2016 (9) TMI 909 - HC - Income Tax

Clarification on Tax Benefits for Co-operative Banks vs. Credit Societies under Income Tax Act

The Court clarified that Section 80P(4) of the Income Tax Act applies only to Co-operative Banks, not credit Co-operative Societies. Entities providing ... Entitlement to deduction under Section 80P(2)(a)(i) - assessee is a Co-operative Bank mainly involved in lending credit facilities to its members - Held that:- As decided in THE COMMISSIONER OF INCOME TAX vs. SRI BILURU GURUBASAVA PATTINA SAHAKARI SANGHA NIYAMITHA, BAGALKOT [2015 (1) TMI 821 - KARNATAKA HIGH COURT ] if a Co-operative Bank is exclusively carrying banking business, then the income derived from the said business cannot be deducted in computing the total income of the assessee. The said income is liable for tax. A Co- operative bank as defined under the Banking Regulation Act includes the primary agricultural credit society or a primary co- operative agricultural rural development bank. The Legislature did not want to deny the said benefit to a primary agricultural credit society or a primary co-operative agricultural and rural development bank. They did not want to extend the said benefit to a co-operative bank which is exclusively carrying on banking business i.e., the purport of the amendment. If the assessee is not a Co-operative bank carrying on exclusively banking business and if it does not possess a license from the Reserve Bank of India to carry on business, then it is not a Co-operative bank. It is a Co-operative society which also carries on the business of lending money to its members which is covered under Section 80P(2)(a)(i) i.e., carrying on the business of banking for providing credit facilitates to its members. The object of the aforesaid amendment is not to exclude the benefit extended under Section 80P(i) to the society. - Decide in favour of assessee. Issues:1. Interpretation of Section 80P(2)(a)(i) of the Income Tax Act for Co-operative Banks and Societies.Analysis:The main issue in this case revolved around the interpretation of Section 80P(2)(a)(i) of the Income Tax Act concerning whether a Co-operative Bank is entitled to deduction under this section. The Tribunal had to determine if a Co-operative Bank primarily involved in lending credit facilities to its members in the nature of bank transactions could be treated similarly to the new clause introduced in the definition of income in section 2(24)(viia) of the Act and fall under the purview of section 80P(4) w.e.f 1/4/2007. The Tribunal's decision was challenged by the Revenue, questioning the applicability of Section 80P(4) to credit Co-operative Societies.In a previous decision dated 27.06.2014, the Court had observed that Section 80P(4) of the Income Tax Act is applicable only to Co-operative Banks and not to credit Co-operative Societies. The Tribunal had differentiated between Co-operative Banks and Societies based on various factors such as registration, nature of business, filing of returns, inspection, and the applicability of Part V of the Banking Regulation Act. The Court referred to a previous case where it was held that if a Co-operative Bank exclusively carries out banking business, the income derived from such activities is taxable and not eligible for deduction under Section 80P. However, if the entity is not a Co-operative Bank exclusively engaged in banking business and does not possess a license from the Reserve Bank of India, it is considered a Co-operative Society eligible for the deduction under Section 80P(2)(a)(i).Based on the precedent set by the previous decision and the interpretation of the relevant provisions of the Income Tax Act and Banking Regulation Act, the Court dismissed the appeal by the Revenue. The Court reiterated that the legislative intent was not to exclude the benefit extended under Section 80P(1) to societies involved in providing credit facilities to their members, even if they are not classified as Co-operative Banks exclusively engaged in banking activities. Therefore, the Court held in favor of the assessee and against the Revenue, concluding that no substantial questions of law arose for consideration in this case.In conclusion, the judgment clarified the distinction between Co-operative Banks and Societies concerning the applicability of Section 80P(2)(a)(i) of the Income Tax Act, emphasizing that entities engaged in providing credit facilities to members can avail of the deduction benefits under this section, irrespective of their classification as Co-operative Banks or Societies exclusively engaged in banking business.