2014 (4) TMI 434 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) of the Act - Whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) and whether the Assessee is hit by the provisions of Sec. 80P(4) which was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007 Held that - Sec. 80P(2)(a)(i) provides two types of activities in which the co-operative society must be engaged to be eligible for deduction under sub-clause (i) - These two activities are not alternates ones because the section allows deduction to the co-operative society on the whole of profits and gains of business attributable to any one or more of such activities - This pre-supposes that eligible co-operative society can carry on either one of these two businesses or can carry both these businesses for the members - If the Assessee co-operative society carries on one or both of the activities, it will be eligible for deduction. Where a co-operative society is engaged in carrying on business of banking facilities to its members and to the public or providing credit facilities to its members or to the public, the income which relates to the business of banking facilities to its members or providing credit facilities to its members will only be eligible for deduction u/s 80P(2)(a)(i) - There is no prohibition u/s 80P not to allow deduction to such co-operative societies in respect of business relating to its members. Whether the Assessee is a co-operative bank or not Held that - In case, the assessee does not comply with the three conditions of being a cooperative society, it cannot be regarded to be a co-operative bank and the provisions of Sec. 80P(4) will not be applicable in the case of the Assessee - Once, the Assessee will not fall within the provisions of Sec. 80P(4), the Assessee, will be eligible to get deduction u/s 80P(2)(a)(i) in respect of whole of the income which the Assessee derives from carrying on the business of banking or providing credit facilities to its members. The Assessee has accepted before the authorities that the Assessee was accepting deposits of money not only from the members but also from the general public who are non-members - it is not necessary that the co-operative society should have a banking licence as per the definition under the Income Tax Act for carrying on banking business - If licence is not obtained it may be an illegal banking business under the other statute the paid up share capital and reserves in the case of the Assessee is more than Rs. 1 lac - Sec. 20 of The Karnataka Souharda Sahakari Act, 1997 permits admission of any other co-operative society as a member - the assessee society complied with all the three conditions thus, the assessee society becomes a primary co-operative bank and in view of explanation (a) of section 80P(4) it has to be regarded as a co-operative bank and is hit by section 80P(4) - the Assessee has to be regarded to be a primary co-operative bank as all the three basic conditions are complied with, it is a co-operative bank and the provisions of Sec. 80P(4) are applicable in the case of the Assessee and Assessee is not entitled for deduction u/s 80P(2)(a)(i) thus, the order of the CIT(A) upheld Decided against Assessee.

Summary

Issues Involved:
1. Entitlement of the Assessee to deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Applicability of Section 80P(4) to the Assessee.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction Under Section 80P(2)(a)(i):
The Assessee, a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997, claimed deductions under Section 80P(2)(a)(i) for the assessment year 2010-11. The Assessing Officer (AO) denied this deduction, asserting that the Assessee is a primary co-operative bank, thus invoking Section 80P(4). The Assessee contended that it is not a co-operative bank but a co-operative society engaged in providing credit facilities to its members. The Assessee's primary object is to promote the economic interest of its members, encourage thrift, self-help, and co-operation among them.

2. Applicability of Section 80P(4):
Section 80P(4) excludes co-operative banks from availing deductions under Section 80P, except for primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal examined whether the Assessee qualifies as a co-operative bank by analyzing the definition provided in the Banking Regulation Act, 1949. The Tribunal noted that for a co-operative society to be considered a primary co-operative bank, it must fulfill three conditions:
- The primary object or principal business is the transaction of banking business.
- The paid-up share capital and reserves are not less than one lakh rupees.
- The bye-laws do not permit the admission of any other co-operative society as a member.

The Tribunal found that the Assessee accepted deposits from the public, including non-members, and used these deposits for lending or investment, thus engaging in banking business. The Assessee's paid-up share capital and reserves exceeded one lakh rupees, and its bye-laws did not permit the admission of other co-operative societies as members. Consequently, the Tribunal concluded that the Assessee fulfilled all three conditions and must be regarded as a primary co-operative bank.

Conclusion:
The Tribunal held that the Assessee is a primary co-operative bank and, therefore, Section 80P(4) applies, disqualifying the Assessee from claiming deductions under Section 80P(2)(a)(i). The appeals filed by the Assessee were dismissed, and the order of the CIT(A) was upheld.