Assessee entitled to deduction under Section 80P(2)(a)(i) for providing banking services to members.

The Tribunal concluded that the Assessee is not a primary co-operative bank and therefore not subject to Section 80P(4). The Assessee is entitled to a deduction under Section 80P(2)(a)(i) for income derived from providing banking or credit facilities to its members. The appeals filed by the Assessee were allowed, and the orders of the CIT(A) were set aside, with the assessing officer directed to allow the deduction under Section 80P(2)(a)(i).

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Issues Involved
1. Whether the Assessee is a Primary Co-operative Bank.
2. Applicability of Section 80P(4) of the IT Act to the Assessee.
3. Interpretation of Section 2(24)(viia) of the IT Act.
4. Legislative intent behind Section 80P(4).
5. Applicability of the Banking Regulation Act, 1949, and RBI Licensing Policy.
6. Consideration of previous judicial decisions favoring the Assessee.
7. Initiation of penal provisions under Section 271(1)(c) of the IT Act.

Detailed Analysis

1. Whether the Assessee is a Primary Co-operative Bank
The Assessee argued that it is a co-operative credit society registered under the Karnataka State Co-operative Societies Act, 1959, and not a co-operative bank. The primary object of the Assessee is to encourage thrift, self-help, and cooperation among its members, which is evident from its bye-laws. The Tribunal noted that the Assessee accepts deposits from members and non-members, but the primary object is not banking business as defined under Section 5(b) of the Banking Regulation Act, 1949. Therefore, the Assessee does not fulfill the conditions to be classified as a primary co-operative bank.

2. Applicability of Section 80P(4) of the IT Act to the Assessee
Section 80P(4) denies deduction to co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal held that the Assessee is not a co-operative bank as it does not meet the criteria under the Banking Regulation Act. Consequently, Section 80P(4) does not apply, and the Assessee is entitled to deduction under Section 80P(2)(a)(i).

3. Interpretation of Section 2(24)(viia) of the IT Act
The Assessee contended that Section 2(24)(viia) affects only banking institutions and not co-operative credit societies. The Tribunal did not find this argument directly relevant to the primary issue of whether the Assessee qualifies for deduction under Section 80P(2)(a)(i).

4. Legislative Intent behind Section 80P(4)
The Assessee argued that the legislative intent behind Section 80P(4) was not to tax co-operative credit societies. The Tribunal agreed, stating that the provision aims to exclude only co-operative banks from the benefits of Section 80P, not co-operative societies engaged in providing credit facilities to their members.

5. Applicability of the Banking Regulation Act, 1949, and RBI Licensing Policy
The Tribunal noted that the Assessee does not need a banking license to be considered a co-operative society under the Income Tax Act. The nature of the business, whether legal or illegal, is irrelevant for tax purposes. The Tribunal found that the Assessee's activities are not governed by the Banking Regulation Act.

6. Consideration of Previous Judicial Decisions Favoring the Assessee
The Tribunal considered various judicial decisions cited by the Assessee, including those from the Gujarat High Court and Karnataka High Court, which supported the view that co-operative societies providing credit facilities to members are not co-operative banks. The Tribunal found these decisions persuasive and applicable to the Assessee's case.

7. Initiation of Penal Provisions under Section 271(1)(c) of the IT Act
The Tribunal did not find any concealment of income by the Assessee. Therefore, the initiation of penal provisions under Section 271(1)(c) was deemed incorrect.

Conclusion
The Tribunal concluded that the Assessee is not a primary co-operative bank and hence, not subject to the provisions of Section 80P(4). The Assessee is entitled to the deduction under Section 80P(2)(a)(i) for the income derived from providing banking or credit facilities to its members. The appeals filed by the Assessee were allowed, and the orders of the CIT(A) were set aside. The assessing officer was directed to allow the deduction under Section 80P(2)(a)(i).

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