2014 (10) TMI 422 - AT - Income Tax

Assessee qualifies for tax deduction as non-cooperative bank: Tribunal decision under Income Tax Act

The Tribunal determined that the assessee, a co-operative society providing credit facilities to its members, is not a co-operative bank under section ... Basic deduction u/s 80P - Co-operative society registered under the Karnataka State Co- operative Societies Act – Effect of amendment - Whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) and whether the Assessee is hit by the provisions of Sec.80P(4) which was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007 - Held that:- If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co-operative society will not be eligible for deduction u/s 80P(2)(a)(i) on the income which it derives from carrying on the activities not relating to its members - where a co-operative society is engaged in carrying on business of banking facilities to its members and to the public or providing credit facilities to its members or to the public, the income which relates to the business of banking facilities to its members or providing credit facilities to its members will only be eligible for deduction u/s 80P(2)(a)(i) - There is no prohibition u/s 80P not to allow deduction to such co-operative societies in respect of business relating to its members. Status of assessee - Whether the Assessee is a co-operative bank or not – Held that:- Banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment - These deposits must be accepted from the public, not only from the members - These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise - the Assessee has categorically accepted before the authorities below that the Assessee was accepting deposits of money only from members - The income has to be assessed u/s 14 of the Income Tax Act under the same head even if the nature of the business is illegal - the types of the deposits which the assessee has accepted as per bye-laws are the same as are being accepted during the course of the carrying out the banking activities - the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac - Therefore, the Assessee satisfies the second condition - Sec.16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member. The society being a co-operative bank providing banking facilities to members is not eligible to claim deduction u/s 80P(2)(a)(i) after the introduction of sub-section (4) to section 80P - Section 80P(4) clearly excludes primary agriculture credit society from its domain - the Assessee has not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied with, therefore, it is not a co-operative bank and the provisions of Sec.80P(4) are not applicable in the case of the Assessee and Assessee is entitled for deduction u/s 80P(2)(a)(i) - the order of the CIT(A) is to be set aside and the AO is directed to allow deduction to the assessee u/s 80P(2)(a)(i) on the income generated for providing banking or credit facilities to its members – Decided in favour of assessee. Issues Involved:1. Whether the assessee is entitled to deduction under section 80P(2)(a)(i) of the Income Tax Act.2. Whether the assessee is considered a co-operative bank under section 80P(4) of the Income Tax Act.Detailed Analysis:1. Entitlement to Deduction Under Section 80P(2)(a)(i):The assessee, a co-operative society registered under the Karnataka State Co-operative Societies Act, claimed a deduction under section 80P(2)(a)(i) for the assessment year 2010-11. The Assessing Officer (AO) denied this deduction, arguing that the assessee is a primary co-operative bank and thus subject to the provisions of section 80P(4). The assessee contended that it is not a co-operative bank but a co-operative society engaged in providing credit facilities to its members. The Tribunal examined the relevant provisions and concluded that section 80P(2)(a)(i) allows deductions for co-operative societies engaged in banking or providing credit facilities to their members. The Tribunal emphasized that the activities must be limited to members for eligibility under section 80P(2)(a)(i).2. Applicability of Section 80P(4):The primary issue was whether the assessee qualifies as a co-operative bank under section 80P(4), which would disqualify it from deductions under section 80P. The Tribunal analyzed the definition of a 'co-operative bank' and 'primary co-operative bank' under the Banking Regulation Act, 1949. It was determined that for a society to be considered a primary co-operative bank, it must meet three conditions: its primary business must be banking, its paid-up share capital and reserves must be at least Rs. 1 lakh, and its by-laws must not permit the admission of any other co-operative society as a member.The Tribunal found that the assessee did not meet these conditions. Specifically:- The primary business of the assessee was not banking as it only accepted deposits from its members, not the public.- Although the assessee's paid-up share capital and reserves exceeded Rs. 1 lakh, its by-laws did not permit the admission of other co-operative societies as members, thereby fulfilling one of the conditions.- The Tribunal concluded that since the assessee did not meet all the conditions, it could not be considered a primary co-operative bank.Conclusion:The Tribunal held that the assessee is not a co-operative bank under section 80P(4) and is therefore entitled to the deduction under section 80P(2)(a)(i). The order of the CIT(A) was set aside, and the AO was directed to allow the deduction.Final Judgment:The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 22.8.2014.