2014 (10) TMI 502 - AT - Income Tax

Entitlement for deduction u/s 80P(2)(a)(i) - Co-operative society providing credit facilities to its members - 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 - Banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment - These deposits must be accepted from the public, not only from the members - These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise - the Assessee has categorically accepted before the authorities that the Assessee was accepting deposits of money not only from the members but also from non-members - it cannot be said that the Assessee society was not carrying on banking business as it was 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 - What we have to see whether the nature of the business carrying on by the assessee is a banking business or not - 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. There is no dispute that the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac - the Assessee satisfies the second condition - so far as the third condition is concerned, Sec. 20 of The Karnataka Souharda Sahakari Act, 1997 permits admission of any other co-operative society as a member - the provisions of Sec. 80P(2)(a)(i) are applicable to a co-operative society which is engaged in carrying on banking business facilities to its members if it is not a co-operative bank - 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 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 set aside 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: Deduction under section 80P(2)(a)(i) of the I.T. Act, 1961; Applicability of section 80P(4) of the I.T. Act, 1961; Definition and classification of a co-operative society versus a co-operative bank; Interpretation of the Banking Regulation Act, 1949.

Issue-Wise Detailed Analysis:

1. Entitlement to Deduction under Section 80P(2)(a)(i):
The primary issue was whether the appellant, a co-operative society, was entitled to a deduction under section 80P(2)(a)(i) of the I.T. Act, 1961. The appellant argued that it was a co-operative society providing credit facilities to its members and should be eligible for the deduction. The Tribunal examined the activities of the appellant and concluded that it was indeed engaged in providing credit facilities to its members. Therefore, the appellant was entitled to the deduction under section 80P(2)(a)(i).

2. Applicability of Section 80P(4):
The Assessing Officer (AO) had denied the deduction on the grounds that the appellant was a primary co-operative bank and thus fell under the provisions of section 80P(4), which excludes co-operative banks from the benefits of section 80P. The Tribunal had to determine whether the appellant was a co-operative bank as defined under the Banking Regulation Act, 1949, and thus subject to section 80P(4).

3. Definition of Co-operative Society vs. Co-operative Bank:
The Tribunal analyzed the definition of a "co-operative bank" under Part V of the Banking Regulation Act, 1949, which includes a state co-operative bank, a central co-operative bank, and a primary co-operative bank. For a co-operative society to be classified as a primary co-operative bank, it must meet three conditions: (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, and (3) the bye-laws must not permit the admission of any other co-operative society as a member. The Tribunal found that the appellant did not meet all three conditions, particularly the third condition, as its bye-laws permitted the admission of other co-operative societies as members.

4. Interpretation of Banking Business:
The Tribunal examined whether the appellant's activities constituted banking business. Banking business is defined under section 5(b) of the Banking Regulation Act, 1949, as accepting deposits from the public for the purpose of lending or investment, repayable on demand or otherwise, and withdrawable by cheque, draft, or order. The Tribunal noted that the appellant accepted deposits from both members and non-members and used these deposits for lending or investment. Therefore, the appellant was engaged in banking business.

5. Case Law Analysis:
The Tribunal referred to various judicial precedents to support its conclusions. It cited the decision of the Hon'ble Gujarat High Court in CIT vs. Jafari Momin Vikas Co-op. Credit Society Ltd., which held that section 80P(4) does not apply to societies that are not co-operative banks. The Tribunal also considered the decision of the Bangalore Bench in ITO vs. Divyajyothi Credit Co-operative Society Ltd., which distinguished between credit co-operative societies and co-operative banks. However, the Tribunal found that the term "credit co-operative society" is not mentioned in section 80P(2)(a)(i) or section 80P(4).

6. Conclusion:
The Tribunal concluded that the appellant was not a primary co-operative bank as it did not meet all the required conditions. Consequently, the provisions of section 80P(4) were not applicable to the appellant. The appellant was entitled to the deduction under section 80P(2)(a)(i) for the income derived from providing banking or credit facilities to its members. The Tribunal set aside the order of the CIT(A) and directed the AO to allow the deduction.

Final Judgment:
The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 4.7.2014.

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