The Commissioner Of Income Tax,Salem v. M/S. S-681 Chinnathirupathi Pacb Ltd.,Chinnathirupathisalem – 636 008

IN THE HIGH COURT OF JUDICATURE AT MADRASDated: 09.08.2016CORAM :THE HONOURABLE MR. JUSTICE S.MANIKUMARandTHE HONOURABLE MR. JUSTICE D.KRISHNAKUMAR Tax Case Appeal No.272 of 2016 The Commissioner of Income Tax,Salem Vs. M/s. S-681 Chinnathirupathi PACB Ltd.,ChinnathirupathiSalem – 636 008. Prayer : Appeal filed under Section 260A of Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal Madras'D' Bench dated 17.07.2015 in I.T.A.No.946/Mds/2015 and againstthe the order of the Commissioner of Income Tax(Appeals), Salemdated 29/1/2015 made in ITA.NO.72/2013-14 and against the orderof the Income Tax Officer, Ward I (4) Salem dated 28/3/2013 madein PAN.No. for the Assessment year 2010-2011. J U D G M E N T (Judgment of the Court was made by D. KRISHNAKUMAR, J)This Appeal has been filed by the Revenue against theorder of the Income Tax Appellate Tribunal Madras 'D' Benchdated 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 inbanking and trading activities. It admitted 'Nil' return ofincome after claiming deduction u/s 80P (2) (a) (i) of the ITAct, 1961. The Assessing Officer disallowed the claim of theassessee on the ground that the assessee had lent monies to themembers who were undertaking non-agricultural/ non-farmactivities and had received the interest on par with commercial https://hcservices.ecourts.gov.in/hcservices/ banks. The Assessing Officer held that since interest isreceived on non-farm sector loans, it does not qualify fordeduction u/s 80P (2) (a) (i) of the IT Act, 1961 and that theassessee's activity is purely in the nature of commercialbanking activities. Further, the Assessing Officer held that asper Section 80P (4), deduction is available only if primaryagricultural credit societies are engaged with a primary objectof providing financial assistance to its members foragricultural activities. Therefore the assessee' claim underSection 80P was rejected. 3. Aggrieved by the assessement order, the assesseefiled appeal to the Commissioner of Income Tax (Appeal). It issubmitted that on identical issue in other cases theCommissioner of Income Tax (Appeal) has found that as per thebye-laws there were two types of members viz., Class A and ClassB members. Class A members are normal members who have votingrights and involved in the running of the assessee's businessand can become the members of Administrative committee, etc.Class B members are anyone other than Class A members, who hadavailed loans from the assessee and is necessarily enrolled asClass B member. The Class B member is not recognized by theassessee for the purpose of the records in statute. Further,the majority of jewel loan and other non-farming loan at ahigher interest were given to Class B members. Therefore, theCommissioner of Income Tax (Appeal) held that the asseesseecannot claim the benefit of deduction under Section 80P (2) (a)(i) on the interest received from the Class B non-members of theassessee society. The deduction was also denied on the groundthat the non-members did not undertake any agricultural activityas required under Section 80P (4). Therefore, the Commissionerof Income Tax (Appeal) held that the assessee had not providedcredit facilities to its members to assist agricultural activityand thereby confirmed the Assessment order. But, in the presentcase the Commissioner of Income Tax (Appeal) followed thedecision of the Tribunal and had allowed the appeal. 4. Aggrieved by the order of the Commissioner ofIncome Tax (Appeal), Revenue filed appeals before the Income TaxAppellate Tribunal. The Tribunal held that as per thedefinition of a member under Section 2(16), the associate memberunder Section 2(6) is also included as per the State CooperativeSocieties Act, 1983. Therefore, the Class B members cannot betreated as non-member and consequently held that the assessee isentitled for deduction under Section 80P (2)(a)(i). TheTribunal held that the assessee will be entitled for deductionunder Section 80P (2) (a) (iv) eventhough the issue did notarise for consideration. The Tribunal did not consider theissue as to whether the interest on the loan lent for non- agricultural activity could be entitled for deduction as perSection 80P (2) (a) (i) read with 80P (4) and the assessee'sviolation to lend amount on par with commercial banks at higherinterest. The Tribunal had followed its own order and allowedthe appeal. 5. Aggrieved by the order of the Income Tax AppellateTribunal, the Revenue has filed this appeal, on raising thefollowing substantial questions of law:- 1. Whether on the facts and in the circumstances of thecase the Tribunal was right in holding that the assesseeis to be treated as primary agricultural society and iscarrying on the business of banking or providing creditfacilities to its members and is entitled for deductionunder Section 80P (2) (a) (i) of the Income Tax Act, 1961with respect to the interest received from Class Bmembers who were involved in non-agricultural activity. 2. Whether on the facts and in the circumstances of thecase the Tribunal was right in holding that the Class Bmembers of the assessee society can be treated as amember of the society for the purpose of Section 80P (2)(a) (i) when Class B members do not have the right toparticipate in the voting and meetings of the board ofthe society. 3. Whether on the facts and in the circumstances of thecase the Tribunal was right in not considering the factthat the assessee was lending monies for non-agriculturalpurpose and the provisions of Section 80P (4) and 2(24)(viia). The contention of the learned counsel for the appellant/ Revenuedepartment, is that Class B members of the respondent societycannot be treated as members of the assessee society, as Class Bmembers were not recognised as per record and bye-laws of theassessee society, for the purpose of voting, attending the boardmeeting etc. Therefore, as per Section 80P (4), the benefitunder Section 80P cannot be extended to any cooperative Bankother than a primary agricultural credit society. The assesseecannot be treated as a credit society for the loan advanced tonon-agricultural purposes and so the assessee societies are notentitled for the benefit under Section 80P (2) (a) (i) read with80P (4). 6. Heard Mr.J. Narayanasamy, learned Senior StandingCounsel for the appellant, Mr. S. Sridhar, learned counsel forthe respondent assessee and perused the material available onrecord. 6. Heard Mr.J. Narayanasamy, learned Senior StandingCounsel for the appellant, Mr. S. Sridhar, learned counsel forthe respondent assessee and perused the material available onrecord. 7. On perusal of the order passed by the Tribunal, itis found that the Assessing Officer while completing theassessment had denied deduction under Section 80P (2) (a) (i) ofthe Income Tax Act, in respect of interest income towards jewelloan and other loans, on the ground that the purpose of loanissued was for commercial activities and not for agriculturalpurposes. Hence, the assessee filed appeal in I.T.A.No.72/2013-14 before the Commissioner of Income Tax (Appeal), which wasallowed by the Commissioner. Aggrieved by the same, the Revenuefiled appeal before the Income Tax Appellate Tribunal, Madras,in I.T.A.No.946/ Mds/2015. The Tribunal dismissed the appeal ofthe Revenue, based on the decisions of the Co-ordinate Bench ofthe Tribunal in the case of M/s. SL (SPL) 151 KarkudalpattyPrimary Agricultural Co-operative Credit Society Ltd. vs. ITOWard II(2), Salem in ITA No.292/ Mds/2014 dated 17.03.2014 andan other decision of the Tribunal in the case of the SalemAgricultural 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 PrimaryAgricultural Co-operative Credit Society in ITA No.197/Mds/2013dated 11.02.2014, the Tribunal had dismissed the appeal of theRevenue. Against the order of the Income Tax AppellateTribunal, the aforesaid Veerakeralam Primary Agricultural Co-operative Credit Society filed an appeal under Section 260A ofthe Income Tax Act, 1961, in T.C.A. Nos. 735, 755 of 2014 and460 of 2015 before this Court. By judgment dated 05.07.2016,the appeals were dismissed, on the following reasoning: “13. Sub-section (4) of Section80P of the Income Tax Act, 1961 is extractedbelow :“(4) The provisions of this section shall notapply in relation to any co-operative bank otherthan a primary agricultural credit society or aprimary co-operative agricultural and ruraldevelopment bank.” Explanation – For the purposes of this sub-section --- (a) “co-operative bank” and “primaryagricultural credit society” shall have themeanings respectively assigned to them inPart V of the Banking Regulation Act, 1949(10 of 1949); (b) “primaryco-operativeagricultural and rural development bank” means a society having its area ofoperation confined to a taluk and theprincipal object of which is to provide forlong-term credit for agricultural and ruraldevelopment activities.” It is seen that the primary object of thesociety is to provide financial accommodation toits members to meet all the agriculturalrequirements and to provide credit facilities tothe members, as per the bye-laws and as laiddown in Section 5 (cciv) of the BankingRegulation Act, 1949. Further, from the CPTCircular dated 12.03.2008, it is evident that acredit co-operative society is not a co-operative bank, as defined in Part V of theBanking Regulation Act, 1949. The object of a'Co-operative bank' is to accept deposits fromthe public, for lending or investment of money. On perusal of the findings of the AppellateAuthority as well as the Appellate Tribunal, itis categorically made clear that the assesseesociety will not come under the object of theprincipal business of a co-operative bank, whichis a banking business. The benefit of Section80P is excluded for deductions by co-operativebanks, whereas the primary agricultural creditsocieties are entitled for the said deduction. 15. In the recent decision of theKerala High Court, in the case of ChirakkalService Co-operative Bank Ltd., Kannur vs. theCommissioner of Income Tax, reported in (2016)68 taxmann.com.298 (Kerala), the High Courtconsidered similar substantial questions of law(Issue No.A) raised by the assessee, regarding 15. In the recent decision of theKerala High Court, in the case of ChirakkalService Co-operative Bank Ltd., Kannur vs. theCommissioner of Income Tax, reported in (2016)68 taxmann.com.298 (Kerala), the High Courtconsidered similar substantial questions of law(Issue No.A) raised by the assessee, regarding the entitlement for exemption under sub section(4) of Section 80P. By considering the factthat the assessee is a primary agriculturalsociety, the Kerala High Court has answered thesubstantial question of law in favour of theassessee and held that the primary agriculturalcredit societies, registered as such under theKCS Act and classified so under that Act,including the appellants, are entitled to suchexemption. Therefore, the aforesaid decisionsis applicable to the instant case. 16. In the light of the aforesaidfacts and circumstances of the case, we are ofthe view, that the substantial question of lawframed in the instant appeals, is answeredagainst the Revenue. The exception barred outin Section 80P (4) of the Income Tax Act, 1961,is applicable to the assessee credit society.Hence, the appeals are accordingly dismissed.” 9. In the instant case, while allowing the appealfiled by the assessee, the Commissioner of Income Tax (Appeal),had relied upon, the following portion of the decision of theTribunal arrived in ITA No.292/Chny/2014:- “ 7. We have heard both parties andgone through the case file. As stated in thepreceding paragraphs, the CIT (A) has proceededto enhance the assessment (supra) only on theground that the assessee's credit and variousother loan, facilities have been allowed to beavailed by 'B' class 'nominal' members whoseliability is limited, at the best; to theextent of loan repayable instead of 'A' classmembers who have voting rights and dividendclaim, and also that the latter members arejointly and severely liable. In this backdrop,when we peruse the relevant provisions of theState Co-operative Societies Act, 1983,governing the assessee-society, it is evidentfrom the definition of 'member' u/s 2(16) thatthe same includes an 'associate member'recognition as per the Act. The net result isthat once the 'nominal' members also enjoystatuary condition imposed by the legislatureu/s 80P (2) (a) (i). We make it clear that weare dealing with the deduction provision to beinterpreted liberally. In our consideredopinion, the objections of the revenue that the'members' defined in sub clause (i) of Section 80P should only include voting members wouldamount to a classification within classificationwhich is beyond the purview of tax statute;unless provided specifically by the legislature.Moreover, we find that the case law of Hon'blePunjab and Haryana High Court (Supra) alsosupports the assessee's case wherein it has beenheld under the very provision that for thepurpose of impugned deduction, it is irrelevantso far as classification of the members in 'A'or 'B' category is concerned. ” 10. The appellate authority, namely, theCommissioner of Income Tax (Appeal) and the Income Tax AppellateTribunal has clearly perceived that the assessee is not a co-operative bank and that the activities of the Bank is in thenature of accepting deposits, advancing loans etc., carried onby the assessee, but is confined to its members only and thattoo in a particular geographical area. Therefore, therespondent Society is eligible for deduction under Section 80P(2) (a) (i) of the Act. The contention of the appellant thatthe members of the assessee society is not entitled to receiveany dividend or having any voting right or no right toparticipate in the general administration or to attend anymeeting etc., because they are admitted as associate member foravailing loan only and was also charging a higher rate ofinterest, is not a ground to deny the exemption granted underSection 80P (2)(a) (i) of the Act. 11. In view of the facts and circumstances of thecases 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 thepresent facts of the case, so far as it relates to theeligibility of the respondent society, under Section 80P (2)(a)(i), we are of the view that the substantial questions of lawraised by the Revenue in the instant appeals are answeredagainst the Revenue. 12. In view of the above, the T.C.A.No.272 of 2016 isdismissed. There shall be no order as to costs. -s/d- Assistant Registrar Sub-Assistant Registrar To 1.The Commissioner of Income Tax, Salem 2.The Income Tax Appellate Tribunal, Madras D bench 3.The Commissioner of Income Tax(Appeals)SalemSalem 4.The Income Tax OfficerWard I(4) Salem +1 cc to Mr.S.Sridhar Advocate sr 45676/16 Tax Case Appeal No.272 of 2016 ca(co)aa23/11/2016