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TMI Blog2014 (3) TMI 647X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. Nature of Assessee - Application of section 80P(4) of the Act on society - Whether the Assessee is a co-operative bank or not – Held that:- The Assessee did not file the copy of the bye-laws - neither are the provisions of Sec. 17 of The Karnataka State Co-operative Societies Act, 1959 - In the absence of the copy of the bye-laws we are unable to express any opinion whether the Assessee complies with the third condition or not – thus, the matter is remitted back to the AO for examination to look into the rules and bye-laws of the Assessee co-operative society – In case the AO finds that the bye-laws do not permit the admission of any other co-operative society, in our opinion, the Assessee will be regarded as a primary co-operative bank and will not be entitled for deduction u/s 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative bank. As such the term banking business has to be properly analyzed and considered. There is one important judgment of jurisdictional Karnataka High Court on the issue of the business carried on by co-operative credit societies. (Vyavasaya Seva Sahakara Sangh...vs State of Karnataka and Others, 19th March, 1990 available at http://indiankanoon.org/doc/672072/) (copy enclosed.) Their lordships (in a decision rendered by Bench) have held that these activities of co-operative credit societies can never become banking business. This judgment was delivered in the context of the co-operative credit societies challenging the decision of the State Government of Karnataka to have ceding with District Central Co-operative banks. While discussing the issue and role of co-operative credit societies, their lordships were of the opinion that the co-operative credit societies are not banks and only the state government can govern them under The Karnataka Co-op Societies Act, 1959. Their lordships also came to an important conclusion that the activities of these societies cannot be banking as contemplated under the Banking Regulation Act, 1949. (See para 10 and 12) The very similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing banking as defined in sec. 5(b) of the Banking Regulation Act. 6. We draw your kind attention to the words used in sec. 80P(2)(a)(i) which seperate banking and providing credit facilities and the section is worded as ........in the case of a co-operative society engaged- in carrying on the business of banking or providing credit facilities to its members........ This clearly brings out the two limbs wherein the enactment itself has distinguished the words business of banking with that of providing credit facilities. If the intention was not to grant deduction to all co-operatives then the section would not have been worded with these two limbs. 7. Sec. 80P talks of the deduction available from the gross total income. If the society earns the income from providing credit facilities to its members then the income is entitled for the benefit. It nowhere discusses the source of funds being accepted from members or otherwise. Therefore, we submit that the only test to be applied for 80P(2)(a)(i) is to find the income generated by providing credit facilities to its members. 8. The co-operative credit society can never issue cheques or drafts and cannot form part of any pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... society is carrying on banking business, the Assessee will not be entitled for the exemption. Reliance was placed on the decision of Hyderabad Bench of the Tribunal in the case of The Citizen Co-operative Society vs. Addl. CIT in ITA Nos. 1003/Hyd/2011 1004/Hyd/2011 dt. 2.7.2012. 2.3 We have heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below as well as the decisions and the entire material and case laws referred to before us. The question before us is whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) and 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. The relevant provisions of both the sections are re-produced for our ready reference as under : 80P.(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Sec. 80P(2)(a)(i), a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is entitled for deduction. After the insertion of Sec. 80P(4), the provisions of Sec. 80P(2)(a)(i) were not amended, rather the co- operative society engaged in carrying on business of banking facilities to its members continued to be entitled for deduction u/s 80P(2)(a)(i). This pre- supposes that every co-operative society engaged in carrying on business of banking cannot be regarded to be a co-operative bank. The embargo put u/s 80P(4) are applicable only to a co-operative bank. In our opinion, it cannot be said that a co-operative society cannot carry on business of banking facilities to its members even if it is not a co-operative bank. If we read the provisions in the manner that every co-operative society engaged in carrying on business of banking even for its members is regarded to be a co-operative bank, then, the provisions of Sec. 80P(2)(a)(i) will become redundant. Therefore, in our opinion, before deciding the issue whether the Assessee is entitled for deduction u/s 80P(2)(a)(i), it is essential to decide whether the Assessee is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion before us is whether the Assessee is a co-operative bank or not. Co-operative Bank is defined in Part V of the Banking Regulations Act, 1949 as under : Co-operative bank means a state co-operative bank, a central co-operative bank and a primary co-operative bank: 2.3.3 From the definition of Co-operative bank it is apparent that Co-operative bank means state co-operative bank, a Central Co-operative Bank and a Primary Co-operative bank. It is not the case of the revenue that the assessee is a state Co-operative bank or Central Co-operative bank. We have therefore to find whether the assessee is a primary Co-operative bank. 2.3.4 The Primary Co-operative bank is defined under section 5 clause (CCV) of Banking Regulation Act 1949 as under:- (CCV) primary co-operative bank means a co-operative society, other than a primary agricultural credit society- (1) the primary object or principal business of which is transaction of banking business: (2) the paid-up share capital and reserves of which are not less than one lakh of rupees: and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members and to construct the structures to benefit the members; 8. To implement the special programmes for financial upliftment of scheduled caste, scheduled tribes and women members; 9. To advance loan to purchase the vehicles and machines; 10. To advance loans on the security of gold and silver to the members of the society; 11. To sanction loan to the security of industrial and commercial products; 12. To provide financial activities and technical assistance to establish industries to self employed people. 13. To carry on the financial activities for the achievement of object with the prior permission of Registrar; On the basis of these objects whether it can be said that the primary object or principal business of the Assessee is transaction of banking business? Banking business has been defined u/s 5(b) of the Banking Regulation Act in the following manner : banking means 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. From the said definition it is clear that banking means accepting deposit of money from the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved by the State Government; (e) a firm, a company or any other body corporate constituted under any law for the time being in force including a society registered under the Karnataka Societies Registration Act, 1960 (Karnataka Act 17 of 1960); (f) a Market Committee established under the Karnataka Agricultural Produce Marketing (Regulation) Act, 1966 (Karnataka Act 27 of 1966); (g) a local authority. Explanation.-For the purpose of this clause, local authority means, a Municipal Corporation, Municipal Council, Town Panchayat, Zilla Panchayat, Taluk Panchayat or Grama Panchayat constituted under any law for the time being in force] (2) No co-operative society shall, without sufficient cause, refuse admission to membership to any person duly qualified therefor under the provisions of this [Act, rules and bye-laws] The aforesaid provision of Sec. 16 mandates admission of any other co- operative society as a member of the co-operative society. The word used in Sec. 16(1) is shall . This fact is clarified further by sub-section (2) as re- produced hereinabove that no co-operative society shall refuse admission to the membership, without sufficient reason, to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to members is not eligible to claim deduction u/s 80P(2)(a)(i) after the introduction of sub-section (4) to section 80P. In view of this finding, the Assessee was denied deduction u/s 80P(2)(a)(i). We have also gone through the decision of the Bangalore Bench of the Tribunal in the case of ITO vs. Divyajyothi Credit Co-operative Society Ltd. (supra) in ITA No. 72/Bang/2013. In this case, we noted that the Hon'ble Tribunal confirmed the order of CIT(A) following the decision of the Tribunal in the case of ACIT, Circle 3(1), Bangalore vs. M/s. Bangalore Commercial Transport Credit Co-operative Society Ltd. in ITA No. 1069/Bang/2010 holding that Sec. 80P(2)(a)(i) is applicable only to a co-operative bank and not to credit co-operative society. With due regards to the Bench, we are unable to find any term credit co- operative society u/s 80P(2)(a)(i) or u/s 80P(4), therefore, this decision cannot assist us. We noted that the Hon'ble Gujarat High Court in the case of CIT vs. Jafari Momin Vikas Co-op. Credit Society Ltd. in Tax Appeals no. 442 of 2013, 443 of 2013 and 863 of 2013 (supra) vide order dt. 15.1.2014 took the view that Sec. 80P(4) will not apply to a society whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e society to accept deposits of money from public for the purpose of lending or investment. In our opinion until and unless that condition is satisfied, it cannot be said that the prime object or principal business of the assessee is banking business. Therefore, the assessee will not comply with the first condition as laid down in the definition as given u/s. 5(ccv) of the Banking Regulation act, 1959 for becoming primary cooperative bank . The assessee, therefore, cannot be regarded to be primary cooperative bank and in consequence thereof, it cannot be a co-operative bank as defined under part V of the Banking Regulation Act 1949. Accordingly, in our opinion the provisions of section 80P (4) read with explanation there under will not be applicable in the case of the assessee. The assessee, therefore, in our opinion will be entitled for the deduction u/s 80P(2)(a)(i). We accordingly confirm the order of CIT(A) allowing deduction to the assessee. 2.3.9 We, therefore, in view of our aforesaid discussion set aside the order of the CIT(A) and restore the issue whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) to the file of the AO for ascertaining from the copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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