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2014 (10) TMI 501 - AT - Income TaxDeduction u/s 80P Assessee is a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997 - 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 - 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 - The Assessee has accepted that the Assessee was accepting deposits of money not only from the members but also from the general public who are non-members - The deposits so accepted are used by the Assessee co-operative society for lending or investment - the Assessee society was not carrying on banking business as it was accepting deposits from the persons who were not members - the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac - Therefore, the Assessee satisfies the second condition - Sec. 20 of The Karnataka Souharda Sahakari Act, 1997 permits admission of any other co-operative society as a member - The word used in Sec.21A is may . Section 21A further states that the co-operative society can be admitted as nominal or associate member for any specific purpose for any specific period as may be mentioned in the bye-laws - in case the rules and bye-laws of the other co-operative society provides otherwise, the co-operative society may not be admitted as a member of the co-operative society. 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) thus, the order of the CIT(A) in not allowing deduction u/s 80P(2)(a)(i) to the assessee is set aside and 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 favour of assessee.
Issues Involved:
1. Whether the assessee is entitled to deduction under Section 80P(2)(a)(i) of the Income Tax Act. 2. Whether the assessee is classified as a co-operative bank under Section 80P(4) of the Income Tax Act. Detailed Analysis: Issue 1: Entitlement to Deduction under Section 80P(2)(a)(i) The assessee, a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997, filed a return declaring gross total income and claimed deduction under Section 80P(2)(a)(i), resulting in a net taxable income of 'nil'. The Assessing Officer (AO) denied this deduction, viewing the assessee as a primary co-operative bank, thus invoking Section 80P(4). The CIT(A) upheld the AO's decision. The primary object of the assessee is to encourage economy, self-help, and co-operative knowledge among its members and depositors, and it operates as a credit society. The assessee argued that it is not a co-operative bank and cited various judgments to support its claim. Issue 2: Classification as a Co-operative Bank under Section 80P(4) The AO and the Departmental Representative (DR) contended that the assessee is a co-operative bank under the definition provided in the Banking Regulation Act, 1949, and thus, Section 80P(4) applies. This section, effective from 1.4.2007, denies deduction to co-operative banks, except primary agricultural credit societies and primary co-operative agricultural and rural development banks. Judgment: Analysis of Section 80P(2)(a)(i) and Section 80P(4) The Tribunal analyzed the provisions of Section 80P(2)(a)(i) and Section 80P(4). Section 80P(2)(a)(i) allows deductions for co-operative societies engaged in banking or providing credit facilities to members. However, Section 80P(4) excludes co-operative banks from such deductions, except for specific types of agricultural credit societies. Determining the Nature of the Assessee The Tribunal examined whether the assessee qualifies as a co-operative bank. According to the Banking Regulation Act, a co-operative bank includes state, central, and primary co-operative banks. The definition of a primary co-operative bank includes three conditions: the primary business must be banking, the paid-up share capital and reserves must be at least Rs. 1 lakh, and the by-laws must not permit the admission of other co-operative societies as members. 1. Primary Business of Banking: The Tribunal noted the assessee accepts deposits from both members and non-members, which aligns with the definition of banking under the Banking Regulation Act. 2. Paid-up Share Capital and Reserves: It was undisputed that the assessee's paid-up share capital and reserves exceed Rs. 1 lakh. 3. By-laws on Membership: The Tribunal reviewed the Karnataka Souharda Sahakari Act and the assessee's by-laws, which allow the admission of other co-operative societies as members. This does not meet the third condition for being classified as a primary co-operative bank. Conclusion The Tribunal concluded that the assessee does not fulfill all the conditions to be classified as a primary co-operative bank and thus is not a co-operative bank under Section 80P(4). Consequently, the provisions of Section 80P(4) do not apply, and the assessee is entitled to deductions under Section 80P(2)(a)(i). Order The Tribunal set aside the CIT(A)'s order and directed the AO to allow the deduction under Section 80P(2)(a)(i) for the income generated from providing banking or credit facilities to its members. The appeal filed by the assessee was allowed. Pronouncement The order was pronounced in the open court on 6.6.2014.
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