2015 (2) TMI 1022 - AT - Income Tax

Assessee entitled to deduction for income from banking services under Section 80P(2)(a)(i)

The Belgaum Taluka Rural Industrial Co-operative Society Versus Income Tax Officer

The Tribunal held that the assessee, not being a co-operative bank, was entitled to the deduction under Section 80P(2)(a)(i) for income earned from its ... Entitlement to deduction u/s 80P(2)(a)(i) - Held that:- As it is apparent that if the co-operative society complied with all the three conditions; firstly that the primary object or principle business transacted by it is a banking business, secondly, the paid up share capital and reserve of which are 1 lakh or more and thirdly, by laws of the co-operative society do not permit admission of any other co-operative society as a member, it will be regarded to be primary co-operative bank. If co-operative society does not fulfil any of the conditions, it cannot be regarded to be a primary co-operative bank. Therefore, in the case of the Assessee we have to examine on the basis of the facts and materials on record whether the Assessee co-operative society complies with all the three conditions. In case, it does not comply with all the three conditions, it cannot be regarded to be a co-operative bank and the provisions of Sec. 80P(4), in our opinion, will not be applicable in the case of the Assessee. Since the Assessee cannot be regarded to be a primary co-operative bank, therefore, 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). We, therefore, set aside the order of CIT(A) and allow deduction to the Assessee u/s 80P(2)(a)(i). - Decided in favour of assessee. Issues Involved:1. Entitlement to deduction under Section 80P(2)(a)(i) of the Income Tax Act.2. Applicability of Section 80P(4) introduced by the Finance Act, 2006.Detailed Analysis:1. Entitlement to Deduction under Section 80P(2)(a)(i):The primary issue in the appeal is whether the assessee, a co-operative society, is entitled to a deduction under Section 80P(2)(a)(i) of the Income Tax Act. This section allows a co-operative society engaged in the business of banking or providing credit facilities to its members to deduct the whole amount of profits and gains from such activities.The Tribunal noted that Section 80P(2)(a)(i) was not amended after the introduction of Section 80P(4). Therefore, a co-operative society engaged in banking or providing credit facilities to its members continues to be eligible for the deduction under Section 80P(2)(a)(i).2. Applicability of Section 80P(4):Section 80P(4) was introduced to deny the deduction to co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal highlighted that for Section 80P(4) to apply, the entity must be a co-operative bank as defined under Part V of the Banking Regulation Act, 1949.The Tribunal examined whether the assessee qualifies as a primary co-operative bank. The definition under Section 5(ccv) of the Banking Regulation Act requires:1. The primary object or principal business to be the transaction of banking business.2. Paid-up share capital and reserves of not less than one lakh rupees.3. Bye-laws that do not permit the admission of any other co-operative society as a member.Upon examining the assessee's bye-laws, the Tribunal found that the primary object was not the transaction of banking business as defined under Section 5(b) of the Banking Regulation Act. The assessee's activities were limited to its members and did not involve accepting deposits from the public, a key aspect of banking business. Therefore, the first condition was not satisfied.While the second condition regarding the paid-up share capital was met, the third condition was not satisfied as the bye-laws permitted the admission of other co-operative societies as members, as mandated by Section 16 of The Karnataka State Co-operative Societies Act, 1959.Since the assessee did not fulfill all three conditions, it could not be regarded as a primary co-operative bank. Consequently, Section 80P(4) was not applicable, and the assessee remained eligible for the deduction under Section 80P(2)(a)(i).Conclusion:The Tribunal concluded that the assessee, not being a co-operative bank, was entitled to the deduction under Section 80P(2)(a)(i) for income earned from its members through banking and credit facilities. The order of the CIT(A) was set aside, and the assessing officer was directed to allow the deduction.Final Order:The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 11.02.2015.