Cooperative Banks vs. Primary Agricultural Credit Societies: Implications for Section 80P Deduction

Comprehensive Analysis of ITAT Judgement on Deduction u/s 80P for Cooperative Societies

Reported as:

2024 (5) TMI 54 - ITAT COCHIN

Introduction

This article provides a detailed analysis of a recent judgement by the Income Tax Appellate Tribunal (ITAT) concerning the deduction u/s 80P of the Income Tax Act, 1961, for cooperative societies. The case revolves around the eligibility of a cooperative society, registered as a Primary Agricultural Credit Society (PACS) under the Kerala Cooperative Societies Act, 1969, to claim deduction u/s 80P(1) read with Section 80P(2)(a)(i) of the Act.

Arguments Presented

Assessee's Contentions

The assessee, a cooperative society established in 1961 and registered as a PACS under the Kerala Cooperative Societies Act, 1969, claimed deduction u/s 80P(1) read with Section 80P(2)(a)(i) on its entire profits and gains from business. The assessee argued that despite being registered as a PACS, it is permitted by its bye-laws to admit other cooperative societies as members, thereby not qualifying as a primary cooperative bank u/s 5(ccv) of the Banking Regulation Act, 1949 (BRA).

Revenue's Contentions

The Revenue contended that although the assessee is registered as a PACS, it is actually undertaking banking business, with only a small fraction (around 10%) of its lending being to the agricultural sector. The Revenue argued that the assessee is a cooperative bank as per the definition in the BRA and, therefore, excluded from the benefit of deduction u/s 80P by virtue of Section 80P(4) of the Act.

Discussions and Findings of the Court

Definition of Banking Business

The ITAT referred to Section 5(b) of the BRA, which defines "banking" as "the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise." The ITAT observed that the assessee's lending activities, acceptance of deposits from members and non-members, and provision of various banking services such as maintaining savings and current accounts, issuing cheques and demand drafts, and offering locker facilities, constitute banking business.

Cooperative Bank vs. Primary Agricultural Credit Society

The ITAT noted that the assessee's lending is admittedly not primarily for agricultural purposes, disqualifying it from being a PACS by definition. However, the ITAT clarified that the assessee's non-compliance with the definition of a PACS does not preclude it from claiming deduction u/s 80P(1) read with Section 80P(2)(a)(i), as the provision recognizes "banking" as an eligible activity for a cooperative society.

Definition of Cooperative Bank

The ITAT referred to Section 5(cci) and Section 5(ccv) of the BRA, which define "cooperative bank" and "primary cooperative bank," respectively. The ITAT noted the assessee's claim that its bye-laws permit the admission of other cooperative societies as members, potentially disqualifying it from being a primary cooperative bank u/s 5(ccv) of the BRA.

Analysis and Decision by the Court

The ITAT observed that the Commissioner of Income Tax (Appeals) [CIT(A)] did not address the assessee's claim regarding its bye-laws permitting the admission of other cooperative societies as members. Considering the significance of this claim in determining whether the assessee falls under the definition of a "cooperative bank" under the BRA, the ITAT restored the matter to the Assessing Officer (AO) for further examination and issuance of a definite finding.

The ITAT directed the AO to hear the assessee, examine the material adduced in support of its claims, and conduct necessary verifications to determine whether the assessee qualifies as a cooperative bank under the BRA's definition, construed strictly. The AO was instructed to determine the assessee's entitlement to exemption u/s 80P(1) read with Section 80P(2)(a)(i) accordingly.

The ITAT clarified that despite not being a PACS under the Act, the assessee is a cooperative society under the Kerala Cooperative Societies Act, 1969, satisfying the requirement of Section 2(19) of the Act, which is relevant for claiming deduction u/s 80P(1).

Comprehensive Summary

The ITAT's judgement addresses the eligibility of a cooperative society, registered as a PACS but undertaking banking activities, to claim deduction u/s 80P(1) read with Section 80P(2)(a)(i) of the Income Tax Act, 1961. The ITAT clarified that the assessee's non-compliance with the definition of a PACS does not preclude it from claiming the deduction, as the provision recognizes "banking" as an eligible activity.

However, the ITAT remanded the matter to the Assessing Officer to determine whether the assessee falls under the definition of a "cooperative bank" under the Banking Regulation Act, 1949, which would exclude it from the benefit of Section 80P by virtue of Section 80P(4) of the Act. The ITAT directed the AO to examine the assessee's bye-laws and conduct necessary verifications to issue a definite finding on the assessee's status as a cooperative bank under the BRA's definition.

The ITAT preserved the legal terminology and significant phrases from the original text, ensuring the accuracy of the analysis and adherence to the legal principles discussed.

Full Text:

2024 (5) TMI 54 - ITAT COCHIN