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2014 (11) TMI 373 - AT - Income TaxDenial of claim of exemption u/s 80P(2)(a)(i) Co-operative society as per Kerala Co-operative Societies Act Nature of assessee 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 Assessee is a co-operative bank, the Assessee will not be entitled for deduction as stipulated u/s 80P(2)(a)(i) but in case the Assessee is not a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the provisions of Sec. 80P(2)(a)(i) will be applicable to the Assessee provided the Assessee is engaged in carrying on business of banking or providing credit facilities 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 such co-operative societies in respect of business relating to its members. 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 - the types of the deposits which the assessee has accepted as per bye-laws are the same as are being accepted during the course of the carrying out the banking activities - the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac - 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 the 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:
1. Whether the appellant society qualifies as a primary co-operative bank. 2. Eligibility of the appellant society for deduction under Section 80P(2)(a)(i) of the Income Tax Act. 3. Applicability of Section 80P(4) of the Income Tax Act to the appellant society. 4. Interpretation of the bye-laws of the appellant society regarding membership. Detailed Analysis: 1. Whether the appellant society qualifies as a primary co-operative bank: The appellant society is registered under the Karnataka State Co-operative Societies Act and filed a return declaring gross total income and claimed deduction under Section 80P(2)(a)(i). The Assessing Officer (AO) denied this deduction, classifying the society as a primary co-operative bank, thereby invoking the provisions of Section 80P(4). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view. 2. Eligibility of the appellant society for deduction under Section 80P(2)(a)(i) of the Income Tax Act: The appellant argued that it is a co-operative society providing credit facilities to its members, not a co-operative bank, and thus entitled to the deduction under Section 80P(2)(a)(i). The Tribunal examined the relevant provisions of Section 80P(2)(a)(i) and Section 80P(4). It was noted that Section 80P(2)(a)(i) allows deductions for co-operative societies engaged in banking or providing credit facilities to members. However, Section 80P(4) denies this deduction to co-operative banks, except primary agricultural credit societies or primary co-operative agricultural and rural development banks. 3. Applicability of Section 80P(4) of the Income Tax Act to the appellant society: The Tribunal analyzed whether the appellant society meets the criteria of a primary co-operative bank as defined under Section 5(CCV) of the Banking Regulation Act, 1949. For a society to be a primary co-operative bank, it must: - Primarily transact banking business. - Have paid-up share capital and reserves of at least Rs. 1 lakh. - Not permit membership of other co-operative societies. The Tribunal found that the appellant society did not accept deposits from the public, only from its members, and thus did not primarily transact banking business. Although the society met the second condition regarding share capital, it did not meet the third condition as its bye-laws allowed membership of other co-operative societies. 4. Interpretation of the bye-laws of the appellant society regarding membership: The bye-laws of the appellant society were scrutinized, particularly clause 14, which did not permit the admission of other co-operative societies as members. This non-compliance with one of the essential conditions for being classified as a primary co-operative bank led to the conclusion that the appellant society is not a co-operative bank. Conclusion: The Tribunal concluded that the appellant society does not qualify as a primary co-operative bank as it does not meet all three conditions stipulated under Section 5(CCV) of the Banking Regulation Act, 1949. Consequently, the provisions of Section 80P(4) do not apply, and the society is entitled to the deduction under Section 80P(2)(a)(i). The order of the CIT(A) was set aside, and the AO was directed to allow the deduction. Final Judgment: The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 14.08.2014.
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