2014 (3) TMI 293 - AT - Income Tax

Assessee entitled to deduction under Section 80P(2)(a)(i) as Tribunal rules against primary co-operative bank classification.

The Tribunal determined that the assessee, a co-operative society, could not be classified as a primary co-operative bank, making Section 80P(4) ... Disallowance u/s 80P(2)(a)(i) of the Act – Co-operative society - 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 – Held that:- Held that:- None of the aims and objects allows the Assessee co-operative society to accept deposits of money from the public for the purpose of lending or investment - until and unless this condition is satisfied, it cannot be said that the prime object or principal business of the Assessee is banking business - 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, 1949 for becoming primary co-operative bank - if the business of the Assessee is limited only to the members and even if it is a banking business, the Assessee will be entitled for deduction u/s 80P(2)(a)(i). There is no dispute that the paid up share capital and reserves in the case of the Assessee is more than Rs. 1 lac. - Sec. 16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member - Assessee did not file copy of its bye-laws - neither are the provisions of Sec. 17 of The Karnataka State Co-operative Societies Act, 1959 - Therefore, we are unable to give a finding whether the Assessee complies with the third condition but since the Assessee did not comply with the first condition - the Assesse cannot be regarded to be a primary co- operative bank - Since the Assessee cannot be regarded to be a primary co-operative bank – thus, it cannot be a co-operative bank and therefore the provisions of Sec. 80P(4) are not applicable in the case of the Assessee and Assessee shall be entitled for deduction u/s 80P(2)(a)(i) – thus, the order of the CIT(A) set aside – Decided in favour of Assessee. Issues Involved:1. Disallowance of deduction under Section 80P(2)(a)(i) of the Income Tax Act.2. Classification of the assessee as a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949.3. Applicability of the Banking Regulation Act, 1949, and the Karnataka Co-operative Societies Act.4. Acceptance of deposits from the general public versus members.5. Entitlement to deduction under Section 80P(2)(a)(i) for providing credit facilities to members.6. Impact of Section 2(24)(viia) on the deduction under Section 80P(2)(a)(i).7. Application of Section 80P(4) to co-operative societies versus co-operative banks.8. Exemption of income on the grounds of mutuality.Detailed Analysis:1. Disallowance of Deduction under Section 80P(2)(a)(i):The primary issue revolves around the disallowance of the deduction claimed by the assessee under Section 80P(2)(a)(i). The assessee, a co-operative society, declared a gross total income of Rs. 18,10,916 and claimed deductions under this section, resulting in a net taxable income of 'nil'. The Assessing Officer (AO) disallowed this deduction, categorizing the assessee as a primary co-operative bank, thus invoking the provisions of Section 80P(4).2. Classification as a Primary Co-operative Bank:The AO and CIT(A) classified the assessee as a primary co-operative bank under Section 5(ccv) of the Banking Regulation Act, 1949. This classification was pivotal because Section 80P(4) denies deductions to co-operative banks, excluding primary agricultural credit societies and primary co-operative agricultural and rural development banks. The Tribunal had to determine if the assessee met the criteria to be classified as a primary co-operative bank, which includes:- The primary object or principal business being the transaction of banking business.- Paid-up share capital and reserves not less than one lakh rupees.- Bye-laws not permitting the admission of any other co-operative society as a member.3. Applicability of the Banking Regulation Act, 1949, and the Karnataka Co-operative Societies Act:The assessee argued that it is governed by the Karnataka Co-operative Societies Act and not the Banking Regulation Act, 1949. The Tribunal acknowledged that the activities of the assessee were confined to its members and did not involve the public at large, thus not constituting banking business as per the Banking Regulation Act, 1949.4. Acceptance of Deposits from the General Public:The Tribunal examined whether the assessee accepted deposits from the general public. The assessee's bye-laws indicated that deposits were accepted only from its members to meet their financial requirements and provide credit facilities. This was crucial in determining whether the assessee's primary object was banking business.5. Entitlement to Deduction under Section 80P(2)(a)(i):The Tribunal held that Section 80P(2)(a)(i) allows deductions for co-operative societies engaged in providing credit facilities to their members. Since the assessee's activities were limited to its members, it was entitled to the deduction under this section, provided it was not classified as a co-operative bank.6. Impact of Section 2(24)(viia) on Deduction under Section 80P(2)(a)(i):The Tribunal noted that the insertion of clause (viia) in Section 2(24) did not alter the position regarding the deduction under Section 80P(2)(a)(i) for co-operative credit societies engaged in providing credit facilities to their members.7. Application of Section 80P(4):The Tribunal clarified that Section 80P(4) applies only to co-operative banks and not to co-operative societies. Since the assessee did not meet all the conditions to be classified as a primary co-operative bank, Section 80P(4) was not applicable. The Tribunal emphasized that a co-operative society engaged in banking activities for its members does not automatically become a co-operative bank.8. Exemption on Grounds of Mutuality:The assessee also claimed that its income was exempt on the grounds of mutuality. The Tribunal did not delve deeply into this issue, as it had already concluded that the assessee was entitled to the deduction under Section 80P(2)(a)(i).Conclusion:The Tribunal concluded that the assessee could not be classified as a primary co-operative bank and hence, the provisions of Section 80P(4) were not applicable. Consequently, the assessee was entitled to the deduction under Section 80P(2)(a)(i). The appeals filed by the assessee were allowed, and the order of the CIT(A) was set aside.