Principal Commissioner of Income Tax, Kottayam v Mundakkayam Service Co-Operative Bank Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI WEDNESDAY, THE 28[TH] DAY OF SEPTEMBER 2022 / 6TH ASWINA, 1944 ## ITA NO. 22 OF 2017 AGAINST THE ORDER ITA 106/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/S: PRINCIPAL COMMISSIONER OF INCOME TAX KOTTAYAM. BY ADVS.SRI NAVNEETH N NATH SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX ## RESPONDENT/S: THE MUNDAKKAYAM SERVICE CO-OPERATIVE BANK LTD. MUNDAKKAYAM,KOTTAYAM-686513. BY ADVS.SRI.LIJI.J.VADAKEDOM DR.K.P.PRADEEP THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 28.09.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **ITA No.22/2017** **-2-** **==> picture [106 x 14] intentionally omitted <==** S.V. Bhatti, J. Heard Adv Navneeth N Nath, holding for learned Senior Counsel Mr P K R Menon, and learned Counsel Dr K P Pradeep for parties. 2. The Principal Commissioner of Income Tax/Revenue is the appellant. The Mundakkayam Service Co-operative Bank Ltd/assessee is the respondent. 2.1 The appeal, at the instance of the Revenue, is directed against the order dated 31.10.2016 of the Income Tax Appellate Tribunal (for short ‘Tribunal’) Cochin Bench in ITA No.106/Coch/2016. The subject matter of the appeal relates to the return filed by the assessee for the Assessment Year 2012- 13. **ITA No.22/2017** **-3-** 3. The controversy between the Revenue and the assessee is substantially centring around Section 80P of the Income Tax Act, 1961 (for short ‘the Act’). The Counsel appearing for the parties invited the attention of the Court to the judgment in _Mavilayi Service Co-operative Bank Ltd v._ that the issue is no more . _Commissioner of Income Tax_[1] _res integra_ To appreciate the argument on the ancillary issue that arises from any one of the questions, we find it useful and appropriate to excerpt such of the paragraphs on which reliance has been . placed by the counsel on _Mavilayi Service Co-operative Bank Ltd_ “Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under section 80P. Therefore, the Assessing Officer under the Act cannot be said to be going behind any registration certificate when he engages in a fact-finding enquiry as to whether the cooperative society concerned is in fact providing credit facilities to its members. Such fact finding enquiry would entail examining all relevant facts of the co-operative society in 1 (2021) 431 ITR 1 (SC) **ITA No.22/2017** **-4-** question to find out whether it is, as a matter of fact, providing credit facilities to its members, whatever be its nomenclature. UDAIPUR SAHKARI UPBHOKTA THOK BHANDAR LTD. v. CIT [2009] 315 ITR 21 (SC) relied on. Sixthly, the expression "providing credit facilities to its members" does not necessarily mean agricultural credit alone. Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and section 80P(2)(a)(i) must be contrasted with section 80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must also further be contrasted with sub-clause (b), which speaks only of a "primary" Society engaged in supplying milk, etc., thereby defining which kind of society is entitled to deduction, unlike the provisions contained in section 80P(2)(a)(i). Also, the proviso to section 80P(2), when it speaks of sub-clauses (vi) and (vii), further restricts the type of society which can avail of the deductions contained in those two subclauses, unlike any such restrictive language in section 80P(2)(a)(i). Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of profits and gains to an activity is a real **ITA No.22/2017** **-5-** one. Since profits and gains from credit facilities given to nonmembers cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.” 4. The circumstances relevant for disposing of the appeal are stated in sufficient detail in the orders under appeal. Hence, are not reiterated. But a singular circumstance noted is that the assessee is a Primary Agricultural Credit Society/a Society registered under the Kerala Societies Registration Act. Therefore, deduction eligible under Section 80P(2) is the issue for consideration. 4.1 In the above background, the following substantial questions are considered: “(i) Whether, on the facts and circumstances of the case, and also in view of the decision in 363 ITR 268 (in the case of Perinthalmanna Service Co-operative Bank), the Tribunal is right in holding that deduction u/s 80P(2)(a)(i) of the Act be allowed to the assessee merely on the strength of the certificate of registration as "Primary Agricultural Credit Society"? **ITA No.22/2017** **-6-** (ii) Are not the findings of the Hon'ble Court reported in 363 ITR 268 and 384 ITR 490 inconsistent and contradictory with regard to the Assessing Officer's power to examine the assessee's eligibility for deduction u/s 80P(2)(a)(i) of the Act? (iii) Is not the judgement in 384 ITR 490 vitiated in confining itself to the provisions of the State Co-operative Societies Act? (iv) Whether the Hon'ble Tribunal is right in taking two different views in two different judgements in respect of "interest income" earned on fixed deposits by the Co-operative Societies? (v) Whether the interest earned on fixed deposits is assessable under the head "business income" also, in view of the decision of the Delhi High Court reported in [2014] 50 taxmann.com 278 (Delhi)? 5. The learned counsel appearing for the Revenue argues that the order of assessment mainly concentrated on the entitlement of benefit under Section 80P(2) of the Act and has not considered the consequential examination _i.e.,_ assuming that the assessee is a Co-operative Society and entitled to the **ITA No.22/2017** **-7-** deduction of Section 80P(2)(a) of the Act, still, the deduction is limited to the extent set out by the Supreme Court in _Mavilayi Service Co-operative Bank Ltd_ . A perusal of the conclusions recorded by the Assessing Officer, according to him, would show that this aspect of the matter is not considered. Therefore, by extending the benefit of Section 80P(2) to the assessee, the consequential consideration of whether the income now claimed by way of deduction warrants inclusion or exclusion has to be considered on case to case basis. For the said purpose the counsel invites the attention of this Court to the judgment of this Court reported in _Principal Commissioner of Income Tax v. Peroorkada Service Co-operative Bank Ltd_[2] _,_ where this Court after recording a finding that entitlement as limiting to Section 80P(2) alone is granted. 6. The learned counsel appearing for the assessee > 2 (2022) 442 ITR 141 (Ker) **ITA No.22/2017** **-8-** contends that there is no reason or necessity for remanding the matter to the Assessing Authority for reconsideration of the returns filed for the subject year in the light of the directions issued by the Supreme Court in _Mavilayi Service Co-operative Bank Ltd_ .). Next, it is argued that the view taken by this Court in _Peroorkada Service Co-operative Bank Ltd_ is contrary to the view taken by a Division Bench of High Court of Andhra Pradesh in _Commissioner of Income Tax-III v. The Andhra Pradesh State Cooperative Bank Limited_[3] . Therefore, firstly, it is commended to this Court to reconsider the view taken by this Division Bench in _Peroorkada Service Co-operative Bank Ltd._ Juxtaposing the reasoning in _Peroorkada Service Co-operative Bank Ltd_ and _The Andhra Pradesh State Cooperative Bank Limited,_ and refer to Full Bench, we take note of the argument and have independently relooked at the reasoning and the conclusion recorded by us in 3 (2011) 336 ITR 516 (AP) **ITA No.22/2017** **-9-** _Peroorkada Service Co-operative Bank Ltd_ and the reasoning/conclusion recorded in _The Andhra Pradesh State_ . _Cooperative Bank Limited_ 6.1 We may hasten to add that in _Peroorkada Service Cooperative Bank Ltd_ we have kept in our perspective the principles laid down by the Supreme Court in _Mavilayi Service Co-operative Bank Ltd_ , the consequential consideration that would arise thereafter. We have, in the above-said background, held the deductions permissible under Section 80P(2) of the Act, what constitutes business income, and what is to be classified as income from other sources. In our considered view, by referring to the ratio in _The Andhra Pradesh State Cooperative Bank_ _Limited_ the matter need not be referred to a Full Bench. A Division Bench of this Court, of which one of us was a party (Justice S V Bhatti), has taken a view to remit the matter to the Assessing Officer in _Principal Commissioner of Income-Tax v._ **ITA No.22/2017** **-10-** _Ponkunnam Service Co-operative Bank Ltd_[4] . By applying the principle laid down by the Apex Court in _Mavilayi Service Cooperative Bank Ltd_ and this Court in _Peroorkada Service Cooperative Bank Ltd_ , the substantial questions raised in the appeal are answered thus: 7. Question Nos.1 and 2: “(i) Whether, on the facts and circumstances of the case, and also in view of the decision in 363 ITR 268 (in the case of Perinthalmanna Service Co-operative Bank), the Tribunal is right in holding that deduction u/s 80P(2)(a)(i) of the Act be allowed to the assessee merely on the strength of the certificate of registration as "Primary Agricultural Credit Society"? (ii) Are not the findings of the Hon'ble Court reported in 363 ITR 268 and 384 ITR 490 inconsistent and contradictory with regard to the Assessing Officer's power to examine the assessee's eligibility for deduction u/s 80P(2)(a)(i) of the Act? 7.1 The above questions are covered by the principle laid down in _Mavilayi Service Co-operative Bank Ltd_ , both on the extent of entitlement of benefit under Section 80P(2) of the Act and also the obligation to independently consider whether the benefit is limited only to such of the income which > 4 (2021) 437 ITR (Ker) **ITA No.22/2017** **-11-** falls within the purview of in _Mavilayi Service Co-operative Bank Ltd_ and _Peroorkada Service Co-operative Bank Ltd_ . Hence, the questions are answered in favour of the Revenue for statistical purposes and matter is remitted to the Assessing Officer for passing fresh assessment order by keeping in view the judgments referred to above. 8. Question No.3: (iii): Is not the judgement in 384 ITR 490 vitiated in confining itself to the provisions of the State Co-operative Societies Act? 8.1 In view of the answer given to question nos 1 and 2, learned Counsel would submit that the question covered by substantial question no.3 is purely academic and need not be answered. 9. Question Nos. 4 and 5: (iv) Whether the Hon'ble Tribunal is right in taking two different views in two different judgements in respect of "interest income" earned on fixed deposits by the Co-operative Societies? (v) Whether the interest earned on fixed deposits is assessable under the head "business income" also, in view of the decision of the Delhi High Court reported in [2014] 50 taxmann.com 278 (Delhi)? **ITA No.22/2017** **-12-** 9.1 Question nos. 4 and 5 refer to the extent to which the assessee is entitled to deduction under Section 80P(2) of the Act. By following _Peroorkada Service Co-operative Bank Ltd_ the questions are answered in favour of the Revenue for statistical purposes and for determination of the actual income assessable to tax under the head applicable, the matter is remitted to the Assessing Officer. 10. Tribunal order, Appeal order and Assessment Order are set aside. Matter is remitted to Assessing Officer for disposal afresh. The Income Tax Appeal is allowed as indicated above. Sd/S.V.BHATTI JUDGE Sd/- BASANT BALAJI JUDGE jjj **ITA No.22/2017** **-13-** ## APPENDIX OF ITA 22/2017 PETITIONER ANNEXURES ANNEXURE A ASSESSMENT ORDER U/S.144 DT.13.03.2015. ANNEXURE B CIT (APPEALS) ORDER NO.K-12/KTM/CIT(A)/KTM/201516 DT.29.01.2016. Annexure C ITAT'S ORDER NO.106/COCH/2016 DT. 31.10.2016.