2015 (2) TMI 977 - AT - Income Tax

Disallowance of deduction u/s 80P(2)(a)(i) - 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.? - whether C.I.T (A) erred in denying deduction u/s 80 (P) (2) (a) (i) of the Act to a co operative society by applying amendment by insertion of section 80P (4) which is applicable to co - operative banks? - Held that - 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. Since the Assessee cannot be regarded to be a primary co-operative bank therefore it cannot be a co-operative bank and therefore the provisions of Sec. 80P(4) are not applicable in the case of the Assessee and Assessee shall be entitled for deduction u/s 80P(2)(a)(i). We therefore set aside the order of CIT(A) and allow deduction to the Assessee u/s 80P(2)(a)(i). - Decided in favor of assessee.

Summary

Issues Involved:
1. Disallowance of deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Classification of the assessee as a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949.
3. Applicability of Section 80P(4) of the Income Tax Act to the assessee.
4. Governance of the assessee under the Karnataka Co-operative Societies Act versus the Banking Regulation Act, 1949.
5. Nature of transactions and membership of the assessee.
6. Impact of Section 2(24)(viia) on the deduction under Section 80P(2)(a)(i).
7. Exemption of income on the ground of mutuality.

Detailed Analysis:

Disallowance of Deduction under Section 80P(2)(a)(i):
The Assessee, a co-operative society registered under the Karnataka State Co-operative Societies Act, claimed a deduction under Section 80P(2)(a)(i) of the Income Tax Act, which was denied by the AO. The AO classified the Assessee as a primary co-operative bank, thus invoking Section 80P(4) to disallow the deduction. The CIT(A) upheld the AO's decision.

Classification as a Primary Co-operative Bank:
The core issue was whether the Assessee could be classified as a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949. The Tribunal examined the Assessee's bye-laws and found that the primary object of the Assessee was to finance artisans and industrialists engaged in cottage and small-scale industries, not to conduct banking business as defined under Section 5(b) of the Banking Regulation Act, which involves accepting deposits from the public repayable on demand or otherwise.

Applicability of Section 80P(4):
Section 80P(4) denies deductions to co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal concluded that the Assessee did not meet the definition of a primary co-operative bank as it did not accept deposits from the public but only from its members, and its bye-laws allowed the admission of other co-operative societies as members, thus failing to meet the third condition of Section 5(ccv).

Governance under Karnataka Co-operative Societies Act:
The Assessee argued that it was governed by the Karnataka Co-operative Societies Act and not by the Banking Regulation Act, 1949. The Tribunal agreed, noting that the Assessee's activities were confined to its members and not the general public, distinguishing it from a co-operative bank.

Nature of Transactions and Membership:
The Tribunal emphasized that the Assessee's transactions were limited to its members, and its primary object was not banking but providing credit facilities to its members. The Tribunal referenced decisions from the Gujarat High Court and Karnataka High Court supporting the view that such societies should not be classified as co-operative banks.

Impact of Section 2(24)(viia):
The Tribunal noted that the insertion of Section 2(24)(viia) did not alter the position regarding the deduction under Section 80P(2)(a)(i) for co-operative credit societies engaged in providing credit facilities to their members.

Exemption on the Ground of Mutuality:
The Tribunal did not delve deeply into the mutuality principle, as it concluded that the Assessee was entitled to the deduction under Section 80P(2)(a)(i).

Conclusion:
The Tribunal held that the Assessee could not be classified as a primary co-operative bank and thus was not subject to the restrictions of Section 80P(4). Consequently, the Assessee was entitled to the deduction under Section 80P(2)(a)(i). The appeal was allowed, and the order of the CIT(A) was set aside. The decision was pronounced in the open court on 28.02.2014.