2014 (4) TMI 161 - AT - Income Tax

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) - These two activities are not alternates 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. 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. Whether the Assessee is a co-operative bank or not Held that - In case, the assessee does not comply with the three conditions of being a cooperative society, it cannot be regarded to be a co-operative bank and the provisions of Sec. 80P(4) 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, 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. The Assessee has not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied with thus, it is not a co-operative bank and the provisions of Sec. 80P(4) are not applicable the Assessee is entitled for deduction u/s 80P(2)(a)(i) thus, the order of the CIT(A) set aside and the AO is directed to allow deduction to the assessee u/s 80P(2)(a)(i) on the income generated for providing banking or credit facilities to its members Decided in favuor of Assessee.

Summary

Issues Involved:
1. Whether the appellant society is a primary co-operative bank and subject to the provisions of Section 80P(4) of the Income Tax Act.
2. Whether the appellant society is entitled to the deduction under Section 80P(2)(a)(i) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Whether the appellant society is a primary co-operative bank and subject to the provisions of Section 80P(4) of the Income Tax Act:

The main contention revolves around whether the appellant society qualifies as a primary co-operative bank under the Banking Regulation Act, 1949, and thus falls within the ambit of Section 80P(4) of the Income Tax Act, which denies deductions to co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks.

The Tribunal examined the definition of "co-operative bank" and "primary co-operative bank" as per the Banking Regulation Act, 1949. According to Section 5(CCV) of the Banking Regulation Act, a primary co-operative bank must meet three conditions:
- The primary object or principal business must be the transaction of banking business.
- The paid-up share capital and reserves must not be less than one lakh of rupees.
- The bye-laws must not permit the admission of any other co-operative society as a member.

Upon analysis, the Tribunal found that:
- The appellant society's primary object, as per its bye-laws, includes promoting the economic interest of its members and providing credit facilities, which aligns with the definition of banking business.
- The society's paid-up share capital and reserves exceed one lakh rupees, satisfying the second condition.
- However, the society's bye-laws permit the admission of other co-operative societies as members, which does not comply with the third condition.

Thus, the Tribunal concluded that the appellant society does not fulfill all three conditions to be classified as a primary co-operative bank. Therefore, it is not subject to the provisions of Section 80P(4) and is not disqualified from claiming deductions under Section 80P(2)(a)(i).

2. Whether the appellant society is entitled to the deduction under Section 80P(2)(a)(i) of the Income Tax Act:

Section 80P(2)(a)(i) provides deductions to co-operative societies engaged in carrying on the business of banking or providing credit facilities to its members. The Tribunal noted that the appellant society is engaged in providing credit facilities to its members, which qualifies for deduction under this section.

The Tribunal also referred to various judicial precedents, including decisions from the Gujarat High Court and Karnataka High Court, which supported the view that co-operative societies providing credit facilities to their members are entitled to deductions under Section 80P(2)(a)(i) and are not disqualified merely because they engage in banking activities.

In conclusion, the Tribunal held that the appellant society is entitled to the deduction under Section 80P(2)(a)(i) as it is not a co-operative bank within the meaning of Section 80P(4). The Tribunal set aside the order of the CIT(A) and directed the assessing officer to allow the deduction to the appellant society.

Final Decision:
The appeal filed by the appellant society was allowed, and the society was granted the deduction under Section 80P(2)(a)(i) of the Income Tax Act.

Order Pronounced:
The order was pronounced in the open court on 28.03.2014.