Charging Higher Rate of Interest cannot be a ground for denying Deduction u/s 80P of Income Tax Act: Madras HC [Read Judgment]

Assessment Penalty - gross total income - Taxscan

The High Court of Madras, in a recent decision, ruled that the Co-operative Societies lending money for non-agricultural purpose are eligible for deduction under section 80P of the Income Tax Act, 1961. While quashing the impugned order by passed by the AO, the division bench further observed that the deduction under the said section cannot be rejected for the reason that the assesse has charged higher rate of interest.

The assesses are registered as Co-operative societies and engaged in banking and trading activities. As per the bye-laws there were two types of members viz., Class A and Class B members. Class A members are normal members who have voting rights and were involved in the running of the assessee’s business and can become the members of Administrative committee, etc. Class B members are anyone other than Class A member, who had availedloans from the assessee and is necessarily enrolled as Class B member. The Class B member is not recognized by the assesse for the purpose of the records in statute. Further, the majority of jewel loan and other non-farming loan at a higher interest were given to Class B members.

In the relevant assessment year, the assesse had lent monies to the members who were undertaking non-agricultural/ non-farm activities and had received the interest on par with commercial banks. They claimed deduction under the income received them n 80P of the Act towards the said income. The assessing officer disallowed the claim of deduction under section 80P on ground that the said deduction is not available to the assesses since they have received interest on non-farm sector loans which is purely in the nature of commercial banking activity, and it do not qualify for deduction u/s 80P (2) (a) (i) of the Income Tax Act, 1961. Accordingly, the AO passed an order rejecting the claim of the assessee and observed that the said deduction is available only to agricultural credit societies are engaged with a primary object of providing financial assistance to its members for agricultural activities.

The Commissioner of Income Tax (Appeals) has confirmed the said order by holding that the assessees had not provided credit facilities to its members to assist agricultural activity. Further, the Appellate Tribunal decided the case in favour of the assessee by observing that Class B members cannot be treated as non-member. Therefore, the Revenue preferred an appeal before the High Court.

The High Court, while rejecting the appeal, observed that “the appellate authority, namely, the Commissioner of Income Tax (Appeal) and the Income Tax Appellate Tribunal has clearly held that the assessees are not cooperative bank and that their activities in the nature of accepting deposits, advancing loans etc., carried on by the assessees are confined to its members only and that too in a particular geographical area. Therefore, the respondent Societies are eligible for deduction under Section 80P (2) (a) (i) of the Income Tax Act. The contention of the appellants that the members of the assessee societies are not entitled to receive any dividend or having any voting right or no right to participate in the general administration or to attend any meeting etc., because they are admitted as associate members for availing loan only and was also charging a higher rate of interest at the rate of 14%, is not a ground to deny the exemption granted under Section 80P (2)(a) (i) of the Income Tax Act.” 

Read the full text of the Judgment below.