2014 (12) TMI 432 - AT - Income Tax

Claim of disallowance of deduction u/s 80P(2)(a)(i) Assessee is a co-operative society registered under the Karnataka State Co-operative Societies Act, 1959 - 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 - - If the co-operative society is engaged in carrying of business of banking or providing credit facilities to its members the co-operative society is entitled for deduction on whole of the income relating to any one or more of such business - 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. Nature of assessee - Cooperative bank or cooperative credit society Whether the Assessee co-operative society complies with all the three conditions - Held that - 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 third condition for becoming primary co-operative bank is also complied with - Since the assessee society does comply with all the three conditions therefore the assessee society does become a primary co-operative bank and in view of explanation (a) of section 80P(4) it has to be regarded as a co-operative bank and is hit by section 80P(4) - the Assessee has to be regarded to be a primary co-operative bank as all the three basic conditions are complied with therefore it is a primary co-operative bank and the provisions of Sec. 80P(4) are applicable in the case of the Assessee and Assessee is not entitled for deduction u/s 80P(2)(a)(i) thus the order of the CIT(A) is upheld in not allowing deduction u/s 80P(2)(a)(i) to the assessee for both the years Decided against assessee.

Summary

Issues Involved:
1. Whether the assessee is entitled to deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Whether the assessee is classified as a "co-operative bank" under section 80P(4) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 80P(2)(a)(i):
The assessee, a co-operative society registered under the Karnataka State Co-operative Societies Act, 1959, filed returns claiming a deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961. The Assessing Officer (AO) denied this deduction, classifying the assessee as a primary co-operative bank, thereby invoking section 80P(4). The CIT(A) upheld this decision. The primary contention from the assessee was that it is not a co-operative bank but a co-operative society engaged in providing credit facilities to its members. The assessee argued that its activities are limited to its members and cited various judicial precedents to support its claim. The Tribunal examined whether the assessee's activities align with the definition of a co-operative bank and noted that the provisions of section 80P(2)(a)(i) allow deductions for co-operative societies engaged in banking or providing credit facilities to its members.

2. Classification as a "Co-operative Bank" under Section 80P(4):
Section 80P(4) denies deductions to co-operative banks, except primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal analyzed whether the assessee qualifies as a primary co-operative bank by examining three conditions under the Banking Regulation Act, 1949:
- The primary object or principal business of the assessee must be banking.
- The paid-up share capital and reserves must be at least Rs. 1 lakh.
- The bye-laws must not permit the admission of any other co-operative society as a member.

The Tribunal found that the assessee accepted deposits from the public, which were repayable on demand and could be withdrawn by cheque, draft, or otherwise, thus fulfilling the first condition. The second condition was undisputed as the assessee's paid-up capital exceeded Rs. 1 lakh. Regarding the third condition, the Tribunal noted that the bye-laws permitted the admission of societies but not co-operative societies, thereby satisfying this condition as well. Consequently, the Tribunal concluded that the assessee meets all criteria to be classified as a primary co-operative bank.

Conclusion:
The Tribunal held that the assessee is a primary co-operative bank and, therefore, the provisions of section 80P(4) apply, disqualifying it from deductions under section 80P(2)(a)(i). The appeals filed by the assessee were dismissed, and the orders of the CIT(A) were confirmed. The Tribunal emphasized that the classification as a co-operative bank under section 80P(4) precludes the assessee from claiming the deduction, aligning with the legislative intent to exclude co-operative banks from such benefits post-2007 amendments.