2014 (4) TMI 1102 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) denied - AO took the view that the Assessee is a primary co-operative bank and therefore provisions of Sec. 80P(4) are applicable in the case of the Assessee - Held that - Assessee has not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied with, therefore, it is not a co-operative bank and the provisions of Sec. 80P(4) are not applicable in the case of the Assessee and Assessee is entitled for deduction u/s 80P(2)(a)(i). We, therefore, confirm the order of the CIT(A) allowing deduction u/s 80P(2)(a)(i) to the assessee u/s 80P(2)(a)(i) on the income generated for providing banking or credit facilities to its members. - Decided against revenue

Summary

Issues Involved:
1. Whether the assessee is a primary co-operative bank and thus ineligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Applicability of Section 80P(4) of the Income Tax Act, 1961 to the assessee.
3. Interpretation of the Banking Regulation Act, 1949 in relation to the assessee's status.
4. Examination of the assessee's bye-laws to determine its primary object or principal business.
5. Compliance with the conditions outlined in Section 5(ccv) of the Banking Regulation Act, 1949.

Issue-wise Detailed Analysis:

1. Whether the assessee is a primary co-operative bank and thus ineligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961:
The Revenue contended that the assessee is a primary co-operative bank and thus ineligible for deduction under Section 80P(2)(a)(i). The Tribunal examined the definition of a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949, which requires compliance with three conditions: the primary object being the transaction of banking business, paid-up share capital and reserves not less than one lakh rupees, and bye-laws not permitting admission of any other co-operative society as a member. The Tribunal concluded that the assessee did not fulfill all three conditions, particularly the third condition, as its bye-laws permitted the admission of other co-operative societies as members. Therefore, the assessee is not a primary co-operative bank and is eligible for deduction under Section 80P(2)(a)(i).

2. Applicability of Section 80P(4) of the Income Tax Act, 1961 to the assessee:
Section 80P(4) denies deduction to a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The Tribunal found that the assessee is not a co-operative bank as defined in Section 80P(4) because it did not meet all the conditions to be considered a primary co-operative bank. Thus, Section 80P(4) does not apply to the assessee, and it remains eligible for deduction under Section 80P(2)(a)(i).

3. Interpretation of the Banking Regulation Act, 1949 in relation to the assessee's status:
The Tribunal analyzed the definition of "banking" under Section 5(b) of the Banking Regulation Act, 1949, which involves accepting deposits from the public for lending or investment, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise. The Tribunal noted that the assessee accepted deposits from the public, including non-members, and used these deposits for lending or investment, thus engaging in banking business. However, the Tribunal emphasized that carrying on banking business does not automatically make the assessee a co-operative bank under the Banking Regulation Act, 1949, unless it meets all the conditions specified in Section 5(ccv).

4. Examination of the assessee's bye-laws to determine its primary object or principal business:
The Tribunal reviewed the assessee's bye-laws and found that the primary object or principal business of the assessee was not exclusively banking. The bye-laws included various objectives such as providing loans, promoting savings schemes, and managing properties, which indicated a broader scope of activities beyond banking. Consequently, the Tribunal concluded that the primary object of the assessee was not solely the transaction of banking business.

5. Compliance with the conditions outlined in Section 5(ccv) of the Banking Regulation Act, 1949:
The Tribunal examined whether the assessee complied with the three conditions specified in Section 5(ccv) of the Banking Regulation Act, 1949. The Tribunal found that while the assessee met the first two conditions (primary object being banking business and paid-up share capital and reserves not less than one lakh rupees), it did not meet the third condition as its bye-laws permitted the admission of other co-operative societies as members. Thus, the assessee did not qualify as a primary co-operative bank.

Conclusion:
The Tribunal concluded that the assessee is not a primary co-operative bank and therefore, the provisions of Section 80P(4) do not apply. The assessee is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The appeal filed by the Revenue was dismissed, and the order of the CIT(A) allowing the deduction to the assessee was confirmed.