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2016 (1) TMI 317 - KARNATAKA HIGH COURT

2016 (1) TMI 317 - KARNATAKA HIGH COURT - TMI - Claiming deduction under Section 80 P(2) (a) (i) - Whether the benefit of deduction, under Section 80P(2)(a)(i) of the IT Act, could be denied to the assessee on the footing that, though the appellant was said to be a Co-operative Society, it was in fact a co-operative bank, within the meaning as assigned to such bank under Part V of the BR Act? - Held that:- There is a seriously disputed question of fact which the Authorities under the IT Act have .....

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. Any opinion expressed therefore is tentative and is not final. The view expressed by this court, however, as to the assessee being a co-operative society and not a co-operative bank in terms of Section 80P(4) of the IT Act, shall hold the field and shall bind the authorities unless held otherwise by the Reserve Bank of India. - Decided in favour of the assessee - INCOME TAX APPEAL NOS.100043, 100045 OF 2014 - Dated:- 21-9-2015 - MR. NAND BYRAREDDY AND MRS. .SUJATHA FOR THE APPELLANT : SHRI H.R .....

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spectively. The appellant - Society had filed its return of income for the assessment year 2009-10, and after claiming deduction under Section 80 P(2) (a) (i) of the IT Act, the total income was declared as 'nil'. For the assessment year 2010-11, as well, the appellant had declared 'nil' income after claiming deduction under Section 80P(2)(a)(i) of the IT Act, at 100%. The Assessing Officer had however, opined that the assessee was not entitled to the deduction, as claimed, for t .....

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1949 (Hereinafter referred to as the 'BR Act' , for brevity.) It was held that the Bye -laws of the Assessee indicated that their primary object was transactions that were apparently in the nature of banking. In that, the assessee was receiving deposits from its members and providing loans to other members and hence it satisfied all the three conditions contemplated under Section 56(ccv) of the BR Act. For this premise, the Assessing Officer had proceeded on the basis that a primary co- .....

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ffirmed the concurrent findings of the above authorities, the appellant is before this court. 4. The questions of law that arise for our consideration in these appeals are : i. Whether the benefit of deduction, under Section 80P(2)(a)(i) of the IT Act, could be denied to the assessee on the footing that, though the appellant was said to be a Co-operative Society, it was in fact a co-operative bank, within the meaning as assigned to such bank under Part V of the BR Act. ii. Whether the Authoritie .....

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accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the 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 (ii) xxxxx (iii) xxxxx xxxxx (4) The provisions of this section shall not apply in relation to any co-operative bank other than a .....

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the principal object of which is to provide for long-term credit for agricultural and rural development activities.]" "Section 56 of the BR Act:- Act to apply to co-operative societies subject to modifications. -The provisions of this Act, as in force for the time being, shall apply to, or in relation to, cooperative societies as they apply to, or in relation to banking companies subject to the following modifications, namely:- (a) throughout this Act, unless the context otherwise req .....

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se (cc), the following clauses shall be inserted, namely:- (cci) "Co-operative bank" means a state cooperative bank, a central co-operative bank and a primary co-operative bank; (ccii) "co-operative credit society" means a cooperative society, the primary object of which is to provide financial accommodation to its members and includes a cooperative land mortgage bank; (cciia) "co-operative society" means a society registered or deemed to have been registered under .....

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ative bank; (cciiib) "multi-State co-operative society" means a multi-State co-operative society registered as such under any Central Act for the time being in force relating to the multi-State co-operative societies but does not include a national co-operative society and a federal co-operative; (cciv) "primary agricultural credit society" means a co-operative society,- (1) the primary object or principal business of which is to provide financial accommodation to its members .....

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operative bank" 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 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 suc .....

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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. Explanation.- If any dispute arises as to the primary object or principal business of any co-operative society referred to in clauses (cciv), (ccv) and (ccvi), a determination thereof by the Res .....

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a Sahakari Sangha Niyamitha (supra) of the I T 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 agricultural credit society or a primary co-operative agricultural and rural development bank. The Legislature did n .....

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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 committed by the Assessing Authority." In Bangalore Commercial Transporter Credit Society (supra), this court has .....

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. 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, regulations and directions issued by Reserve Bank of India (RBI). 1. As per the bye laws of the co-operative society. 2. Societ .....

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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. Useof words The word 'bank', 'banker', 'banking' can be used by a cooperative bank. The word 'bank', 'banker', .....

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IT Appeal No. 298 of 2013] 4. CIT v. Vasavi Credit Co-operative Society Ltd. [IT Appeal No.118 of 2012] 5. CIT v. Sri Vasavi Multi Purpose Souharda Sahakari Sangha Niyamitha [IT Appeal No. 505 of 2013] 6. CIT v. General Insurance Employees Co-operative Society Ltd. [IT Appeal No. 273 of 2013]. 7. The learned counsel Shri A. Shankar while drawing attention of this court to the tenor of the relevant provisions of law and the above decisions, would contend that this court has categorically held tha .....

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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 80P(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 further contended that the activity of "banking", is defined under Section 5 (b) of .....

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tion 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 cooperative society referred to in clauses (cciv), (ccv) and (ccvi), a determination thereof by .....

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es 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 bank. For the purpose of section 80P(4), a co-operative bank has been given a meaning assigned to them in Part V of the Banking Regulation Act, 1949. In Part V of the Banking Regulation Act, 1949, section 5(b), a "co-operative bank" means a State Co-operative Bank, a Central Co-operative Bank and a Primary Co .....

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e 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 insertion of Section 80P(4), the provisions of Section 80P(2)(a)(i) were not amended and the co-operative societies engaged in carrying on business in banking with its members continued to be entitled for deduction. The embargo put under Section 80P(4) are applicable only to a co-operative society, treated as a bank by a l .....

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ce 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 clause (viia) in clause (24) of Section 2 definition of "income" by the Finance Act, 2006, with effect from 1.4.2007, is as under: The Co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefits. It is, therefore proposed to amend section 80P by inserting a new sub-section (4 .....

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2 so as to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of "income".' Section 2(24)(viia) of the Income Tax Act inserted by the Finance Act, 2006, with effect from 1.4.2007 includes the following in its definition of "income" as under: "profits and gains of any business of banking (including providing credit facilities) ca .....

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ng, namely:- (a) the case of a co-operative society engaged in :- (i) Carrying on the business of banking or providing credit facilities to its members, or …… (ii) .................... (iii) .................... (iv) .................... (v) .................... (vi) .................... (vii) .................... The whole of the amount of profits and gains of business attributable to any one or more of such activities." Section 80P(4) which came to be introduced in the statu .....

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lation 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 agricultural and rural development activities.' Part V of the Banking Regulation Act, 1949, section 5(cci): In order to examine in a given case of an assessee society whether it is a co-operative bank or not as defined in Part V of the Banking Regula .....

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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'". Section 5(cciia) of Banking Regulation Act .....

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ciety is transaction of banking business. The section is as under: 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. The learned counsel would incidentally contend that the Tribunal while taking the cue from the decisions of this Court in Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha (supra) and other cases, in certain other appeals a .....

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erred in not examining whether the bye-laws of the assessee society permits other cooperative society to become member as per Section 5(ccv) of the Banking Regulation Act, 1949. Provisions of Section 16(1) and 16(2) of the Karnataka State Co-operative Societies Act, 1959 does not help in any way to come to the conclusion that the bye-laws in the case of a particular assessee society permits admission of any other co-operative society as a member. Proposition: The Tribunal has referred to sectio .....

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er the Karnataka Societies Registration Act, 1960 are allowed to become members. The Tribunal had failed to appreciate that a society registered under the Karnataka Societies Registration Act, 1960 is established or created for different purposes and cannot be treated as that of the one registered under the Karnataka Cooperative Societies Act, 1959 or that registered under the Karnataka Souhardha Sahakari Co-operative Societies Act, 1997. Proposition: The issue is covered by the decision of a Di .....

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e case, had not examined the applicability of the provisions of the definition of a co-operative bank as per Part V of the Banking Regulation Act, 1949 by reading Explanation to section 80P(4). The facts of the above case are clearly distinguishable and are not applicable. However, a Review Petition was filed in the said case and subsequently, a memo had been filed to withdraw the said Review Petition, which is pending. It is submitted that the matter is being taken up by the Revenue in appeal b .....

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given subject. 2. In this regard, I have been directed to state that sub-section (4) of section 80P provides that deduction under the said section shall not be allowable to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. For the purpose of the said sub-section, co-operative bank shall have the meaning assigned to it in part V of the Banking Regulations Act, 1949. 3. In part V of the Banking Regulation Act, .....

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s only clarified that if the societies do not fall within the meaning of the co-operative bank as per Part V of the Banking Regulation Act, 1949, then exception under Section 80P(4) will not apply. Proposition: The assessee Society has not obtained Banking Licence from the R.B.I: It is contended that it is also pertinent to note that it is necessary that a co-operative society should have a banking licence as per the definition under the Income Tax Act, for carrying on banking business and if th .....

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ds 'primary co-operative bank' means a co-operative society other than …' in clause (ccv) of BR Act, the Legislature has created a legal fiction for the purpose of taxing under certain circumstances, a Society which is to be treated as a 'bank' for the purposes of the Income Tax Act, 1961 while dealing with the issue of its claim of deduction under Section 80P. Further, when a Statute enacts that something shall be deemed to be treated as something else, which in fact .....

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a 'primary co-operative bank' which fulfils the above three conditions. 9. In the light of the above contentions and on an examination of the relevant legal provisions, it is to be noticed at the outset that this court in the appeal in Bangalore Commercial Transporter Credit Co-operative Society Limited (supra), 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 T .....

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