2014 (9) TMI 263 - AT - Income Tax

Grant of deduction u/s 80P(2)(a)(i) Failure to consider that as such no prohibition in the bye-laws Held that - The provisions of Sec. 80P(4) mandates that the provisions of Sec. 80P will not apply to any co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank but as per the provisions of Sec. 80P(2)(a)(i), a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is entitled for deduction - it cannot be said that a co-operative society cannot carry on business of banking facilities to its members even if it is not a co-operative bank - every co-operative society engaged in carrying on business of banking even for its members is regarded to be a co-operative bank, then, the provisions of Sec. 80P(2)(a)(i) will become redundant. Status of assessee - Co-operative society or not - Whether the Assessee is a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank 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, it 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 facilties 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. 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 did not file copy of its bye-laws before us; neither are the provisions of Sec. 17 of The Karnataka State Co-operative Societies Act, 1959 - In case the bye-laws permit for the admission of any other co-operative society as a member, the Assessee will not be not treated as a co-operative bank and the provisions of Sec. 80P(4) will not apply to the Assessee the matter is remitted back to the AO for determination of status of assessee and to decide as to whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) for ascertaining from the copy of the rules and bye-laws of the co-operative society whether the bye-laws of the assessee permit admission of any other co-operative society - In case the AO finds that the bye-laws do not permit the admission of any other co-operative society, the Assessee will be regarded as a primary co-operative bank and will not be entitled for deduction u/s 80P(2)(a)(i) Decided in favour of Assessee.

Summary

Issues Involved:

1. Entitlement of the Assessee to deduction under section 80P(2)(a)(i).
2. Applicability of section 80P(4) to the Assessee.
3. Distinction between a co-operative bank and a co-operative society.

Issue-wise Detailed Analysis:

1. Entitlement of the Assessee to Deduction under Section 80P(2)(a)(i):

The Assessee, a co-operative society registered under the Karnataka State Co-operative Societies Act, filed a return declaring a gross total income of Rs. 4,24,499 and claimed a deduction under section 80P(2)(a)(i). The Assessing Officer (AO) denied the deduction, treating the Assessee as a primary co-operative bank and thus applying the provisions of section 80P(4). The CIT(A) upheld the AO's decision. The Assessee argued that its activities did not constitute banking as defined under the Banking Regulation Act, 1949, and relied on various judicial precedents to support its claim for deduction under section 80P(2)(a)(i).

2. Applicability of Section 80P(4) to the Assessee:

Section 80P(4) was introduced by the Finance Act, 2006, and denies deduction to a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The Assessee contended that it was not a co-operative bank but a co-operative society providing credit facilities to its members. The Tribunal noted that section 80P(2)(a)(i) allows deductions to co-operative societies engaged in banking or providing credit facilities to their members. The Tribunal emphasized that not every co-operative society engaged in banking is a co-operative bank. Therefore, it was essential to determine whether the Assessee was a co-operative bank as defined under the Banking Regulation Act, 1949.

3. Distinction between a Co-operative Bank and a Co-operative Society:

The Tribunal examined whether the Assessee met the criteria to be classified as a primary co-operative bank under section 5(ccv) of the Banking Regulation Act, 1949. The three conditions are: (1) the primary object or principal business is banking, (2) the paid-up share capital and reserves are not less than one lakh of rupees, and (3) the bye-laws do not permit admission of any other co-operative society as a member. The Tribunal found that the Assessee accepted deposits from the public, satisfying the first condition. The second condition was also met as the Assessee's paid-up share capital and reserves exceeded one lakh rupees. However, the Tribunal could not determine the third condition due to the absence of the Assessee's bye-laws and remanded the issue to the AO to verify whether the bye-laws permitted the admission of other co-operative societies as members.

Conclusion:

The Tribunal concluded that if the Assessee's bye-laws did not permit the admission of other co-operative societies, it would be classified as a primary co-operative bank and would not be entitled to deduction under section 80P(2)(a)(i). Conversely, if the bye-laws allowed such admission, the Assessee would not be considered a co-operative bank, and the provisions of section 80P(4) would not apply, making the Assessee eligible for the deduction. The appeal was allowed for statistical purposes, and the AO was directed to verify the Assessee's bye-laws to make a final determination.