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TMI Blog2019 (3) TMI 1580X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by the decision of a Division Bench of this Court in Chirakkal Service Co-operative Bank Ltd. v. Commissioner of Income Tax 2016 (2) KHC 726 : (2016) 384 ITR 490 (Ker) : 2016 (2) KLT 535 : ILR 2016 (2) Ker. 821. On the other hand, the Revenue contended that the aforesaid decision was rendered without noticing the decision of yet another Division Bench in Perinthalmanna Service Co-operative Bank Ltd. v. Income Tax Officer and Another (2014) 363 ITR 268 (Ker). A reading of the order of reference would show that the learned Senior Counsel/learned counsel for the assessees raised certain grounds to dissuade the Division Bench from referring the issue to a Larger Bench. After considering those contentions and going through the decisions in Perinthalmanna Service Cooperative Bank 363 ITR 268 and Chirakkal Service Co-operative Bank 2016 (2) KHC 726 : (2016) 384 ITR 490 (Ker) : 2016 (2) KLT 535 : ILR 2016 (2) Ker. 821, the Division Bench referred the matter to be placed before the Larger Bench, relying on the judgment of the Apex Court in Assistant Commissioner of Income Tax v. Victory Aqua Farm Ltd. (2015) 280 CTR 32 (SC). The Division Bench noticed that there is divergence of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Officer, Ward-1, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-D order dated 22/04/2013 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No. 340/Coch/2012, for the Assessment Year 2009-2010, arising out of Annexure-B assessment order dated 15/12/2011 of the Income Tax Officer, Ward-1, Kannur and Annexure-C appellate order dated 21/09/2012 of the Commissioner of Income Tax (Appeals)-II, Kozhikode. 3.3 ITA No. 3 of 2017: The respondent, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-3, Thiruvalla. The Revenue has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 19/07/2016 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No. 191 Coch/2016, for the Assessment Year 2010-2011, arising out of Annexure-A assessment order dated 26/03/2013 of the Income Tax Officer, Ward-3, Thiruvalla and Annexure-B appellate order dated 10/02/2016 of the Commissioner of Income Tax (Appeals), Kottayam. 3.4 ITA No. 11 of 2017: The respondent, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-5, Kottayam. The Revenue has filed this appeal under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessment Year 2012-13, arising out of Annexure-A assessment order dated 27/03/2015 of the Income Tax Officer, Ward-5, Alappuzha and Annexure-B appellate order dated 02/06/2016 of the Commissioner of Income Tax (Appeals), Kottayam. 3.9 ITA No. 32 of 2017: The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-2, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 12/02/2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No. 517/Coch/2014, for the Assessment Year 2010-11, arising out of Annexure-A assessment order dated 26/03/2013 of the Income Tax Officer, Ward-2, Kannur and Annexure-B appellate order dated 30/09/2014 of the Commissioner of Income Tax (Appeals)-II, Kozhikode. 3.10 ITA No. 33 of 2017: The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-2, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 12/02/2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No. 516/Coch/2014, for the Assessment Year 2008-09, arising out of Annexure-A assessment order dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Annexure-B appellate order dated 21/09/2012 of the Commissioner of Income Tax (Appeals)-II, Kozhikode. 3.15 ITA No. 73 of 2017: The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-4, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 02/11/2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No. 561/Coch/2014, for the Assessment Year 2007-08, arising out of Annexure-A assessment order dated 26/03/2013 of the Income Tax Officer, Ward-4, Kannur and Annexure-B appellate order dated 30/09/2014 of the Commissioner of Income Tax (Appeals), Kozhikode. 3.16 ITA No. 74 of 2017: The appellant, which is a PACS is an assessee on the rolls of the Income Tax Officer, Ward-1, Kannur. The appellant has filed this appeal under Section 260A of the IT Act challenging Annexure-C order dated 02/11/2015 of the Income Tax Appellate Tribunal, Cochin Bench in ITA No. 179/Coch/2015, for the Assessment Year 2008-09, arising out of Annexure-A assessment order dated 07/12/2010 of the Income Tax Officer, Ward-1, Kannur and Annexure-B appellate order dated 03/12/2014 of the Commissioner of Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. 5. Per contra, the learned Senior Counsel/Standing Counsel for Revenue would contend that deduction under Section 80P of the IT Act, after the introduction of sub-section (4) thereof, cannot be allowed to an assessee merely on the strength of certificate of registration under Section 8 of the KCS Act and the Assessing Officer has ample power during the course of assessment to examine the eligibility of the assessee for such deduction, for each assessment year. 6. Since, other substantial questions of law have also been raised in the respective Income Tax Appeals, we deem it appropriate only to answer the question referred to the Full Bench, with reference to the claim for deduction under of Section 80P of the IT Act, by reason of sub-section (4) thereof. Though the learned Senior Counsel/the learned counsel for the assessees and also the learned Standing Counsel for the Revenue raised various contentions on merits, as to the claim made by the respective assessees for deduction under Section 80P of the IT Act, by reason of sub-section (4) thereof, we do not propose to consider those issues in this order. 7. Before proceeding to answer the question referred to the Full Bench, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply to societies or banks in existence at the commencement of the Kerala Co-operative Societies (Amendment) Act, 1999. The second proviso to clause (oa) provides further that, if the above principal object is not fulfilled, such Societies shall lose all characteristics of a Primary Agricultural Credit Society as specified in the Act, Rules and Bye-laws, except the existing staff strength. Clause (oa) of Section 2 of the KCS Act was re-numbered as clause (oaa) by the Kerala Co-operative (Amendment) Act, 2013, with effect from 14/02/2013. 8.2 Chapter II of the KCS Act deals with registration of Co-operative Societies. As per Section 4, subject to the provisions of the Act, a Co-operative Society which has its object the promotion of the economic interest of its members or the interests of the public in accordance with co-operative principles, or a society established with the object of facilitating the operations of such a society, may be registered under the Act. Section 6 deals with application for registration of Co-operative Societies. As per sub-section (1) of Section 6, an application for the registration of a Co-operative Society shall be made to the Registrar in such form a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistrar shall, mutatis mutandis, apply also to the registration of amendments to bye-laws. As per Section 13, an amendment of the bye-laws of a society shall, unless it is expressed to come into operation on a particular day, come into force on the day on which it is registered. 8.5 Section 15 of the KCS Act deals with cancellation of registration certificates of societies in certain cases. Sub-section (1) of Section 15 deals with cases where the whole of the assets and liabilities of a society are transferred to another society in accordance with the provisions of Section 14; sub-section (2) deals with cases where two or more societies are amalgamated into a new society in accordance with the provisions of Section 14; and sub-section (2) deals with cases where a society is divided into two or more societies in accordance with the provisions of Section 14. 9. Chapter II of the KCS Rules deals with registration of Co-operative Societies and their bye-laws. Rule 3 deals with application for registration. As per sub-rule (1) of Rule 3, every application for registration of a Society under sub-section (1) of Section 6 shall be made in duplicate in Form No. 1, accompanied by the docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court of Kerala/Government of Kerala to the Chief Promoter within 15 days of such order. 9.1 Rule 5 of the KCS Rules deals with subject matter of bye-laws. As per sub-rule (1) of Rule 5, the bye-laws of a society shall not be contrary to the provisions of the Act and the Rules and may deal with all or any of the matters specified in clauses (a) to (ab) of sub-rule (1) and with such other matters incidental to the organisation of the society and the management of its business, as may be deemed necessary. Sub-rule (2) of Rule 5 deals with credit societies; sub-rule (3) deals with non-credit societies; and sub-rule (4) deals with composite society. Rule 9 of the KCS Rules deals with procedure regarding amendment of bye-laws and Rule 13 deals with amalgamation, transfer of assets and liabilities or division of societies. 9.2 Rule 15 of the KCS Rules deals with classification of societies according to types. As per Rule 15, after the registration of a society the Registrar shall classify the society into one or other of the types enumerated in Rule 15. according to the principal object provided in the bye-laws. As per Note (i) to Rule 15, if any question arises as to the classific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise. Clause (c) of Section 5 define 'banking company' to mean any company, which transacts the business of banking in India. 11.1 Part V of the BR Act deals with application of the said Act to Cooperative Banks. As per Section 56, the provisions of the BR Act, as in force for the time being, shall apply to, or in relation to, Co-operative Societies as they apply to, or in relation to, banking companies subject to the modifications enumerated in clauses (a) to (zl) of Section 56. As per clause (a) of Section 56, throughout the BR Act, unless the context otherwise requires- (i) references to a 'banking company' or 'the company' or 'such company' shall be construed as references to a Co-operative Bank; and (ii) reference to 'commencement of this Act' shall be construed as reference to commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965). As per clause (b) of Section 56, in Section 2, the words and figures 'the Companies Act, 1956 (1 of 1956), and' shall be omitted. 11.2 As per sub-clause (i) of clause (c) of Section 56 of the BR Act, clauses (cci) to (ccvii), as enumerated in sub-clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (2) of Section 5A of the BR Act, any provision contained in the bye-laws, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be. 11.4 Similarly, as per clause (f) of Section 56, Section 7 of the BR Act was substituted. Section 7, as substituted by clause (f) of Section 56, deals with use of words 'bank', 'banker' or 'banking'. As per sub-section (1) of Section 7 of the BR Act, no Co-operative Society other than a Co-operative Bank shall use as part of its name or in connection with its business any of the words 'bank', 'banker', or 'banking', and no Co-operative Society shall carry on the business of banking in India unless it uses as part of its name at least one of such words. As per sub-section (2) of Section 7, nothing in this section shall apply to- (a) a Primary Credit Society, or (b) a Co-operative Society formed for the protection of the mutual interest of Co-operative Banks or Co-operative Land Mortgage Banks. or (c) any Co-operative Society, not being a Primary Credit Society, formed by the employees of- (i) a banking c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the expiry of three months from its so coming into existence, every Primary Credit Society which had become a Primary Co-operative Bank on or before the commencement of the Banking Laws (Amendment) Act, 2012, shall before the expiry of three months from the date on which it had become a Primary Co-operative Bank and every Co-operative Society shall before commencing banking business in India, apply in writing to the Reserve Bank for a licence under this Section. 11.7 As per the proviso, nothing in clause (b) of sub-section (1) of Section 22 of the BR Act shall be deemed to prohibit,- (i) a Co-operative Society carrying on business as a Co-operative Bank at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965); or (ii) a Co-operative Bank which has come into existence as a result of the division of any other Co-operative Societies carrying on business as a Co-operative Bank, or the amalgamation of two or more Co-operative Societies carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), or at any time thereafter; from carrying on banking business until it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities, and as such, that society is entitled for deduction under Section 80P of the IT Act, by reason of sub-section (4) thereof, merely on the strength of the certificate registration issued under sub-section (1) of Section 8 of the KCS Act. 14. As per clause (oa) of Section 2 of the KCS Act, which was later re-numbered as clause (oaa), the principal object of a PACS should be to undertake agricultural credit activities and provide loans and advances for agricultural purposes, at the rate of interest on such loans and advances fixed by the Registrar, and a PACS shall have its area of operation confined to a Village, Panchayat or Municipality. As per the second proviso to the said clause, inserted with effect from 28/04/2010, if the aforesaid principal object is not fulfilled, such societies shall lose all characteristics of a PACS. as specified in the KCS Act, KCS Rules and the Bye-laws, except the existing staff strength. Therefore, in order to claim the benefit of deduction under Section 80P of the IT Act, after the introduction of sub-section (4) thereof, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bothered to find out the operations of the society to justify retention of the identity and that is why the society continues to retain the registration originally obtained. In any case what can be noticed from second proviso to clause (oa) of Section 2 of the KCS Act is that, as and when the society ceases to be a Primary Agricultural Credit Society, it shall loose that identity irrespective of whether the Registrar has made changes or not. Paragraphs 3 to 5 of the judgment read thus; "3. There is no dispute that in this case the Society is one registered as a Primary Agricultural Credit Society in terms of Section 2(oa) of the Act. However, appellant's case is that the activities of the Society reflected in the accounts establish beyond doubt that the society has ceased to be a Primary Agricultural Credit Society and is in fact a Primary Credit Society defined under Section 2(ob) of the Act. Counsel relied on Annexure-2 produced in WA No. 1023/2012 wherein Deposits and advances are described by the Society in the letter addressed to the Assistant Registrar of Co-operative Societies as follows: Deposit 22,22,47,697.54 Loans 20,41,01,375.66 Kisan Credit Card (Agricultur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23/2012 which is information furnished to the Appellant by the Public Information officer of the office of the Assistant Registrar of Co-operative Societies under the Right to Information Act that most of the objectives of the Society covered by various clauses of the Memorandum of Association are not undertaken by the Society. In other words, the operations of the society in accepting massive deposits from members and public and lending the same to non-agricultural operations has made it a Primary Credit Society. Probably the camouflage of Primary Credit Society as a 'Primary Agricultural Credit Society' is to get the benefit of agricultural credits from Government agencies. Debt waiver for borrowers and also to advance loans at lower rate of interest applicable to agriculture. Obviously the functioning of the Society is in a dubious manner by getting registration under one category and by functioning as a Society of a different category. None of the party respondents including Society and also the Special Government Pleader could deny the factual position stated above inasmuch as the Society though registered as Primary Agricultural Credit Society has ceased to be so and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of staff strength. Thus, it is very much obligatory for the petitioners societies, who claim the status and the benefits of Primary Agricultural Credit Societies, to substantiate that their main object of incorporation is being continued to be fulfilled as well. As such, they have to obtain a certificate from the competent authority by producing the relevant facts and figures including the balance sheet, profit and loss accounts etc., that they satisfy the requirements of the 'second proviso' to Section 2(oa) of the Act, to claim the status of Primary Agricultural Credit Societies so as to contend that they stand exempted by virtue of Section 194A(3)(viia)(a) of the IT Act and hence are not required to effect any TDS. As a natural consequence, they are not supposed to comply with the requirements of Section 200(3) of the IT Act as well, if they succeed. Paragraphs 15 to 17 of the judgment read thus; "15. True, there is a reference to the Banking Regulation Act, 1949, as given in sub-section (4) of Section 80P of the Income Tax Act. A Society claiming the benefit of exemption under Section 80P has necessarily to satisfy the requirements and specifications of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, to claim the status of Primary Agricultural Credit Societies so as to contend that they stand exempted by virtue of Section 194A(3)(viia)(a) of the Act and hence are not required to effect any TDS. As a natural consequence, they are not supposed to comply with the requirements of Section 200(3) as well, if they succeed. 17. As held already, it is for the petitioners to establish their status as Primary Agricultural Credit Societies by obtaining and producing the relevant certificate from the competent authority, as mentioned hereinbefore. It is also open for the petitioners to opt to produce the relevant records before the Income Tax authorities as well, to establish their status and credentials, that there is no lapse in fulfilling the objective as Primary Agricultural Credit Societies so as to absolve from further proceedings at the hands of the Income Tax Department, in relation to Section 194A and Section 200(3) of the Act. So as to enable the petitioners to pursue such exercise, further proceedings shall be kept in abeyance for a period of three months from the date of receipt of a copy of the judgment. If the petitioners fail to produce the certificates in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Assessing Officer, without conducting any enquiry on such aspects, allowed the claim of deduction under Section 80P without proper verification of the status of the assessee as a PACS. 17.2 Before the Revisional Authority, the assessee contended that a certificate of registration under Section 8 of the KCS Act is conclusive evidence that the society is duly registered under the said Act and the Registrar of Cooperative Socialites has classified the society as a PACS, as per the provisions of Rule 15 of the KCS Rules. Such a registration can be maintained and continued only if the society continues to function according to its objectives, which is continuously monitored by the Registrar. The Revisional Authority, after considering the submissions made by the assessee and taking note of the relevant provisions under the IT Act and the BR Act, arrived at a conclusion that in order to be eligible for deduction under Section 80P of the IT Act, with effect from the Assessment Year 2007-08 onwards, a Co-operative Society, irrespective of carrying on the business of banking or providing credit facility to its members, should either be a Primary Agricultural Credit Society (PACS) or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding that Annexure-C order does not suffer from any mistake calling for rectification under sub-section (2) of Section 264 of the IT Act. 17.5 Annexure-C and Annexure-D orders of the Appellate Tribunal were under challenge before this Court in ITA No. 4 of 2014 filed by the assessee. In Perinthalmanna 363 ITR 268, after perusing Annexure-A order of the Assessing Officer, Annexure-B order of the Revisional Authority and Annexure-C order of the Appellate Tribunal, the Division Bench noticed that, the entire controversy involved is with regard to the exact status of the assessee whether it is Cooperative Bank or a Primary Co-operative Credit Society and that, this question arises in the light of the assessee claiming benefits under Section 80P of the IT Act. The Division Bench observed that, once a claim is made under Section 80P necessarily the Assessing Officer has to consider the implication of sub-section (4) of Section 80P with reference to such claim depending upon the nature of transaction conducted by the assessee irrespective of the nomenclature of the assessee. 17.6 Before the Division Bench, the assessee contended that, its case has to be considered only by looking into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the Revisional Authority in Annexure-B order and directed the Assessing Officer to pass fresh assessment order after making necessary enquiries, as observed in the order of the Revisional Authority, untrammelled by any of the opinions expressed by the Revisional Authority. Accordingly, the Division Bench disposed of the appeal with the above observations, without interfering with the orders impugned in that appeal. 18. In Chirakkal 2016 (2) KHC 726 : (2016) 384 ITR 490 (Ker) : 2016 (2) KLT 535 : ILR 2016 (2) Ker. 821, the substantial questions of law formulated, at the time of admission, was whether on the facts and circumstances of the case under consideration, the Tribunal is correct in law in deciding against the assessee, the issue regarding entitlement for exemption under Section 80P of the IT Act ignoring the fact that the assessee is a PACS: and whether the Tribunal is justified in denying the exemption under Section 80P of the IT Act on the mere grounds of belated filing of return by the assessee. The Division Bench, after referring to the provisions under sub-section (4) of Section 80P of the IT Act and Section 56 of the BR Act held that, 'Co-operative Bank' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the principal object of such societies is to undertake agricultural credit activities and to provide loans and advances for agricultural purposes, the rate of interest on such loans and advances to be at the rate to be fixed by the Registrar of Co-operative Societies under the KCS Act and having its area of operation confined to a Village, Panchayat or a Municipality. This is the consequence of the definition clause in Section 2(oaa) of the KCS Act. The authorities under the IT Act cannot probe into any issues or such matter relating to such societies. 18.2 The Division Bench held further that, the position of law being as above with reference to the statutory provisions, the appellants had shown to the authorities and the Tribunal that they are PACS in terms of clause (cciv) of Section 5 of the BR Act, having regard to the primary object or the principal business of each of the appellants. It is clear from the materials of records that bye-laws of each of the appellants do not permit admission of any Co-operative Society as a member, except may be, in accordance with the provisions of sub-clause (2) of clause (ccv) of Section 5 of the BR Act. The different orders of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... society was carrying on banking business for public at large and for all practical purposes it was acting like a Cooperative Bank governed by the BR Act and its operation was not confined to its members but outsiders as well. 19.2 The question that came up for consideration before the Apex Court was as to whether the appellant, which is a Multi-State Co-operative Society registered under the Multi-State Co-operative Societies Act, 2002 in terms of certificate of registration issued by the Central Registrar of Co-operative Societies, New Delhi is barred from claiming deduction under Section 80P of the IT Act, in view of sub-section (4) thereof. The assessee is being assessed to income tax since its inception. It has been claiming exemption under Section 80P, which was being allowed by the authorities. As per the assessee, in the course of its operations, members deposit cash into their accounts with the society and they withdraw the same. It was claimed that, earlier, none of the Income Tax Authorities had pointed out that acceptance of deposits from its members in cash and withdrawal thereof by them in cash would violate the provisions of Sections 269SS and 269T of the IT Act, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Apex Court, one of the contentions raised by the learned Senior Counsel for the assessee, after referring to the provisions under Section 80P of the IT Act was that the entire purport and objective to enact the said provision was to encourage and promote growth of co-operative sector in the economic life of the country in pursuance of the declared policy of the Government. This is so recognised by various judgments of the Apex Court firmly laying down the rule that a provision for direction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. After referring to the objects for which the assessee society has been established, the learned counsel submitted that, the principal object of the society is to promote interest of all its members to attain their social and economic betterment through self-help and mutual aid in accordance with the co-operative principles and keeping in view the same the assessee society can engage in certain specified forms of business stipulated in the objective clause of the society. The purpose, therefore, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and not to defeat it. Therefore, it hardly needs to be emphasised that all those Co-operative Societies which fall within the purview of Section 80P of the Act are entitled for deduction in respect of any income referred to in sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributed to any one or more of such activities which are mentioned in sub-section (2). Sub-clause (i) of clause (a) of sub-section (2) recognises two kind of Co-operative Societies, namely, (i) those carrying on business of banking and (ii) those providing credit facility to its members. With the insertion of sub-section (4) of Section 80P of the IT Act, by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a Co-operative Bank. However, if it is a Primary Agricultural Credit Society or a Primary Co-operative Agricultural or Rural Development Bank, the deduction would still be provided. Thus, Co-operative Banks are now specifically excluded from the ambit of Section 80P of the Act. 19.7 The Apex Court noticed that, if one has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 80P(2)(a)(1) of the IT Act. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. In the assessment order, the Assessing Officer found that the assessee failed to satisfy the test of mutuality at the time of making payments. There is detailed discussion in this behalf in the order of the Assessing Officer. The Apex Court found that those findings of facts have remained unshaken till the stage of the High Court. Once the aforesaid aspects are kept in mind, the conclusion is obvious that the appellant assessee cannot be treated as a Co-operative Society meant only for its members and providing credit facility to its members. Therefore, the Apex Court held that the appellant society cannot claim the benefit under Section 80P of the IT Act. 20. In Citizen Co-operative Society 2017 KHC 5350 : (2017) 397 ITR 1 (SC) : (2017) 9 SCC 364 : AIR 2017 SC 5147 the Apex Court was dealing with the case of a Multi-State Co-operative Society registered under the Multi-State Co-operative Societies Act, [like the assessee in ITA No. 68 of 2017 in this batch of cases] which claimed deduction under Section 80P of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction to resolve the controversy as to whether the assessee was a Co-operative Society or a Co-operative Bank, as defined under the provisions of the BR Act. In the said decision, the Division Bench held that, whether Co-operative Society referred to in clauses (cciv), (ccv) and (ccvi) of Section 56 of the BR Act is carrying on the activities of a Co-operative Society or a Co-operative Bank is required to be determined by the Reserve Bank of India, before the authorities could term the assessee as a Co-operative Bank for the purpose of Section 80P of the IT Act. Similar view was expressed in the judgment in Shri. Basaveshwar Urban Co-operative Credit Society Ltd. v. Income Tax Officer (judgment of a Division Bench of Karnataka High Court dated 21/09/2015 in I.T.A. No. 100066 of 2014). 21.1 We notice that, after the judgment of the Apex Court in Citizen Co-operative Society 2017 KHC 5350 : (2017) 397 ITR 1 (SC) : (2017) 9 SCC 364 : AIR 2017 SC 5147 the aforesaid issue came up for consideration before the Division Bench of the Karnataka High Court in Principal Commissioner of Income Tax and another v. M/s. Vijay Souharda Credit Sahakari Ltd. (judgment dated 23/10/2017 in ITA No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s categorically held that whether the co-operative society referred to in clauses (cciv), (ccv) and (ccvi) of Section 56 of the Banking Regulation Act, is carrying on the activities of the co-operative society or a co-operative bank requires to be determined by the Reserve Bank of India before the authorities could term the assessee as a cooperative bank, for purpose of Section 80P of the Act. In view of the same, without there being any determination to the said effect by the authorities, the stand taken by the department in this appeal proceedings based on the judgment of the Hon'ble Apex Court in the case of Citizen Co-operative Society Limited, supra, is wholly arbitrary and unjustifiable. Thus, the learned counsel seeks for rejection of the appeal as there is no substantial question of law arising for consideration before this Court. 5. We have heard the learned counsel appearing for the parties. Perused the material on record. 6. The sole substantial question of law raised by the appellants requires to be answered on the determination of the crucial question whether the respondent-assessee is a co-operative society or a co-operative bank. In the judgment referred to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connected cases, since the tax effect was less than Rs. 1 Crore and covered by Circular No. 3/2018 dated 11/07/2018 of the Central Board of Direct Taxes. On the dismissal of Civil Appeal, the judgment of this Court in Chirakkar has merged with the order of the Apex Court in that Civil Appeal. They would also contend that the Revenue did not challenge the judgment in the connected ITAs in Chirakkal 2016 (2) KHC 726 : (2016) 384 ITR 490 (Ker) : 2016 (2) KLT 535 : ILR 2016 (2) Ker. 821 by filing SLPs before the Apex Court. 22.1. Section 268A of the IT Act deals with filing of appeal or application for reference by Income Tax Authority. As per sub-section (1) of Section 268A, the Board may, from time to time, issue orders, instructions or directions to other Income Tax Authorities, fixing such monetary limits as it may deem fit, for the purpose of regulating filing of appeal or application for reference by any Income Tax Authority under the provisions of Chapter XX. As per sub-section (2), where, in pursuance of the orders, instructions or directions issued under sub-section (1), an Income Tax authority has not filed any appeal or application for reference on any issue in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that common judgment, can only be repelled. 23. In Kerala State Co-operative Marketing Federation Ltd. and Others v. Commissioner of Income Tax (1998) 231 ITR 814, the question that came up for consideration before the Apex Court was as to whether the assessees, which are Co-operative Societies, are entitled to deduction under Section 80P(2)(a)(3) of the IT Act, in respect of the purchases made from members societies. In that context, the Apex Court held that the provisions under Section 80P are introduced with a view to encouraging and promoting growth of Co-operative sector in the economic life of the country and in pursuance of declared policies of the Government. The correct way of reading the different heads of exemption enumerated in that Section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a Co-operative Society is exempted from tax, what has to be seen is to whether the income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax, notwithstanding that the conditions of another head of exemption are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than infrastructure development undertakings (which are separately dealt with under Section 80IA). The clause relevant for purposes of this appeal is Clause 2 which makes the deductions permissible in respect of industrial undertakings fulfilling the conditions specified therein. The scheme applies to small scale industrial undertakings as defined in Clause 14(g) which in terms refers to Section 11B of the Industries (Development and Regulation) Act, 1951. The extent of deduction permissible is mentioned in Clause 3 which is 25% (30% in the case of a company) of the profits and gains derived from such industrial undertakings for 10 consecutive assessment years beginning with the initial assessment. The 'initial assessment year' is defined in Clause 14(c) as the year in which manufacturing/production commences. 11. As already noted, the question for consideration is whether deduction under Clause 3 for 10 consecutive assessment years remains permissible irrespective of compliance of conditions subject to which the said deduction is permitted in the relevant assessment years. For purposes of deduction, the industrial undertakings covered by Section 80IB are of differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vations. Incentive is given to a particular category of industry for a specified purpose. An incentive meant for small scale industrial undertaking cannot be availed by an assessee which is not such an undertaking. It does not, in any manner-mean that the object of permitting industrial expansion is defeated, if benefit is not allowed to other undertakings. On this logic, incentive must be given irrespective of any condition as the incentive certainly helps further expansion by reducing the tax burden. The concept of vertical equity is well known under which all the assessees need not be uniformly taxed. Progressive taxation is a well known element of tax policy. Higher slabs of tax or higher tax burden on an assessee having higher income or higher capacity cannot in any manner, be considered unreasonable." (underline supplied) 25.1 In Ace Multi Axes Systems' case (supra) the Apex Court noticed that the scheme of the statute is clear that the incentive is applicable to a Small Scale Industrial Undertaking. The intention of legislature is in no manner defeated by not allowing the said incentive if the assessee ceases to be the class of industrial undertaking for which the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he undertaking may be formed without splitting up or reconstructing any existing business or without transfer of any building material or plant of any previous business. Such an undertaking undoubtedly would be eligible to benefit without any difficulty. On the other extreme may be an undertaking new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two there may be various other situations. The difficulty arises in such cases. For instance a new company may be formed, as was in this case a fact which could not be disputed, even by the Income Tax Officer. But tools and implements worth Rs. 3,500 were transferred to it of previous firm. Technically speaking it was transfer of material used in previous business. One could say as was vehemently urged by the learned counsel for the department that where the language of statute was clear there was no scope for interpretation. If the submission of the learned counsel is accepted then once it is found that the material used in the undertaking was of a previous business there was an end of inquiry and the assessee was precluded from claiming any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king. The intention of legislature is in no manner defeated by not allowing the said incentive if the assessee ceases to be the class of industrial undertaking for which the incentive is provided even if it was eligible in the initial year. Each assessment year is a separate unit. 17. In Citizen Co-operative Society Limited v. Assistant Commissioner of Income Tax, Circle - 9(1), Hyderabad, 391 ITR 1 : (2017) 9 SCC 364, this Court considered the incentive under Section 80P meant for a primary agricultural credit society or a primary cooperative agricultural and rural development bank. The assessee was held not to be entitled to the said incentive as business of the assessee was held to be finance business to which the incentive was not admissible even though the principle of liberal interpretation in terms of Bajaj Tempo (supra) was applied. 18. In State of Haryana v. Bharti Teletech Ltd., (2014) 3 SCC 556, eligibility of an assessee to get benefit of exemption from tax was an issue. It was observed that while the exemption notification should be liberally construed, the beneficiary must fall within the ambit of the exemption and fulfill the conditions thereof. In case such cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he public interest would, however, depend upon the facts of each case." 25. From the aforesaid authorities, it is clear as crystal that a statutory rule or an exemption notification which confers benefit on the assessee on certain conditions should be liberally construed but the beneficiary should fall within the ambit of the rule or notification and further if there are conditions and violation thereof are provided, then the concept of liberal construction would not arise. Exemption being an exception has to be respected regard being had to its nature and purpose. There can be cases where liberal interpretation or understanding would be permissible, but in the present case, the rule position being clear, the same does not arise." 19. Same view was taken in Commissioner of Customs v. M. Ambalal & Co., (2011) 2 SCC 74, as follows: "16. It is settled law that the notification has to be read as a whole. If any of the conditions laid down in the notification is not fulfilled, the party is not entitled to the benefit of that notification. The rule regarding exemptions is that exemptions should generally be strictly interpreted but beneficial exemptions having their purpose as enco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectory rule. 26. Whenever the statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads to severe consequences, such requirement would be mandatory. It is the cardinal rule of interpretation that where a statute provides that a particular thing should be done, it should be done in the manner prescribed and not in any other way. It is also settled rule of interpretation that where a statute is penal in character, it must be strictly construed and followed. Since the requirement, in the instant case, of obtaining prior permission is mandatory, therefore, non - compliance with the same must result in cancelling the concession made in favour of the grantee, the respondent herein." 21. In view of the above judgments, we do not see any difference in the situation where the assessee is not initially eligible, or where the assessee though initially eligible loses the qualification of eligibility in subsequent assessment years. In both such situations, principle of interpretation remains the same. 22. Thus, while there is no conflict with the principle that interpretation has to be given to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery or part thereof which tends to change the value of either of the parameters, referred to in sub-rule (3) of Rule 3, on the basis whereof the annual capacity of production had already been determined, would obviously require re-determination of annual capacity of production of the factory/mill, for the purpose of levy of duty. It is plain that in the absence of any other Rule, providing for any alternative formula or mechanism for re-determination of production capacity of a factory, on furnishing of information to the Commissioner as contemplated in Rule 4(2) of the 1997 Rules, such determination has to be in terms of sub-rule (3) of Rule 3. That being so, it must logically follow that Rule 5 cannot be ignored in relation to a situation arising on account of an intimation under Rule 4(2) of the 1997 Rules. Moreover, the language of Rule 5 being clear and unambiguous, in the sense that in a case where annual capacity is determined/re-determined by applying the formula prescribed in sub-rule (3) of Rule 3, Rule 5 springs into action and has to be given full effect to. 19. The principle that a taxing statute should be strictly construed is well settled. It is equally trite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decision, is limited to the decision itself and as to what is necessarily involved in it. The enunciation of the reason or principal upon which a question before a court has been decided is alone as a precedent. The ratio decidendi has to be ascertained by an analysis of the facts of the case and the process of reasoning involving the major premise consisting of a pre existing rule of law, either statutory or judge made, and a minor premise consisting of the material facts of the case under immediate consideration. If it is not clear, it is not the duty of the court to spell it out with difficulty in order to be bound by it. 28.1 Relying on the judgment of the Apex Court in Krishena Kumar's case (supra) the learned counsel for the assessee in ITA No. 22 of 2017 would contend that, as there is no ratio decidendi in Perinthalmanna 363 ITR 268 the Division Bench went wrong in referring the matter to a Larger Bench on the ground that there is divergence of opinion expressed by the two Division Benches in Perinthalmanna 363 ITR 268 and Chirakkal 2016 (2) KHC 726 : (2016) 384 ITR 490 (Ker) : 2016 (2) KLT 535 : ILR 2016 (2) Ker. 821. 28.2 The Latin phrase 'ratio decidendi' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee irrespective of the nomenclature of the assessee. Before the Division Bench, the assessee contended that, its case has to be considered only by looking into the provisions of the KCS Act and nothing else, as the certificate of registration would indicate their claim and also decide what exactly the nature of business. The Division Bench held that the Revisional Authority was justified in saying that, with the introduction of sub-section (4) of Section 80P that, necessarily an enquiry has to be conducted into the factual situation whether a Co-operative Bank is conducting the business as a PACS or a Primary Co-operative Agricultural and Rural Development Bank, and depending upon the transactions, the Assessing Officer has to extent the benefits available and not merely looking at the registration certificate under the KCS Act or the nomenclature. Therefore, we find no merit in the contention of the learned counsel for the assessee that as there is no ratio decidendi in Perinthalmanna: 363 ITR 268 the Division Bench went wrong in referring the matter to a Larger Bench on the ground that there is divergence of opinion expressed by the two Division Benches in Perinthalmanna 363 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the competent authority by producing the relevant facts and figures including the balance sheet, profit and loss accounts etc. that they satisfy the requirements of the 'second proviso' to Section 2(oa) of the Act to claim the status of Primary Agricultural Credit Societies. 31. In view of the law laid down by the Apex Court in Citizen Co-operative Society 2017 KHC 5350 : (2017) 397 ITR 1 (SC) : (2017) 9 SCC 364 : AIR 2017 SC 5147 it cannot be contended that, while considering the claim made by an assessee society for deduction under Section 80P of the IT Act, after the introduction of sub-section (4) thereof, the Assessing Officer has to extend the benefits available, merely looking at the class of the society as per the certificate of registration issued under the Central or State Co-operative Societies Act and the Rules made thereunder. On such a claim for deduction under Section 80P of the IT Act, the Assessing Officer has to conduct an enquiry into the factual situation as to the activities of the assessee society and arrive at a conclusion whether benefits can be extended or not in the light of the provisions under sub-section (4) of Section 80P 32. In Chirakkal 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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