Loans Granted For Non-Agricultural Purposes Not Bar 80P Deduction: ITAT Deletes ₹1.63 Crore Addition [Read Order]

In a recent ruling, the Income Tax Appellate Tribunal (ITAT), Cochin Bench, held that granting loans for non-agricultural purposes does not disentitle a PrimaryAgricultural Credit Society (PACS) from claiming a deduction under Section80P(2)(a)(i) of the Income Tax Act.

The Tribunal deleted an addition of ₹1.63 crore made by the Assessing Officer (AO), thereby restoring the assessee’s claim for deduction.

The assessee, Avinissery Service Co-operative Bank Ltd., registered under the Kerala Co-operative Societies Act, 1969, filed its return for Assessment Year (AY) 2016-17, claiming a deduction under Section 80P.

The AO denied the claim, classifying the assessee as a cooperative bank on the ground that its lending was largely non-agricultural and made an addition of ₹1.63 crore.

The Commissioner of Income Tax (Appeals) (CIT(A)) under the National Faceless Appeal Centre (NFAC) upheld the disallowance, leading to the two appeals before the ITAT.

The appellant contended that, as a registered PACS, it was neither granted nor eligible for an RBI banking license, rendering Section 80P(4) inapplicable. Relying on the Supreme Court's ruling in Mavilayi Service Co-operative Bank Ltd. v. CIT (2021), it argued that "providing credit facilities to members" under Section 80P(2)(a)(i) is not confined to agricultural credit and that all loans were granted only to members, including nominal members.

The assessee also challenged the NFAC order as void, noting it bore the marking "Draft Order" on its face. Believing a final order was forthcoming, the assessee delayed filing its appeal, resulting in an eight-month delay. It was argued that the order, lacking finality, was void ab initio and liable to be quashed.

The Revenue argued that with agricultural loans constituting less than 1% of total lending, the assessee was not genuinely functioning as a PACS but was conducting banking operations similar to a commercial bank, thereby attracting Section 80P(4) and disentitling it from deduction under Section 80P.

The matter was heard by a bench comprising Inturi Rama Rao (Accountant Member) and Rahul Chaudhary (Judicial Member). The Tribunal observed that the issue is no longer res integra, being squarely covered by the Supreme Court's ruling in Mavilayi Service Co-operative Bank Ltd. v. CIT, which held that Section 80P(4) operates only as a proviso excluding cooperative banks that accept public deposits and hold a valid RBI banking license, and has no application to societies registered as PACS.

The bench clarified that "providing credit facilities to members" under Section 80P(2)(a)(i) is not confined to agricultural credit. Further, it was held that ‘nominal members’ fall within the definition of "member" under the Kerala Co-operative Societies Act, and loans extended to them qualify for deduction under Section 80P(2)(a)(i).

The Tribunal in the present case noted that the Revenue failed to distinguish this binding precedent on facts or law, and hence, a deduction must be granted.

On the Draft Order ground, the Tribunal, while acknowledging the procedural infirmity of NFAC, dismissed it as infructuous in view of the substantive relief granted on merits.

Accordingly, of the two appeals filed, one was dismissed as a duplicate, while the other was partly allowed in favour of the assessee, and a deduction was granted.

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