2006 (1) TMI 192 - AT - Income Tax

Cooperative bank exempt from member-only banking rule under Income-tax Act

The Tribunal allowed the appeal of the cooperative bank, ruling that it did not need to limit its banking activities to members only to claim exemption ... Income Of Co-operative Societies Issues:- Disallowance of exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961 for income derived from services rendered to non-members by a cooperative bank.Detailed Analysis:1. The appellant, a cooperative bank, appealed against the disallowance of exemption under section 80P(2)(a)(i) for income derived from services provided to non-members. The Assessing Officer questioned the tax exemption on income received from non-members for various services rendered by the bank, such as facilitating purchase of DDs, opening savings accounts, and discounting cheques. The bank argued that such income was part of normal banking activities and thus exempt under section 80P(2)(a)(i) of the Act. However, the Assessing Officer disagreed, citing precedents and comparing the bank's transactions with those of other banks.2. The Assessing Officer calculated the non-exempt income based on a proportionate basis for different services provided to non-members. The appellant then appealed to the Commissioner of Income-tax (Appeals), who upheld the Assessing Officer's decision. The bank contended that the conjunction 'or' in the relevant section allowed for exemption even if the banking business was not solely conducted with members. The Commissioner rejected this argument, stating that the exemption was based on the principle of mutuality, which did not apply to the income in question.3. The Tribunal analyzed whether the bank needed to conduct banking activities exclusively with its members to qualify for exemption under section 80P(2)(a)(i). Referring to relevant case law, including the Mehsana District Central Co-operative Bank Ltd. case, the Tribunal concluded that the bank was not required to limit its banking activities to members only. The Tribunal emphasized that the conjunction 'or' in the section indicated alternative activities, and the principle of mutuality did not restrict the exemption. The Tribunal also cited decisions by various High Courts supporting its interpretation.4. The Tribunal highlighted the Gujarat High Court's ruling in the CIT v. Baroda Peoples Co-op. Bank Ltd. case, which clarified that the activities of carrying on banking business and providing credit facilities to members were distinct and separate. The court emphasized that the conjunction 'or' allowed for different activities, and each category of income was to be treated as a separate head of exemption. The Tribunal concluded that income from banking activities with non-members was also entitled to exemption under section 80P(2)(a)(i).5. Ultimately, the Tribunal allowed the appeal of the assessee, ruling that a cooperative bank did not need to limit its banking activities to members only to claim exemption under section 80P(2)(a)(i). The decision was based on the interpretation of the conjunction 'or' in the section and the objective of promoting the cooperative sector's growth. The Tribunal's decision aligned with previous court rulings and upheld the bank's entitlement to exemption for income derived from banking activities with non-members.