2014 (9) TMI 155 - AT - Income Tax

Entitlement for deduction u/s 80P(4) Effect of amendment to the statue - banking or credit facilities to its members - admission of any other co-operative society as a member of the co-operative society - 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 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) - the order of the CIT(A) is upheld in allowing deduction u/s 80P(2)(a)(i) to the assessee and direct the AO 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. 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 income has to be assessed u/s 14 of the Income Tax Act under the same head even if the nature of the business is illegal - the types of the deposits which the assessee has accepted as per bye-laws are the same as are being accepted during the course of the carrying out the banking activities - the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac - the Assessee satisfies the second condition - Sec. 16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member Decided against Revenue.

Summary

Issues Involved:

1. Whether the assessee is a co-operative bank under section 80P(4) of the Income Tax Act, 1961.
2. Eligibility of the assessee for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.

Detailed Analysis:

1. Whether the assessee is a co-operative bank under section 80P(4) of the Income Tax Act, 1961:

The Revenue contended that the assessee, a co-operative society, qualifies as a primary co-operative bank as per section 5(ccv) of the Banking Regulation Act, 1949. The three conditions for a primary co-operative bank are: (1) the primary object or principal business is the transaction of banking business, (2) the paid-up share capital and reserves are not less than one lakh rupees, and (3) the bye-laws do not permit admission of any other co-operative society as a member.

The Tribunal examined whether the assessee fulfilled these conditions:
- Primary Object of Banking Business: The assessee accepted deposits from both members and non-members, which were repayable on demand and withdrawable by cheque, draft, or otherwise. This activity qualifies as banking business under section 5(b) of the Banking Regulation Act. Thus, the first condition was satisfied.
- Paid-Up Share Capital and Reserves: There was no dispute that the assessee's paid-up share capital and reserves exceeded one lakh rupees, satisfying the second condition.
- Bye-Laws and Membership: The assessee's bye-laws permitted the admission of other co-operative societies as members, which contravenes the third condition for being a primary co-operative bank. Therefore, the assessee did not satisfy all three conditions to be classified as a primary co-operative bank.

Consequently, the assessee was not considered a co-operative bank under section 80P(4), and the provisions of this section did not apply.

2. Eligibility of the assessee for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961:

Section 80P(2)(a)(i) allows deduction for co-operative societies engaged in banking or providing credit facilities to its members. The Tribunal noted that:
- The assessee's activities included accepting deposits and providing loans to its members, which aligns with the activities specified under section 80P(2)(a)(i).
- The Tribunal emphasized that section 80P(4) does not amend the provisions of section 80P(2)(a)(i), and a co-operative society engaged in banking or providing credit facilities to its members remains eligible for deduction unless it qualifies as a co-operative bank under section 80P(4).

The Tribunal concluded that since the assessee did not qualify as a co-operative bank under section 80P(4), it was entitled to the deduction under section 80P(2)(a)(i) for its income derived from providing banking or credit facilities to its members.

Conclusion:

The Tribunal upheld the CIT(A)'s decision allowing the deduction under section 80P(2)(a)(i) to the assessee. The appeals filed by the Revenue were dismissed, and the cross-objections filed by the assessee were deemed infructuous and dismissed. The order was pronounced in the open court on 11.04.2014.