TaxTMI 
TaxTMI 
2014 (3) TMI 647
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....he Assessee filed return declaring gross total income of Rs.23,65,850/- and claimed deduction u/s 80P(2)(a)(i) and therefore net taxable income was shown to be "nil". The AO did not allow the deduction to the Assessee u/s 80P(2)(a)(i) and the income was assessed at Rs.23,65,850/-. The AO while denying the deduction to the Assessee 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. The Assessee went in appeal before the CIT(A). CIT(A) dismissed the appeal of the Assessee. 2.1 The Assessee filed the following written submission : "The issue in appeal relates to interpretation of the word "banking" with reference to the business of co-operative credit societies. When section 80P(4) is analyzed, it takes into its ambit the cooperative bank and for this purpose the definition is borrowed from Banking Regulation Act. In this definition under Banking Regulation Act, co-operative bank is defined to be a central co-operative bank, a state co-operative bank or a primary co-operative bank. To be a Primary co-operative bank the first very stipulation is that it should be ca....
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....as clarified that Non Banking Financial Companies doing functions similar to banks can never be termed as banks. The relevant question and answer is reproduced below: FAQ"s from rbi.org Q.No 2 "NBFCs are doing functions similar to banks. What is difference between banks & NBFCs? Ans. NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below: i. NBFC cannot accept demand deposits; ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself; iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks." 5. In the website of NABARD, the comments are offered on Banking Regulation Act as applicable to societies. Therein also there is a mention about the role of co-operative credit societies. While interpreting sec. 5(b) of Banking Regulation Act which defines the term banking, it is categorically stated that merely because the societies are required to advance loans to their members, they do not cease to be co-operative societies governed by the Act nor ca....
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....he co-operative sectors under field of credit lending, it means the intention of the statute is to cover only co-operative banks doing banking business. In explanatory notes and other relevant discussions, there is only a reference about bringing the co-operative banks at par with that of nationalized. 10. In Banking Regulation Act also, the word co-operative credit society stands separately defined. It takes into its ambit the co-operative societies extending financial assistance to its members. The Banking Regulation Act separately defines the word co-operative society and also defines primary co-operative bank. Primary co-operative bank takes into its ambit the co-operative societies main object of which is to carry on the banking business. Thus the definition given in banking regulation act of a co-operative credit society does not fit into the definition of co-operative bank. 11. Based on the above facts and submissions, we submit that the society is entitled for benefit of deduction u/s 80P(2)(a)(i)." 2.2 The ld. DR, on the other hand vehemently contended that the Assessee is a co-operative bank. In view of the definition of the co-operative bank given under explanat....
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....it is apparent that if the co-operative society is engaged in carrying of business of banking or providing credit facilities to its members, the co-operative society is entitled for deduction on whole of the income relating to any one or more of such business. From the reading of Sec. 80P(4) it is apparent that this section denies deduction to a co- operative bank other than a primary agricultural credit society or primary co- operative agricultural and rural development bank. The provisions of Sec. 80P(4) was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007. The explanation to the section defines the co-operative bank and primary agricultural credit society to have the same meaning as assigned to them in Part- V of the Banking Regulation Act, 1949. It is not the case of either of the parties that the Assessee is a primary co-operative agricultural and rural development bank. It is also not the claim of the Assessee that Assessee is a primary agricultural credit society. If we read both the sections, Sec. 80P(2)(a)(i) and Sec. 80P(4) together, we find that the provisions of Sec. 80P(4) mandates that the provisions of Sec. 80P will not apply to any co-operative ban....
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....ciety can carry on either one of these two businesses or can carry both these businesses for the members. If the Assessee co-operative society carries on one or both of the activities, it will be eligible for deduction. These two activities are (a) co-operative society engaged in carrying on business of banking facilities to its members or (b) co-operative society engaged in providing credit facilities to its members. Both the activities must be carried on by the co-operative society for its members. If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co-operative society, in our opinion, will not be eligible for deduction u/s 80P(2)(a)(i) on the income which it derives from carrying on the activities not relating to its members. Therefore, where a co-operative society is engaged in carrying on business of banking facilities to its members and to the public or providing credit facilities to its members or to the public, the income which relates to the business of banking facilities to its members or providing credit facilties to its members will only be eligible for deduction u/s 80P(2)(a)(i). There is no prohi....
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....he three conditions, it cannot be regarded to be a co- operative bank and the provisions of Sec. 80P(4), in our opinion, will not be applicable in the case of the Assessee. Once, the Assessee will not fall within the provisions of Sec. 80P(4), the Assessee, in our opinion, will be eligible to get deduction u/s 80P(2)(a)(i) in respect of whole of the income which the Assessee derives from carrying on the business of banking or providing credit facilities to its members. 2.3.6 Whether condition no. 1 is applicable in the case of the Assessee, for this we have to look into the bye-laws of the Assessee. The objects of the Assessee in this case are enumerated as under : "1. To improve the financial capacity, savings of the members of the society and to encourage for mutual help; 2. Collection of funds for the financial benefit of members as per financial sanction scheme and as mentioned in bye laws; 3. To do transaction of sanctioning of loan to members of society; 4. To sanction finance to the members for agricultural based industries; 5. To arrange the function to sanction the finance to facilitate members for their social and educational development and to encourage....
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....enied that the society has carried out banking business and the banking business is not limited in that case to the members. Thus, the first condition, in our opinion, stands satisfied for becoming the primary co- operative bank. 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. 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. The provisions of Sec. 16 are laid down as under : "16. Persons who may become members - [(1) Subject to the provisions of Section 17, no person shall be admitted as a member of a co-operative society except the following, namely:-- [(a) an individual who needs the services of such co-operative society [and is residing in the area of the operation of the society] and is competent to enter into contract under the Contract Act, 1872 (Central Act IX of 1872);] [(a-1) a depositor;] (b) any other co-operative society; (c) the State Government or the ....
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....n or not. Therefore, in the interest of justice and fair play to both the parties we restore this issue to the file of the AO with the direction that the AO shall look into the rules and bye-laws of the Assessee co-operative society and in case the AO finds that the bye-laws did not permit admission of any other co-operative society, it be treated that the Assessee complies with all the three conditions for becoming a primary co-operative bank. In case the bye-laws permit for the admission of any other co-operative society as a member, the Assessee will not be not treated as a co-operative bank and the provisions of Sec. 80P(4) will not apply to the Assessee. The Assessee will be entitled in that case, in our opinion, for the deduction as stipulated u/s 80P(1) r.w.s. 80P(2)(a)(i). 2.3.8 We have gone through the decision of the Hyderabad bench of this Tribunal in the case of The Citizen Cooperative Society vs. Addl. CIT (supra). We noted that this decision is not applicable to the facts of the case before us. In this decision, under para 23 the Tribunal has given a finding that the Assessee is carrying on banking business and for all practical purposes it acts like a co-operative....
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....tioners-the co-operative societies in question-are required to advance loans to their members, they do not cease to be co-operative societies governed by the Act nor can they be treated as banking companies. It is also not possible to hold that these activities of the petitioners amount to "banking" as contemplated under the Banking Regulation Act, 1949, inasmuch as these co- operative societies are not established for the purpose of doing "banking" as defined in section 5(b) of the Banking Regulation Act, 1949." This decision, in our opinion, is not applicable to the case before us because the provisions of Sec. 80P(2)(a)(i), as we have already held in the preceding paragraphs, are applicable to a co-operative society which is engaged in carrying on banking business facilities to its members if it is not a co-operative bank. We have also gone through the decision of this Bench in the case of DCIT vs. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. in ITA No. 1 to 3/PNJ/2012 dt. 30.3.2012 (supra), for which the undersigned is the author. While discussing this issue, after analysing the aims and objects of the co-operative society under para 12 of its order, this Tribun....