2014 (7) TMI 1317 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - whether the Assessee is a co-operative bank or not? - 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 - 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. What we have to see whether the nature of the business carrying on by the assessee is a banking business or not. 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. If we look into the bye-laws which consists of fund of the society, we noted 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. So far as the second condition is concerned, there is no dispute that 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. So far as the third condition is concerned, we noted that Sec. 16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member. From clause 16, it is apparent that the bye-laws of society does not permit the admission of any other co-operative society as member. Thus the third condition for becoming primary co-operative bank is complied with. Since the assessee society does not comply with all the three conditions, therefore, in our opinion the assessee society does not become a primary co-operative bank and in view of explanation (a) of section 80P(4) it has not to be regarded as a co-operative bank and is not hit by section 80P(4). 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). We, therefore, setaside the order of the CIT(A) not allowing deduction u/s 80P(2)(a)(i) to the assessee and direct the assessing officer 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. Appeal filed by the assessee is allowed.

Issues Involved:

1. Applicability of Section 80P(2)(a)(i) for deduction to the assessee.
2. Applicability of Section 80P(4) and whether the assessee is considered a co-operative bank.
3. Compliance with conditions defining a primary co-operative bank under the Banking Regulation Act, 1949.

Issue-wise Detailed Analysis:

1. Applicability of Section 80P(2)(a)(i):
The assessee, a co-operative society registered under the Karnataka State Co-operative Societies Act, claimed a deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, which allows deduction for co-operative societies engaged in carrying on the business of banking or providing credit facilities to its members. The Assessing Officer (AO) denied this deduction, treating the assessee as a primary co-operative bank, thus invoking Section 80P(4) which disallows such deductions to co-operative banks. The CIT(A) upheld the AO's decision.

2. Applicability of Section 80P(4):
The assessee contended that it is not a co-operative bank but a co-operative society, and thus, Section 80P(4) should not apply. Section 80P(4) was introduced to deny deductions to co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal had to determine whether the assessee qualifies as a co-operative bank under this section.

3. Compliance with Conditions Defining a Primary Co-operative Bank:
To classify as a primary co-operative bank under Section 5(CCV) of the Banking Regulation Act, 1949, a co-operative society must:
- Have the primary object or principal business of transacting banking business.
- Have a paid-up share capital and reserves of not less than one lakh rupees.
- Have bye-laws that do not permit admission of any other co-operative society as a member.

The Tribunal examined the assessee's bye-laws and activities. It was found that:
- The primary object of the assessee was to improve the financial position of its members and not to transact banking business as defined under the Banking Regulation Act.
- The assessee did not accept deposits from the public but only from its members, which does not qualify as banking business.
- The paid-up share capital and reserves were more than one lakh rupees, satisfying the second condition.
- The bye-laws did not permit the admission of any other co-operative society as a member, fulfilling the third condition.

Since the assessee did not meet all three conditions, it was not considered a primary co-operative bank. Consequently, Section 80P(4) did not apply, and the assessee was entitled to the deduction under Section 80P(2)(a)(i).

Conclusion:
The Tribunal concluded that the assessee is not a primary co-operative bank and thus not subject to the restrictions of Section 80P(4). Therefore, the assessee is entitled to the deduction under Section 80P(2)(a)(i) for income generated from providing banking or credit facilities to its members. The appeal filed by the assessee was allowed, and the order of the CIT(A) was set aside. The assessing officer was directed to allow the deduction to the assessee under Section 80P(2)(a)(i).

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