The Commissioner Of Income Tax,Salem v. M/S.s-1308 Ammapet Primary Agriculturalco-Operative Bank Ltdammapetsalem 636 003

IN THE HIGH COURT OF JUDICATURE AT MADRASDated: 10/8/2016 C O R A M THE HONOURABLE MR. JUSTICE S.MANIKUMAR The Commissioner of Income Tax,Salem....Appellant Vs M/s.S-1308 Ammapet Primary AgriculturalCo-operative Bank LtdAmmapetSalem 636 003....Respondent Prayer: Appeal filed under Section 260A of Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal Madras'C' Bench dated 23/9/2015 in I.T.A.No.825/Mds/2015 as againstthe order of the Commissioner of Income Tax Appeals Salem, dated29.1.15 in ITA No.64/13-14 as against order of the Income TaxOfficr Ward 1 (4) Salem dated 28.3.13 in PAN NO.AAALSO228A For Appellant : Mr.J. Narayanasamy Senior Standing Counsel for I.TFor Respondent : Mr.B.Vasudevan - - - - - - J U D G M E N T This Appeal has been filed by the Revenue against theorder of the Income Tax Appellate Tribunal Madras 'C' Benchdated 23/9/2015 in I.T.A.No.825/Mds/2015. 2. The facts of the case are as follows :- a. 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 https://hcservices.ecourts.gov.in/hcservices/ Income Tax Act, 1961. The Assessing Officer, disallowed theclaim of the assessee on the ground that the assessee had lentmonies to the members, who were undertaking non-agricultural/non-farm activities and had received the intereston par with commercial banks. The Assessing Officer found thatsince interest is received, non-farm sector loans do not qualifyfor deduction u/s 80P (2) (a) (i) of the IT Act, 1961 and thatthe assessee's activity is purely in the nature of commercialbanking activities. Further, the Assessing Officer held that asper Section 80 P (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's claim underSection 80P was rejected. b. Against the assessment order, the assessee filed anappeal to the Commissioner of Income Tax (Appeal). It issubmitted that on an 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 andClass B members. Class A members are regular members, who havevoting rights and were involved in the running of the assessee'sbusiness and can become the members of Administrative committee,etc. Class B members are those other than Class A member, whohad availed loans from the assessee and is necessarily enrolledas Class B member. The Class B member is not recognized by theassessee for the purpose of records in statute. Further, themajority of jewel loan and other non-farming loan at a higherinterest were given to Class B members. Therefore, theCommissioner of Income Tax (Appeal) observed that the asseesseecannot claim the benefit of deduction under Section 80P (2) (a)(i), on the interest received from Class B non-members of theassessee's society. The deduction was denied on a furtherground that the non-members did not undertake any agriculturalactivity as required under Section 80 P (4). Therefore, theCommissioner of Income Tax (Appeal) found that the assessee hadnot provided credit facilities to its members to assistagricultural activity and thereby confirmed the Assessmentorder. But, in the present case, the Commissioner of Income Tax(Appeal), followed the decision of the Tribunal and had allowedthe appeal. c. Aggrieved by the order of the Commissioner of IncomeTax (Appeal), Revenue filed an appeal in I.T.A.No.825/Mds/2015before the Income Tax Appellate Tribunal. The Tribunalperceived that as per the definition of a member under Section 2(16), the associate member under Section 2(6) 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 deductionunder Section 80P (2)(a)(i). The Tribunal perceived that theassessee will be entitled for deduction under Section 80 P (2)(a) (iv) eventhough the issue did not arise for consideration.The Tribunal did not consider the issue as to whether theinterest on the loan lent for non-agricultural activity could beentitled for deduction, as per Section 80P (2) (a) (i) read with80P (4) and the assessee's violation to lend amount on par withcommercial banks at higher interest. The Tribunal following itsown order and had allowed the appeal. 3. Being not satisfied with the order of the Income TaxAppellate Tribunal, in I.T.A.No.825/Mds/2015, the Revenue hasfiled the instant appeal, on raising the following substantialquestions of law:- (i). Whether on the facts and in thecircumstances of the case the Tribunal wasright in holding that the assessee is tobe treated as primary agricultural societyand is carrying on the business of bankingor providing credit facilities to itsmembers and is entitled for deductionunder Section 80P (2) (a) (i) of theIncome Tax Act, 1961 with respect to theinterest received from Class B members whowereinvolvedinnon-agriculturalactivity? (ii). Whether on the facts and inthe circumstances of the case the Tribunalwas right in holding that the Class Bmembers of the assessee society can betreated as a member of the society for thepurpose of Section 80P (2) (a) (i) whenClass B members do not have the right toparticipate in the voting and meetings ofthe board of the society? (iii). Whether on the facts and inthe circumstances of the case the Tribunalwas right in not considering the fact thatthe assessee was lending monies for non-agricultural purpose and the provisions ofSection 80P (4) and 2(24) (viia)?” 4. The contention of the learned counsel for theappellant/ Revenue, that Class B members of the respondentsocieties cannot be treated as members of the assessee societies, as Class B members were not recognised as per thebye-laws of the assessee society, for the purpose of voting,attending the board meeting etc. Therefore, as per Section 80P(4), the benefit under Section 80P cannot be extended to anycooperative Bank other than a primary agricultural creditsociety. The assessee cannot be treated as a credit society forthe loan advanced to non-agricultural purposes and so theassessee societies are not entitled for the benefit underSection 80P (2) (a) (i) read with 80P (4). 5. Heard Mr.J. Narayanasamy, learned Senior StandingCounsel for the appellant and perused the material available onrecord. societies, as Class B members were not recognised as per thebye-laws of the assessee society, for the purpose of voting,attending the board meeting etc. Therefore, as per Section 80P(4), the benefit under Section 80P cannot be extended to anycooperative Bank other than a primary agricultural creditsociety. The assessee cannot be treated as a credit society forthe loan advanced to non-agricultural purposes and so theassessee societies are not entitled for the benefit underSection 80P (2) (a) (i) read with 80P (4). 5. Heard Mr.J. Narayanasamy, learned Senior StandingCounsel for the appellant and perused the material available onrecord. 6. On perusal of the order passed by the Tribunal, it isfound that the Assessing Officer while completing the assessmenthad denied deduction under Section 80 P (2) (a) (i) of theIncome Tax Act, in respect of interest income towards jewel loanand other loans, on the ground that the purpose of loan issuedwas for commercial activities and not for agricultural purposes.Hence, the assessee filed an appeal in I.T.A.No.64/2013-14before the Commissioner of Income Tax (Appeal), which wasallowed by the Commissioner, by order, dated 29/1/2015, based onthe decisions of the Co-ordinate Bench of the Tribunal in thecase of Karkudalpatty Primary Agricultural Co-operative CreditSociety Ltd. vs. ITO in ITA No.292/Mds/2014 dated 17.03.2014.Further, in another decision of the Tribunal in the case of theSalem Agricultural Producers Co-operative Marketing Society Ltd.vs. ITO in ITA Nos.730 to 732/Mds/2014 dated 30.06.2014, it hasbeen held as follows :- “2. The common issue raised in all theseappeals is that the Commissioner of Income Tax(Appeals) has erred in confirming the order ofthe Assessing authority in denying the claim ofbenefits available under section 80P (2)(a)(i)of the Income Tax Act, 1961. The case of theassessee is that the bye-laws of the societyallow the assessee to lend/advance loans to itsmembers on agricultural produce loan and on thepledge of gold jewels and silver articles,earned interest income only as per the objectsand submitted before the lower authorities thatthe claim of the assessee has to be consideredunder Section 80P(2)(a)(i) of the Act. 3. This issue has been considered byIncome Tax Appellate Tribunal, Chennai 'B' Benchin the cases of SL(SPL) 151, KarkudalpattyPrimary Agricultural Co-operative Credit Society Ltd and S 1382 Mullukuruchi Primary AgriculturalCo-operative Credit Society Ltd in I.T.A. Nos.292 & 293/Mds/2014 vide common order dated17.03.2014 and also the decision of 'C' Bench inthe cases of M/s. 1915 Vellalapatty PrimaryAgricultural Co-operative Credit Society Ltd. inI.T.A. Nos. 385 & 386/Mds/2014, M/s.6648 AtturMulluvadi Primary Agricultural Co-operativeCredit Society Ltd. in I.T.A. No. 387/Mds/2014vide common order dated 01.05.2014. Afterperusing the relevant provisions of State Co-operative Societies Act, 1983, governing similarassessees, the Tribunal found that definitionof 'members' includes 'associate members', aswell. The Tribunal found that such nominalmembers also enjoy statutory recognition as perthe State Co-operative Societies Act. TheTribunal further observed that the objections ofthe Revenue that 'members' defined in sub-clause(i) of Section 80P(2) should only include votingmembers, would amount to a classification withinclassification which is beyond the purview oftaxing statute; unless provided specifically bythe legislature. 4. Therefore, we find that the issueraised in these appeals stands adjudicated bythe Tribunal in favour of the assessee.Accordingly, we set aside the orders of thelower authorities on this point and direct theassessing authority to grant the benefit to theassessee available under Section 80P(2)(a)(i). ” 4. Therefore, we find that the issueraised in these appeals stands adjudicated bythe Tribunal in favour of the assessee.Accordingly, we set aside the orders of thelower authorities on this point and direct theassessing authority to grant the benefit to theassessee available under Section 80P(2)(a)(i). ” 7. Following the decision of the Hon'ble Punjab andHaryana High Court, in the case of CIT Vs. Punjab State Co-operative Bank Ltd., reported in 300 ITR 24, the appellateauthority as well as the Income Tax Appellate Tribunal, haspassed the order impugned. 8. As the appeal of the Revenue in the case of ITO Vs.M/s. Veerakeralam Primary Agricultural Co-operative CreditSociety was dismissed, the Society filed an appeal underSection 260A of the Income Tax Act, 1961, in T.C.A. Nos. 735,755 of 2014 and 460 of 2015 before this Court, vide judgment,dated 05.07.2016, the appeals were dismissed, on the followingreasoning: “13. Sub-section (4) of Section 80P of theIncome Tax Act, 1961 is extracted below : “(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-operativebank”and“primaryagricultural credit society” shall have themeanings respectively assigned to them inPart V of the Banking Regulation Act, 1949(10 of 1949); (b) “primary co-operative agricultural andrural development bank” means a societyhaving its area of operation confined to ataluk and the principal object of which isto provide for long-term credit foragriculturalandruraldevelopmentactivities.” 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 credit societies are entitled for the said deduction. 14. .... 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, regardingthe 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 appeal filed bythe assessee, the Commissioner of Income Tax (Appeal), hadrelied 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 dividend claim, 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 Section80P should only include voting members wouldamounttoaclassificationwithinclassification which is beyond the purview oftax statute; unless provided specifically bythe legislature. Moreover, we find that thecase law of Hon'ble Punjab and Haryana HighCourt (Supra) also supports the assessee's casewherein it has been held under the veryprovision that for the purpose of impugneddeduction, it is irrelevant so far asclassification of the members in 'A' or 'B'category is concerned. ” 10. The appellate authority, namely, the Commissioner ofIncome Tax (Appeal) and the Income Tax Appellate Tribunal hasclearly perceived that the assessee is not a co-operative bankand that the activities of the Bank is in the nature ofaccepting deposits, advancing loans etc., carried on by theassessee, but is confined to its members only and that too in aparticular geographical area. Therefore, the respondent Societyis eligible for deduction under Section 80P (2) (a) (i) of theAct. The contention of the appellant that the members of theassessee society is not entitled to receive any dividend orhaving any voting right or no right to participate in thegeneral administration or to attend any meeting etc., becausethey are admitted as associate member for availing loan only andwas also charging a higher rate of interest at the rate of 14%,is not a ground to deny the exemption granted under Section 80P(2)(a) (i) of the Act. 11. In view of facts and circumstances of the case and thedecision 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 factsof the case, so far as it relates to the ineligibility of therespondent society, under Section 80P (2)(a)(i), we are of theview that the substantial questions of law raised by the revenuein the instant appeals are answered against the Revenue. 12. In view of the above, the T.C.A.No. 259 of 2016 isdismissed. There shall be no order as to costs. -sd-Assistant Registrar //True copy// Sub Assistant Registrarmvs.To1. The Commissioner of Income Tax,Salem.2The Commisoner of Income Tax,Ward 1(4), Salem.3. The Income Tax Appellate Tribunal Madras 'C' Bench, Chennai.+1 C.C. to M/S. R.VASUDEVAN Advocate SR.NO.45653/16 +1 C.C. to M/S.J.NARAYANASWAMY Advocate SR.NO.46349/16 Tax Case Appeal No.259 of 2016 CNR (CO)VS 12.11.2016 https://hcservices.ecourts.gov.in/hcservices/