Ita/212/2013 Of The Chirakkal Service Co-Op. Bank Ltd v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE THOTTATHIL B.RADHAKRISHNAN & THE HONOURABLE MR.JUSTICE K.HARILAL MONDAY, THE 15TH DAY OF FEBRUARY 2016/26TH MAGHA, 1937 ITA.No. 212 of 2013 () ----------------------- AGAINST THE ORDER IN ITA 309/2012 OF INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH DATED 28-02-2013 -------- APPELLANT: ------------------ THE CHIRAKKAL SERVICE CO-OPERATIVE BANK LTD P.O.CHIRACKAL, KANNUR, KANNUR-670 011. BY ADVS.SRI.I.V.PRAMOD DR.K.P.PRADEEP RESPONDENT(S)/RESPONDENT : ------------------------------------------------ THE COMMISSIONER OF INCOME TAX AYKAR BHAVAN, MANANCHIRA, KOZHIKODE-1. BY SRI.P.K.R.MENON, SENIOR SC, GOI(TAXES) SRI.JOSE JOSEPH, SC THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 02-02-2016 ALONG WITH ITA.273/2013 & CONNECTED CASES, THE COURT ON 15-02-2016 DELIVERED THE FOLLOWING: MKS APPENDIX APPELLANT'S ANNEXURES ANNEXURE-A-TRUE COPY OF THE ORDER OF ASSESSMENT FOR 2009-10 DATED16/12/2011. ANNEXURE-B-TRUE COPY OF THE ORDER IN APPEAL IN ITA 196/KNR/CIL/CLT/2011-12DATED 21/09/2012 OF THE COMMISSIONER OF INCOME TAX (APPEAL), KOZHIKODE ANNEXURE-C-TRUE COPY OF THE ORDER IN APPEAL IN ITA NO. 309/COC/2012DATED 28/02/2013 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH RESPONDENT'S ANNEXURE NIL \TRUE COPY\ P.S. TO JUDGE MKS “C.R.” Thottathil B.Radhakrishnan & K.Harilal, JJ. = = = = = = = = = = = = = = = = = = = = = = = = I.T.A.Nos.212, 273, 278, 292, 299 & 313 of 2013,156, 188, 189, 190, 191, 192, 193, 197, 198, 199,201, 202, 203, 204, 205, 206, 207, 209, 211, 212,214, 216, 217, 218, 219, 220, 221, 222, 223, 224,225, 227, 228, 229, 230, 231, 237, 238, 239, 240,241, 243, 247, 250, 251, 252, 253, 254, 255, 265,266, 268, 269, 270, 271,272,273,275 & 281 of 2014156, 188, 189, 190, 191, 192, 193, 197, 198, 199,201, 202, 203, 204, 205, 206, 207, 209, 211, 212,214, 216, 217, 218, 219, 220, 221, 222, 223, 224,225, 227, 228, 229, 230, 231, 237, 238, 239, 240,241, 243, 247, 250, 251, 252, 253, 254, 255, 265,266, 268, 269, 270, 271,272,273,275 & 281 of 2014 and 25, 26, 29, 30, 32, 34, 35, 37, 38, 39, 40, 41, 42, 45, 46 & 53 of 2015 = = = = = = = = = = = = = = = = = = = Dated this the 15[th] day of February, 2016 Judgment Thottathil B.Radhakrishnan, J. 1.These appeals by primary agricultural creditsocieties registered and classified as such undersocieties registered and classified as such under the provisions of the Kerala Co-operativeSocieties Act, 1969, for short, 'KCS Act', relateto exemptions claimed by them with reference tosection 80P(4) of Income Tax Act, 1961; hereinafter, 'IT Act'. Issues are also raisedrelating to the validity or otherwise of thereturns filed by the assessees beyond the period stipulated under section 139(1)/(4) or section142(1)/148 for the purpose of deciding exemptionunder section 80P of the IT Act. Incidentalissues relating to doubtful debts proportionateto the gross total income and the status of ruralbranch to claim deduction referable to section 36(1)(viia) of the IT Act are also raised. 2.HeardSnr.Adv.FirozeB.AndhyarujinaandSnr.Adv.T.M.SreedharanandotherlearnedadvocatesfortheappellantsandSnr.Adv.P.K.R.Menon, learned senior standingcounsel for the Government of India (Taxes)assisted by Adv.Jose Joseph, standing counsel forIncome Tax Department and Adv.Ajay V.Anand. 3.ITA.No.212 of 2013 was admitted on 21.11.2013 andthe following substantial questions of law wereformulated at the time of admission forconsideration:A)Whether on the facts and in thecircumstancesofthecaseunder consideration, the Tribunal is correct inlaw in deciding against the assessee, theissue regarding entitlement for exemptionunder section 80P, ignoring the fact thatthe assessee is a primary agriculturalcredit society? 2.HeardSnr.Adv.FirozeB.AndhyarujinaandSnr.Adv.T.M.SreedharanandotherlearnedadvocatesfortheappellantsandSnr.Adv.P.K.R.Menon, learned senior standingcounsel for the Government of India (Taxes)assisted by Adv.Jose Joseph, standing counsel forIncome Tax Department and Adv.Ajay V.Anand. 3.ITA.No.212 of 2013 was admitted on 21.11.2013 andthe following substantial questions of law wereformulated at the time of admission forconsideration:A)Whether on the facts and in thecircumstancesofthecaseunder consideration, the Tribunal is correct inlaw in deciding against the assessee, theissue regarding entitlement for exemptionunder section 80P, ignoring the fact thatthe assessee is a primary agriculturalcredit society? B)Whether the Tribunal is justified indenying the exemption under section 80P ofthe Income Tax Act, 1961, on the mere groundof belated filing of return by the assessee?denying the exemption under section 80P ofthe Income Tax Act, 1961, on the mere groundof belated filing of return by the assessee? C)Whether a return filed by the assesseebeyond the period stipulated under section139(1)/(4) or section 142(1)/148 can be heldas non est in law and invalid for thepurpose of deciding exemption under section80P of the Income Tax Act, 1961?beyond the period stipulated under section139(1)/(4) or section 142(1)/148 can be heldas non est in law and invalid for thepurpose of deciding exemption under section80P of the Income Tax Act, 1961? D)Whether the Tribunal is correct in law oris justified in restricting the provisionsfor bad and doubtful debt at the 7.5% of thegross total income, on the reason that theis justified in restricting the provisionsfor bad and doubtful debt at the 7.5% of thegross total income, on the reason that the assessee is not entitled for the status ofrural branch to claim 10% of the aggregateaverage advances as bad and doubtful debt,under section 36(1)(viia) of the Income TaxAct, 1961? 4.Thereafter, noticing that all the captionedappeals give rise to the same questions of law,the other appeals were also admitted on thesubstantial questions of law as framed inITA.No.212 of 2013 and those substantialquestions of law were incorporated into the otherappeals as well.appeals give rise to the same questions of law,the other appeals were also admitted on thesubstantial questions of law as framed inITA.No.212 of 2013 and those substantialquestions of law were incorporated into the otherappeals as well. 5.Before proceeding further, we may note that theIncome Tax Appellate Tribunal also proceeded todecide many of the fundamental issues as if theyare common to all these cases. Some of thematters before the Tribunal were either bunchedup and decided in one go, while the others wererendered following the earlier decisions on thesame issue. 6.Of prime importance is the plea of the appellantsthat they are primary agricultural creditsocieties and are, therefore, eligible toexemption in terms of sub-section 4 of section80P of the IT Act. The characteristics of theappellants as primary agricultural creditsocieties including the fact that they areregistered under the KCS Act and that their fundmanagement is in terms of the regulatorydirections of the Registrar of Co-operativeSocieties and other aspects are referred to, toshow that all the appellants are eligible to theexemption provided for through section 80P(4) ofthe IT Act. We will detail the relevant statutoryprovisions as pointed out by the learned seniorcounsel for the appellants as we proceed with theconsideration of the issue in this regard. 7.Submissions were also made on the questionsraised relating to the belated filing of returns.Some of the cases are those were returns werefiled belatedly; some relate to claim ofexemption after best of judgment assessments; 7.Submissions were also made on the questionsraised relating to the belated filing of returns.Some of the cases are those were returns werefiled belatedly; some relate to claim ofexemption after best of judgment assessments; and, yet another group relates to cases wherenotices were issued under sections 147 and 148 ofthe IT Act which may have a bearing on thequestion of delay. 8.On behalf of the department, it is argued thatthe Tribunal was justified in holding that theappellants are not entitled to exemption in termsof section 80P(4) and therefore, they fall intothe tax net by virtue of section 80((1), subjectonly to the permissible deductions under sub-section 2 of section 80P. The findings of theTribunal are sought to be supported also asregards the belated filing of returns and claimfor exemption. It is argued that the appellantsare, essentially, Co-operative Banks; and, notmerely primary agricultural credit societies; andhence the appellants' plea as to exemption undersection 80P(4) is unfounded. 9.Section 80P of the IT Act deals with deduction inrespect of income of co-operative societies. Sub-section 1 of that section provides that where, in the case of an assessee being a co-operativesociety, the gross total income includes anyincome referred to in sub-section 2 of thatsection, there shall be deducted, in accordancewith and subject to the provisions of section80P, the sums specified in sub-section 2 thereof,in computing the total income of the assessee.Sub-section 4 of section 80P provides that theprovisions of section 80P shall not apply inrelation to any co-operative bank other than aprimary agricultural credit society or a primaryco-operative agricultural and rural developmentbank. This provision in sub-section 4 of section80P means that the provisions of section 80Pshall not apply to a primary agricultural creditsociety. Hence, the levy of tax in terms of theprovisions of section 80P does not apply to aprimary agricultural credit society. 10.The terms 'co-operative bank' and 'primaryagricultural credit society'; for the purpose ofsub-section 4 of section 80P of the IT Act, shallhave the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949;for short; BR Act, going by Explanation (a)occurring after section 80P(4) of the IT Act. Forthe purpose of that sub-section, 'primary co-operative agricultural and rural developmentbank' is defined to mean what is stated inExplanation (b) to Section 80P(4) of the IT Act. 11.Part V of the BR Act carries section 56 of thatAct, which prescribes modifications to theprovisions of the BR Act in their application andin relation to co-operative societies. 12.'Co-operative bank' is a term defined in section5(cci) of the BR Act to mean, inter alia, aprimary co-operative bank. A primary co-operativebank is a co-operative society other thanaprimary agricultural credit society, going byclause (ccv) of section 5 of the BR Act.Therefore, a primary agricultural credit societyis not to be treated as a primary co-operativebank and therefore, not to be reckoned as a co-operative Bank. We state this here and now to ITA212/13 & con. cases point out that the appellants which are primaryagricultural credit societies are not of suchtype that they would fall for consideration as aco-operative bank for the purpose of sub-section4 of section 80P of the IT Act. Resultantly, theconsequential legal implication is that a primaryagricultural credit society is one among the twotypes of institutions which gain the benefit ofsub-section 4 of section 80P to ease themselvesout from the coverage of section 80P. Theargument advanced on behalf of the Revenue, tothe contrary is repelled. ITA212/13 & con. cases point out that the appellants which are primaryagricultural credit societies are not of suchtype that they would fall for consideration as aco-operative bank for the purpose of sub-section4 of section 80P of the IT Act. Resultantly, theconsequential legal implication is that a primaryagricultural credit society is one among the twotypes of institutions which gain the benefit ofsub-section 4 of section 80P to ease themselvesout from the coverage of section 80P. Theargument advanced on behalf of the Revenue, tothe contrary is repelled. 13.Reverting to section 5(cciv) of the BR Act;'primary agricultural credit society' means a co-operative society, the primary object orprincipal business of which is to providefinancial accommodation to its members foragricultural purposes or for purposes connectedwith agricultural activities (including themarketing of crops; and the bye-laws of which donot permit admission of any other co-operativesociety as member. However, the provisions in sub-clause 2 of section 5(cciv) shall not applyto the admission of a co-operative bank as amember by reason of such co-operative banksubscribing to the share capital of such co-operative society out of funds provided by theState Government for the purpose. This is theeffect of the proviso occurring after sub-clause2 of section 5(cciv) which is referred to hereinonly for continuity, though we are not reallyconcerned with the effect of that proviso.Keeping in mind that 'primary agricultural creditsociety' is defined with reference to the term'co-operative society'; reverting to section 5(cciia) of the BR Act, it can be seen that forthe purpose of that Act, 'co-operative society'means a society registered or deemed to have beenregistered under any Central Act for the timebeing in force relating to the multi-State co-operative societies, or any other Central orState law relating to co-operative societies forthe time being in force. ITA212/13 & con. cases-: 11 :- legislative tool used is 'means'; and not'includes'. Therefore, when the term 'co- operative society' is defined to mean, interalia, a society registered under any State lawrelating to co-operative societies for the timebeing in force; one such is a co-operativesociety for the purposes of the BR Act and ifthat co-operative society satisfies thedefinition of 'primary agricultural creditsociety', it would be one to which the exemptionas per sub-section 4 of section 80P of the IT Actwould apply. 15.Appellants in these different appeals are indisputably societies registered under theKerala Co-operative Societies Act, 1969, forshort, KCS Act and the bye-laws of each of them,as made available to this Court as part of thepaper books, clearly show that they have beenclassified as primary agricultural creditsocieties by the competent authority under theprovisions of that Act. The Parliament, havingdefined the term 'co-operative society' for the 15.Appellants in these different appeals are indisputably societies registered under theKerala Co-operative Societies Act, 1969, forshort, KCS Act and the bye-laws of each of them,as made available to this Court as part of thepaper books, clearly show that they have beenclassified as primary agricultural creditsocieties by the competent authority under theprovisions of that Act. The Parliament, havingdefined the term 'co-operative society' for the purposes of the BR Act with reference to, amongother things, the registration of a society underany State law relating to co-operative societiesfor the time being; it cannot but be taken thatthe purpose of the societies so registered underthe State Law and its objects have to beunderstood as those which have been approved bythe competent authority under such State law.This, we visualise as due reciprocativelegislativeexercisebytheParliamentrecognising the predominance of decisionsrendered under the relevant State Law. In thisview of the matter, all the appellants havingbeen classified as primary agricultural creditsocieties by the competent authority under theKCS Act, it has necessarily to be held that theprincipal object of such societies is toundertake agricultural credit activities and toprovide loans and advances for agriculturalpurposes, the rate of interest on such loans andadvances to be at the rate fixed by the Registrarof Co-operative Societies under the KCS Act andhaving its area of operation confined to a village, panchayat or a municipality. This is theconsequence of the definition clause in section 2(oaa) of the KCS Act. The authorities under theIT Act cannot probe into any issue or such matterrelating to such applicants. 16.The position of law being as above withreference to the statutory provisions, theappellants had shown to the authorities and theTribunal that they are primary agriculturalcredit societies in terms of clause (cciv) ofsection 5 of the BR Act, having regard to theprimary object or principal business of each ofthe appellants. It is also clear from thematerials on record that the bye-laws of each ofthe appellants do not permit admission of anyother co-operative society as member, except maybe, in accordance with the proviso to sub-clause2 of section 5(cciv) of the BR Act. The differentorders of the Tribunal which are impeached inthese appeals do not contain any finding of factto the effect that the bye-laws of any of theappellant or its classification by the competent authority under the KCS Act is anything differentfrom what we have stated herein above. For thisreason, it cannot but be held that the appellantsare entitled to exemption from the provisions ofsection 80P of the IT Act by virtue of sub-section 4 of that section. In this view of thematter, the appeals succeed. 17.In the light of the aforesaid, we answersubstantial question 'A' in favour of theappellants and hold that the Tribunal erred inlaw in deciding the issue regarding theentitlement of exemption under section 80Pagainst the appellants. We hold that the primaryagricultural credit societies, registered as suchunder the KCS Act; and classified so, under thatAct, including the appellants are entitled tosuch exemption. 18.Questions B and C relate to denial of exemptionon ground referable to belated filing of return,that is to say, returns filed beyond the periodstipulated under section 139(1) or section 139on ground referable to belated filing of return,that is to say, returns filed beyond the periodstipulated under section 139(1) or section 139 17.In the light of the aforesaid, we answersubstantial question 'A' in favour of theappellants and hold that the Tribunal erred inlaw in deciding the issue regarding theentitlement of exemption under section 80Pagainst the appellants. We hold that the primaryagricultural credit societies, registered as suchunder the KCS Act; and classified so, under thatAct, including the appellants are entitled tosuch exemption. 18.Questions B and C relate to denial of exemptionon ground referable to belated filing of return,that is to say, returns filed beyond the periodstipulated under section 139(1) or section 139on ground referable to belated filing of return,that is to say, returns filed beyond the periodstipulated under section 139(1) or section 139 (4), as the case may be, as well as section 142(1) or section 148, as the case may be. There areno cases among these appeals where returns werenot filed. There are cases where claims have beenmade along with the returns and the returns werefiled within time. Still further, there are caseswhere returns were filed belatedly, that is tosay, beyond the period stipulated under sub-section 1 or 4 of section 139; and, there arealso returns filed after the period withreference to sections 142(1) and 148 of the ITAct. 19.Section 80A(5) provides that where the assesseefails to make a claim in his return of income forany deduction, inter alia, under any provision ofChapter VIA under the heading “C.-Deductions inrespect of certain incomes”, no deduction shallbe allowed to him thereunder. Therefore, in caseswhere no returns have been filed for a particularassessment year, no deductions shall be allowed.This embargo in section 80A(5) would apply,though section 80P is not included in section 80AC. This is so because, the inhibition againstallowing deduction is worded in quite similarterms in sections 80A(5) and 80AC, of whichsection 80A(5) is a provision inserted throughthe Finance Act 33/2009 with effect from 1.4.2013after the insertion of section 80AC as per theFinance Act of 2006 with effect from 1.4.2006.Thisclearlyevidencesthelegislativeintendiment that the inhibition contained in sub-section 5 of section 80A would operate by itself.In cases where returns have been filed, thequestion of exemptions or deductions referable tosection 80P would definitely have to beconsidered and granted if eligible. 20.Here, questions would arise as to whetherbelated returns filed beyond the periodstipulated under section 139(1) or section 139(4)as well as following sections 142(1) and 148proceedings could be considered for exemption. Ifthose returns are eligible to be accepted interms of law, going by the provisions of thestatute and the governing binding precedents, it goes without saying that the claim for exemptionwill also stand effectuated as a claim duly madeas part of the returns so filed, for dueconsideration. 21.When a notice under section 142(1) is issued,the person may furnish the return and while doingso, could also make claim for deduction referableto section 80P. Not much different is thesituation when pre-assessment enquiry is carriedforward by issuance of notice under section 142(1) or when notice is issued on the premise ofescaped assessment referable to section 148 ofthe IT Act. This position notwithstanding, whenan assessment is subjected to first appeal orfurther appeals under the IT Act or all questionsgermane for concluding the assessment would berelevant and claims which may result inmodification of the returns already filed couldalso be entertained, particularly when it relatesto claims for exemptions. This is so because thefinality of assessment would not be achieved inall such cases, until the termination of all such appellate remedies. Under such circumstances, theTribunal was not justified in denying exemptionunder section 80P of the IT Act on the mereground of belated filing of return by theassessee concerned. A return filed by theassessee beyond the period stipulated undersection 139(1) or 139(4) or under section 142(1)or section 148 can also be accepted and actedupon provided further proceedings in relation tosuch assessments are pending in the statutoryhierarchy of adjudication in terms of theprovisions of the IT Act. In all such situations,it cannot be treated that a return filed at anystage of such proceedings could be treated as nonest in law and invalid for the purpose ofdeciding exemption under section 80P of the ITAct. We thus answer substantial questions of lawB and C formulated and enumerated above. With the aforesaid, we remit all these mattersfor reconsideration by the Income Tax AppellateTribunal in the light of the answers renderedherein on substantial questions of law A, B and ITA212/13 & con. cases C. The Tribunal will thereupon consider theissues relating to the bad and doubtful debts andthe claim of the assessee in that regard bytreating that in all cases where exemptions areclaimed under section 80P and such matters werepending before the assessing authority or beforethe appellate authority, including in theseappeals, the question of exemption availableunder section 80P was still available fordecision. Sd/-Thottathil B.Radhakrishnan Judge Sha/040216 Sd/- K.Harilal Judge -true copy- PS to Judge