2014 (11) TMI 259 - AT - Income Tax

Claim u/s 80P(2)(a)(i) disallowed - Banking license from RBI not possessed by assessee - co-operative society registered under the Karnataka State Co-operative Societies Act Nature of assessee as Primary Cooperative Society read Section 5 of the Banking Regulation Act 1949 or not - 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 - the Assessee is a co-operative bank, the Assessee will not be entitled for deduction as stipulated u/s 80P(2)(a)(i) but in case the Assessee is not a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the provisions of Sec. 80P(2)(a)(i) will be applicable to the Assessee provided the Assessee is engaged in carrying on business of banking or providing 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 the assessee will be entitled for the 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 set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Classification of the appellant cooperative society as a "Bank" under Section 80P(4) of the Income Tax Act, 1961.
3. Treatment of the appellant as a "Primary Cooperative Society" under Section 5 of the Banking Regulation Act, 1949.
4. Disallowance of Government Audit Fees under Section 43B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80P(2)(a)(i):
The assessee, a cooperative society, filed returns claiming deductions under Section 80P(2)(a)(i), which were disallowed by the AO on the grounds that the assessee is a primary cooperative bank and thus provisions of Section 80P(4) apply. The CIT(A) upheld this view. The Tribunal examined whether the assessee qualifies as a cooperative bank and thus is ineligible for the deduction. It was noted that Section 80P(2)(a)(i) allows deductions for cooperative societies engaged in banking or providing credit facilities to members. The Tribunal concluded that the assessee is not a cooperative bank but a cooperative society, making it eligible for deductions under Section 80P(2)(a)(i).

2. Classification as a "Bank" under Section 80P(4):
Section 80P(4) denies deductions to cooperative banks except primary agricultural credit societies or primary cooperative agricultural and rural development banks. The Tribunal analyzed whether the assessee fits the definition of a "cooperative bank" under Part V of the Banking Regulation Act, 1949. It was determined that the assessee does not meet all three conditions required to be considered a primary cooperative bank: (1) primary business of banking, (2) paid-up share capital and reserves of at least Rs. 1 lakh, and (3) bylaws not permitting admission of other cooperative societies as members. Thus, the assessee is not a cooperative bank and is not subject to Section 80P(4).

3. Treatment as a "Primary Cooperative Society":
The Tribunal examined the assessee's bylaws and activities to determine if it qualifies as a primary cooperative society under Section 5 of the Banking Regulation Act, 1949. The Tribunal found that the assessee's primary object is not banking but providing credit facilities to its members. Additionally, the bylaws permit the admission of other cooperative societies as members, which disqualifies it from being a primary cooperative bank. Therefore, the assessee is a cooperative society eligible for deductions under Section 80P(2)(a)(i).

4. Disallowance of Government Audit Fees under Section 43B:
The AO disallowed the government audit fees of Rs. 97,720 under Section 43B, which was upheld by the CIT(A). The Tribunal referred to the Bombay High Court's decision in Shri Varana Sahakari Sakhar Karkhana, which held that Section 43B is not applicable to government audit fees. Consequently, the Tribunal deleted the disallowance of the audit fees.

Conclusion:
The Tribunal allowed the assessee's appeals, concluding that the assessee is not a cooperative bank and is thus eligible for deductions under Section 80P(2)(a)(i). The disallowance of government audit fees was also deleted. The Tribunal directed the AO to allow the deductions accordingly. The order was pronounced on 08.08.2014.