2015 (11) TMI 801 - HC - Income Tax

Entitlement to deduction under Section 80P(2)(a)(i) - Whether Section 80P(4) is applicable only for the assessment year 2008-09 onwards inspite of the fact that the explanatory notes of the Finance Act 2006 makes it abundantly clear that this provision is applicable from assessment year 2007-08?? - Held that - If a Co-operative Bank is exclusively carrying banking business, then the income derived from the said business cannot be deducted in computing the total income of the assessee. The said income is liable for tax. A Co-operative bank as defined under the Banking Regulation Act includes the primary agricultural credit society or a primary co-operative agricultural rural development bank. The Legislature did not want to deny the said benefit to a primary agricultural credit society or a primary co- operative agricultural and rural development bank. They did not want to extend the said benefit to a co-operative bank which is exclusively carrying on banking business i.e., the purport of the amendment. If the assessee is not a Co-operative bank carrying on exclusively banking business and if it does not possess a license from the Reserve Bank of India to carry on business, then it is not a Co-operative bank. It is a Co-operative society which also carries on the business of lending money to its members which is covered under Section 80P(2)(a)(i) i.e., carrying on the business of banking for providing credit facilitates to its members. The object of the aforesaid amendment is not to exclude the benefit extended under Section 80P(i) to the society. See THE COMMISSIONER OF INCOME TAX vs. SRI BILURU GURUBASAVA PATTINA SAHAKARI SANGHA NIYAMITHA, BAGALKOT 2015 (1) TMI 821 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Summary

Issues:
Interpretation of Section 80P of the Income Tax Act, 1961 regarding its applicability to co-operative banks and credit co-operative societies.

Analysis:
The High Court of Karnataka heard an appeal by the revenue challenging the Tribunal's order that Section 80P(4) of the Income Tax Act applies only to co-operative banks and not credit co-operative societies. The key question raised was whether the provision was applicable from the assessment year 2007-08, as per the explanatory notes of the Finance Act 2006, or from 2008-09 as held by the ITAT.

The Tribunal differentiated between co-operative banks and societies based on various criteria such as registration, nature of business, filing of returns, inspection, and the application of Part V of the Banking Regulation Act. The Court referred to a previous judgment where it was established that if a co-operative bank exclusively conducts banking business, the income derived from it is taxable and not eligible for deduction under Section 80P. This benefit is intended for primary agricultural credit societies or rural development banks, not for co-operative banks exclusively engaged in banking activities.

The Court emphasized that if an entity is not a co-operative bank engaging solely in banking business with an RBI license, it falls under the category of a co-operative society providing credit facilities to its members, covered under Section 80P(2)(a)(i). The legislative intent was not to exclude this benefit from societies. Therefore, the Court ruled in favor of the assessee and against the revenue, aligning with the previous judgment's interpretation of the law.

In conclusion, the High Court dismissed the appeal and upheld the Tribunal's decision. The substantial questions of law were resolved in favor of the assessee, confirming that Section 80P(4) applies to co-operative banks and not credit co-operative societies, as per the specific provisions and legislative intent outlined in the Income Tax Act.