2014 (3) TMI 1203 - AT - Income Tax

Credit society not eligible for tax deduction as primary cooperative bank under Banking Regulation Act

Shri Mallikarjun Co-operative Credit Society Ltd. Versus Commissioner of Income Tax (Appeals), Belgaum

The Tribunal concluded that the assessee, a cooperative credit society, qualifies as a primary cooperative bank under the Banking Regulation Act, 1949. As ... Deduction u/s 80P - Assessee is a co-operative society registered under the Karnataka State Co-operative Societies Act - whether assessee carrying out the banking activities? - AO while denying the deduction u/s 80P(2)(a)(i) took the view that the Assessee is a primary co-operative bank and therefore provisions of Sec. 80P(4) are applicable in the case of the Assessee - whether the Assessee is a co-operative bank or not? - Whether co-operative society compiling with first condition of primary object or principle business transacted by it is a banking business? - HELD THAT:- It is not necessary that the co-operative society should have a banking licence as per the definition under the Income Tax Act for carrying on banking business. If licence is not obtained it may be an illegal banking business under the other statute. What we have to see whether the nature of the business carrying on by the assessee is a banking business or not. The Income Tax in our opinion is not concerned whether the banking business carried on by the assessee is legal or illegal. 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. If we look into chapter III of the bye-laws which consists of fund of the society, we noted that the types of the deposits which the assessee has accepted as per bye-laws 7 are the same as are being accepted during the course of the carrying out the banking activities. Paid up share capital and reserve of which are 1 lakh or more - So far as the second condition is concerned, there is no dispute that the paid up share capital and reserves in the case of the Assessee is more than Rs. 1 lac. Therefore, the Assessee satisfies the second condition. 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 - So far as the third condition is concerned, we noted that Sec. 16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member - in case the rules and bye-laws of the other co-operative society provides otherwise, the co-operative society may not be admitted as a member of the co-operative society. The person, as per sub-section (2), must be qualified for becoming member not only u/s 16(1) but also as per the rules and bye-laws of the co-operative society. We cannot read sub-section (2) in the manner that the rules and bye-laws cannot permit the admission of any other co-operative society as a member of the co-operative society. Had that been the intention of the legislature, they would have not used the words “this Act, rules and bye-laws” in sub-section (2). Qualification of Membership - Condition for completing 18 years of age cannot be imposed for co-operative society. This condition can be applied only to an individual. From this, it is apparent that the bye-laws of society does not permit the admission of any other co-operative society as member. Thus the third condition for becoming primary co-operative bank is also complied with. Since the assessee society complies with all the three conditions, therefore, in our opinion the assessee society becomes a primary co-operative bank and in view of explanation (a) of section 80P(4) it has to be regarded as a co-operative bank and is hit by section 80P(4). Section 80P(2)(a)(i) nowhere talks of co-operative credit society and therefore the distinction made under the Banking Regulation Act cannot be imported u/s 80P(2)(a)(i). Assessee has to be regarded to be a primary co-operative bank as all the three basic conditions are complied with, therefore, it is a co-operative bank and the provisions of Sec. 80P(4) are applicable in the case of the Assessee and Assessee is not entitled for deduction u/s 80P(2)(a)(i). We, therefore, confirm the order of the CIT(A) not allowing deduction u/s 80P(2)(a)(i) to the assessee. - Decided against assessee. Issues Involved:1. Whether the assessee, a co-operative credit society, qualifies as a primary co-operative bank.2. Applicability of Section 80P(4) of the IT Act to the assessee.3. Interpretation of the definition of income under Section 2(24)(viia) of the IT Act.4. Understanding the legislative intent behind Section 80P(4).5. Applicability of the Banking Regulation Act, 1949, and RBI licensing policy to the assessee.6. Consideration of previous decisions by appellate authorities favoring the appellant society.7. Addition of commission paid to Pigmy Agents without TDS.8. Initiation of penal provisions under Section 271(1)(c) of the IT Act.Issue-wise Detailed Analysis:1. Whether the assessee qualifies as a primary co-operative bank:The Tribunal examined whether the assessee, a co-operative society, meets the criteria of a primary co-operative bank as defined under Section 5(ccv) of the Banking Regulation Act, 1949. The three conditions for being a primary co-operative bank are:- The primary object or principal business is the transaction of banking business.- The paid-up share capital and reserves are not less than one lakh rupees.- The bye-laws do not permit the admission of any other co-operative society as a member.The Tribunal found that the assessee accepted deposits from both members and non-members, satisfying the first condition. The second condition was undisputedly met as the paid-up share capital exceeded one lakh rupees. The third condition was also met as the bye-laws did not permit other co-operative societies as members. Thus, the Tribunal concluded that the assessee qualifies as a primary co-operative bank.2. Applicability of Section 80P(4) of the IT Act: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 since the assessee qualifies as a primary co-operative bank, it falls under the purview of Section 80P(4) and is not entitled to the deduction under Section 80P(2)(a)(i).3. Interpretation of the definition of income under Section 2(24)(viia):The Tribunal did not find this issue directly relevant to the determination of the assessee's status as a primary co-operative bank or the applicability of Section 80P(4).4. Understanding the legislative intent behind Section 80P(4):The Tribunal emphasized that Section 80P(4) was introduced to exclude co-operative banks from the benefits of Section 80P, except for primary agricultural credit societies and primary co-operative agricultural and rural development banks. The Tribunal interpreted the legislative intent as aiming to distinguish between co-operative banks and other co-operative societies providing credit facilities to their members.5. Applicability of the Banking Regulation Act, 1949, and RBI licensing policy:The Tribunal noted that the assessee's activities fell within the definition of banking under the Banking Regulation Act, 1949, as it accepted deposits from the public and provided loans. The Tribunal clarified that the absence of a banking license does not affect the nature of the business for tax purposes.6. Consideration of previous decisions by appellate authorities:The Tribunal reviewed several decisions cited by the assessee, including those of the Bangalore and Panaji Benches and the Gujarat and Karnataka High Courts. However, the Tribunal found that these decisions did not alter the conclusion that the assessee qualifies as a primary co-operative bank under the specific facts and circumstances of the case.7. Addition of commission paid to Pigmy Agents without TDS:The Tribunal did not address this issue in detail, focusing primarily on the applicability of Section 80P(4) and the assessee's status as a primary co-operative bank.8. Initiation of penal provisions under Section 271(1)(c):The Tribunal did not address this issue in detail, as the primary focus was on the applicability of Section 80P(4) and the assessee's status.Conclusion:The Tribunal concluded that the assessee qualifies as a primary co-operative bank and is therefore subject to the provisions of Section 80P(4), making it ineligible for the deduction under Section 80P(2)(a)(i). The appeals filed by the assessee were dismissed.