TMI Blog2014 (7) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... tually every bank which is not a scheduled bank would fall under the definition of non-scheduled bank. Reading of definition of non-schedule bank along with meaning of rural branch under Explanation to Section 36(1) of the Act, clearly indicate that cooperative bank also falls under the category of non-schedule bank for the purpose of this Section. Therefore, reading of entire Section 36(1)(viia)(a) along with explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision.Therefore, we are of the opinion, authorities below were justified in opining that benefit of deduction of 10% of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts.– Decided against assessee. Disallowance of interest paid without deducting tax to non members u/s. 40(a)(ia) - Held that:- In view of the admitted fact that the taxpayer is maintaining savings account, current account and providing cheque facility to its customers, it is obvious that the taxpayer is engaged itself in the business of banking apart from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Income Tax Officer, Ward-2, Kannur. 3. 133/Coch/2013 2009- 10 The Madikai Service Cooperative Bank Ltd., Madikai, Kasargod-671 531. [PAN:AAAAT 7221K] The Income Tax Officer, Ward-2, Kasargod. 4. 134/Coch/2013 5.719/Coch/2013 2009- 10 2010- 11 The Kotacherry Service Cooperative Bank Ltd., Kanhangad, Kasargod-671 315. [PAN: AAAAT 3164F] The Income Tax Officer, Ward-2, Kasargod. 6. 135/Coch/2013 7. 720/Coch/2013 2009- 10 2010- 11 The Nileshwar Service Cooperative Bank Ltd., Nileshwar, Kasargod-671 314. [PAN:AAAAT 3163C] The Income Tax Officer, Ward-2, Kasargod. 8. 325/Coch/2012 2009- 10 The Payyannur Service Cooperative Bank Ltd. Main Road, Payyannur, Kannur-7[PAN:AAEFT 2178E] The Income Tax Officer, Ward-4,Kannur 9. 660/Coch/2013 2008- 09 Mavilayi Service Co-operative Bank Ltd., Moonapalam, Mavilayi P.O., Kan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Appellant: Shri K K John, Sr. DR, Shri K K John, Sr. DR, Shri Prasanth Srinivas, CA For the Respondent: Shri Vedanga Prabhu, Sri K P Pradeep and Shri Mathew Joseph, CAs Smt. Divya Ravindran, Adv. ORDER Per: Chandra Poojari: These cross appeals filed by different assessees and revenue are directed against the orders of the Ld. CIT(A), Kozhikode for different assessment years. 2. The common ground in all these appeals and C.O. No. 05/Coch/2014 is with regard to allowability of deduction u/s. 80P(2) and 80P(2)(d) of the I.T. Act. 2. 1 The brief facts of the cases are that the lower authorities denied the claim of the assessees for deduction u/s. 80P of the Act. The primary object or principal business of the assessee is to provide financial accommodation to its members for agricultural purposes or for the purposes connected with agricultural activities. Since the assesses provided only nominal amount of loan for agricultural purposes; these assessees are not treated as primary agricultural credit societies (PACS). Since the assessee are doing banking business and these assessee are treated as co-operative banks, the assessees are not granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment bank Explanation. - For the purposes of this subsection,- (a) co-operative bank and primary agricultural credit society shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) primary co-operative agricultural an rural development bank means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities. 5. The sub clause (i) of clause (a) of sub section 2 of section 80P given above speaks of two incomes i.e., income from banking and income from providing credit facility to members. As per the newly introduced sub section 4, the provision of section 80P shall not apply in relation to any cooperative bank other than a primary agricultural credit society, or a primary co-operative agricultural and rural development bank. Thus the restriction u/s. 80P(4) is applicable only to co-operative banks and what has become taxable as per the amendment is the income from banking mentioned in the first part of 80P(2) a(i). The restriction in subsection 4 does not apply to any other Co-opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding marketing of crops). It may also please be noted that the society can give membership only to individuals and certain other specified entities like state cooperative banks, district co-operative banks and the Government of Kerala. The bye-laws do not permit admission of any other cooperative society as a member. It is on fulfilling the above two conditions that the society is rightly classified as a primary agricultural credit society by the Registrar of Co-operatives. The authority to assign the status of a society being Registrar of Co-operatives, the contention of the Assessing officer that the society is not a primary agricultural credit society is beyond his powers and is invalid. 10. The principal business of the society is to provide financial accommodation to its members for agricultural purposes and for the purposes connected with agricultural activities. The society is situated in a place/village mostly inhabited by agriculturists. Since the area of operation of the bank is also restricted by byelaws, thesoci8ety can lend mostly to agriculturists only and not others. A major portion of the advances by the society is gold loans. A gold loan taken by an agricult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. According to the Ld. AR, the Madai Co-operative Rural Bank Ltd., The Kadirur Service Co-operative Bank Ltd. Etc. which are co-operative Banks functioning at par with the assessee and having much higher volume of business had applied to the Reserve Bank of India for banking license. But the license was denied to them as according to the Reserve Bank of India the applicants are Primary Agricultural Credit Society. Thus according to the Reserve Bank of India also the assessee is a Primary Agricultural Credit Society. As per explanation below section 56 of Banking Regulation Act, if any dispute arises as to the primary object or principal business of any co-operative society a determination there of by the Reserve Bank of India shall be final. As the RBI has recognized the assessee as a Primary Agricultural Credit Society, the Assessing authority is bound to accept it. 14. According to the Ld. AR, the assessee is not a co-operative bank for the following reasons. As per the section 80P(4) of Co-operative bank and primary agricultural credit society shall have the meaning respectively assigned to them in part V of the Banking Regulation Act, 1949. Part V of the Banking Regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety is formed mainly for providing credit facility to the members for carrying out their agricultural activities and also to promote other agro based activities. Principal business 19. As per the second part of sub clause (1) of clause (ccv) quoted above, in order to become a Co-operative society a bank, its principal business should be transaction of banking business. The principal business of the assessee is not doing banking business for the following reasons: The assessee does not have a banking license from the RBI. 20. The first and foremost requisite in India to do the business of banking is to obtain a license from RBI. Without a valid license from the RBI nobody can do the business of banking. In this regard it may please be noted that the mere activity of collecting deposits and lending it will not constitute banking. If it were so, the multi crore finance companies (even listed in stock exchanges) like Reliance Capital and LIC Housing Finance need not have been called non banking finance companies. Many such multi crore Companies are collecting deposits and lending for home finance, vehicle finance and other infrastructural activities. The Ld. AR submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits of sec. 43D. 25. The Ld. AR submitted that such banks are not allowed to do trading. As per sec. 8 of the Banking Regulation Act, a banking company may engage only in any one or more of the business as specified in clause 6 Part II of the Banking Regulation Act, 1949 which does not include trading activity. Thus the Ld. AR contended that it is clear that out of the three conditions prescribed for a Primary Co-operative Bank as defined under section 5 clauses (ccv) of Banking Regulation Act, 1949, the most important clause no. 1 is not being applicable to the assessee. Hence the assessee does not fall under the definition of cooperative bank as defined in Part V of the Banking Regulation Act, 1949 and therefore, sub-section 4 of section 80P of the Act is not applicable to it. 26. Alternatively, the Ld. AR contended that even if it is held to be a bank for arguments sake, still it is eligible for the deduction of 80P(2)(a)(i) since the intention of law as per explanatory note to Finance Bill, 2006, under the head withdrawal of tax benefits available to certain co-operative banks are rightly quoted by the Assessing officer is given below: The co-operative banks ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax liability assessed is much more than the net profit. Such a situation could not be the consequence of the implementation of any prudent law as survival of the entity is at stake in the long run. 30. The Ld. AR drew our attention to the sub-section 80P(4) of the Act which is reproduced below: (4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. The Ld. AR submitted that even on a simple reading of sub-section, the usage of the words other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank implies that statute intends to exempt a certain category of co-operative banks from the adverse impact arising on implementation of the amended law. Otherwise it would have been sufficient to say that the provision of this section shall not apply in relation to any co-operative bank . Now the assessing authorities, may be out of their enthusiasm to achieve collection target, are not allowing exemption to any category of co-operative banks as intended in the subsecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not apply to an assessee which is not a co-operative bank. In the case clarified by CBDT, Delhi Coop Urban Thrift Credit Society Ltd. was under consideration. Circular clarified that the said entity not being a co-operative, section 80P(4) of the Act would not apply to it. In view of such clarification, we cannot entertain the Revenue contention that section 80P(4) would exclude not only the cooperative banks other than those fulfilling the description contained therein but also credit societies, which are not cooperative banks. In the present case, respondent assessee is admittedly not a credit co-operative bank but a credit cooperative society. Exclusion clause of sub-section(4) of section 80P, therefore would not apply. (iv) The Hon'ble Kerala High Court has held in Moolamattom Electricity vs. Unknown on 10 July, 199 - Equivalent citations : (1999) 238 ITR 630 (Ker) has held as under: The exemption clause in reference to the co-operative society calls for a liberal interpretation. that apart, a plain interpretation of the relevant clauses would go to show that there is a clear exemption in favour of a primary credit society. It may not be possible or open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icultural purposes. 33. The Ld. DR submitted that apart from this, it was found that the principal business of the above societies was banking business. Hence the assessee societies/bank were treated as Co-operative banks. Since after the insertion of section 80P(4) w.e.f. 1-4-2007, co-operative banks are not eligible for any deduction u/s. 80P of the I.T. Act, 1961, deduction u/s. 80P was denied to them on this ground also. 34. The Ld. DR submitted that the orders of the respective Assessing officers denying deduction u/s. 80P for the service co-operative banks was upheld by the CIT(A), Calicut . While upholding the orders of the Assessing officers, the CIT(A), Calicut relied on his own order in the case of Karivellur Service Co-operative Bank Ltd. for the A.Y. 2009-10. The CIT(A)'s order was also confirmed by the Hon'ble ITAT Cochin vide order dated 22/03/2013 in I.T.A. No. 311/Coch/2012 in the case of The Karivelloor Service Co-Op Bank Ltd. 35. The Ld. DR also placed reliance on the recent decision of the ITAT, Panaji Bench dated 14-03-2014 in the case of Shri Chandraprabhu Urban Co-operative Society Ltd. (45 taxmann.com 14(Panaji-trib) and also on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, with the introduction of section 80P(4), necessarily, an enquiry has to be conducted into the factual situation whether co-operative bank is conducting the business as Primary Agricultural Credit Society or a primary co-operative agricultural and rural development bank and depending upon the transactions, the Assessing officer has to extend the benefits available and not merely looking at the registration certificate by the Kerala Co-operative Societies Act or the nomenclauture. 38. The Ld. DR further submitted that it is pertinent to note that the President of The Kizhathadiyoor Service Co-op Bank has vide letter dated 13-11-2010 written to the Hon'ble Finance Minister of India stated that the PACS in Kerala are doing banking business and providing credit facilities to member and non-members and that they are given non-agricultural loans as well as non-credit services to members and non-members. 39 After hearing both the parties, we are of the opinion that similar issue came for consideration before this Cochin Bench of the Tribunal on the earlier occasion in the case of Kunnamangalam Co-operative Bank in I.T.A. No. 156/Coch/2014 vide order dated 25/07/2014 decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming under the purview of the Banking Regulation Act. They are the co-operative societies registered under the Act, and as such they are governed by the provisions of the Act passed by the State Legislature. Consequently, the State Government has control over them to the extent the Act permits. Major activities of the petitioners are to finance its members. For the purpose of financing its members, they borrow money from the financing agencies and repay the same. Merely because the petitioners the co-operative societies in question-are required to advance loans to their members, they do not cease to be co-operative societies governed by the Act nor can they be treated as banking companies. It is also not possible to hold that these activities of the petitioners amount to banking as contemplated under the Banking Regulation Act, 1949, inasmuch as these co-operative societies are not established for the purpose of doing banking as defined in section 5(b) of the Banking Regulation Act, 1949. This decision, in our opinion, is not applicable to the case before us because the provisions of Sec. 80P(2)(a)(i), as we have already held in the preceding paragraphs, are applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted to shareholders as shareholders, the principle of mutuality is not satisfied. A shareholder in the assessee-company is entitled to participate in the profits without contributing to the funds of the company by taking loans. He is entitled to receive dividend as long as he held shares. He did not have to fulfil any other condition. His position is in no way different from a shareholder in a banking company, limited by shares. Indeed, the position of the assessee is no different from an ordinary bank except that it lends money and receives dividend from its shareholders which does not by itself make its income any the less income from business. The same judgment was followed in the case of CIT vs. Arcot Dhanasekhara Nidhi Ltd., 59 ITR 480 (Mad.), CIT vs. Dharmavaram Mutual Benefit Permanent Fund Ltd., 67 ITR 673 (AP) and CIT vs. Bhavnagar Trust Corporation (P) Ltd., 69 ITR 278. Further, the Hon'ble Kerala High Court in the case of Kottayam Co-operative Land Mortgage Bank Ltd. vs. CIT, 172 ITR 443(Ker.) where it was held as under: The Income-tax Officer held the view that the assessee is not entitled to claim any further exemption under clause (c) as the assessee is ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it has engaged itself in carrying on the activity giving rise to profits or gains. Such activity of the assessee must have a direct or proximate connection with or nexus to the earning in order that the assessee may enjoy the exemption. Section 80P(2)(c) of the Act exempts income of co-operative societies to the extent mentioned therein if the profits or gains are attributable to the activity in which the co-operative society is engaged. The expression attributable to is much wider than the expression derived from and it covers receipts from sources other than the actual conduct of the business of the assessee. In this view of the matter, interest earned by a co-operative society, which was carrying on the business of supplying sugarcane on statutory investment in Government securities, was held profit attributable to the carrying on of the activity of supplying sugarcane (CIT vs. Cooperative Cane Development Union Ltd. (1979) 118 ITR 770 (All.) The profits and gains from such investments were connected with or incidental to the carrying on of the actual business. Where, however, the assessee as owner of certain property lets out that property and receives rental incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that similar issue came up for consideration in the case of Kannur Co-operative Bank Ltd. in I.T.A. Nos. 182 183/Coch/2014 dated 27/06/2014 wherein the Tribunal held as under: 3. The assessee raised the ground in both the appeals that the Ld. CIT(A) erred in holding that the assessee was not entitled to deduction of 10% of the aggregate average advances made by its rural branches u/s. 36(1)(viia) of the I.T. Act. 4. After hearing both the parties, we are of the opinion that an identical issue was considered by the Hon'ble Jurisdictional High Court in the assessee's own case in I.T.A. Nos. 179/2012, 33,37,238,241,243,254 258 of 2013 vide its judgment dated 3rd April, 2014. The Hon'ble Jurisdictional High Court held as under: 8. Section 36 of the Act deals with various deductions that could be allowed in computing the income referred to in Section 28 of the Act. Section 36 has various clauses and each clause refers to deduction allowable to a particular assessee like amount of premium paid in respect of insurance against risk of damages, federal milk co-operative society,general insurance etc. We are concerned with sub-clause (a) of clause (viia) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a scheduled bank, one has to see whether such bank finds a place in the Second Schedule to Reserve Bank of India Act. Cooperative Bank means a bank as explained under sub-section (4) of Section 80P of the Act. Section 5(c) of Banking Regulation Act defines banking company as under: Banking company means any company which transacts the business of banking in India. U/s. 80P, it again refers to Section 56 of Banking Regulation Act. U/s. 56, falling under Chapter V of Banking Regulation Act, entire provisions deal with co-operative societies. Section 56 says, after clause (cc) clause (cci), definition of co-operative bank, is to be included. Section 56(c) of Banking Regulation Act says: In section 5:- (i) after clause (cc), the following clause shall be inserted, namely:- (cci) Co-operative bank means a state co-operative bank, a central co-operative bank and a primary cooperative bank. Meaning of different terms useful for the purpose of deciding the controversy, one has to see how presence of a particular term in a particular provision and simultaneously being absent in the explanation to the said provision would change the position of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 36(1). 10. Then coming to the other controversial issue whether a cooperative bank, irrespective of having rural branch as explained under Explanation, is entitled to have the benefit of second part of Section 36(1)(viia)(a), we have to see, in the absence of cooperative bank in the definition of rural branch under explanation to Section 36(1) would it make any difference. Learned counsel appearing for appellants tried to convince the court that adjective of rural would mean in relation to or characteristic of the countryside rather than the town; remote rural areas. Urban, no doubt, is opposite to rural. Urban is in relation to or characteristic of a town or city. 11. According to us, there is no necessity to find out the generic meaning of either urban or rural for the simple reason that explanation under Section 36(1) itself defines what could be considered as a rural branch so far as Section 36(1) of the Act. In the light of giving a particular definition for the purpose of understanding rural branch with reference to sub-clause (a) of clause (viia) to Section 36(1) one need not to go in search of the meaning of rural or what exactly would constitute rural br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s accepted, then probably even in municipal areas there may be wards with less than 10000 population thereby answering the branch located in such municipal area also as a rural branch. Going by the ordinary meaning of rural branch, we feel only branches of the bank located in rural areas are covered. When the Legislature adopts population as the basis for classification of rural branches, that too, with reference to the last Census Report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel the above meaning of rural area contained in the Census Report wherein revenue village is treated as a unit of rural area, can be rightly adopted. So much so, place referred to in the above definition clause for the purpose of identifying the branch of a bank as a rural branch with reference to its location is the revenue village. Therefore, in our view, the finding of the Tribunal that place referred to in the definition is the ward of a local authority like panchayat or municipality is incorrect and, in our view, a rural branch has to be always in rural areas and the place referred can easily be taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apparently, we do not find the term cooperative bank. Section 5(cci) of Banking Regulation Act though has brought in definition of co-operative bank, virtually every bank which is not a scheduled bank would fall under the definition of non-scheduled bank. Reading of definition of non-schedule bank along with meaning of rural branch under Explanation to Section 36(1) of the Act, clearly indicate that cooperative bank also falls under the category of non-schedule bank for the purpose of this Section. Therefore, reading of entire Section 36(1)(viia)(a) along with explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision. 13. Therefore, we are of the opinion, authorities below were justified in opining that benefit of deduction of 10% of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts. Such rural branch means a branch as explained under Explanation (ia), as opined in the decision of Lord Krishna Bank's case (supra). In the light of above observations and reasoning, non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icultural cooperative banks are bound to deduct tax. In this case, admittedly, the tax payer is engaged in the banking activity and maintaining savings bank account, current account and providing cheque facility to its customers. Therefore, the taxpayer is bound to deduct tax in respect of interest on the deposits. Therefore, this Tribunal is of the considered opinion that the decision in the case of Kadachira Service Cooperative Bank Ltd.(supra) may not be applicable to the facts of the present case. Accordingly, the orders of the lower authorities are confirmed. 42.2. Being so, this issue is identical and the facts are also similar to the one considered by this Bench of the Tribunal in the earlier occasion, we are inclined to decided the issue against the assessee. This ground in all the assessee's appeals is dismissed. 43. Next ground in I.T.A. Nos. 325/Coch/2012, 680/Coch/2013, 681/Coch/2013, 683/Coch/2013 684/Coch/2013 and 685/Coch/2013 is with regard to disallowance of contribution to the employees pension fund/gratuity fund. 43.1 We have heard the parties. We find a similar issue came up for consideration of this Bench of the Tribunal in the case of Kadachira ..... X X X X Extracts X X X X X X X X Extracts X X X X
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