Member-based credit society not treated as a co-operative bank; section 80P deduction remains available absent primary banking status.

A co-operative society lending only to its members is not excluded from deduction under section 80P(2)(a)(i) unless it satisfies the statutory test of a primary co-operative bank under section 5(ccv) of the Banking Regulation Act, 1949. The decisive factors are whether banking business is its principal object and whether it is authorised to accept deposits from the public; member-based credit activity alone is insufficient. Although the society met the paid-up capital condition, it did not carry on banking as its principal object and therefore did not fall within section 80P(4). The Karnataka State Co-operative Societies Act, 1959 did not alter that banking-status analysis.

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Issues: Whether the assessee, a co-operative society engaged in lending to members, was a primary co-operative bank so as to be hit by section 80P(4) of the Income-tax Act, 1961, and whether it was therefore entitled to deduction under section 80P(2)(a)(i).

Analysis: Section 80P(2)(a)(i) grants deduction to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, while section 80P(4) excludes only a co-operative bank other than the specified agricultural credit institutions. The decisive question was whether the assessee satisfied the definition of a primary co-operative bank under section 5(ccv) of the Banking Regulation Act, 1949. The Court noted that the society's objects were confined to members and did not authorise acceptance of deposits from the public as contemplated by section 5(b) of the Banking Regulation Act, 1949. It further observed that although the paid-up capital condition was met, the society did not satisfy the first condition of carrying on banking business as its principal object. On the material before it, the assessee could not be treated as a primary co-operative bank, and therefore section 80P(4) did not apply. The discussion also noted that the Karnataka State Co-operative Societies Act, 1959 permitted admission of other co-operative societies as members, but that did not alter the conclusion on banking status.

Conclusion: The assessee was not a co-operative bank within the meaning of section 80P(4) and remained entitled to deduction under section 80P(2)(a)(i); the disallowance was unsustainable.

Final Conclusion: The appeals succeeded, and the assessee obtained deduction for income attributable to its member-based credit activities.

Ratio Decidendi: A co-operative society does not fall within section 80P(4) unless it satisfies the statutory test of a primary co-operative bank under the Banking Regulation Act, 1949; mere lending or credit activity confined to members does not by itself make the society a co-operative bank.

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