2014 (4) TMI 357 - AT - Income Tax

Claim 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 - The provisions of Sec. 80P(4) mandates that the provisions of Sec. 80P will not apply to any co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank but as per the provisions of Sec. 80P(2)(a)(i), a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is entitled for deduction. After the insertion of Sec. 80P(4), the provisions of Sec. 80P(2)(a)(i) were not amended, rather the co- operative society engaged in carrying on business of banking facilities to its members continued to be entitled for deduction u/s 80P(2)(a)(i). This pre- supposes that every co-operative society engaged in carrying on business of banking cannot be regarded to be a co-operative bank. If a co-operative society is engaged in carrying on the 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 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 - It is not necessary that the co-operative society should have a banking licence as per the definition under the Income Tax Act for carrying on banking business - If licence is not obtained it may be an illegal banking business under the other statute - 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 in the case of the Assessee and Assessee is entitled for deduction u/s 80P(2)(a)(i) the orders of the CIT(A) is set aside in not allowing deduction u/s 80P(2)(a)(i) to the assessee 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 Decided in favour of Assessee.

Issues Involved
1. Whether the Assessee is a Primary Co-operative Bank.
2. Applicability of Section 80P(4) of the IT Act to the Assessee.
3. Interpretation of Section 2(24)(viia) of the IT Act.
4. Legislative intent behind Section 80P(4).
5. Applicability of the Banking Regulation Act, 1949, and RBI Licensing Policy.
6. Consideration of previous judicial decisions favoring the Assessee.
7. Initiation of penal provisions under Section 271(1)(c) of the IT Act.

Detailed Analysis

1. Whether the Assessee is a Primary Co-operative Bank
The Assessee argued that it is a co-operative credit society registered under the Karnataka State Co-operative Societies Act, 1959, and not a co-operative bank. The primary object of the Assessee is to encourage thrift, self-help, and cooperation among its members, which is evident from its bye-laws. The Tribunal noted that the Assessee accepts deposits from members and non-members, but the primary object is not banking business as defined under Section 5(b) of the Banking Regulation Act, 1949. Therefore, the Assessee does not fulfill the conditions to be classified as a primary co-operative bank.

2. Applicability of Section 80P(4) of the IT Act to the Assessee
Section 80P(4) denies deduction to co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal held that the Assessee is not a co-operative bank as it does not meet the criteria under the Banking Regulation Act. Consequently, Section 80P(4) does not apply, and the Assessee is entitled to deduction under Section 80P(2)(a)(i).

3. Interpretation of Section 2(24)(viia) of the IT Act
The Assessee contended that Section 2(24)(viia) affects only banking institutions and not co-operative credit societies. The Tribunal did not find this argument directly relevant to the primary issue of whether the Assessee qualifies for deduction under Section 80P(2)(a)(i).

4. Legislative Intent behind Section 80P(4)
The Assessee argued that the legislative intent behind Section 80P(4) was not to tax co-operative credit societies. The Tribunal agreed, stating that the provision aims to exclude only co-operative banks from the benefits of Section 80P, not co-operative societies engaged in providing credit facilities to their members.

5. Applicability of the Banking Regulation Act, 1949, and RBI Licensing Policy
The Tribunal noted that the Assessee does not need a banking license to be considered a co-operative society under the Income Tax Act. The nature of the business, whether legal or illegal, is irrelevant for tax purposes. The Tribunal found that the Assessee's activities are not governed by the Banking Regulation Act.

6. Consideration of Previous Judicial Decisions Favoring the Assessee
The Tribunal considered various judicial decisions cited by the Assessee, including those from the Gujarat High Court and Karnataka High Court, which supported the view that co-operative societies providing credit facilities to members are not co-operative banks. The Tribunal found these decisions persuasive and applicable to the Assessee's case.

7. Initiation of Penal Provisions under Section 271(1)(c) of the IT Act
The Tribunal did not find any concealment of income by the Assessee. Therefore, the initiation of penal provisions under Section 271(1)(c) was deemed incorrect.

Conclusion
The Tribunal concluded that the Assessee is not a primary co-operative bank and hence, not subject to the provisions of Section 80P(4). The Assessee is entitled to the deduction under Section 80P(2)(a)(i) for the income derived from providing banking or credit facilities to its members. The appeals filed by the Assessee were allowed, and the orders of the CIT(A) were set aside. The assessing officer was directed to allow the deduction under Section 80P(2)(a)(i).

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