2014 (9) TMI 154 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) Effect of amendment - banking or credit facilities to its members - admission of any other co-operative society as a member of the co-operative society - 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 - The aforesaid provision of Sec. 20 to 21A mandates admission of any other co-operative society as a member of the co-operative society - Section 21A further states that the co-operative society can be admitted as nominal or associate member for any specific purpose for any specific period as may be mentioned in the bye-laws - the society being a co-operative bank providing banking facilities to members is not eligible to claim deduction u/s 80P(2)(a)(i) after the introduction of sub-section (4) to section 80P - the Assessee was denied deduction u/s 80P(2)(a)(i) relying upon ACIT vs Palhawas Primary Agriculture Co-operative Society Ltd. 2012 (10) TMI 276 - ITAT DELHI - Section 80P(4) clearly excludes primary agriculture credit society from its domain - section 80P(2)(a)(i) nowhere talks of co-operative credit society and therefore the distinction made under the Banking Regulation Act cannot be imported u/s 80P(2)(a)(i) - the Assessee has not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied, 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) 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. Whether the Assessee is a co-operative bank or not Held that - If the co-operative society complied with all the three conditions - 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 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 ₹ 1 lac - the Assessee satisfies the second condition - Sec. 20 of The Karnataka Souharda Sahakari Act, 1997 permits admission of any other co-operative society as a member Decided against Revenue.

Summary

Issues Involved:
1. Whether the assessee is a co-operative bank under section 80P(4) of the Income Tax Act, 1961.
2. Whether the assessee is entitled to deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the assessee is a co-operative bank under section 80P(4) of the Income Tax Act, 1961:

The revenue contended that the assessee, a co-operative society, qualifies as a primary co-operative bank under section 5(ccv) of the Banking Regulation Act, 1949, and thus, is not eligible for deduction under section 80P(2)(a)(i) due to the provisions of section 80P(4). The primary co-operative bank is defined as a co-operative society that meets three conditions: (1) its primary object or principal business is the transaction of banking business; (2) its paid-up share capital and reserves are not less than Rs. 1 lakh; and (3) its bye-laws do not permit the admission of any other co-operative society as a member.

The tribunal analyzed the facts and found that:

- The assessee accepted deposits from non-members and the general public, which satisfies the first condition of conducting banking business.
- The paid-up share capital and reserves of the assessee exceeded Rs. 1 lakh, satisfying the second condition.
- However, the bye-laws of the assessee allowed the admission of other co-operative societies as members, thereby failing the third condition.

Therefore, the tribunal concluded that the assessee does not qualify as a primary co-operative bank since it does not meet all three conditions. Consequently, the provisions of section 80P(4) do not apply to the assessee.

2. Whether the assessee is entitled to deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961:

Section 80P(2)(a)(i) allows a deduction for co-operative societies engaged in carrying on the business of banking or providing credit facilities to its members. The tribunal noted that the assessee is a co-operative society registered under the Karnataka Souharda Sahakari Act, 1997, and primarily engaged in providing credit facilities to its members.

The tribunal emphasized that section 80P(2)(a)(i) provides for deduction on the whole of the profits and gains of business attributable to the activities of banking or providing credit facilities to its members. The tribunal also clarified that the embargo under section 80P(4) applies only to co-operative banks and not to co-operative societies engaged in providing banking or credit facilities to their members.

The tribunal referenced several case laws, including the decisions of the Gujarat High Court in CIT vs. Jafari Momin Vikas Co-op. Credit Society Ltd. and the Karnataka High Court in Vyavasaya Seva Sahakara Sangha vs. State of Karnataka & Ors., which supported the view that co-operative societies not qualifying as co-operative banks are eligible for deduction under section 80P(2)(a)(i).

Based on the analysis, the tribunal held that the assessee, not being a co-operative bank, is entitled to the deduction under section 80P(2)(a)(i) for the income generated from providing banking or credit facilities to its members.

Conclusion:

The tribunal dismissed the revenue's appeal and confirmed the order of the CIT(A), allowing the deduction under section 80P(2)(a)(i) to the assessee. The assessing officer was directed to allow the deduction on the income generated from providing banking or credit facilities to its members.