissed. There shall be no order as to costs.

(S.M.K., J.) (D.K.K., J.)

09.08.2016

Index : Yes / No

Internet : Yes / No.