2014 (3) TMI 1242 - AT - Income Tax

Denial of deduction u/s 80P(2)(c) - appellant is covered under the definition of a primary co-operative bank - HELD THAT - The Hon ble Karnataka High Court 2015 (1) TMI 821 - KARNATAKA HIGH COURT after reproducing sub section 4 of section 80P of the Act held that the said provisions is not applicable to co-operative societies and is restricted only to cooperative bank which has got license to do banking business from the RBI. The Bangalore Bench of the Tribunal in the case M/s. Bangalore Commercial Transport Credit Co-operative Society Ltd. 2011 (4) TMI 1222 - ITAT BANGALORE held that section 80P(4) is applicable only to cooperative banks and not to credit cooperative societies. The intention of the Legislature to introduce 80P(4) was to bring to tax cooperative banks which is in par with commercial banks. Since the assessee is a cooperative society and not a cooperative bank the provisions of section 80P(4) will not have application in the assessee s case and therefore it is entitled to deduction u/s 80P(2)(a)(i) of the Act. Thus we hold that the authorities below is not justified in denying the benefit of deduction u/s 80P(2) of the Act to the assessee society. Therefore AO is directed to grant the relief sought by the assessee society. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the appellant, a co-operative society engaged in providing credit facilities to its members, is entitled to claim deduction under section 80P(2)(a)(i) of the Income Tax Act for the relevant assessment year.

2. Whether the provisions of section 80P(4) of the Income Tax Act, which restrict deduction to certain categories of co-operative banks, apply to the appellant.

3. Whether the appellant falls within the definition of a "primary co-operative bank" under Part V of the Banking Regulation Act, 1949, thereby attracting the exclusion under section 80P(4).

4. The effect of the amendment introduced by Finance Act, 2006, specifically the insertion of section 2(24)(viia) and the explanation to section 80P(4), on the eligibility of the appellant to claim deduction.

5. The binding nature and applicability of precedents and circulars, including the CBDT Circular No. 133 of 2007, in interpreting the scope of section 80P(4).

Issue-wise Detailed Analysis

Issue 1 & 2: Applicability of section 80P(2)(a)(i) deduction and section 80P(4) exclusion

Relevant legal framework and precedents: Section 80P(2)(a)(i) provides deduction to co-operative societies engaged in the business of banking or providing credit facilities to their members. Section 80P(4) excludes from such deduction 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) refers to the definitions in Part V of the Banking Regulation Act, 1949.

The Finance Act, 2006 inserted section 2(24)(viia), expanding the definition of "income" to include profits and gains from banking business carried on by a co-operative society with its members. This amendment also introduced the exclusion in section 80P(4) to restrict deduction for certain co-operative banks.

Precedents include the Karnataka High Court ruling in CIT vs. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, where it was held that section 80P(4) applies only to co-operative banks licensed by the RBI under Part V of the Banking Regulation Act and not to co-operative societies merely providing credit facilities to members. Similarly, the Gujarat High Court in CIT vs. Jafari Momin Vikas Co-op Credit Society Ltd confirmed that section 80P(4) applies only to co-operative banks, not to credit co-operative societies.

The CBDT Circular No. 133 of 2007 clarified that sub-section (4) of section 80P will not apply to co-operative societies that do not fall within the definition of co-operative banks under Part V of the Banking Regulation Act.

Court's interpretation and reasoning: The Court examined the legislative intent behind section 80P(4) and the 2006 amendment. It noted that the legislature intended to tax co-operative banks engaged exclusively in banking business, aligning them with commercial banks. However, primary agricultural credit societies and primary co-operative agricultural and rural development banks were expressly excluded from this restriction, preserving their entitlement to deduction.

The Court emphasized that the appellant is a co-operative society engaged in providing credit facilities to its members but is not a co-operative bank as defined under Part V of the Banking Regulation Act, 1949, since it does not possess an RBI banking license and does not carry on banking business in the statutory sense.

The Court relied on the CBDT Circular and judicial precedents to hold that section 80P(4) does not apply to the appellant. Therefore, the appellant remains eligible for deduction under section 80P(2)(a)(i).

Key evidence and findings: The appellant's registration under the Co-operative Societies Act, 1959, and absence of a banking license under the Banking Regulation Act, 1949, were critical. The Court distinguished between co-operative banks and co-operative societies based on their regulatory framework, powers, and functions, as summarized in the comparative table extracted from the Tribunal's order. The appellant's inability to perform banking functions such as opening savings/current accounts, issuing cheques, or acting as a clearing agent confirmed its status as a co-operative society rather than a bank.

Application of law to facts: Applying the legal definitions and the legislative intent, the Court found that the appellant does not fall within the ambit of section 80P(4). Consequently, the denial of deduction under section 80P(2)(a)(i) by the Assessing Officer and CIT(A) was incorrect.

Treatment of competing arguments: The Revenue contended that the insertion of section 2(24)(viia) and section 80P(4) excluded the appellant from claiming deduction as it carried on banking business. The Court rejected this, holding that the term "banking" in the amendment refers to co-operative banks as defined under the Banking Regulation Act, not credit co-operative societies. The Court also rejected the CIT(A)'s view that the Tribunal's prior decisions were per incuriam, affirming the binding nature of precedents.

Conclusions: The Court concluded that the appellant is entitled to deduction under section 80P(2)(a)(i) as it is not a co-operative bank within the meaning of Part V of the Banking Regulation Act, and section 80P(4) does not apply to it.

Issue 3: Definition of "primary co-operative bank" under Part V of the Banking Regulation Act, 1949

Relevant legal framework: Part V of the Banking Regulation Act defines "co-operative bank" to include State Co-operative Banks, Central Co-operative Banks, and Primary Co-operative Banks. These entities are subject to RBI regulation, have banking licenses, and are empowered to carry on banking business.

Court's interpretation and reasoning: The Court analyzed the appellant's status and found it registered under the Co-operative Societies Act rather than the Banking Regulation Act, lacking a banking license and the statutory powers of a co-operative bank. The Court highlighted differences in regulatory oversight, permissible activities, and nomenclature between co-operative banks and co-operative societies, as per the detailed comparison table.

Application of law to facts: The appellant's inability to perform banking functions and lack of RBI licensing confirmed it is not a primary co-operative bank. Hence, it does not fall within the exclusion under section 80P(4).

Conclusions: The appellant is not a primary co-operative bank within the meaning of Part V of the Banking Regulation Act, 1949.

Issue 4: Effect of Finance Act, 2006 amendment and section 2(24)(viia)

Relevant legal framework: Section 2(24)(viia) expanded the definition of "income" to include profits and gains from banking business carried on by co-operative societies with members. The amendment also inserted section 80P(4), restricting deduction to certain co-operative banks.

Court's interpretation and reasoning: The Court held that while the amendment broadened the scope of taxable income, the exclusion in section 80P(4) applies only to co-operative banks as defined under the Banking Regulation Act. The legislative intent was to tax co-operative banks on par with commercial banks, not to deny deduction to credit co-operative societies providing credit to members.

Application of law to facts: The appellant's status as a co-operative society means the amendment's exclusion does not apply, preserving its entitlement to deduction under section 80P(2)(a)(i).

Issue 5: Binding nature of precedents and CBDT Circular No. 133 of 2007

Relevant legal framework: Judicial precedents and CBDT Circulars are authoritative in interpreting tax statutes.

Court's interpretation and reasoning: The Court relied heavily on the Karnataka and Gujarat High Court decisions and the CBDT Circular, which clarified that section 80P(4) applies only to co-operative banks and not to co-operative societies. The Court rejected the CIT(A)'s characterization of Tribunal decisions as per incuriam.

Application of law to facts: The precedents and Circular supported the appellant's claim for deduction, reinforcing the Court's conclusion.

Significant Holdings

"If a Co-operative bank is exclusively carrying on banking business, then the income derived from the said business cannot be deducted in computing the total income of the assessee. The said income is liable for tax. A Co-operative bank as defined under the Banking Regulation Act includes the primary agricultural credit society or a primary co-operative agricultural and rural development bank. The Legislature did not want to deny the said benefits to a primary agricultural credit society or a primary cooperative agricultural and rural development bank."

"Sub-section (4) of section 80P will not apply to an assessee which is not a co-operative bank. ... The exclusion clause of sub-section (4) of section 80P, therefore, would not apply to credit co-operative societies."

"Section 80P(4) has got its application only to cooperative banks. Section 80P(4) does not define the word 'cooperative society'. The existing sub-section 80P(2)(a)(i) shall be applicable to a cooperative society carrying on credit facility to its members."

"If the intention of the legislature was not to grant deduction u/s 80P(2)(a)(i) to co-operative societies carrying on the business of providing credit facilities to its members, then this section would have been deleted."

Final determinations:

- The appellant is not a primary co-operative bank within the meaning of Part V of the Banking Regulation Act, 1949.

- The provisions of section 80P(4) of the Income Tax Act do not apply to the appellant.

- The appellant is entitled to claim deduction under section 80P(2)(a)(i) for income derived from providing credit facilities to its members.

- The orders of the Assessing Officer and CIT(A) denying the deduction are set aside.

- The appeal is allowed accordingly.