Primary co-operative bank test under section 80P: society remained eligible for deduction on member-based banking income

A co-operative society is excluded from deduction only if it satisfies all conditions of a primary co-operative bank under section 5(ccv) of the Banking Regulation Act, including principal business as banking, minimum paid-up share capital and reserves, and bye-laws barring admission of other co-operative societies as members. On the facts, the society dealt only with members, did not accept deposits from non-members, and its bye-laws allowed other co-operative societies to become members, so it did not meet the statutory test. Section 80P(4) therefore did not apply, and the society remained eligible for deduction under section 80P(2)(a)(i) on income from banking or credit facilities to its members.

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Issues: Whether the assessee society was a co-operative bank or a primary co-operative bank so as to fall within the exclusion in section 80P(4) of the Income-tax Act, 1961, and consequently whether it remained entitled to deduction under section 80P(2)(a)(i).

Analysis: Section 80P(2)(a)(i) allows deduction to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, whereas section 80P(4) withdraws the benefit only from a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. A co-operative society is a primary co-operative bank only if all the conditions in section 5(ccv) of the Banking Regulation Act, 1949 are satisfied, namely that its principal business is banking, its paid-up share capital and reserves are at least one lakh rupees, and its bye-laws do not permit admission of any other co-operative society as a member. On the facts, the society did not accept deposits from non-members, its objects and activities were confined to members, and its bye-laws permitted admission of other co-operative societies. As all the essential conditions for treatment as a primary co-operative bank were not satisfied, section 80P(4) did not apply. The society therefore continued to fall within section 80P(2)(a)(i) in respect of income attributable to banking or credit facilities provided to its members.

Conclusion: The assessee was not a co-operative bank for purposes of section 80P(4) and was entitled to deduction under section 80P(2)(a)(i).

Ratio Decidendi: A co-operative society that does not satisfy all the statutory conditions of a primary co-operative bank is not excluded by section 80P(4), and remains eligible for deduction under section 80P(2)(a)(i) on income from banking or credit facilities to its members.

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