2015 (4) TMI 1340 - HC - Income Tax

Deduction u/s 80P(2)(a)(i) - Tribunal held that the Appellant is a Co-operative Bank and hence, it is not entitled to deduction under Section 80P(2)(a)(i) by virtue of Section 80P(4) - transactions with non members - HELD THAT - It is undisputed that the transactions with non members are insignificant/miniscule. On the above basis it cannot be concluded that the appellant's principal business is of accepting deposits from public and therefore it is in banking business. In fact, the impugned order erroneously relies upon bye-law 43 of the society which enables the society to receive deposits to conclude that it can receive deposits from public. However, the impugned order relies upon bye-law 43 to conclude that it enables the appellant to receive deposits from any person is not correct. Thus in the present facts the finding that the appellant's principal business is of Banking is perverse as it is not supported by the evidence on record. So far as the issue of primary object of the appellant is concerned the impugned order gives no finding on that basis to deprive the appellant the benefit of Section 80P of the Act. The impugned order sets out the object clause of the appellant, which has 24 objects but thereafter draws no sequiter to conclude that the primary object is Banking. Consequently there is no occasion to deal with the same as that is not the basis on which the impugned order holds that it is a Primary Cooperative Bank. In the above view, the alternative contention of the appellant that it is not in the business of Banking as the sine quo non to carry on banking business is a licence to be issued by the Reserve Bank of India, which it admittedly does not have, is not being considered. As rightly pointed out on behalf of the appellant the word society as referred to bye law 9(d) would include the co-operative society. This is so as the definition of a society under the Co-operative Act is co-operative society registered under the Cooperative Act. Besides the qualifying condition 3 for being considered as a primary Cooperative bank is that the bye laws must not permit admission of any other cooperative society. This is a mandatory condition i.e. the bye laws must specifically prohibit admission of any other cooperative society to its membership. Revenue has not been able to show any such prohibition in the bye laws of the appellant. Thus even the aforesaid qualifying condition (3) for being considered as a primary cooperative bank is not satisfied. Thus, the three conditions as provided under Section 5 (CVV) of the Banking Regulation Act, 1949, are to be satisfied cumulatively and except condition (2) the other two qualifying conditions re not satisfied. Ergo, appellant cannot be considered to be a co-operative bank for the purposes of Section 80P(4) of the Act. Thus, the appellant is entitled to the benefit of deduction available under Section 80P(2)(a)(i) of the Act. The contention of the revenue that the appellant is not entitled to the benefit of Section 80P(2)(a)(i) of the Act in view of the fact that it deals with non-members cannot be upheld. This for the reason that Section 80P(1) of the Act restricts the benefits of deduction of income of co-operative society to the extent it is earned by providing credit facilities to its members. Therefore, to the extent the income earned is attributable to dealings with the non-members are concerned the benefit of Section 80P of the Act would not be available. In the above view of the matter, at the time when effect has been given to the order of this Court, the authorities under Act would restrict the benefit of deduction under Section 80P of the Act only to the extent that the same is earned by the appellant in carrying on its business of providing credit facilities to its members. - Decided in favour of assessee.

Summary

Issues Involved:
1. Entitlement to deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Classification of the appellant as a Co-operative Bank or a Co-operative Credit Society.
3. Application of Section 80P(4) of the Income Tax Act, 1961.
4. Compliance with conditions under Section 5(ccv) of the Banking Regulation Act, 1949.
5. Transactions with non-members and its impact on the deduction claim.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 80P(2)(a)(i):
The appellant, a co-operative society registered under the Goa Co-operative Societies Act, 2001, claimed a deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, declaring nil taxable income. The Assessing Officer disallowed this claim, categorizing the appellant as a primary co-operative bank, thereby invoking the exclusion under Section 80P(4). However, the CIT(A) reversed this decision, identifying the appellant as a Co-operative Credit Society, not a Co-operative Bank, and directed the allowance of the deduction. The Tribunal later reinstated the Assessing Officer's decision, which led to the present appeal.

2. Classification of the Appellant:
The core issue was whether the appellant qualified as a Co-operative Bank or a Co-operative Credit Society. The Tribunal's decision was based on the definition of a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949. The appellant contended that it did not meet the criteria of a primary co-operative bank, specifically arguing that banking was not its primary business, nor did its bye-laws prohibit other co-operative societies from becoming members.

3. Application of Section 80P(4):
Section 80P(4) excludes co-operative banks from the benefits provided under Section 80P, except for primary agricultural credit societies or primary co-operative agricultural and rural development banks. The appellant argued that it did not fall under the definition of a co-operative bank as per the Banking Regulation Act, thus should not be excluded from the benefits of Section 80P(2)(a)(i).

4. Compliance with Conditions under Section 5(ccv) of the Banking Regulation Act:
The appellant needed to satisfy three cumulative conditions to be classified as a primary co-operative bank:
- Principal business should be banking.
- Paid-up share capital and reserves should not be less than one lakh rupees.
- Bye-laws should prohibit admission of any other co-operative society as a member.

The court found that while the appellant satisfied the second condition, it did not meet the first and third conditions. The principal business was not banking, as evidenced by the insignificant dealings with non-members, and the bye-laws did not prohibit other co-operative societies from becoming members.

5. Transactions with Non-Members:
The Tribunal noted that the appellant had engaged in transactions with non-members, which could potentially disqualify it from claiming the deduction under Section 80P(2)(a)(i). However, the court clarified that the deduction should be restricted to income earned from providing credit facilities to its members, and any income from dealings with non-members should not be eligible for the deduction.

Conclusion:
The court concluded that the appellant did not qualify as a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949, and therefore, was not excluded from the benefits of Section 80P(2)(a)(i) by Section 80P(4). The substantial question of law was answered in favor of the appellant, allowing the appeals and directing that the deduction under Section 80P should be restricted to income earned from providing credit facilities to its members. The appeals were allowed with no order as to costs.