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TMI Blog2014 (9) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... k – Held that:- If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co-operative society, it will not be eligible for deduction u/s 80P(2)(a)(i) on the income which it derives from carrying on the activities not relating to its members - where a co-operative society is engaged in carrying on business of banking facilities to its 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. Once the Assessee will not fall within the provisions of Sec. 80P(4), the Assessee, will be eligible to get deduction u/s 80P(2)(a)(i) in respect of whole of the income which the Assessee derives from carrying on the business of banking or providing credit facilities to its members - The Assessee did not file copy of its bye-laws before us; neither are the provisions of Sec. 17 of The Karn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at ₹ 4,24,500/-. The AO while denying the deduction to the Assessee u/s 80P(2)(a)(i) took the view that the Assessee is a primary co-operative bank and therefore provisions of Sec. 80P(4) are applicable in the case of the Assessee. The Assessee went in appeal before the CIT(A). CIT(A) dismissed the appeal of the Assessee. 2.1 The Assessee filed the following written submission : The issue in appeal relates to interpretation of the word 'banking' with reference to the business of co-operative credit societies. When section 80P(4) is analyzed, it takes into its ambit the cooperative bank and for this purpose the definition is borrowed from Banking Regulation Act. In this definition under Banking Regulation Act, co-operative bank is defined to be a central co-operative bank, a state co-operative bank or a primary co-operative bank. To be a Primary co-operative bank the first very stipulation is that it should be carrying on business of banking. This fact of carrying on the business of banking is a pre-requisite to designate itself as a primary co-operative bank. As such the term banking business has to be properly analyzed and considered. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rg Q.No 2 NBFCs are doing functions similar to banks. What is difference between banks NBFCs? Ans. NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below: i. NBFC cannot accept demand deposits; ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself; iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. 5. In the website of NABARD, the comments are offered on Banking Regulation Act as applicable to societies. Therein also there is a mention about the role of co-operative credit societies. While interpreting sec. 5(b) of Banking Regulation Act which defines the term banking, it is categorically stated that merely because the societies are required to advance loans to their members, they do not cease to be co-operative societies governed by the Act nor can they be treated as banking companies. The activities cannot amount to banking as the societies are not established for the purpose of doing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks doing banking business. In explanatory notes and other relevant discussions, there is only a reference about bringing the co-operative banks at par with that of nationalized. 10. The definition of primary co-operative bank also states a situation where the bye laws of the society should not permit admission of any other co-operative society as member. In our case, any person eligible to enter into a contract under Indian contract Act is eligible for membership. The term 'any person is eligible to enter into a contract' takes into its ambit a co-operative society as well. We draw your kind attention and rely on a decision of Hon'ble Allahabad High Court in State of Uttar Pradesh v. Kanhalyalal Makund AIR 1956 ALL 383(copy enclosed). In this judgement, the lordships have held that the greater part of modern industry and commerce is founded on contracts and unincorporated bodies habitually enter into contracts thus holding that the word person should not be given a restricted meaning. 11. In our case, our bye laws do not prohibit the membership to any other co-operative society. Taking into consideration the availability of membership to any person eli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely : (a) in the case of a co-operative society engaged in (i) carrying on the business of banking or providing credit facilities to its members, or the whole of the amount of profits and gains of business attributable to any one or more of such activities. 80P(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation. For the purposes of this sub-section, (a) co-operative bank and primary agricultural credit society shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) primary co-operative agricultural and rural development bank means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.' From the plain reading of Sec. 80P(2)(a)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. In case it is found that the Assessee is a co-operative bank, the Assessee will not be entitled for deduction as stipulated u/s 80P(2)(a)(i) but in case the Assessee is not a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the provisions of Sec. 80P(2)(a)(i) will be applicable to the Assessee provided the Assessee is engaged in carrying on business of banking or providing credit facilities to its members. 2.3.1 In our opinion, Sec. 80P(2)(a)(i) provides two types of activities in which the co-operative society must be engaged to be eligible for deduction under sub-clause (i). These two activities are not alternate ones because the section allows deduction to the co-operative society on the whole of profits and gains of business attributable to any one or more of such activities. This pre-supposes that eligible co-operative societ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such Co-operative society out of funds provided by the State Government for the purpose.' 2.3.5 From the aforesaid definition, it is apparent that if the co-operative society complied with all the three conditions; firstly that the primary object or principle business transacted by it is a banking business, secondly, the paid up share capital and reserve of which are 1 lakh or more and thirdly, by laws of the co-operative society do not permit admission of any other co-operative society as a member, it will be regarded to be primary co-operative bank. If co- operative society does not fulfil any of the conditions, it cannot be regarded to be a primary co-operative bank. Therefore, in the case of the Assessee we have to examine on the basis of the facts and materials on record whether the Assessee co-operative society complies with all the three condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, and withdrawable by cheque, draft, order or otherwise.' From the said definition it is clear that banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment. These deposits must be accepted from the public, not only from the members. These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise. We noted that the Assessee has categorically accepted before the authorities below that the Assessee was accepting deposits of money not only from the members but also from the general public. The relevant confirmation of the Assessee is re-produced as under : We admit and state that our society admits and accept deposits from Regular members as A class member having voting rights, other members as nominal members having no voting rights. We also admit members as nominal members who do not have voting rights. The society also accepts deposits from General Public also. The deposits so accepted are used by the Assessee co-op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefor 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 person who is qualified to become member under the provisions of this Act, rules and bye-laws. This clearly proves that in case the rules and bye-laws of the other co-operative society provides otherwise, the co-operative society may not be admitted as a member of the co-operative society. The person, as per sub-section (2), must be qualified for becoming member not only u/s 16(1) but also as per the rules and bye-laws of the co-operative society. We cannot read sub-section (2) in the manner that the rules and bye-laws cannot permit the admission of any other co-operative society as a member of the co-operative society. Had that been the intention of the legislature, they would have not used the words this Act, rules and bye-laws in sub-section (2). 2.3.7 The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Gujarat High Court in the case of CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. [Tax Appeals nos. 442 443 of 2013] vide order dt. 15.1.2014] took the view that Sec. 80P(4) will not apply to a society which is not a co-operative bank. In the case of Vyavasaya Seva Sahakara Sangha v. State of Karnataka [1993] 76 Comp. Cas. 278 (Kar.) we noted that the issue before the Hon'ble High Court in the Writ Petition filed by the Petitioner related to the legislative competence of the State Legislature for issuing a circular. The issue does not relate to the claim of deduction u/s 80P(2)(a)(i). While dealing with this issue, the Hon'ble High Court under para 12 observed as under : 12. It is not possible to accept this contention. The petitioners are not the banking institutions coming under the purview of the Banking Regulation Act. They are the co-operative societies registered under the Act, and as such they are governed by the provisions of the Act passed by the State Legislature. Consequently, the State Government has control over them to the extent the Act permits. Major activities of the petitioners are to finance its members. For the purpose of financing its ..... X X X X Extracts X X X X X X X X Extracts X X X X
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