2015 (8) TMI 1592 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - denial of claim as assessee was a cooperative bank and hence not entitled to claim deduction by virtue of sec. 80P(4) - HELD THAT - Commissioner of Income Tax (Appeals) has allowed the claim of deduction u/s 80P(2)(a)(i) of the Act by following the decisions of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha 2015 (1) TMI 821 - KARNATAKA HIGH COURT and General Insurance Employees Cooperative Credit Society Ltd. 2014 (6) TMI 912 - KARNATAKA HIGH COURT held held that the cooperative societies are not doing banking business and therefore the provisions of section 80P(4) are not applicable to them and where the assessee cooperative society engaged in providing credit facilities to its members and not accepting deposit from public as evidenced from their bye laws or the cooperative societies accepting other cooperative societies as members have held that those cooperative societies are entitles to the benefit of deduction u/s 80P(2)(a)(i). As no contrary decision could be cited by the Departmental Representative. We therefore do not find any good and justifiable reason to interfere. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issue considered in this judgment is whether the assessees, being cooperative societies, are entitled to claim deductions under Section 80P(2)(a)(i) of the Income Tax Act, 1961, despite the provisions of Section 80P(4) which exclude cooperative banks from such deductions. The core legal question is whether the assessees qualify as "primary cooperative banks" under the Banking Regulation Act, 1949, thereby making them ineligible for the deduction.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Eligibility for Deduction under Section 80P(2)(a)(i)

Relevant legal framework and precedents:

Section 80P(2)(a)(i) of the Income Tax Act provides deductions for cooperative societies engaged in banking or providing credit facilities to its members. However, Section 80P(4), introduced by the Finance Act, 2006, excludes cooperative banks from these deductions. The definition of "cooperative bank" and "primary cooperative bank" is derived from the Banking Regulation Act, 1949.

Court's interpretation and reasoning:

The court examined whether the assessees were "cooperative banks" or "primary cooperative banks" under the Banking Regulation Act. The Commissioner of Income Tax (Appeals) concluded that the assessees were cooperative societies providing credit facilities to members and not cooperative banks, as they did not possess a banking license from the Reserve Bank of India (RBI).

Key evidence and findings:

The assessees were registered under the Karnataka Cooperative Societies Act, 1959, and were not conducting banking activities as defined by the Banking Regulation Act, specifically lacking the ability to issue cheques, drafts, or pay orders. The court relied on the Karnataka High Court's decisions, which had previously ruled in similar cases that cooperative societies not registered with the RBI as banks were eligible for deductions under Section 80P(2)(a)(i).

Application of law to facts:

The court applied the definitions and provisions of the Income Tax Act and the Banking Regulation Act to determine that the assessees did not meet the criteria of a "primary cooperative bank" and were therefore entitled to the deduction under Section 80P(2)(a)(i).

Treatment of competing arguments:

The Department argued that the assessees were conducting banking activities and thus should be classified as cooperative banks, making them ineligible for the deduction. However, the court found that the assessees did not fulfill the conditions necessary to be considered cooperative banks under the Banking Regulation Act.

Conclusions:

The court concluded that the assessees were not cooperative banks and were entitled to the deductions under Section 80P(2)(a)(i). The appeals by the Revenue were dismissed, affirming the decisions of the Commissioner of Income Tax (Appeals).

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"Therefore, as the assessee is not a Cooperative bank carrying on exclusively banking business and as it does not possess a licence from Reserve Bank of India to carry on business, it is not a Co-operative bank. It is a Cooperative society which also carries on the business of lending money to its members which is covered under Section 80P(2)(a)(i) i.e. carrying on the business of banking for providing credit facilities to its members."

Core principles established:

The judgment reinforces the principle that cooperative societies not registered as banks with the RBI and not conducting banking activities as defined by the Banking Regulation Act are eligible for tax deductions under Section 80P(2)(a)(i).

Final determinations on each issue:

The court confirmed the eligibility of the assessees for deductions under Section 80P(2)(a)(i) and dismissed the Revenue's appeals, upholding the decisions of the Commissioner of Income Tax (Appeals).