2014 (10) TMI 350 - AT - Income Tax

Deduction u/s 80P Effect of amendment - 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 - The assessee contended that it is lending money primarily for the purpose of agricultural activities and its member agriculturists. Being so the assessee is entitled for deduction u/s. 80P of the Act - Held that - AO has clearly brought on record that the assessee has lent only 3.56% of total loans advanced during the year under consideration for the purpose of agricultural activities - The assessee was unable to point out that how with this meagre 3.56% of the loans advanced for the purpose of agricultural activities; the assessee is entitled for deduction u/s. 80P of the I.T. Act. - 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. Nature of assessee - Whether the Assessee is a cooperative bank or not Held that - CIT(A) was rightly of the view that the Assessee has carried on banking activities on the basis of findings in the assessment order - The deposits accepted are used by the Assessee co-operative society for lending or investment - This fact has not been denied - Even out of the deposits so received the loans have been given to the members of the society in accordance with the objects - it cannot be said that the Assessee society was not carrying on banking business as it was accepting deposits from the persons who have no voting right - the paid up share capital and reserves in the case of the Assessee is more than 1 lac - all the three conditions in the case of the assessee for becoming primary cooperative bank stand complied with - the assessee is not entitled for deduction u/s. 80P of the Act on any reasoning Decided against assessee.

Summary

Issues Involved:
1. Disallowance of deduction under Section 80P of the Income Tax Act.
2. Classification of the assessee as a primary agricultural credit society.
3. Application of the concept of mutuality for tax exemption.
4. Compliance with conditions under Section 80P(4) of the Income Tax Act.

Issue-wise Detailed Analysis:

Disallowance of Deduction under Section 80P:
The primary issue revolves around the disallowance of the deduction claimed by the assessee under Section 80P of the Income Tax Act. The assessee, a co-operative bank, claimed that its entire income was exempt under this section. However, the Assessing Officer (AO) disallowed the claim on the grounds that the main activity of the society was providing non-agricultural credits and banking business, which did not qualify for the deduction under the amended Section 80P. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, noting that only 3.56% of the total loans were for agricultural purposes, insufficient to qualify for the deduction.

Classification as a Primary Agricultural Credit Society:
The assessee argued that it is a primary agricultural credit society and thus eligible for the deduction under Section 80P. The CIT(A) and AO, however, found that the assessee did not fulfill its main objective of providing financial accommodation to its members for agricultural purposes. The Kerala High Court's decision in the case of M/s. Thathamangalam Service Co-operative Bank Ltd. was cited, emphasizing that societies must substantiate their primary objective of supporting agricultural activities to qualify for the deduction.

Application of the Concept of Mutuality:
The assessee also contended that its income should be exempt under the concept of mutuality, as it was lending money only to its members. However, the Tribunal found this argument unconvincing, citing the Supreme Court's decision in CIT vs. Kumbakonam Mutual Benefit Fund Ltd., which held that profits distributed to shareholders as shareholders do not satisfy the principle of mutuality. The Tribunal concluded that the assessee's operations were akin to those of an ordinary bank, disqualifying it from mutuality-based exemptions.

Compliance with Conditions under Section 80P(4):
The Tribunal examined whether the assessee complied with the conditions under Section 80P(4), which excludes co-operative banks from the benefits of Section 80P unless they are primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal found that the assessee met the criteria of a primary co-operative bank as defined under the Banking Regulation Act, 1949, and thus was not eligible for the deduction under Section 80P(2)(a)(i). The Tribunal noted that the assessee's primary business was banking, with a paid-up share capital and reserves exceeding one lakh rupees, and its bye-laws did not permit the admission of other co-operative societies as members.

Conclusion:
The Tribunal concluded that the assessee did not qualify for the deduction under Section 80P of the Income Tax Act due to its primary engagement in banking activities rather than agricultural credit. The concept of mutuality was also found inapplicable. Consequently, the appeal filed by the assessee was dismissed, and the disallowance of the deduction was upheld. The judgment was pronounced on 25-07-2014.