TMI Blog2014 (10) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... business relating to its members. Nature of assessee - Whether the Assessee is a co-operative bank or not – 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 - 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 - there is no dispute that the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac – the bye-laws of society does permit the admission of other co-operative society as member - Thus the third condition for becoming primary co-operative bank is not complied with - Since the assessee society did not comply all the three conditions, therefore, the assessee society cannot be regarded to be a primary co-operative bank as all the three conditions as discussed by us in the preceding paragraphs are not complied with and in consequence it is not a co-operative bank and the assessee is not hit by the provision of section 80P(4). The provisions of Sec. 80P( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT(Appeals) erred in law and on facts in relying on this definition which was applicable to the Karnataka Co-operative Societies Act, 1959 only to deem it to include co-operative societies under the Karnataka Societies Registration Act, 1960 does not apply to a co-operative society but only applies to the Societies registered under that Act. d. The learned CIT(Appeals) erred in law and on facts in allowing deduction under section 80P(2)(a)(i) to the assessee ignoring the fact that the assessee does not permit co-operative societies to become a member and as such, satisfy conditions to become primary co-operative bank. e. The learned CIT(Appeals) erred in law and on facts in not appreciating the definition of a co-operative bank which as per Explanation below section 80P(4) the co-operative bank shall have the meaning assigned to it in Part-V of the Banking Regulation Act, 1949. f. The learned CIT(Appeals) erred in law and on facts in not appreciating the fact that the assessee society being a credit co-operative society engaged in banking business is a Primary Co-operative Bank within the definition of section 5(ccv) of the Banking Regulation Act, 1949 and as such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely :- (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or the whole of the amount of profits and gains of business attributable to any one or more of such activities. 80P(4) The provisions of this section 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. Explanation.-For the purposes of this sub-section,- (a) co-operative bank and primary agricultural credit society shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) primary co-operative agricultural and rural development bank means a society having its area of operation confined to a taluka and the principal object of which is to provide for long-term credit for agricultural and rural development activities. 2.3 From the plain reading of Sec. 80P(2)(a)(i) it is apparent that if the co-operative society is engaged in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 80P(2)(a)(i), it is essential to decide whether the Assessee is a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. In case it is found that the Assessee is a co-operative bank, the Assessee will not be entitled for deduction as stipulated u/s 80P(2)(a)(i) but in case the Assessee is not a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the provisions of Sec. 80P(2)(a)(i) will be applicable to the Assessee provided the Assessee is engaged in carrying on business of banking or providing credit facilities to its members. This action nowhere states co-operative credit society except mentioned under proviso 2 to section 80P which is relevant for sub-clause 6 or 7. It has nothing to do with section 80P(2)(a)(i). 2.4 In our opinion, Sec. 80P(2)(a)(i) provides two types of activities in which the co-operative society must be engaged to be eligible for deduction under sub-clause (i). These two activities are not alternate ones because the section allows deduction to the co-operative society on the whole of profits a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction of banking business: (2) the paid-up share capital and reserves of which are not less than one lakh of rupees: and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such Co-operative society out of funds provided by the State Government for the purpose. 2.7 From the aforesaid definition, it is apparent that if the co-operative society complied with all the three conditions; firstly that the primary object or principle business transacted by it is a banking business, secondly, the paid up share capital and reserve of which are 1 lakh or more and thirdly, 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. If co-operative society does not fulfil any of the conditions, it cannot be regarded to be a primary co-operative bank. Therefore, in the case of the Assessee we have to examine on the basis of the facts and materials on record whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To form a committee the fulfilment of common objects of the share holder. 16. With prior permission of the Registrar to do all other activities which are required to achieve the aims and purposes mentioned in bye-laws. On the basis of these objects whether it can be said that the primary object or principal business of the Assessee is transaction of banking business? Banking business has been defined u/s 5(b) of the Banking Regulation Act in the following manner : banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. From the said definition it is clear that banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment. These deposits must be accepted from the public, not only from the members. These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise. We noted that the Assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter the registration of a co-operative, the members shall be admitted only by the elected board. (2) No person shall be eligible to continue as a member if such person ,- a) has not used the services of the co-operative for two consecutive years to the minimum level specified in the bye-laws; or b) has not attended three consecutive general meetings of the co-operative and such absence has not received the consent of the general body; or c) is in default regarding any payment to be made to the co-operative exceeding an amount and for a period specified in the bye-laws. (3) If a question arises as to the eligibility or otherwise of a person to become a member or to continue as a member, the board shall decide the question after giving such person an opportunity of being heard. The decision of the board shall be final. 21. Removal of membership.-(1) The board may, by a resolution passed by a majority of not less than two thirds of the members present and voting, remove the membership of a person in the co-operative for acts or omissions which are detrimental to the interest of the co-operative: Provided that a member shall not be removed unless a reasonable oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not been filed before us. We noted that the CIT(A) under para 9.1 of its order reproduced the bye-law relating to the membership clause as per remand report of the assessing officer dated 18.11.2013 mentioning therein that certified copy of English translation of bye-laws were produced. The membership clause reads as under :- 6. Admission for Membership:- 1) He shall have the following eligibility criteria to be a member of a sahakari. i) Any person within the area of operation of the sahakari or any employee, businessman or an industrialist or an individual who has attained the age of 18 years and not bankrupt and mentally ill, may be considered for membership. ii) Partnership firms or the societies registered under provisions of Karnataka Co-operative Societies Act 1960 (as per the Co-operative Societies Act, 1960 provisions of Rule 17). iii) An individual of any institution constituted under the provisions of any prevailing law. (Except the registered society under Souharda Sahakari.) From this, it is apparent that the bye-laws of society does permit the admission of other co-operative society as member. Thus the third condition for becoming primary co-oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompetence of the State Legislature for issuing a circular. The issue does not relate to the claim of deduction u/s 80P(2)(a)(i). While dealing with this issue, the Hon'ble High Court under para 12 observed as under :- 12. It is not possible to accept this contention. The petitioners are not the banking institutions coming under the purview of the Banking Regulation Act. They are the co-operative societies registered under the Act, and as such they are governed by the provisions of the Act passed by the State Legislature. Consequently, the State Government has control over them to the extent the Act permits. Major activities of the petitioners are to finance its members. For the purpose of financing its members, they borrow money from the financing agencies and repay the same. Merely because the petitioners-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-oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of co-operative credit society and therefore the distinction made under the Banking Regulation Act cannot be imported u/s 80P(2)(a)(i). This decision in our opinion will not assist the assessee. The decision of Karnataka High Court in the case of CIT vs Sri Biluru Gurubasava Pattana Sahakari Sangh Niyamitha dated 5.2.2014, relates to an appeal filed against the order passed u/s 263 and the question involved was whether the Revisional Authority was justified in invoking his power u/s 263 without the foundational fact of the assessee being co-operative bank. Therefore, this decision is not applicable. 2.15 We, therefore, in view of our aforesaid discussion hold that the Assessee has not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied with, therefore, it is not a co-operative bank and the provisions of Sec. 80P(4) are not applicable in the case of the Assessee and Assessee is entitled for deduction u/s 80P(2)(a)(i). We, therefore, confirm the order of the CIT(A) and direct the assessing officer to allow deduction to the assessee u/s 80P(2)(a)(i) on the income generated for providing banking or credit facilities to its members. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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