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TMI Blog2015 (11) TMI 647X X X X Extracts X X X X X X X X Extracts X X X X ..... quires the inclusion of profits and gains of any business of banking (including providing credit facilities) carried on by a cooperative society. Reference was made to the Explanation appended to Section 80 P (4) - which lays down that a co-operative bank and a primary agricultural credit society, shall have the same meaning assigned to them in Part V of the Banking Regulation Act, 1949 (Hereinafter referred to as the 'BR Act', for brevity.) It was held that the Bye -laws of the Assessee indicated that their primary object was transactions that were apparently in the nature of banking. In that, the assessee was receiving deposits from its members and providing loans to other members and hence it satisfied all the three conditions contemplated under Section 56 (ccv) of the BR Act. For this premise, the Assessing Officer had proceeded on the basis that a primary co-operative bank, meant a Co-operative Society. Therefore, the Assessing Officer held that the respondent - society being a primary co4 operative bank, was not eligible for deduction under Section 80 P of the IT Act. 3. The respondent - Society had then preferred an appeal before the Commissioner of Income Tax (App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred 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 (ii) x x x x x (iii) x x x x x x x x x x (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 cooperative agricultural and rural development bank. Explanation.-- For the purposes of this subsection, (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.]" "Section 56 of the BR Act:- Act to apply to co-operative societies subject to modifications. -The provisions of this Act, as in force for the time being, shall apply to, or in relation to, cooperative societies as they apply to, or in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-scribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose; (ccv) "primary co-operative bank" means a cooperative society, other than a primary agricultural credit society,- (1) the primary object or principal business of which is the 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 sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such cooperative bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose; (ccvi) "primary credit society" means a cooperative society, other than a primary agricultural credit society,- (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are 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: Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the said section with reference to Part V of the Banking Regulation Act, 1949. However, if an assessee society does not fulfill any of the above three conditions as defined under Section 5(ccv) of Banking Regulation Act, 1949, it cannot be treated as a 'primary co-operative bank' and as such will be eligible to get the deduction under Section 80P(2)(a)(i) Attention is also drawn to the relevant portion of the Finance Minister's Budget Speech explaining the reasons for withdrawal of tax benefits to some Societies by way of insertion of sub-section 80P(4) and insertion of new sub-clause (viia) in clause (24) of Section 2 definition of "income" by the Finance Act, 2006, with effect from 1.4.2007, is as under: "The Co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefits. It is, therefore proposed to amend section 80P by inserting a new sub-section (4) so as to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than primary credit society or a primary co-operative agricultural and rural development bank. It is also proposed to define the expressions "co-operativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultural and rural development activities. Part V of the Banking Regulation Act, 1949, section 5(cci): In order to examine in a given case of an assessee society whether it is a co-operative bank or not as defined in Part V of the Banking Regulation Act, 1949, of the said Act has to be looked into. Section 5(cci) states as under: "Co-operative bank" means a state co-operative bank, a central co-operative bank and a primary cooperative bank." The primary co-operative bank is defined under Section 5(ccv) of the BR Act as under: ""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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... society as a member. Proposition: Referring to the bye-laws of the assessee society, the Tribunal has observed that the Societies registered under the Karnataka Societies Registration Act, 1960 are allowed to become members. The Tribunal had failed to appreciate that a society registered under the Karnataka Societies Registration Act, 1960 is established or created for different purposes and cannot be treated as that of the one registered under the Karnataka Cooperative Societies Act, 1959 or that registered under the Karnataka Souhardha Sahakari Co-operative Societies Act, 1997. Proposition: The issue is covered by the decision of a Division Bench of this Hon'ble Court in the case of Sri. Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, Bagalkot in ITA No.5006/2013 dated 5th February 2014: The substantial question of law pleaded on behalf of the Revenue in the said case was as follows: "In the facts and circumstances of this case, whether the Revisional Authority was justified in invoking his power under Section 263 of the Act without the foundational fact of assessee being cooperative bank was not there?" It is pointed out that this Court, in the above case, had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under the Income Tax Act, for carrying on banking business and if the required licence is not obtained as per other laws, it can only be termed as an illegal banking business under a particular statute prescribing the same. Income Tax Act, however is concerned with the taxing of "income" as per the provisions of the Income Tax Act and "income" if any, has to be taxed whether it is from a legal or illegal business. Hence, it is contended by the learned counsel that, by the insertion of Section 2(24(viia) and Section 80P(4), by adopting the words 'primary co-operative bank' means a co-operative society other than ...' in clause (ccv) of BR Act, the Legislature has created a legal fiction for the purpose of taxing under certain circumstances, a Society which is to be treated as a 'bank' for the purposes of the Income Tax Act, 1961 while dealing with the issue of its claim of deduction under Section 80P. Further, when a Statute enacts that something shall be deemed to be treated as something else, which in fact is not true, the Court shall appreciate and ascertain for what purposes the statutory fiction is resorted and then give full effect to the statutory f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with approval the following differences between a co-operative society and a co-operative bank - as depicted by the Tribunal, in tabular form thus :- Nature Co-operative society registered under Banking Regulation Act, 1949 Co-operative Society registered under Karnataka Cooperative Society Act, 1959 Registration Under the Banking Regulation Act, 1949 and Co-operative Societies Act, 1959 Co-operative Societies Act, 1959 Nature of business 1. As defined in Section 6 of Banking Regulation Act. 2. Can open savings bank account, current account, overdraft account, cash credit account, issue letter of credit, discounting bills of exchange, issue cheques, demand drafts (DD), Pay orders, Gift cheques, lockers, bank guarantees etc. 3. Co-operative Banks can act as clearing agent for cheques, DDs, pay orders and other forms. 4. Banks are bound to follow the rules, regulations and directions issued by Reserve Bank of India (RBI). 1. As per the bye laws of the co-operative society. 2. Society cannot open savings bank account, current account, issue letter of credit, discounting bills of exchange, issue cheque, demand drafts, pay orders, gift cheques, lockers, bank guarantees et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the point of law as to the entitlement of deduction under Section 80 P (2) (a) (i) in so far as the assessee is concerned, would have to be held in its favour. He would contend that all co-operative banks may be cooperative Societies, but all co-operative Societies are not necessarily co-operative banks. It is further contended that the activity of "banking", is defined under Section 5 (b) of the BR Act as follows : "5(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise; It is asserted that the assessee did not carry on any such activity. And if they did carry on any such activity, it would be illegal and becomes subject to the rigour of Section 37 of the BR Act. It is further contended that even if there was a disputed question as to whether the assessee was indeed a cooperative bank. The authorities under the IT Act were not competent and did not have the jurisdiction to arrive at a finding in that regard and attention is drawn to the Explanation appended to clause (ccvi ) to Section 56 of the BR Act, which reads as follow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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