Income Tax Appellate Tribunal - Cochin
Chettiamparamba Service Co-Operative ... vs Assessee on 21 November, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI N.R.S.GANESAN, JM and CHANDRA POOJARI, AM
I.T.A. No. 60 /Coch/2014
Assessment Year : 2007-08
The Chettiamparamba Service Vs. The Income Tax Officer, Ward-2,
Co-op Bank Ltd., Kannur.
Chettiamparamba, Kelakam,
Thalassery-670 674.
[PAN: AAFFC 6250P]
(Assessee -Appellant) (Revenue-Respondent)
Assessee by Shri Arun Raj S. Adv.
Revenue by Shri K.K. John, Sr. DR
Date of hearing 13/11/2014
Date of pronouncement 21/11/2014
ORDER
Per CHANDRA POOJARI, Accountant Member:
This appeal filed by the assessee is directed against the order dated 19/11/2013 passed by the CIT(A), Kozhikode for the assessment years 2007-
08.
2. The first ground raised by the assessee is with regard to denial of deduction u/s. 80P(4) of the I.T. Act.
2 I.T.A. No.60/Coch/20143. The brief facts of the case are that the Assessing officer after analyzing the activities of the assessee-society came to the conclusion that since the assessee has not fulfilled its main objective of providing financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities, it is not eligible for deduction u/s. 80P of the Act.
4. On appeal, the CIT(A) observed that as per section 80P(4), "primary agricultural credit society" shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949). As per section 59cciv) of the Banking Regulation Act, "primary agricultural credit society' means a co-
operative society - 'the primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops)". According to the CIT(A), there was no clause incorporated in the bye-law of the assessee bank for provision of financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities and the agricultural credit provided by the assessee is negligible.
Thus, the CIT(A) held that the assessee had failed to fulfil its obligation as defined u/s. 59cciv) of the Banking Regulation Act and since the assessee 3 I.T.A. No.60/Coch/2014 has been more in the field of banking instead of the principal objective of extending credit facility to its members for agricultural purposes, the assessee cannot claim deduction u/s. 80P of the Act. The CIT(A) relied on the judgment of the jurisdictional High Court in the case of M/s. Thathamangalam Service Co-operative Bank Ltd. in WP(C) No. 14226 of 2012(C) dated 14th September, 2012.
5. The Ld. AR submitted that the substantial portion of 96.33% of the total outstanding advances was given for agricultural purposes. Hence, the principal business of the assessee was to provide financial accommodation for purposes connected with agricultural activities to its members and further, the assessee is not having any other co-operative societies as its member.
Hence, the assessee comes under the meaning of primary agricultural credit society and as such, the assessee is eligible for deduction u/s. 80P of the I.T. Act.
6. On the other hand, the Ld. DR relied on the orders of the lower authorities.
4 I.T.A. No.60/Coch/20147. We have heard both the parties and perused the record. We are of the opinion that similar issue came for consideration before the 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 which decided the issue against the assessee. The relevant portion of the said order is as follows:
8. We have heard both the parties and perused the material on record. In this case, the assessee's contention is that it is lending money primarily for the purpose of agricultural activities and its member agriculturists. Being so, the assessee is entitled for deduction u/s. 80P of the Act. We have carefully gone through the business carried on by the assessee. The Assessing officer has clearly brought on record that the assessee has lent only 3.56% of total loans advanced during the year under consideration for the purpose of agricultural activities. The assessee was unable to point out that how with this meagre 3.56% of the loans advanced for the purpose of agricultural activities; the assessee is entitled for deduction u/s. 80P of the I.T. Act. The question before us is whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) and whether the Assessee is hit by the provisions of Sec. 80P(4) which was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007. The relevant provisions of both the sections are re-produced for our ready reference as under :
"80P.(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub- section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely :--
(a) in the case of a co-operative society engaged in--
(i)carrying on the business of banking or providing credit facilities to its members, or..............."the whole of the amount of profits and gains of business attributable to any one or more of such activities.5 I.T.A. No.60/Coch/2014
"80P(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 co-operative agricultural and rural development bank. Explanation.--For the purposes of this sub-section,--
(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 and 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."
8.1 In our opinion, Sec. 80P(2)(a)(i) provides two types of activities in which the co-operative society must be engaged to be eligible for deduction under sub-clause (i). These two activities are not alternate ones because the section allows deduction to the co-operative society on the whole of profits and gains of business attributable to any one or more of such activities. This pre-supposes that eligible co-operative society can carry on either one of these two businesses or can carry both these businesses for the members. If the Assessee co-operative society carries on one or both of the activities, it will be eligible for deduction. These two activities are (a) co- operative society engaged in carrying on business of banking facilities to its members or (b) co-operative society engaged in providing credit facilities to its members. Both the activities must be carried on by the co-operative society for its members. If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co- operative society, in our opinion, will not be eligible for deduction u/s 80P(2)(a)(i) on the income which it derives from carrying on the activities not relating to its members. Therefore, where a co-operative society is engaged in carrying on business of banking facilities to its members and to the public or providing credit facilities to its members or to the public, the income which relates to the business of banking facilities to its members or providing credit facilities to its members will only be eligible for deduction u/s 80P(2)(a)(i). There is no prohibition u/s 80P not to allow deduction to such co-operative societies in respect of business relating to its members.
8.2 Now, the question before us is whether the Assessee is a co-operative bank or not. Co-operative Bank as defined in Part V of the Banking Regulations Act, 1949 is as under :
"Co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank:"6 I.T.A. No.60/Coch/2014
8.3 From the definition of Co-operative bank it is apparent that Co- operative bank means state co-operative bank, a Central Co-operative Bank and a Primary Co-operative bank. It is not the case of the revenue that the assessee is a state Co-operative bank or Central Co-operative bank. We have therefore to find whether the assessee is a primary Co-operative bank.
8.4 The Primary Co-operative bank is defined under section 5 clause (CCV) of Banking Regulation Act 1949 as under:-
"(CCV)" primary co-operative bank" means a co-operative society, other than a primary agricultural credit society-
(1) The primary object or principal business of which is transaction of banking business:
(2) the paid-up share capital and reserves of which are not less than one lakh of rupees: and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-
clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such Co-operative society out of funds provided by the State Government „for the purpose"
8.5 From the aforesaid definition, it is apparent that if the co-operative society complied with all the three conditions; firstly that the primary object or principle business transacted by it is a banking business, secondly, the paid up share capital and reserve of which are 1 lakh or more and thirdly, by laws of the co-operative society do not permit admission of any other co-operative society as a member, it will be regarded to be primary co-operative bank. If co- operative society does not fulfill any of the conditions, it cannot be regarded to be a primary co-operative bank. Therefore, in the case of the Assessee we have to examine on the basis of the facts and materials on record whether the Assessee co-operative society complies with all the three conditions. In case, it does not comply with all the three conditions, it cannot be regarded to be a co- operative bank and the provisions of Sec. 80P(4), in our opinion, will not be applicable in the case of the Assessee. Once, the Assessee will not fall within the provisions of Sec. 80P(4), the Assessee, in our opinion, will be eligible to get deduction u/s 80P(2)(a)(i) in respect of whole of the income which the Assessee derives from carrying on the business of banking or providing credit facilities to its members.7 I.T.A. No.60/Coch/2014
8.6 Whether condition no. 1 is applicable in the case of the Assessee, for this we have to look into the bye-laws of the Assessee. The objects of the Assessee in this case are enumerated as under :
1) To provide short terms, medium term and long term loans to its members.
2) To provide over draft facilities to members who are traders and kisan credit card loan to members who are farmers;
3) To invent and execute different schemes for the non agricultural purpose of the members;
4) To procure and distribute fertilizers, pesticides and equipments for agricultural purposes and different articles for house-hold needs of the members;
5) To devise different schemes for collection, processing and the marketing of agricultural produce of the members;
6) In order to lend money to members, take loans from government and other co-operative institutions;
7) To provide banking facilities to members including encashment of cheque, drafts, bills etc.;
8) To acquire movable and immovable assets for the functioning of the bank;
9) To collect deposits from members and customers under different deposit Schemes;
10)Marketing of the agricultural produce of the members, co-
operating with government and Quasi government agencies;
11) To start branches and extension counters within its area of operation if necessary for the development of the bank;
12) To acquire and market industrial products for the benefit of the members;
13) To issue loans to members under hire purchase scheme for purchasing household articles, machinery, jeep, autorikshaw, car etc. 8 I.T.A. No.60/Coch/2014
14) To accept deposits from primary non-agricultural co-operative societies.
Out of these, only four objects (i.e. clause no. 2,4,5 and 10) are related to agriculture or agricultural operations. So from the bye-laws of the bank it cannot be aid that the primary object or principal business of the bank is to provide financial accommodation to its members for agricultural purposes or for the purposes connected with agricultural activities.
8.7 On the basis of these objects whether it can be said that the primary object or principal business of the Assessee is transaction of banking business? Banking business has been defined u/s 5(b) of the Banking Regulation Act in the following manner :
" banking" means the accepting, for the purpose of lending or in vestment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."
From the said definition it is clear that banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment. These deposits must be accepted from the public, not only from the members. These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise. We notice that the CIT(A) has given a categorical finding that the Assessee has carried on banking activities on the basis of findings in the assessment order. The relevant portion of the assessment order is as under :
"16. This shows that more than 95% percentage of the loans advance for non-agricultural purposes (normal banking business activities like any other commercial bank). The percentage of loans issued for agricultural purposes is only 3.56%. In short, it cannot be said that the primary object or principal business of the bank is to provide financial accommodation to its members for agricultural purposes or for the purposes connected with agricultural activities.
17. The assessee bank is having four types of share holdings. (A) Class equity shares of Rs. 5/- each with voting rights. It is explained that these shares are issued to individuals. (B) Class equity shares of Rs.250/- each. It is submitted that presently Kerala Government is holding three shares. (C) Class equity shares of Rs. 5/- each without 9 I.T.A. No.60/Coch/2014 voting rights. These shares are issued to individuals. (D) Class equity shares of Rs. 25/- each without voting rights. These shares are also issued to individuals. As per the bye-laws of the banks, (B) class shares can be issued to State Government, State Co-operative bank, District Co-operative bank, Kerala Coconut Farmer's Co-operative Federation, Local bodies and trust falling under the area of operation of the bank. There is no specific clause in the Bye-laws of the bank which do not permit admission of any other co-operative society as a member.
18. The assessee Co-operative bank is registered as a Primary Agricultural Credit Society, but as narrated above, it does not satisfy the criteria or conditions stipulated in the Banking Regulation Act, 1949. So it squarely falls under the operation of Sub-section (4) of Section 80P of Income Tax Act, 1961. As such the assessee is not eligible for deduction u/s. 80P of the Income Tax Act, 1961."
8.8 The deposits accepted are used by the Assessee co-operative society for lending or investment. This fact has not been denied. Even out of the deposits so received, the loans have been given to the members of the society in accordance with the objects as enumerated above. Thus, in our opinion, condition no. 1 stands satisfied and it cannot be said that the Assessee society was not carrying on banking business as it was accepting deposits from the persons who have no voting right. So far as the second condition is concerned, there is no dispute that the paid up share capital and reserves in the case of the Assessee is more than Rs. 1 lac. Therefore, the Assessee satisfies the second condition.
8.9 Thus, we notice that all the three conditions in the case of the assessee for becoming primary cooperative bank stand complied with.
8.10 We have gone through the decision of the Hyderabad bench of this Tribunal in the case of The Citizen Cooperative Society vs. Addl. CIT, 41 305 (Hyd). We notice that this decision is applicable to the facts of the case before us. In that decision, under para 23 the Tribunal has given a finding that the Assessee is carrying on banking business and for all practical purposes it acts like a co-operative bank. The Society is governed by the Banking Regulations Act. Therefore, the society being a co-operative bank providing banking facilities to members is not eligible to claim deduction u/s 80P(2)(a)(i) after the introduction of sub-section (4) to section 80P. In view of this finding, the Assessee was denied deduction u/s 80P(2)(a)(i). We have also gone through the decision of the Bangalore Bench of the Tribunal in the case of ITO vs. Divyajyothi Credit Co-operative Society Ltd. (supra) in ITA No. 72/Bang/2013. In this case, we notice that the Hon'ble Tribunal confirmed the order of CIT(A) 10 I.T.A. No.60/Coch/2014 following the decision of the Tribunal in the case of ACIT, Circle 3(1), Bangalore vs. M/s. Bangalore Commercial Transport Credit Co-operative Society Ltd. in ITA No. 1069/Bang/2010 holding that Sec. 80P(2)(a)(i) is applicable only to a co-operative bank and not to credit co-operative society. With due regards to the Bench, we are unable to find any term„credit co-operative society‟ u/s 80P(2)(a)(i) or u/s 80P(4), therefore, this decision cannot assist us. We noted that the Hon'ble Gujarat High Court in the case of CITvs. Jafari Momin Vikas Co-op. Credit Society Ltd. in Tax Appeals no 442 of 2013, 443 of 2013 and 863 of 2013 (supra) vide order dt. 15.1.2014 took the view that Sec. 80P(4) will not apply to a society which is not a co-operative bank. In the case of Vyavasaya Seva Sahakara Sangha vs. State of Karnataka &Ors. (supra) we notice that the issue before the Hon'ble High Court in the Writ Petition filed by the Petitioner related to the legislative competence of the State Legislature for issuing a circular. The issue does not relate to the claim of deduction u/s 80P(2)(a)(i). While dealing with this issue, the Hon'ble High Court under para 12 observed as under :
"12.It is not possible to accept this contention. The petitioners are not the banking institutions coming 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 a co-operative society which is engaged in carrying on banking business facilities to its members if it is not a co-operative bank. We have also gone through the decision of this Bench in the case of DCIT vs. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. in ITA No. 1 to 3/PNJ/2012 dt. 30.3.2012 (supra). While discussing this issue, after analysing the aims and objects of the co-operative society under para 12 of its order, this Tribunal has held as under :
11 I.T.A. No.60/Coch/2014"12.From the aforesaid objects, it is apparent that none of the aims and objects allows the assessee cooperative society to accept deposits of money „from public for the purpose of lending or investment. In our opinion until and unless that condition is satisfied, it cannot be said that the prime object or principal business of the assessee is banking business. Therefore, the assessee will not comply with the first condition as laid down in the definition as given u/s. 5(ccv) of the Banking Regulation act, 1959 for becoming "primary cooperative bank". The assessee, therefore, cannot be regarded to be primary cooperative bank and in consequence thereof, it cannot be a co-operative bank as defined under part V of the Banking Regulation Act 1949. Accordingly, in our opinion the provisions of section 80P (4) read with explanation there under will not be applicable in the case of the assessee. The assessee, therefore, in our opinion will be entitled for the deduction u/s 80P(2)(a)(i). We accordingly confirm the order of CIT(A) allowing deduction to the assessee."
The other decisions also relied on are not applicable to the facts of the case of the assessee.
8.11. In view of our aforesaid discussion, we hold that the assessee is a primary cooperative bank and therefore hit by the provisions of section 80P(4).
9. On the other hand, the assessee made an alternative plea that the assessee is lending money only to its members. Being so, applying the concept of mutuality, the total income of the assessee has to be exempt from tax. However, we find that this argument of the assessee is also devoid of merits. The Hon'ble Supreme Court had an occasion to consider this mutuality concept. Similar issue came up for consideration of the Hon'ble Supreme Court in the case of CIT vs. Kumbakonam Mutual Benefit Fund Ltd., 53 ITR 241 (SC) wherein it was held that if the profits are distributed 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 12 I.T.A. No.60/Coch/2014 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 entitled to exemption u/s. clause (a) in respect of the banking activities. The Appellate Assistant Commissioner, in allowing the assessee's appeal, held that exemption under clause
(c) is in addition to the exemption allowable under clauses (a) and (b) and directed the Income-tax Officer to allow a deduction of Rs. 20,000 separately, taking into consideration the property income earned by the assessee. The Revenue carried the matter in appeal before the Appellate Tribunal. The Tribunal held that the rule of construction of ejusdem generis applies to the construction of clause (c), which results in profits and gains, that the income from house property has been dealt with in sections 22 to 27 as income and not as profits and gains and that the assessee is not, therefore, entitled to any exemption under clause
(c). The Tribunal did not accept the alternative contention raised by the assessee for the first time before the Tribunal that the letting out of surplus space should be treated as a business activity under clause (a) of sub-section (2) of section 80P of the Act. The appeals were accordingly allowed. The question of law arises out of the order of the Tribunal.
Section 80P of the Income-tax Act, 1961, allows a straight deduction, in the computation of the total income of a co- operative society, to the extent mentioned. Clause(c) of section 80P(2) provides that in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) either independently of, or in addition to, all or any of the activities so specified, so much of its profits and gains attributable to such activities as does not exceed Rs. 20,000 shall be deducted in computing the total income.
The co-operative society engaged in carrying on the business of banking or providing credit facilities to its members falls under clause (a) of section 80P(2). The claim for exemption under clause (c) is in addition to the exemption provided under clause
(a). The provisions are cumulative and mutually supplementing. The limits specified in clause(c) are in relation to the profits and gains attributable to the activity other than that specified in clause (a). If the rental income received by the society is 13 I.T.A. No.60/Coch/2014 attributable to any activity of the society, clause (c) would be attracted. It is then necessary that the co-operative society must prove that 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 surgarcane on statutory investment in Government securities, was held profit attributable to the carrying on of the activity of supplying sugarcane (CIT vs. Co-operative 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 income, the income thus received cannot partake of the character of profits and gains attributable to an activity carried on by the society. The building let out is not a commercial asset or the rent received is not profit or gain arising from the exploitation of a business asset. The word "activity" is wider than the word "business". It connotes a specified form of supervised action or 0field of action. Read in the context of the profit earning activity of a co-operative society, it means the corporate activity of the society, that is to say, whether or not they amount to a business, trade or profession in the ordinary sense. Clause (c) of section 80P(2) is intended to cover receipts from sources other than the actual conduct of the business but attributable to an activity which results in profits and gains. Letting out of surplus space in the building owned and used by the assessee is not such an activity falling under clause
(c). The rent thus received by the assessee is not eligible for the exemption provided thereunder. In this view, the Appellate Tribunal was justified in rejecting the assessee's claim."
10. In view of the above discussions, we are inclined to hold that the assessee is not entitled for deduction u/s. 80P of the Act on any reasoning."
14 I.T.A. No.60/Coch/20148. In view of the above Tribunal order, we are inclined to dismiss this ground of the assessee.
9. The assessee raised the ground that the CIT(A), having considered the assessee as "Co-operative Bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, and allowed deduction u/s. 36(1)(viia) ought to have allowed deduction vide proviso to section 36(1) (viia) for provisions made for assets classified as doubtful assets or loss assets in accordance with the guidelines issued by the Reserve Bank of India.
10. We have heard both the parties and perused the record. A similar case came up for consideration before the Cochin Bench of the Tribunal in the case of The Kannur District Co-operative Bank Ltd. vs. DCIT in I.T.A. Nos. 182&183/Coch/2014 dated 27/06/2014 wherein it was held as under:
"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 15 I.T.A. No.60/Coch/2014 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) to Section 36(1). This clause makes provision for bad and doubtful debts. In other words, deduction could be claimed by banks referred to in clause (viia) in respect of bad and doubtful debts. It provides certain terms and conditions under which such deductions could be claimed by a particular bank. Section 36(1)(viia) commences with following words "in respect of any provision for bad and doubtful debt made by" and sub-clause (a) reads as under:
"A scheduled bank not being a bank approved by Central Government for the purposes of clause (viiia) or a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half percent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner."
Under explanation to Section 36 for better understanding of certain terms used in sub-clause (a) of clause (viia) definitions ar provided. For the purpose of the above appeals, we need to know what exactly non-scheduled bank, rural branch co-operative bank and scheduled bank mean as per the explanation which read as under:
"Non-scheduled bank" means a banking company as defined under clause (c) of section 5 of the Banking Regulation Act, 1949, which is not a scheduled bank.
"Rural branch" means a branch of a scheduled bank or a non- scheduled bank situated in a place which has a population of nor more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
"Co-operative bank", primary agricultural credit society" and "primary co-operative agricultural and rural development bank"
shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of Section 80P.
16 I.T.A. No.60/Coch/2014"Scheduled bank" means a bank for the time being included in the Second Schedule to the Reserve Bank of India Act."
In order to understand what is a banking company, one has to refer to Banking Regulation Act and to understand whether a particular bank is a scheduled bank, one has to see whether such bank finds a place in the Second Schedule to Reserve Bank of India Act. Co- operative 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 co-operative 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 appellate banks with reference to the context.
9. Admittedly, appellants/assessees are co-operative banks. With introduction of Finance Act of 2007, coming into effect from 01.04.2007, one has to understand what was the position prior to 01.04.2007 and after 01.04.2007, they were enjoying the benefits provided u/s. 80P. With the introduction of Finance Act 2007 with effect from 01.04.2007, they could claim deductions as provided u/s. 36(1) of the Act. We are concerned with sub-clause(a) of clause (viia) to Section 36(1). Prior to Finance Act of 2007, co-operative bank was not included in sub-clause (a) so far as provisions for bad 17 I.T.A. No.60/Coch/2014 and doubtful debts. With effect from 01.04.2007, co-operative bank was included under sub-clause 9a) of clause (viia) of Section 36(1). It is further clarified that only such co-operative bank other than a primary agriculture credit society, etc. is included in sub-clause (a) of clause (viia). The provision is a beneficial one. No doubt, plain reading of main Section 36(1) (viia)(a) and Explanation under said section present certain difficulties, but situation is not without possibilities. The object and intention of the legislature is to be understood by harmonious construction of the provisions. The policy was to include Co-operative Banks as well, as they could not take shelter u/s. 80P of the Income Tax Act any more. By restricting the scope of the provisions, the very purpose of inclusion of Co-operative Bank would be lost. Sub-clause (a) consists of two types of deductions. One refers to deduction of an amount not exceeding 7.5% of the total income. Only condition is, there should be a provision for bad and doubtful debts. Till 01.04.2007, there was no need to make any provision for bad and doubtful debts under this clause so far as co-operative bank and they were claiming benefits applicable to them u/s. 80P. During the assessment year in question they claimed deductions u/s. 36(1)(viia)(a) of the Act. Only with reference to the assessment year in question appellants/assessees have created provision for bad and doubtful debts in the books of accounts. So far as this issue is concerned, opinion of the assessing officer and two appellate authorities is justified and we need not interfere with the opinion of the authorities in restricting deductions only to 7.5% of the total income as provided under sub-clause (viia) of Section 36(1).
10. Then coming to the other controversial issue whether a co- operative 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 co- operative 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 18 I.T.A. No.60/Coch/2014 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 branch. This Court had an occasion to decide the said controversy pertaining to bad and doubtful debts of a rural branch. While explaining the meaning of 'place' in Explanation (ia) to Section 36(1)(viia), their Lordships opined as under:
"Next question raised pertains to the assessee's claim for deduction of provision for bad debts in terms of section 36(1) (viia) of the Income-tax Act. Here the only question raised is as to basis of classifying branches of the bank as rural branches and other branches. Rural branch is defined under Explanation (ia) to section 36(1)(viia) as follows:
"rural branch" means a branch of a scheduled bank or a non- schedules bank situated in a place which has a population of nor more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.".
What is clear from the above is that the classification between rural and other branches of a bank is made based on the population in the place where the concerned branch is located. While the assessee's case that found acceptance with the Tribunal is that "place" referred to in the above definition clause is the ward of a panchayat or municipality, the Assessing officer took the view that "place" contained in the definition clause should mean a revenue village. No doubt," as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of "place" referred to in the section. Standing counsel for the Department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of "place" as referred to in the Census Report produced could be adopted for the purpose of this case. What is written in the Census Report 2001 is as follows:
"The basic unit for rural areas is the revenue village with definite surveyed boundaries. The rural area is, however, taken as the residual portion excluding the urban area and for that no strict definition is followed.19 I.T.A. No.60/Coch/2014
In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee's case accepted by the Tribunal that population in a ward has to be reckoned for deciding as to whether the location of a panchayat is in a rural area or not is 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 a village. Several wards may come within a village, whether it be in corporation, municipality or panchayats. There can be no village in a municipal or corporation area where the population is less than 10000. So much so, rural branches are such of the branches located in a village where the population in the village as a unit is less than 10000."
It is clear from the above judgment that this Court had already an occasion to consider the meaning of place with reference to above section. Therefore, rural branch is a branch which falls under Explanation (ia) to Section 36(1) (viia). Tribunal had to reverse the judgment of CIT(appeals) in the light of the decision in Lord Krishna Bank's case (supra).
12. Then coming to the controversy whether co-operative bank could claim deduction of 10% of the aggregate average advances while computing the income irrespective of falling under rural branch as per Explanation, in order to consider a company as a banking company it must transact business of banking in India as defined u/s. 5(c) of Banking Regulation Act. Explanation to Section 5(c) clearly indicates which are the transactions which would not come within the meaning of banking business. Non-schedule bank means a banking 20 I.T.A. No.60/Coch/2014 company as defined u/s. 5(c) which is not a scheduled bank. As already stated above, co-operative bank cannot be considered as a scheduled bank as Second Schedule to Reserve Bank of India Act does not include any of the co-operative banks. Reading of Section 5(c) along with explanation, clearly indicates though any company which transacts business of banking in India would come within the meaning of non-scheduled bank, by virtue of Explanation (1) under this clause scheduled bank is excluded. So far as sub-clause(a) of clause (viia) to Section 36(1), two types of deductions are provided to non-scheduled bank, a scheduled bank and a co-operative bank other than a primary agricultural credit society, etc. It is to be noted that appellants/assessees are not primary agricultural credit co- operative society or other kind of bank so as to go out of the definition of co-operative bank under sub-clause (a) to clause (viia) of Section 36(1). No doubt, Explanation (ia) to Section 36(1)(viia) defines what is a rural branch. It is with reference to a place and certain number of population. It refers to branch of a scheduled bank or a non-scheduled bank. Apparently, we do not find the term co-operative 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- schedule 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 co-operative 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, none of the contentions raised by appellants are sustainable. Hence, these appeals are dismissed answering substantial questions of law in favour of Revenue."
21 I.T.A. No.60/Coch/20145. In view of the above judgment of the Hon'ble Jurisdictional High Court in the assessee's own case, we are inclined to decide the issue against the assessee. Accordingly, this ground raised by the assessee in both the appeals is dismissed"
6. In the result, the appeals filed by the assessee in I.T.A. Nos. 182&183/Coch/2014 are dismissed."
.
11. In view of the above Tribunal order, this ground of the assessee is dismissed.
12. The Ld. AR also submitted that CIT(A) has wrongly considered the reserve for overdue interest due on borrowings amounting to Rs.41,60,210/- payable by the assessee as provision for bad and doubtful debts and allowed deduction u/s. 36(1) (vii) subject to the statutory limit specified therein instead of allowing the interest on borrowing u/s. 36(1)(vii) of the I.T. Act. The assessee explained that the reserve for overdue interest debited in the P&L account was actually the cumulative figure and not solely for the current year.
13. The above ground taken by the assessee is totally misconstrued as the CIT(A) is justified in giving a finding that the assessee's claim for deduction u/s. 36(1)(vii) (a) is to be considered subject to statutory limit and also the Ld. AR has not been able to show as to how this section is 22 I.T.A. No.60/Coch/2014 not applicable to the assessee's case. Being so, we decline to interfere with the order of the CIT(A) on this issue. Accordingly, this ground of the assessee is dismissed.
14. In the result, the appeal filed by the assessee is dismissed.
-
Pronounced accordingly on 21-11-2014.
sd/- sd/-
(N.R.S.GANESAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi
Dated: 21st November, 2014
GJ
Copy to:
1. The Chettiamparamba Service Co-op Bank Ltd., Chettiamparamba, Kelakam, Thalassery-670 674.
2. The I.T.O., Ward-2, Kannur.
3. The Commissioner of Income-tax(Appeals), Kozhikode.
4. The Commissioner of Income-tax, Kozhikode.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T, COCHIN