2023 (9) TMI 1687 - AT - Income Tax

Revision u/s 263 - admissibility of deduction claimed u/s 80P(2)(a)(i) and section 80P(2)(d) - HELD THAT - Certainly relying on various judicial pronouncements and principal of mutuality transactions carried out with known members and general public are not entitled for the benefit of section 80P(2)(a)(i) of the Act. As far as deposits with other cooperative banks whatever may be the form income arising to the assessee is squarely covered by the provisions of section 80P (2) (d). The main foundation of the case as laid down by the Ld. PCIT is based on section 80P (4) which is in the nature of a proviso restricting the claim of a cooperative society u/s. 80P if the cooperative society is a cooperative bank or cooperative societies possess a license from the RBI to do the banking business. In this case assessee is neither a cooperative bank nor a cooperative society possessing a license from the RBI to do banking business. Assessee is fully entitled for deduction u/s. 80P (2) (a)(i) on the transaction entered into with the members of the society. As far as transactions and consequent earnings with non-members are concerned that has already been taxed by the AO in his assessment order so to this extent as far as applicability /charging of section 80P(2)(a)(i) is concerned we do not find any perversity in the order of AO. As far as assessee s claim u/s. 80P(2)(d) assessee is entitled for the same as assessee is not falling in section 80P(4) which is applicable only in the case of cooperative banks /cooperative societies having licences from RBI to do banking business. The whole foundation as laid down by the Ld. PCIT is on wrong appreciation of the facts and misinterpretation of relevant sections. Thus we are not in agreement with the order of PCIT. Accordingly the grounds raised by the assessee are allowed.

Summary

The primary legal issues considered by the Tribunal in this appeal under section 263 of the Income Tax Act, 1961, relate to the jurisdictional validity and correctness of the revisional order passed by the Principal Commissioner of Income Tax (PCIT). Specifically, the core questions are:

1. Whether the PCIT had jurisdiction to invoke section 263 to set aside the assessment order passed under section 143(3) of the Act on the ground that it was erroneous and prejudicial to the interests of the Revenue.

2. Whether the deduction claimed by the assessee under section 80P(2)(a)(i) and section 80P(2)(d) of the Income Tax Act was rightly allowed by the Assessing Officer (AO) and whether the PCIT was correct in holding that the deduction was erroneous and prejudicial.

3. The applicability and interpretation of section 80P, particularly clauses (2)(a)(i), (2)(d), and proviso (4), in the context of the assessee being a cooperative credit society but not a cooperative bank licensed by the Reserve Bank of India (RBI).

4. The relevance and binding nature of judicial precedents, including decisions of the Supreme Court and High Courts, particularly in relation to the distinction between cooperative credit societies and cooperative banks, and their entitlement to deduction under section 80P.

5. Whether the PCIT adequately applied the twin conditions necessary for exercise of revisional jurisdiction under section 263, i.e., that the assessment order is both erroneous and prejudicial to the interests of the Revenue.

Issue-wise Detailed Analysis

1. Jurisdiction of PCIT under Section 263 to Set Aside Assessment Order

Legal Framework and Precedents: Section 263 empowers the Principal Commissioner or Commissioner to revise any order passed by an Assessing Officer if it is found to be erroneous in so far as it is prejudicial to the interests of the Revenue. The jurisdiction under this section is limited and can be exercised only if both conditions are satisfied. The Supreme Court and various High Courts have emphasized that the revisional power is not supervisory but corrective, and the PCIT must demonstrate that the order suffers from jurisdictional error or is perverse.

Court's Interpretation and Reasoning: The Tribunal noted that the PCIT failed to explain how the AO's order was erroneous and prejudicial. The PCIT's reliance on surmises and conjectures without proper investigation or examination was held to be insufficient to invoke section 263. The Tribunal emphasized that the PCIT did not consider binding judicial precedents which had already settled the legal position in favor of the assessee.

Application of Law to Facts: The AO had conducted limited scrutiny and made additions only where warranted, such as income from loans to non-members. The PCIT's order was found to be based on incorrect appreciation of facts and law, and thus beyond the scope of revisional jurisdiction.

Conclusion: The revisional order under section 263 was without jurisdiction and void ab initio, as the condition precedent of erroneous and prejudicial order was not met.

2. Deduction under Section 80P(2)(a)(i) and 80P(2)(d)

Legal Framework: Section 80P provides deductions to cooperative societies on income earned from specified activities. Clause (2)(a)(i) grants deduction for profits and gains from business of banking or providing credit facilities to members. Clause (2)(d) allows deduction for income by way of interest or dividends from investments with other cooperative societies. Proviso (4) excludes cooperative banks (licensed by RBI) from these benefits.

Relevant Precedents: The Tribunal extensively relied on Supreme Court decisions, notably in the cases of Mavilayi Service Co-operative Bank Ltd. and Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd., which clarified that primary agricultural credit societies or cooperative credit societies providing credit only to members are not cooperative banks under the Banking Regulation Act and are entitled to deduction under section 80P(2). The proviso in section 80P(4) applies only to cooperative banks licensed by RBI, which carry on banking business with the general public.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee is a cooperative credit society providing loans exclusively to its members and not a cooperative bank. The income from deposits with other cooperative banks falls under section 80P(2)(d). The PCIT's reliance on section 80P(4) to deny deduction was held to be a misinterpretation, as the assessee does not possess an RBI banking license and does not carry on banking business as defined by the Banking Regulation Act.

Key Evidence and Findings: The AO's findings that income from loans to non-members was rightly added back and taxed, and that the deduction was allowed only on income attributable to members, was accepted. The Tribunal found no perversity or error in the assessment order on this point.

Treatment of Competing Arguments: The PCIT's reliance on the Supreme Court's decision in Citizen Cooperative Society was distinguished on facts, as the assessee's activities and status differ significantly from that case. The Tribunal also noted that the PCIT ignored binding precedents favorable to the assessee.

Conclusion: The assessee was entitled to deduction under sections 80P(2)(a)(i) and 80P(2)(d), and the PCIT's order denying such deduction was unsustainable.

3. Applicability of Section 80P(4) and Definition of Cooperative Bank

Legal Framework: Section 80P(4) excludes cooperative banks (other than primary agricultural credit societies or primary cooperative agricultural and rural development banks) from the benefit of section 80P. The Banking Regulation Act defines cooperative banks as those licensed by RBI and carrying on banking business with the public.

Court's Interpretation and Reasoning: The Tribunal reiterated that the assessee is neither a cooperative bank nor licensed by RBI. The activity of providing credit to members alone does not convert a cooperative credit society into a cooperative bank. The Supreme Court decisions cited confirm that primary agricultural credit societies are entitled to exemption under section 80P(2) and are not subject to the restriction under section 80P(4).

Application of Law to Facts: The assessee's operations are confined to members and do not involve banking business as defined under the Banking Regulation Act. Hence, section 80P(4) is inapplicable.

Conclusion: The proviso in section 80P(4) does not restrict the assessee's claim for deduction under section 80P(2).

4. Consideration of Judicial Precedents and Binding Authority

Legal Framework: Decisions of the Supreme Court and High Courts on similar facts and legal questions are binding and must be followed. The principle of mutuality and the distinction between cooperative credit societies and cooperative banks have been judicially settled.

Court's Interpretation and Reasoning: The Tribunal observed that the PCIT failed to consider or deliberately ignored binding precedents, including the Supreme Court's rulings in Mavilayi Service Cooperative Bank and Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd. The Tribunal emphasized that these decisions conclusively hold that primary agricultural credit societies or cooperative credit societies providing credit only to members are entitled to exemption under section 80P(2), and the restrictive proviso under section 80P(4) applies only to cooperative banks licensed by RBI.

Conclusion: The PCIT's order was contrary to settled legal principles and binding judicial precedents.

5. Compliance with Principles of Natural Justice and Tax Jurisprudence

Court's Interpretation and Reasoning: The Tribunal found that the PCIT's order was based on surmises, conjectures, and incorrect facts without proper inquiry or investigation. The order was held to be against principles of natural justice and established tax jurisprudence, as no adequate explanation was provided to satisfy the twin conditions for revision under section 263.

Conclusion: The PCIT's order was procedurally and substantively flawed.

Significant Holdings

"In view of above provisions, it is crystal clear without discussing any judicial pronouncements for the time being that as per section 80P (2) (a) (i) of the Act, transactions of the assessee with its members are exempted."

"The whole foundation as laid down by the Ld. PCIT is on wrong appreciation of the facts and misinterpretation of relevant sections."

"Primary Agricultural Credit Societies cannot be termed as Co-operative Banks under the Banking Regulation Act and, therefore, such credit societies shall be entitled to exemption under section 80(P)(2) of the Income-tax Act, 1961."

"Merely giving credit to its members only cannot be said to be the Co-operative Banks/Banks under the Banking Regulation Act. The banking activities under the Banking Regulation Act are altogether different activities."

"Section 80P being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably."

"The limited object of section 80P (4) is to exclude co-operative banks that function at par with other commercial banks i.e., which lend money to members of the public."

"The PCIT had not given any explanation how it satisfied the twin conditions that scrutiny assessment order passed under section 143(3) is erroneous and prejudicial to the interest of the revenue."

"The order appeal against is based on surmises and conjectures."

"The appeal filed by the assessee is allowed."