2014 (8) TMI 760 - AT - Income Tax

Status of assessee Co-operative society or not type of co-operative societies not specified - Eligibility for deduction u/s 80P(2)(a)(i) Held that - If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co-operative society, will not be eligible for deduction u/s 80P(2)(a)(i) on the income which it derives from carrying on the activities not relating to its members - 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 co-operative societies in respect of business relating to its members. The deposits accepted are used by the Assessee co-operative society for lending or investment - Even out of the deposits so received, the loans have been given to the members of the society in accordance with the objects Thus it cannot be said that the Assessee society was carrying on banking business as it was not accepting deposits from the persons who were not members - it is not necessary that the co-operative society should have a banking licence as per the definition under the Income Tax Act it has to be seen as to whether the nature of the business carrying on by the assessee is a banking business or not - the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac also, Sec. 20 of The Karnataka Souharda Sahakari Act, 1997 permits admission of any other co-operative society as a member - in case the rules and bye-laws of the other co-operative society provides otherwise, the co-operative society may not be admitted as a member of the co-operative society - the assessee society cannot be regarded to be a primary co-operative bank as all the three conditions are not complied with and it is not a co-operative bank and the assessee is not hit by the provision of section 80P(4) and asessee is entitled for deduction u/s 80P(2)(a)(i) - 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 against Revenue.

Issues Involved:
1. Whether the assessee is a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949.
2. Whether the assessee is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
3. Applicability of Section 80P(4) to the assessee.

Detailed Analysis:

Issue 1: Whether the assessee is a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949.
The primary issue was to determine if the assessee qualifies as a primary co-operative bank as defined under Section 5(ccv) of the Banking Regulation Act, 1949. The conditions to be met include:
1. The primary object or principal business must be the transaction of banking business.
2. The paid-up share capital and reserves must be not less than one lakh rupees.
3. The bye-laws must not permit the admission of any other co-operative society as a member.

Upon examination, the Tribunal found that:
- The primary object of the assessee, as per its bye-laws, was to encourage thrift, self-help, and co-operation among its members and provide financial facilities. The activities were limited to its members and did not include accepting deposits from the public, which is a crucial aspect of banking business as defined under Section 5(b) of the Banking Regulation Act, 1949.
- The assessee's paid-up share capital and reserves exceeded one lakh rupees, satisfying the second condition.
- The bye-laws of the assessee allowed the admission of other co-operative societies as members, thus failing the third condition.

Since the assessee did not meet all three conditions, it was concluded that the assessee is not a primary co-operative bank.

Issue 2: Whether the assessee is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961.
Section 80P(2)(a)(i) allows deductions for co-operative societies engaged in the business of banking or providing credit facilities to its members. The Tribunal noted that:
- The assessee is a co-operative society engaged in providing credit facilities to its members.
- The activities were confined to its members, and no banking business was conducted with the general public.
- The Tribunal emphasized that Section 80P(2)(a)(i) provides for deductions if the co-operative society is engaged in either banking or providing credit facilities to its members.

Given that the assessee was not a co-operative bank and was engaged in providing credit facilities to its members, it was eligible for the deduction under Section 80P(2)(a)(i).

Issue 3: Applicability of Section 80P(4) to the assessee.
Section 80P(4) excludes co-operative banks from availing deductions under Section 80P. The Tribunal analyzed whether this section applies to the assessee:
- Section 80P(4) was introduced to deny deductions to co-operative banks, but not to co-operative societies engaged in providing credit facilities to their members.
- The Tribunal observed that the assessee is not a co-operative bank as it did not meet the definition under Section 5(ccv) of the Banking Regulation Act, 1949.

Thus, Section 80P(4) was deemed inapplicable to the assessee, and the assessee was entitled to the deductions under Section 80P(2)(a)(i).

Conclusion:
The Tribunal concluded that the assessee is not a primary co-operative bank and is therefore eligible for the deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The appeals filed by the revenue were dismissed, and the order of the CIT(A) allowing the deduction was upheld.

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