2016 (1) TMI 573 - AT - Income Tax

Deduction u/s 80P - CIT(A) allowed the claim even thought the assessee carries on banking business/other business in the name of credit co-operative society - Held that - Commissioner of Income Tax (Appeals) has already examined the expenditure account of the assessee. The assessee received interest of ₹ 16,74,584/- on fixed deposits and no other interest income from FDs was credited. In the balance sheet, the accrued interest, as on 31/03/2010, on FDs, was shown at ₹ 30,46,494/- whereas as on 31/03/2009, it was ₹ 23,90,648/-. The interest has been received either from a schedule bank or a cooperative bank. No interest income has been received by the assessee from its investment in a cooperative society. In the present appeal, the assessee has invested statutory reserved funds in fixed deposits with schedule banks/cooperative banks. Such reserves funds are either surplus funds or which cannot be utilized or appropriated by the assessee for its day to day activities including granting of loan to its members, meaning thereby, such reserve funds has to be invested only for the highly restricted purposed as mentioned in the bye laws of the assessee society. - Decided against revenue

Summary

Issues Involved:
1. Deduction under Section 80P of the Income Tax Act, 1961.
2. Applicability of Section 80P(4) and sub-clause (viia) to Section 2(24) introduced by Finance Act, 2006.
3. Distinction between a credit co-operative society and a co-operative bank.
4. Interpretation of the term "banking business" under the Banking Regulation Act, 1949.

Detailed Analysis:

1. Deduction under Section 80P of the Income Tax Act, 1961:
The Revenue challenged the decision of the First Appellate Authority, Mumbai, which allowed the assessee to claim a deduction under Section 80P of the Income Tax Act, 1961. The assessee, a credit co-operative society, claimed exemption of Rs. 80,98,490/- under Section 80P(2)(a)(i) of the Act. The Assessing Officer (A.O.) denied this claim, citing that the insertion of Section 80P(4) by Finance Act, 2006, disqualified co-operative banks from such deductions. However, the First Appellate Authority disagreed, stating that the assessee was not a co-operative bank but a credit co-operative society, thus eligible for the deduction.

2. Applicability of Section 80P(4) and sub-clause (viia) to Section 2(24) introduced by Finance Act, 2006:
The A.O. interpreted that after the insertion of Section 80P(4), the exemption under Section 80P would not be available to any co-operative bank other than primary agricultural credit societies or primary co-operative agricultural and rural development banks. This interpretation was based on the combined reading of Section 2(24)(viia) and Section 80P of the Act. The First Appellate Authority, however, held that the assessee's activities did not fall under the definition of "banking activities" as per the Banking Regulation Act, 1949, and thus Section 80P(4) was not applicable.

3. Distinction between a credit co-operative society and a co-operative bank:
The Tribunal referred to multiple judicial precedents, including the Gujarat High Court's decision in CIT vs. Jafari Momin Vikas Co-op Credit Society Ltd. and the Karnataka High Court's decision in CIT vs. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha. Both judgments clarified that Section 80P(4) applies only to co-operative banks and not to credit co-operative societies. The Tribunal affirmed that the assessee was a credit co-operative society, not a co-operative bank, and therefore, Section 80P(4) did not apply.

4. Interpretation of the term "banking business" under the Banking Regulation Act, 1949:
The First Appellate Authority and the Tribunal both concluded that the assessee's activities were limited to its members and did not constitute "banking business" as defined under the Banking Regulation Act, 1949. The Tribunal noted that the assessee's primary activities were providing credit facilities to its members, which did not amount to banking business. The Tribunal also emphasized that the assessee did not possess a license from the Reserve Bank of India to carry on banking business, further supporting the conclusion that it was not a co-operative bank.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the First Appellate Authority's decision to allow the assessee's claim for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Tribunal affirmed that Section 80P(4) did not apply to credit co-operative societies, and the assessee's activities did not constitute banking business under the Banking Regulation Act, 1949. The Tribunal relied on judicial precedents and the Central Board of Direct Taxes Circular No. 133 of 2007 to support its decision.