2019 (3) TMI 1699 - AT - Income Tax

Deduction u/s 80P(2)(d) - Interest on Deposits placed by the appellant with the Cooperative Bank - Whether a co-operative bank is a co-operative credit society or not as specified under Sec. 80P(2)(d)? - HELD THAT - Admittedly, as per the Explanation to Sec. 80P(4) the term Co-operative bank has to be construed as per the meaning given to it in Part V of the Banking Regulation Act, 1949 (10 of 1949). As is discernible from Sec. 56 (cci) of Part V of the Banking Regulation Act, 1949, a Co-operative bank means a state cooperative bank, a central co-operative bank and a primary cooperative bank. It is the case of the A.O that the assessee is a Primary co-operative bank . As neither of the lower authorities have recorded any finding that the assessee was also accepting deposits or lending money from/to the non-members, therefore, the 1st condition envisaged in Sec. 56(ccv) of the Banking Regulation Act, 1949 would not be satisfied, as it cannot be held that the primary object or principal business of the assessee was as that of transacting banking business. Apart there from, as per Sec. 56(4) of the Banking Regulation Act, 1949 every co-operative society shall before commencing banking business in India apply in writing to the Reserve Bank for a license under the said section. In fact, a cooperative credit society cannot be held to have as its principal business as banking business in the absence of a banking license issued by the Reserve Bank of India under the Banking Regulation Act, 1949. Rather, the issue that a co-operative society cannot be held to be a co-operative bank in the absence of a license to do banking business is covered by the Hon ble High Court of Karnataka in the case of CIT and Another vs. Sri Biuru Gurubasva Pattina Sahakari Sangha Niyamitha Bagalkot 2015 (1) TMI 821 - KARNATAKA HIGH COURT In absence of any material to the contrary available on record, are of the considered view that in can safely be concluded that the assessee is a cooperative credit society and not a co-operative bank. Insofar the issue that a co-operative society is entitled to claim deduction u/s 80P(2)(d) on the interest received from deposits with a co-operative bank is concerned, the same we find is covered by the order in the case of Kaliandas Udyog Bhavan Premises Co-operative Society Ltd. Vs. ITO-21(2)(1), Mumbai 2018 (4) TMI 1678 - ITAT MUMBAI . It can safely be concluded that the assessee which is a co-operative credit society was duly entitled to claim deduction u/s 80P(2)(d) on the interest income on its investments held with the co-operative banks. Assessee which is a co-operative credit society is entitled to claim deduction on its investments held with the co-operative banks, therein direct the A.O to allow the same to the said extent. The order of the CIT(A) is set aside in terms of our aforesaid observations. - Decided in favour of assessee.

Summary

Issues Involved:
1. Eligibility of Interest on Deposits with Co-operative Banks for Deduction under Section 80P(2)(d).
2. Characterization of the Assessee as a Co-operative Credit Society or a Primary Co-operative Bank.
3. Entitlement to Deduction under Section 80P(2)(a)(i) for Interest Income Earned from Business of Lending to Members.

Detailed Analysis:

1. Eligibility of Interest on Deposits with Co-operative Banks for Deduction under Section 80P(2)(d):
The primary issue was whether the interest income earned by the assessee, a co-operative credit society, from its deposits with co-operative banks is eligible for deduction under Section 80P(2)(d) of the Income-tax Act, 1961. The lower authorities had denied this deduction, arguing that the interest income from co-operative banks does not qualify under Section 80P(2)(d) following the insertion of sub-section (4) of Section 80P by the Finance Act, 2006. However, the Tribunal disagreed, citing the definition of "co-operative society" under Section 2(19) and judicial precedents, including the ITAT Mumbai's decision in Kaliandas Udyog Bhavan Premises Co-operative Society Ltd. vs. ITO, which held that interest income from investments with co-operative banks qualifies for deduction under Section 80P(2)(d). The Tribunal concluded that the interest income derived from investments held with a co-operative bank is eligible for deduction under Section 80P(2)(d).

2. Characterization of the Assessee as a Co-operative Credit Society or a Primary Co-operative Bank:
The Tribunal examined whether the assessee, a co-operative credit society, could be characterized as a primary co-operative bank, which would affect its eligibility for deductions under Section 80P. The lower authorities had classified the assessee as a primary co-operative bank based on its activities and membership restrictions. However, the Tribunal found that the assessee did not meet the criteria for a primary co-operative bank as defined in Section 56(ccv) of the Banking Regulation Act, 1949. Specifically, the Tribunal noted that the assessee did not accept deposits from or lend to non-members and lacked a banking license from the Reserve Bank of India. Consequently, the Tribunal concluded that the assessee is a co-operative credit society, not a primary co-operative bank.

3. Entitlement to Deduction under Section 80P(2)(a)(i) for Interest Income Earned from Business of Lending to Members:
The Tribunal also addressed whether the interest income earned by the assessee from its business of lending to members qualifies for deduction under Section 80P(2)(a)(i). The lower authorities had vacated the disallowance of the deduction claimed under this section. The Tribunal upheld this view, noting that the assessee's primary business involved providing credit facilities to its members, which falls under the purview of Section 80P(2)(a)(i). Therefore, the interest income earned from such activities is eligible for deduction under this section.

Conclusion:
The Tribunal allowed the appeal, directing the Assessing Officer to allow the deduction under Section 80P(2)(d) for the interest income earned from investments in co-operative banks. The Tribunal also affirmed the assessee's characterization as a co-operative credit society and upheld the eligibility for deductions under Section 80P(2)(a)(i) for interest income from lending to members. The order of the CIT(A) was set aside to the extent of disallowance under Section 80P(2)(d).