Deduction under Section 80P(2)(a)(i) allowed to cooperative society; not a bank, Section 80P(4) inapplicable therefore fully

ITAT Bangalore-AT upheld the order of CIT(A) allowing deduction u/s 80P(2)(a)(i) to the assessee, a co-operative society engaged in providing credit facilities to its members. It held that the assessee is a co-operative society and not a co-operative bank, and therefore the restrictive provisions of s.80P(4) are inapplicable. Relying on HC precedent, the Tribunal ruled that income from lending to members qualifies for deduction u/s 80P(2)(a)(i). Finding no error in the CIT(A)'s order, the Revenue's appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether a co-operative society engaged in banking/credit activities with its members is a "co-operative bank" within the meaning of section 80P(4) and the Banking Regulation Act, 1949, so as to be excluded from deduction under section 80P.

1.2 Whether the assessee, being a co-operative society providing credit facilities to its members, is entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, for the relevant assessment year.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of section 80P(4) to the assessee society

Legal framework

2.1 Section 80P(2)(a)(i) grants deduction where the gross total income of a co-operative society includes income from carrying on the business of banking or providing credit facilities to its members.

2.2 Section 80P(4), inserted by Finance Act, 2006 with effect from 1-4-2007, provides that the provisions of section 80P shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The explanation to section 80P(4) adopts the meanings of "co-operative bank" and "primary agricultural credit society" from Part V of the Banking Regulation Act, 1949.

2.3 Part V of the Banking Regulation Act, 1949 defines "co-operative bank" to mean a State co-operative bank, a Central co-operative bank and a primary co-operative bank.

2.4 CBDT Circular No. 133/06/2007-TPL dated 9-5-2007 clarifies that section 80P(4) denies deduction only to "co-operative banks" as defined in Part V of the Banking Regulation Act and that if an entity does not fall within that definition, section 80P(4) will not apply.

Interpretation and reasoning

2.5 The Assessing Officer treated the assessee as a "co-operative bank" on the basis that its objects and activities, as per its bye-laws, were in the nature of banking, and that it fell within the explanation to section 80P(4) read with section 5(b) and section 6 of the Banking Regulation Act, notwithstanding registration as a credit co-operative society and restriction of lending to members.

2.6 The Tribunal noted that section 80P(4) expressly applies only to "co-operative banks" and does not define or refer to "co-operative societies" generally. The pre-existing provision in section 80P(2)(a)(i) continues to apply to co-operative societies carrying on the business of providing credit facilities to their members.

2.7 The Tribunal relied on its earlier decision holding that the legislative intent behind inserting section 80P(4) was to bring co-operative banks on par with commercial banks for taxation purposes, and not to withdraw deduction from ordinary credit co-operative societies.

2.8 The Tribunal contrasted co-operative banks and co-operative societies with reference to the statutory scheme and regulatory framework: co-operative banks are registered under the Banking Regulation Act and the relevant Co-operative Societies Act, can conduct full banking operations (opening savings/current accounts, issuing cheques, demand drafts, etc.), are subject to RBI regulation, and fall under Part V of the Banking Regulation Act; co-operative societies are registered only under the Co-operative Societies Act, are bound by their bye-laws, cannot perform the full range of banking functions or act as clearing agents, are regulated by the Registrar of Co-operative Societies, and Part V of the Banking Regulation Act does not apply to them.

2.9 The Tribunal observed that if the Legislature had intended to deny deduction to all co-operative societies engaged in providing credit facilities to members, section 80P(2)(a)(i) would have been amended or deleted; instead, the restriction in section 80P(4) is confined to "co-operative banks".

2.10 The Tribunal referred to and followed the clarification in CBDT Circular No. 133/2007 and the reasoning adopted by the High Courts in holding that section 80P(4) does not apply to credit co-operative societies which are not co-operative banks as defined in the Banking Regulation Act.

Conclusions

2.11 The assessee, being a co-operative society registered under the Co-operative Societies Act and not a "co-operative bank" within the meaning of Part V of the Banking Regulation Act, does not fall within the exclusionary scope of section 80P(4).

2.12 Section 80P(4) is held inapplicable to the assessee, and the Assessing Officer's characterization of the assessee as a co-operative bank for the purpose of denying deduction is rejected.

Issue 2: Entitlement to deduction under section 80P(2)(a)(i)

Legal framework

2.13 Section 80P(2)(a)(i) allows deduction in respect of income of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members.

Interpretation and reasoning

2.14 Having held that section 80P(4) does not apply to the assessee, the Tribunal proceeded on the basis that the pre-existing provisions of section 80P(2)(a)(i) govern the claim.

2.15 The Tribunal noted that the assessee is a co-operative society whose business consists of providing credit facilities to its members and, therefore, falls squarely within section 80P(2)(a)(i).

2.16 The Tribunal adopted and applied the reasoning of earlier coordinate bench decisions and High Court judgments which held that co-operative societies providing credit facilities to their members, but not qualifying as co-operative banks under the Banking Regulation Act, continue to be eligible for deduction under section 80P(2)(a)(i) notwithstanding the insertion of section 80P(4).

Conclusions

2.17 The assessee, being a co-operative society engaged in providing credit facilities to its members and not being hit by section 80P(4), is entitled to deduction under section 80P(2)(a)(i) of the Act.

2.18 The disallowance made by the Assessing Officer is unsustainable; the order of the appellate authority allowing the deduction is upheld and the revenue's appeal is dismissed.

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