2024 (11) TMI 847 - AT - Income Tax

Deduction u/s 80P(4) - appellant is a co-operative bank - HED THAT - As the appellant CIDCO Employee co-operative credit society was registered under Maharashtra state co-operative societies Act, 1960 on 11.10.1999. According to appellant's bye laws the main objective of the appellant society is to provide credit facility among its members and the membership is restricted to its employees only. The appellant assessee society s members contribute their funds to society and same funds are given as loans on interest amongst its members only. Assessee s principal business is not banking business as it does not transact banking business with general public in India. The first and third conditions, thus do not exist in the functioning of assessee society. It is accordingly held that in absence of aforesaid two conditions, the appellant assessee does not fall under the category either of a co-operative bank or a primary co-operative bank , hence not hit by sub section 4 of section 80P of the Act. Apart from the business income, certain small portion of income of the society was earned from the interest and dividend. It appears from the profit loss A/C of paper book at page 37 that the appellant's co-operative credit society received interest income on investments and dividend income on bank shares. The investee institutions have not been questioned by the authorities below in respect of their status as co-operative societies. The total income from profit gains during the term under consideration is not disputed by the revenue. The income from interest on investment dividend is eligible for deduction u/s. 80P(2)(d) and the remaining amount received from the interest from members on deposit is attributable to assessee society s business income and is deductible u/s. 80P(2)(a)(i) - AO was thus not justified in denying the benefit of Section 80P of the Act to the assessee society. The aforesaid point is accordingly determined in favour of the assessee and against the revenue.

Issues Involved:

1. Whether the appellant CIDCO Employees Credit Society qualifies as a co-operative bank under Section 80P(4) of the Income Tax Act, 1961.
2. Whether the appellant is entitled to deductions under Section 80P(2)(a)(i) and Section 80P(2)(d) of the Income Tax Act.
3. Applicability of the Supreme Court judgment in Totgar's Co-operative Sale Society Ltd. v. ITO.
4. Determination of the nature of income and the eligibility for deductions under the provisions of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Qualification as a Co-operative Bank:
The primary issue was whether the appellant, a co-operative credit society, is considered a co-operative bank under Section 80P(4) of the Income Tax Act. The Tribunal examined the definition of a "primary co-operative bank" under Section 56(ccv) of the Banking Regulation Act, 1949, which requires three conditions: the principal business of banking, a paid-up share capital and reserves of not less than Rupees One Lakh, and bye-laws that do not permit admission of any other co-operative society as a member. The Tribunal found that while the appellant's paid-up share capital exceeded Rupees One Lakh, it did not engage in banking business with the public, nor did its bye-laws permit admission of other co-operative societies as members. Thus, the appellant did not qualify as a co-operative bank, and Section 80P(4) did not apply.

2. Entitlement to Deductions under Section 80P:
The Tribunal held that the appellant was entitled to deductions under Section 80P(2)(a)(i) and Section 80P(2)(d). It was determined that the appellant's principal business was providing credit facilities to its members and not banking with the public. The Tribunal noted that the appellant's income from interest on investments and dividends was eligible for deduction under Section 80P(2)(d), while income from interest from members on deposits was deductible under Section 80P(2)(a)(i). The Tribunal concluded that the Assessing Officer was unjustified in denying these deductions.

3. Applicability of Totgar's Co-operative Sale Society Ltd. Judgment:
The Tribunal considered the applicability of the Supreme Court's judgment in Totgar's Co-operative Sale Society Ltd. v. ITO, which was cited by the Revenue to support the disallowance of deductions. However, the Tribunal distinguished the facts of the present case from Totgar's, noting that the appellant was not engaged in marketing agricultural produce or retaining members' funds for investment, which were key aspects in Totgar's. The Tribunal relied on subsequent judgments that clarified the scope of Section 80P, emphasizing that deductions should be granted liberally to encourage the co-operative sector.

4. Nature of Income and Eligibility for Deductions:
The Tribunal examined the nature of the appellant's income, which included interest and dividends from investments. It was found that these incomes were derived from investments with other co-operative societies, making them eligible for deduction under Section 80P(2)(d). The Tribunal also noted that the appellant's income from providing credit facilities to its members was attributable to its business and deductible under Section 80P(2)(a)(i). The Tribunal directed the Assessing Officer to allow the deductions accordingly.

Conclusion:
The Tribunal allowed the appeals, setting aside the impugned orders and directing the Assessing Officer to grant the deductions under Section 80P(2)(a)(i) and Section 80P(2)(d) for the assessment years in question. The Tribunal emphasized that the appellant did not qualify as a co-operative bank, and thus Section 80P(4) was not applicable. The judgment reinforced the liberal interpretation of Section 80P to support the growth of the co-operative sector.

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