2014 (7) TMI 1317 - AT - Income Tax

Co-op society not a bank under Banking Reg Act, qualifies for tax deduction for providing banking services.

Athani Taluka Primary Teachers Co-operative Credit Society Ltd Versus The Income Tax Officer, Ward – 1 (1), Belgaum.

Athani Taluka Primary Teachers Co-operative Credit Society Ltd Versus The Income Tax Officer, Ward – 1 (1), Belgaum. - TMI Issues Involved:1. Applicability of Section 80P(2)(a)(i) for deduction to the assessee.2. Applicability of Section 80P(4) and whether the assessee is considered a co-operative bank.3. Compliance with conditions defining a primary co-operative bank under the Banking Regulation Act, 1949.Issue-wise Detailed Analysis:1. Applicability of 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) of the Income Tax Act, 1961, which allows deduction for co-operative societies engaged in carrying on the business of banking or providing credit facilities to its members. The Assessing Officer (AO) denied this deduction, treating the assessee as a primary co-operative bank, thus invoking Section 80P(4) which disallows such deductions to co-operative banks. The CIT(A) upheld the AO's decision.2. Applicability of Section 80P(4):The assessee contended that it is not a co-operative bank but a co-operative society, and thus, Section 80P(4) should not apply. Section 80P(4) was introduced to deny deductions to co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks. The Tribunal had to determine whether the assessee qualifies as a co-operative bank under this section.3. Compliance with Conditions Defining a Primary Co-operative Bank:To classify as a primary co-operative bank under Section 5(CCV) of the Banking Regulation Act, 1949, a co-operative society must:- Have the primary object or principal business of transacting banking business.- Have a paid-up share capital and reserves of not less than one lakh rupees.- Have bye-laws that do not permit admission of any other co-operative society as a member.The Tribunal examined the assessee's bye-laws and activities. It was found that:- The primary object of the assessee was to improve the financial position of its members and not to transact banking business as defined under the Banking Regulation Act.- The assessee did not accept deposits from the public but only from its members, which does not qualify as banking business.- The paid-up share capital and reserves were more than one lakh rupees, satisfying the second condition.- The bye-laws did not permit the admission of any other co-operative society as a member, fulfilling the third condition.Since the assessee did not meet all three conditions, it was not considered a primary co-operative bank. Consequently, Section 80P(4) did not apply, and the assessee was entitled to the deduction under Section 80P(2)(a)(i).Conclusion:The Tribunal concluded that the assessee is not a primary co-operative bank and thus not subject to the restrictions of Section 80P(4). Therefore, the assessee is entitled to the deduction under Section 80P(2)(a)(i) for income generated from providing banking or credit facilities to its members. The appeal filed by the assessee was allowed, and the order of the CIT(A) was set aside. The assessing officer was directed to allow the deduction to the assessee under Section 80P(2)(a)(i).