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2014 (7) TMI 557 - AT - Income TaxDeduction u/s 80P(2)(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 - If the co-operative society is engaged in carrying of business of banking or providing credit facilities to its members, the co-operative society is entitled for deduction on whole of the income relating to any one or more of such business the section denies deduction to a co- operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank - 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) - 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 - it is not necessary that the co-operative society should have a banking licence as per the definition under the Income Tax Act - The Income Tax is not concerned whether the banking business carried on by the assessee is legal or illegal - The income has to be assessed u/s 14 of the Income Tax Act under the same head even if the nature of the business is illegal. The bye-laws of society does permit the admission of other co-operative society as member - Since the assessee society did not comply all the three conditions, therefore the assessee society cannot be regarded to be a primary co-operative bank as all the three conditions are not complied with and in consequence it is not a co-operative bank and the assessee is not hit by the provision of section 80P(4) thus, the Assessee has not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied with, therefore, it is not a co-operative bank and the provisions of Sec. 80P(4) are not applicable in the case of the Assessee and Assessee is entitled for deduction u/s 80P(2)(a)(i) thus, the order of the CIT(A) is upheld and the AO is directed to allow deduction to the assessee u/s 80P(2)(a)(i) on the income generated for providing banking or credit facilities to its members Decided in favour of Assessee.
Issues Involved:
1. Classification of the assessee's income under Section 80P(4). 2. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Classification of the Assessee's Income under Section 80P(4): The primary issue was whether the assessee, a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997, qualifies as a "co-operative bank" under Section 80P(4) of the Income Tax Act, 1961. The Assessing Officer (AO) had denied the deduction under Section 80P(2)(a)(i) on the grounds that the assessee is a primary co-operative bank, thus falling under the purview of Section 80P(4), which disallows such deductions. 2. Eligibility for Deduction under Section 80P(2)(a)(i): The assessee contended that it is not a co-operative bank but a co-operative society engaged in providing credit facilities to its members, and hence, eligible for deduction under Section 80P(2)(a)(i). The assessee argued that the activities were limited to its members and relied on various judicial precedents to support its claim. Detailed Analysis: 1. Classification under Section 80P(4): The Tribunal examined whether the assessee qualifies as a "co-operative bank" by analyzing the definition under Part V of the Banking Regulation Act, 1949. According to Section 5(CCV) of the Banking Regulation Act, a "primary co-operative bank" must meet 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 Rs. 1 lakh. - The bye-laws do not permit the admission of any other co-operative society as a member. The Tribunal found that: - The primary object of the assessee was not the transaction of banking business as it did not accept deposits from non-members, failing the first condition. - The assessee met the second condition as its paid-up share capital and reserves exceeded Rs. 1 lakh. - The bye-laws allowed the admission of other co-operative societies as members, failing the third condition. Since the assessee did not meet all three conditions, it was not classified as a "primary co-operative bank" and thus, not a "co-operative bank" under Section 80P(4). 2. Eligibility for Deduction under Section 80P(2)(a)(i): The Tribunal noted that Section 80P(2)(a)(i) allows deductions for co-operative societies engaged in the business of banking or providing credit facilities to its members. Since the assessee was a co-operative society providing credit facilities exclusively to its members and not a "co-operative bank," it was eligible for the deduction under Section 80P(2)(a)(i). Judicial Precedents: The Tribunal referred to various judicial precedents, including: - Hon'ble Gujarat High Court in CIT vs. Jafari Momin Vikas Co-op. Credit Society Ltd. - Hon'ble Karnataka High Court in Vyavasaya Seva Sahakara Sangha vs. State of Karnataka & Ors. - Bangalore Bench of the Tribunal in ITO vs. Divyajyothi Credit Co-operative Society Ltd. - Panaji Bench in DCIT vs. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. - Panaji Bench in Tararani Mahila Co-operative Credit Society vs. ITO. - Delhi High Court in ACIT vs. Palhawas Primary Agriculture Co-operative Society Ltd. These cases supported the view that Section 80P(4) applies only to co-operative banks and not to co-operative credit societies. Conclusion: The Tribunal concluded that the assessee is not a co-operative bank and hence, the provisions of Section 80P(4) do not apply. The assessee is entitled to the deduction under Section 80P(2)(a)(i) for the income generated from providing credit facilities to its members. The appeals filed by the assessee were allowed, and the AO was directed to grant the deduction. Order Pronounced: The order was pronounced in the open court on 04.07.2014, allowing the appeals filed by the assessee.
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