2017 (9) TMI 564 - AT - Income Tax

Disallowance of claim of deduction of interest on deposits with co-operative banks (co-operative society) u/s 80P(2)(d) - primary objects of society - Held that - The primary objects of any society are prescribed in the bye laws. In order to become a bank, the principal business of the co-operative society should be transaction of banking business. A perusal of the audited accounts would indicate the same. The first and foremost requirement in India to do business of banking is to obtain a licence from the Reserve Bank of India (RBI). Without a valid licence from RBI, nobody can do business of banking. Also Urban Co-operative Bank is known as Primary Co-operative Bank. It is a bigger entity and fall under the Banking Regulation Act . It is also regulated by State Government and RBI. Primary Co-operative Banks, popularly called Urban Co-operative Banks, whose net worth is ₹ 1,00,000/- and above, who are recognized as banks, are members of payment system and also enjoy deposit insurance. Also some Urban Co-operative Banks are conferred with Scheduled status by the RBI. The above factual aspects have not been examined either by the AO or the Ld. CIT(A). Therefore, we deem it proper to set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make a fresh assessment after examining the facts mentioned at para 7.1 here-in-above. Needless to say, the AO would give a reasonable opportunity of being heard to the assessee before finalizing the assessment order. The assessee is directed to file the required details before the AO.

Summary

Issues:
1. Disallowance of deduction of interest on deposits with co-operative banks under section 80P(2)(d) of the Income Tax Act.
2. Disallowance of claim of interest received by the assessee from another co-operative society under section 80P(2)(d).
3. Classification of co-operative banks as co-operative societies under section 2(19) of the Act.
4. Tax exemption under the principle of mutuality for income of the assessee.

Analysis:

Issue 1:
The assessee appealed against the disallowance of the deduction of interest on deposits with co-operative banks under section 80P(2)(d). The Assessing Officer (AO) rejected the claim citing the Finance Act, 2006, which withdrew such deductions for co-operative banks. The AO also referred to legal precedents stating interest earned on deposits with other banks falls under "income from other sources." The AO concluded that co-operative banks do not qualify as co-operative societies under section 80P(2)(d), hence disallowed the claim.

Issue 2:
The Commissioner of Income Tax (Appeals) upheld the disallowance made by the AO under section 80P(2)(d) based on the Tribunal's order in similar cases. The assessee argued that co-operative banks in Maharashtra are registered as co-operative societies under the Bombay/Maharashtra Co-operative Act, making them eligible for deductions under section 80P(2)(d). The assessee cited legal cases to support their claim.

Issue 3:
The contention revolved around whether co-operative banks like Saraswat Co-operative Bank Ltd. qualify as co-operative societies under section 2(19) of the Act. The AO considered co-operative banks as commercial banks, not falling under the definition of a co-operative society as per section 80P(2)(d). However, the Tribunal highlighted the need to examine factual aspects, such as obtaining a banking license and regulatory framework, before making a final determination.

Issue 4:
Regarding the tax exemption under the principle of mutuality, the AO argued that the interest earned by the assessee from the co-operative bank did not satisfy the principle of mutuality. The Tribunal, while not delving into the case laws presented, set aside the CIT(A)'s order and directed the AO to re-examine the matter considering the factual aspects related to the banking operations of co-operative banks.

In conclusion, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a fresh assessment by the AO after considering the specific operational aspects of co-operative banks.