2012 (6) TMI 407 - AT - Income Tax

Denial of claim of exemption u/s. 80P(2)(a)(i) - Cooperative Society - the amendment to section 80P w.e.f. 01-04-2007, excludes benefit u/s. 80P to co-operative banks other than the defined categories assessee claimed to be a primary co-operative agricultural and rural development bank Held that - Nothing in its object clause to suggest that its primary object is providing financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including marketing of crops) - the only object which enables it to provide financial accommodation is its object clause 2(a) only specifing the assets on the security of which the assessee-society may provide finance to its members - its area of operation admittedly extends beyond one Taluk - the assessee s claim of being a primary cooperative agricultural and rural development bank, which though would require independent examination and finding/s, is strongly indicative of the nature of its lending activities, which has a direct bearing on the question of it being a PACS (or not) - restore the matter for the purpose of necessary verification and issue of definite findings of fact/s, back to the file of the first appellate authority - no basis to consider the assessee as being a primary cooperative agricultural and rural development bank as defined in section 80P, so as to be entitled for tax benefit thereunder on its income as one such in favour of assessee for statistical purpose.

Issues Involved:
1. Eligibility of the assessee for exemption under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Classification of the assessee as a co-operative bank.
3. Whether the assessee qualifies as a primary agricultural credit society (PACS) or a primary co-operative agricultural and rural development bank.

Issue-wise Detailed Analysis:

1. Eligibility of the Assessee for Exemption under Section 80P(2)(a)(i):
The assessee, a cooperative society, claimed exemption under Section 80P(2)(a)(i) of the Income Tax Act on its total income. The Assessing Officer (AO) proposed to disallow this exemption due to an amendment to Section 80P via the Finance Act, 2006, which excluded co-operative banks from this benefit, except for certain defined categories. The assessee argued that it was a primary co-operative agricultural and rural development bank, which was an excepted category under Section 80P(4). However, the AO found that the assessee was engaged in financing activities beyond purely agricultural activities and its area of operation extended beyond one Taluk, thus not meeting the criteria for the exemption.

2. Classification of the Assessee as a Co-operative Bank:
The assessee contended that it was not a co-operative bank as it did not engage in the business of banking, defined under Section 5(b) of the Banking Regulation Act, 1949, as accepting deposits from the public. The assessee had not applied for approval from NABARD/RBI to accept deposits, and thus, its object of receiving deposits was only on paper. The Commissioner of Income-tax (Appeals) [CIT(A)] rejected this argument, stating that the assessee's object clause indicated it was a co-operative bank. The CIT(A) relied on the decision in Madras Auto Rickshaw Drivers' Co-operative Society v. CIT, where the Supreme Court held that the activities of the society did not constitute providing credit facilities to its members.

3. Qualification as a Primary Agricultural Credit Society (PACS) or a Primary Co-operative Agricultural and Rural Development Bank:
The Tribunal examined whether the assessee could be classified as a PACS or a primary co-operative agricultural and rural development bank, which are excepted categories under Section 80P(4). The assessee's object clause did not explicitly state that its primary object was to provide financial accommodation for agricultural purposes or activities connected with agriculture. The Tribunal noted that the principal business of providing financial accommodation for agricultural purposes could qualify the assessee as a PACS even if not explicitly stated in its object clause. However, the assessee needed to satisfy the taxing authority regarding this principal business independently for each year.

The Tribunal also considered whether the assessee qualified as a primary co-operative agricultural and rural development bank. The Revenue rejected this claim because the assessee's area of operation extended beyond one Taluk, and its object clause did not indicate that its principal object was to provide long-term credit for agricultural and rural development activities. The Tribunal agreed with the Revenue, noting that the definition of a primary co-operative agricultural and rural development bank was clear and had to be strictly construed.

Conclusion:
The Tribunal found that the assessee did not qualify for exemption under Section 80P(2)(a)(i) as it could not be classified as a PACS or a primary co-operative agricultural and rural development bank. The assessee's appeal was allowed for statistical purposes, and the matter was remanded to the first appellate authority for necessary verification and findings. The Tribunal directed the first appellate authority to adjudicate the matter after hearing the parties and considering any new evidence.

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