2008 (4) TMI 348 - AT - Income Tax

Summary

Issues involved:
1. Eligibility of a co-operative bank for income exemption under section 80P(2)(a)(i) of the IT Act.
2. Interpretation of the condition that the business of banking should be confined to the members of the co-operative society.
3. Determination of whether the business conducted by the co-operative bank qualifies as banking or providing credit facilities.
4. Compliance with RBI regulations and licensing requirements for carrying on banking business.
5. Eligibility of income from providing credit facilities for deduction under section 80P(2)(a)(i) of the IT Act.

Issue 1: The primary issue in this case was the eligibility of a co-operative bank for income exemption under section 80P(2)(a)(i) of the IT Act for the assessment year 2003-2004. The Assessing Officer (AO) rejected the claim of the assessee, a co-operative bank, for exemption on the grounds that the banking business was conducted with both members and non-members of the society, making the income ineligible for exemption.

Issue 2: The interpretation of whether the condition that the business of banking should be confined to the members of the co-operative society was a crucial aspect of the judgment. The Tribunal held that this condition only applies to the business of providing credit facilities and not to the business of banking. The disjunctive "or" in the statutory provision clearly indicated that the business of banking can be carried out with both members and non-members.

Issue 3: The determination of whether the business conducted by the co-operative bank qualified as banking or providing credit facilities was extensively discussed. The AO contended that the bank was not engaged in banking but only providing credit facilities. However, the Tribunal disagreed, highlighting provisions of the Banking Regulation Act and the RBI license granted to the bank to carry on banking business.

Issue 4: The compliance of the co-operative bank with RBI regulations and licensing requirements for carrying on banking business was a significant aspect of the judgment. The Tribunal emphasized that the bank operated under the supervision and control of the RBI, holding a valid license to conduct banking activities, which further supported the argument that the bank was engaged in banking business.

Issue 5: The eligibility of income from providing credit facilities for deduction under section 80P(2)(a)(i) of the IT Act was also addressed. The Tribunal concluded that even if the bank was considered to be providing credit facilities, the income derived from such activities qualified for the deduction as it arose and was received only from the members of the co-operative society.

In conclusion, the Tribunal allowed the appeal partly, directing the AO to allow the deduction claimed by the co-operative bank under section 80P(2)(a)(i) of the IT Act for the income derived from its banking activities.