2014 (3) TMI 646 - AT - Income Tax

Disallowance of deduction u/s 80P(2)(a)(i) of the Act 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 Held that - 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) - The 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. If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co-operative society, 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 - 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 facilties 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. Nature of Assessee - Application of section 80P(4) of the Act on society - Whether the Assessee is a co-operative bank or not Held that - The Assessee did not file the copy of the bye-laws - neither are the provisions of Sec. 17 of The Karnataka State Co-operative Societies Act, 1959 - In the absence of the copy of the bye-laws we are unable to express any opinion whether the Assessee complies with the third condition or not thus, the matter is remitted back to the AO for examination to look into the rules and bye-laws of the Assessee co-operative society In case the AO finds that the bye-laws do not permit the admission of any other co-operative society, in our opinion, the Assessee will be regarded as a primary co-operative bank and will not be entitled for deduction u/s 80P(2)(a)(i) - Decided in favour of Assessee.

Issues Involved:

1. Disallowance of deduction under Section 80P(2)(a)(i).
2. Classification of the assessee as a primary co-operative bank.
3. Distinction between a co-operative society and a co-operative bank.
4. Interpretation of Section 80P(4) and its applicability.
5. Determination of whether the assessee is conducting banking business.

Issue-Wise Detailed Analysis:

1. Disallowance of Deduction under Section 80P(2)(a)(i):

The primary issue revolves around the disallowance of the deduction claimed by the assessee under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer (AO) and CIT(A) denied this deduction, asserting that the assessee is a primary co-operative bank, thus falling under the purview of Section 80P(4), which denies such deductions to co-operative banks. The Tribunal examined the applicability of Section 80P(2)(a)(i) and concluded that the assessee is entitled to the deduction if it is not classified as a co-operative bank.

2. Classification of the Assessee as a Primary Co-operative Bank:

The Tribunal analyzed whether the assessee qualifies as a primary co-operative bank based on the criteria outlined in Section 5(ccv) of the Banking Regulation Act, 1949. The three conditions to be met are: (a) the primary object or principal business is the transaction of banking business; (b) the paid-up share capital and reserves are not less than one lakh rupees; and (c) the bye-laws do not permit the admission of any other co-operative society as a member. The Tribunal found that while the assessee met the second condition, it did not satisfy the first and third conditions. Specifically, the assessee's primary object was not banking business, and its bye-laws did not prohibit the admission of other co-operative societies as members.

3. Distinction Between a Co-operative Society and a Co-operative Bank:

The Tribunal emphasized the difference between a co-operative society and a co-operative bank. It noted that a co-operative society engaged in providing credit facilities to its members does not automatically become a co-operative bank. The Tribunal referred to various judicial precedents, including the decisions of the Gujarat High Court and Karnataka High Court, to support its view that the assessee, being a co-operative society, is distinct from a co-operative bank.

4. Interpretation of Section 80P(4) and Its Applicability:

The Tribunal discussed the implications of Section 80P(4), introduced by the Finance Act, 2006, which excludes co-operative banks from claiming deductions under Section 80P. It clarified that the provisions of Section 80P(4) apply only to co-operative banks and not to co-operative societies engaged in providing credit facilities to their members. The Tribunal concluded that since the assessee is not a co-operative bank, Section 80P(4) does not apply, and the assessee is eligible for the deduction under Section 80P(2)(a)(i).

5. Determination of Whether the Assessee is Conducting Banking Business:

The Tribunal examined whether the assessee is engaged in banking business as defined under the Banking Regulation Act, 1949. It noted that banking involves accepting deposits from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise. The Tribunal found that the assessee accepted deposits from the public, not just its members, which constitutes banking business. However, it also noted that the assessee's primary object was not banking business, and its bye-laws allowed the admission of other co-operative societies as members. Thus, the assessee did not fulfill all conditions to be classified as a primary co-operative bank.

Conclusion:

The Tribunal concluded that the assessee is not a primary co-operative bank and is therefore entitled to the deduction under Section 80P(2)(a)(i). The order of the CIT(A) was set aside, and the AO was directed to allow the deduction to the assessee. Both appeals filed by the assessee were allowed.

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