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Commissioner of Income Tax, Income Tax Officer Versus Shri Laxmi Credit Souhard Sahakari Ltd.

2015 (11) TMI 647 - KARNATAKA HIGH COURT

Eligibility of deduction under Section 80P(2)(a)(i) - Held that:- There is a seriously disputed question of fact which the Authorities under the IT Act have taken upon themselves to interpret in the face of the BR Act prescribing that in the event of a dispute as to the primary object or principal business of any co-operative society referred to in clauses (cciv), (ccv) and (ccvi) of Section 56 of the BR Act, a determination thereof by the Reserve Bank shall be final, would require the dispute t .....

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- ITA No. 100127 of 2014 - Dated:- 21-9-2015 - Anand Byrareddy And S. Sujatha, JJ. For the Appellant : Shri Y V Raviraj, Adv For the Respondent : Shri Sangram S Kulkarni, Adv JUDGMENT This appeal is by the revenue under the Income Tax Act, 1961 (Hereinafter referred to as the 'IT Act, for brevity). The assessee is said to be a Co-operative Society registered under the Karnataka State Co-operative Societies Act, 1956, (Hereinafter referred to as the 'KCS Act', for brevity). 2. The app .....

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lusion of profits and gains of any business of banking (including providing credit facilities) carried on by a cooperative society. Reference was made to the Explanation appended to Section 80 P (4) - which lays down that a co-operative bank and a primary agricultural credit society, shall have the same meaning assigned to them in Part V of the Banking Regulation Act, 1949 (Hereinafter referred to as the 'BR Act', for brevity.) It was held that the Bye -laws of the Assessee indicated tha .....

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co4 operative bank, was not eligible for deduction under Section 80 P of the IT Act. 3. The respondent - Society had then preferred an appeal before the Commissioner of Income Tax (Appeals) challenging the above order of the Assessing Officer. The same was said to have been dismissed. The respondent - Assessee had then approached the Income Tax Appellate Tribunal. The Tribunal having accepted the case of the respondent, it was held that: i) The assessee - Society had satisfied condition no.1 men .....

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sfied since the bye-laws of the society permits other cooperative society to become its member. The Tribunal held that the assessee - Society is not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied with and therefore, it is not a cooperative bank and the provisions of section 80P(4) are not applicable in the case of the assessee and the assessee is entitled for deduction under Section 80P(2)(a)(i). Hence, the Revenue is in appeal before this Cou .....

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rsy as to whether the assessee was a co-operative society or co-operative bank, as defined under the provisions of the BR Act?" 5. In addressing the above, it would be useful to extract the relevant provisions for ready reference. "80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified .....

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ural and rural development bank. Explanation.- For the purposes of this subsection, (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 taluk and the principal object of which is to provide for long-term credit for a .....

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mpany" or "such company" shall be construed as references to a co-operative bank; (ii) references to "commencement of this Act" shall be construed as references to commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965); (b) in section 2, the words and figures "the Companies Act, 1956 (1 of 1956) and" shall be omitted; (c) in section 5,- [(i) after clause (cc), the following clauses shall be inserted, namely:- (cci) " .....

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e co-operative societies, or any other Central or State law relating to co-operative societies for the time being in force;] (cciii) "director" in relation to a co-operative society, includes a member of any committee or body for the time being vested with the management of the affairs of that society; [(cciiia) "multi-State co-operative bank" means a multi-State co-operative society which is a primary cooperative bank;] [(cciiib) "multi-State co-operative society" .....

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tural activities (including the marketing of crops); and (2) the bye-laws of which do not permit admission of any other co-operative society as 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 sub-scribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose; (ccv) "primary co-operative bank" means a cooperative society, other than a pr .....

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erative society out of funds provided by the State Government for the purpose; (ccvi) "primary credit society" means a cooperative society, other than a primary agricultural credit society,- (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are 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 .....

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i Y.V. Raviraj, appearing on behalf of the Revenue contends as follows : Section 80P(2)(a)(i) provides deduction of income of cooperative societies "carrying on the business of banking or providing credit facilities to its members". However, an exception to this is provided under Section 80P(4) which provides that this deduction will not be available to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development ba .....

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i) The primary object or principal business of which is transaction of banking business. ii) The paid-up share capital and reserves of which are not less than one lakh of rupees and iii) The bye-laws of which do not permit admission of any other co-operative society as a member. If a co-operative society fulfills all the above three conditions, it is to be treated as a co-operative bank for the purpose of section 80P(4) and the benefit of deduction under Section 80P(2)(a)(i) is denied. After ins .....

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ociety does not fulfill any of the above three conditions as defined under Section 5(ccv) of Banking Regulation Act, 1949, it cannot be treated as a 'primary co-operative bank' and as such will be eligible to get the deduction under Section 80P(2)(a)(i) Attention is also drawn to the relevant portion of the Finance Minister's Budget Speech explaining the reasons for withdrawal of tax benefits to some Societies by way of insertion of sub-section 80P(4) and insertion of new sub-clause .....

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ive agricultural and rural development bank. It is also proposed to define the expressions "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank". It is also proposed to insert a new sub-clause (viia) in clause (24) of the Section 2 so as to provide that ttheprofits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members s .....

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ve society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with an subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sum referred to in sub-section (1) shall be the following, namely:- (a) the case of a co-operative society engaged in :- (i) Carrying on the business of banking or providing credit facilities to its memebrs, or …… ( .....

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te by the Finance Act, 2006, with effect from 1.4.2007, reads as under: 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 Regu .....

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Act, 1949, of the said Act has to be looked into. Section 5(cci) states as under: "Co-operative bank" means a state co-operative bank, a central co-operative bank and a primary cooperative bank." The primary co-operative bank is defined under Section 5(ccv) of the BR Act as under: ""primary co-operative bank" means a co-operative society, other than a primary agricultural credit society- (1) The primary object or principal business of which is transaction of banking .....

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ing Regulation Act, 1949 defines a Co-operative Society as under: "Co-operative Society means a society registered or deemed to have been registered under any Central Act for the time being in force relating to the multi-State co-operative societies or any other Central or State law relating to co-operative societies for the time being in force;" Section 5(b) of the Banking Regulation Act, will also have to be looked into to examine whether the primary object or principal business of t .....

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, in certain other appeals apart from the present has also formed an opinion on certain further propositions, namely: Proposition: Assessee society has not fulfilled the third condition mentioned in Section 5(ccv) of the BR Act and as such, cannot be treated as a primary co-operative bank as defined therein: The Tribunal has referred to section 16 of the Karnataka State Co-operative Societies Act, 1959 and held that the said provisions permit admission of any other co-operative society as a memb .....

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Tribunal has referred to section 20 to 21A of the Karnataka Souhardha Sahakari Co-operative Societies Act, 1997, and held that the said provisions permit admission of any other co-operative society as a member. The Tribunal however ought to have examined into the aspect as to whether the bye-laws in the case of a particular assessee society permits admission of any other co-operative society as a member. Proposition: Referring to the bye-laws of the assessee society, the Tribunal has observed th .....

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covered by the decision of a Division Bench of this Hon'ble Court in the case of Sri. Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, Bagalkot in ITA No.5006/2013 dated 5th February 2014: The substantial question of law pleaded on behalf of the Revenue in the said case was as follows: "In the facts and circumstances of this case, whether the Revisional Authority was justified in invoking his power under Section 263 of the Act without the foundational fact of assessee being cooperat .....

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It is submitted that the matter is being taken up by the Revenue in appeal before the Hon'ble Apex Court. It is also stated that in some matters, the Tribunal has granted relief by holding that Section 80P(4) is not applicable, by referring to one circular of CBDT No.133 of 2007 dated 9.5.2007 which provided as under:- "Subject: clarification regarding admissibility of deduction under Section 80P of the Income Tax Act, 1961. 1. Please refer to your letter No.DCUS/30688/2007, dated 28.03 .....

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e Banking Regulations Act, 1949. 3. In part V of the Banking Regulation Act, "Co-operative Bank" means a State co-operative bank, a Central Co-operative Bank and a primary Cooperative bank. 4. Thus, if the Delhi Co-op Urban T and C Society Ltd. does not fall within the meaning of "Cooperative Banks" as defined in part V of the Banking Regulation Act, 1949, sub-section (4) of Section 80P will not apply in this case. 5. The issues with the approval of Chairman, Central Board of .....

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inition under the Income Tax Act, for carrying on banking business and if the required licence is not obtained as per other laws, it can only be termed as an illegal banking business under a particular statute prescribing the same. Income Tax Act, however is concerned with the taxing of "income" as per the provisions of the Income Tax Act and "income" if any, has to be taxed whether it is from a legal or illegal business. Hence, it is contended by the learned counsel that, by .....

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at something shall be deemed to be treated as something else, which in fact is not true, the Court shall appreciate and ascertain for what purposes the statutory fiction is resorted and then give full effect to the statutory fiction to carry it to the logical conclusion. Therefore, in the case of an assessee - Co-operative Society claiming deductions under Section 80P, an examination of the factual aspects will have to be conducted by the Revenue authorities on the basis of the facts and materia .....

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redit Society in ITA No.351/2011 & ITA No.599/2013 In interpreting Section 80 P (4) in CIT v. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha of the IT Act, it was held as follows : "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 .....

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siness and as it does not possess a licence from Reserve Bank of India to carry on business, it is not a Co-operative bank. It is a Co-operative society which also carries on the business of lending money to its members which is covered under Section 80P(2)(a)(i) i.e. carrying on the business of banking for providing credit facilities to its members. The object of the aforesaid amendment is not to exclude the benefit extended under Section 80P(1) to such society. Therefore, there was no error co .....

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e Societies Act, 1959 Co-operative Societies Act, 1959 Nature of business 1. As defined in Section 6 of Banking Regulation Act. 2. Can open savings bank account, current account, overdraft account, cash credit account, issue letter of credit, discounting bills of exchange, issue cheques, demand drafts (DD), Pay orders, Gift cheques, lockers, bank guarantees etc. 3. Co-operative Banks can act as clearing agent for cheques, DDs, pay orders and other forms. 4. Banks are bound to follow the rules, r .....

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iling of returns Co-operative banks have to submit annual return to RBI every year. Society has to submit the annual return to Registrar of Societies. Inspection RBI has the power to inspect accounts and overall functioning of the Bank. Registrar has the power to inspect accounts and overall functioning of the bank. Part V Part V of the Banking Regulation Act is applicable to cooperative banks. Part V of the Banking Regulation Act is not applicable to cooperative banks. Use of words The word  .....

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t Co-operative Society Ltd. in ITA 237/2012 3. CIT vs. Mysore University Employees Co-operative Credit Society Ltd. in ITA 298/2013 4. CIT vs. Vasavi Credit Co-operative Society Ltd. in ITA No.118/2012 5. CIT vs. Sri Vasavi Multi Purpose Souharda Sahakari Sangha Niyamitha in ITA No.505/2013 6. CIT vs. General Insurance Employees Co-operative Society Ltd. in ITA No.273/2013. 8. The learned counsel Shri A. Shankar while drawing attention of this court to the tenor of the relevant provisions of law .....

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ention of the Tribunal, it had not chosen to distinguish the said decisions nor has it chosen to refer the matter to a special bench, as propriety demanded. It is hence contended that the point of law as to the entitlement of deduction under Section 80 P (2) (a) (i) in so far as the assessee is concerned, would have to be held in its favour. He would contend that all co-operative banks may be cooperative Societies, but all co-operative Societies are not necessarily co-operative banks. It is furt .....

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of Section 37 of the BR Act. It is further contended that even if there was a disputed question as to whether the assessee was indeed a cooperative bank. The authorities under the IT Act were not competent and did not have the jurisdiction to arrive at a finding in that regard and attention is drawn to the Explanation appended to clause (ccvi ) to Section 56 of the BR Act, which reads as follows : "Explanation- If any dispute arises as to the primary object or principal business of any coop .....

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4, had framed the following substantial questions of law : "(i) Whether the Tribunal was correct in holding that the provision of sub-section (4) of Section 80P of the Income Tax Act are applicable only to cooperative Banks and not to credit Co-operative Societies, which are engaged in business of banking, including providing credit facilities to their members? (ii) Whether the Tribunal was correct in holding that the assessee is a co-operative society and not a cooperative Bank in terms of .....

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