2014 (10) TMI 498 - AT - Income Tax

Claim of deduction u/s 80P(2)(a)(i) - Assessee is a co-operative society under Karnataka Societies Act, 1959 - 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 - 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. Nature of assessee - 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 - The Income Tax in our opinion is not concerned whether the banking business carried on by the assessee is legal or illegal - 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 - there is no dispute that the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac the bye-laws of society does permit the admission of other co-operative society as member - Thus the third condition for becoming primary co-operative bank is not complied with - Since the assessee society did not comply all the three conditions, therefore, the assessee society cannot be regarded to be a primary co-operative bank as all the three conditions as discussed by us in the preceding paragraphs are not complied with and in consequence it is not a co-operative bank and the assessee is not hit by the provision of section 80P(4). The provisions of Sec. 80P(2)(a)(i) are applicable to a co-operative society which is engaged in carrying on banking business facilities to its members if it is not a co-operative bank relying upon DCIT vs. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. 2012 (8) TMI 185 - ITAT PANAJI - 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 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) thus, the order of the CIT(A) is upheld 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 against revenue.

Summary

Issues Involved:
1. Whether the assessee is a primary cooperative bank as per Section 5(ccv) of the Banking Regulation Act, 1949.
2. Applicability of Section 80P(4) of the Income Tax Act, 1961 to the assessee.
3. Entitlement of the assessee to deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.

Detailed Analysis:

1. Whether the assessee is a primary cooperative bank as per Section 5(ccv) of the Banking Regulation Act, 1949:

The primary issue revolves around determining if the assessee qualifies as a primary cooperative bank. According to Section 5(ccv) of the Banking Regulation Act, 1949, a primary cooperative bank must fulfill three conditions:
- The primary object or principal business is the transaction of banking business.
- The paid-up share capital and reserves are not less than one lakh rupees.
- The bye-laws do not permit the admission of any other cooperative society as a member.

The tribunal examined the bye-laws and operations of the assessee. The assessee's primary objects included encouraging thrift, extending financial assistance to members, promoting savings programs, and providing banking facilities through cheques. The tribunal noted that the assessee accepted deposits from non-members, indicating that it was engaged in banking business. The tribunal also confirmed that the assessee's paid-up share capital and reserves exceeded one lakh rupees. However, the tribunal found that the bye-laws permitted the admission of other cooperative societies as members, thus failing the third condition. Consequently, the assessee could not be regarded as a primary cooperative bank.

2. Applicability of Section 80P(4) of the Income Tax Act, 1961 to the assessee:

Section 80P(4) of the Income Tax Act, 1961, denies deduction under Section 80P to cooperative banks, excluding primary agricultural credit societies or primary cooperative agricultural and rural development banks. The tribunal highlighted that Section 80P(4) was introduced by the Finance Act, 2006, effective from April 1, 2007. The tribunal emphasized that the provisions of Section 80P(4) apply only to cooperative banks and not to cooperative societies engaged in banking or providing credit facilities to their members. Since the assessee did not qualify as a primary cooperative bank, Section 80P(4) was deemed inapplicable.

3. Entitlement of the assessee to deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961:

Section 80P(2)(a)(i) provides for the deduction of income derived by a cooperative society engaged in the business of banking or providing credit facilities to its members. The tribunal noted that the assessee was a cooperative society engaged in providing banking and credit facilities to its members. The tribunal reiterated that the provisions of Section 80P(4) did not apply to the assessee, as it was not a cooperative bank. Consequently, the assessee was entitled to the deduction under Section 80P(2)(a)(i) for the income generated from providing banking or credit facilities to its members.

Conclusion:

The tribunal concluded that the assessee could not be regarded as a primary cooperative bank as it did not fulfill all the conditions specified in Section 5(ccv) of the Banking Regulation Act, 1949. Consequently, the provisions of Section 80P(4) were not applicable to the assessee. The assessee was entitled to the deduction under Section 80P(2)(a)(i) for the income derived from providing banking or credit facilities to its members. The tribunal dismissed the appeals filed by the revenue and confirmed the order of the CIT(A).