IT : Section 80P deductions to be denied only to Co-operative banks and not to Co-operative society after insertion of section 80P(4)
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[2013] 38 taxmann.com 322 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'C'
Income-tax Officer, Ward -I (1), Erode
v.
The Kasipalayam Primary Agricultural Co-operative Bank Ltd.*
N.S. SAINI, ACCOUNTANT MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
IT APPEAL NO. 174 (MAD.) OF 2013
C.O. NO. 42 (MAD.) OF 2013
[ASSESSMENT YEAR 2009-10]
C.O. NO. 42 (MAD.) OF 2013
[ASSESSMENT YEAR 2009-10]
AUGUST 23, 2013
Section 80P of the Income-tax Act, 1961 - Deductions - Income of co-operative societies [Co-operative banks] - Assessment year 2009-10 - Deduction under section 80P was claimed by assessee - Assessing Officer noted that with effect from 1-4-2007 sub-section (4) of section 80P was inserted to provide that deduction under section 80P would not be allowed in case of Co-operative Bank and held that since main activity of assessee was its banking business deduction was not allowable - However, Commissioner (Appeals) allowed deduction under section 80P to assessee by observing that new sub-section (4) was brought into statute for prohibiting deduction to Co-operative Banks only and not to co-operative credit societies and assessee was a co-operative credit society - Whether since no material could be brought to show that assessee was a co-operative bank within meaning of sub-section (4) of section 80P and not a co-operative credit society, no interference was called for with Commissioner (Appeals) order - Held, yes [Paras 17 & 18] [In favour of assessee]
FACTS
| ■ | The assessee claimed deduction under section 80P. | |
| ■ | According to the Assessing Officer, the assessee's main activity was only banking business and income from banking business was taxable from assessment year 2007-08 onwards by amending section 80P(2)(a)(i) and, thus, assessee was not eligible for deduction. | |
| ■ | The Commissioner (Appeals) allowed deduction under section 80P to assessee by observing that new sub-section (4) was brought into statute for prohibiting deduction to co-operative banks only and not to co-operative credit societies and assessee was a co-operative society. | |
| ■ | On second appeal: |
HELD
| ■ | No material could be brought to show that assessee was a co-operative bank within the meaning of sub-section (4) of section 80P and not co-operative credit society and no material was brought to show that the provision of accepting nominal members was not in accordance with the Co-operative Societies Act or Rules or the persons who were made nominal members were, in fact, not the members of the assessee-society. In the above circumstances, there was no good reason to interfere with the order of the Commissioner (Appeals) which has been passed following the order of the Tribunal. [Para 18] |
CASES REFERRED TO
Apex Urban Co-operative Bank of Maharashtra & Goa v. ITO [2011] 16 taxmann.com 302/[2012] 134 ITD 118 (Mum.) (para 9) and ACIT v.Bangalore Commercial Transport Credit Cooperative Society Ltd. [IT Appeal No. 1069 (Bang.) of 2010, dated 8-4-2011]
T.N. Betgiri for the Appellant. S. Sridhar for the Respondent.
ORDER
N.S. Saini, Accountant Member - This is an appeal filed by the Revenue and the cross objection filed by the assessee against the order of the ld. CIT(A)-I, Coimbatore, dated 1.11.2012.
2. The Revenue has taken the following grounds of appeal:
| "1. | The order of learned Commissioner of Income-tax (Appeals) is erroneous and opposed to law. | |
| 2. | The learned CIT (A) failed to appreciate the fact that the assessee's principal business is banking only after the considering the profits and it is not a credit society within the meaning of explanation below section 80P(4) and hence the assessee is not eligible for deduction u/s 80P(2)(a)(i). | |
| 3. | The learned CIT (A) didn't call for any remand report and no opportunity was given to the AO to explain. | |
| 4. | The learned CIT(A) didn't look into the facts which had been distinguished clearly before allowing the appeal. | |
| 5. | For these and other grounds that may be adduced at the time of hearing, the order of CIT (Appeals) may be cancelled and that of the Assessing Officer be restored." |
3. The only issue involved in this appeal of the Revenue is whether the assessee is a 'Co-operative Bank' or a 'Primary Agricultural Credit Society'.
4. The brief facts of the case are that the Assessing Officer observed that the assessee carried out the following activities:
| (a) | Banking business | |
| (b) | Trading in Civil supply goods | |
| (c) | Trading in Fertilizers |
The assessee claimed deduction u/s 80P of the Act of Rs. 36,76,329/-. According to the Assessing Officer, the assessee's main activity was only banking business and income from banking business was taxable from assessment year 2007-08 onwards by amending section 80P(2)(a)(i) of the Act. Hence, the provisions of section 80P are not applicable to any co-operative bank other than Primary Agricultural Credit Society with effect from 1.4.2007. According to the Assessing Officer, the intention of the legislature was to extend the benefit of deduction u/s 80P(4) only when the activities of the society are in connection with agricultural purposes and activities for which it was started. The totality of the circumstances clearly indicates that the activities of the society are never intended for any agricultural activities or purposes. Mere naming of a society as ' Primary Agricultural Co-operative Society' was not sufficient for claiming deduction under the above section, but the principal or predominant activities of the bank should be in connection with agricultural purposes or for purposes connected with agricultural activities. He, therefore, held that in the light of the factual position, the assessee was not eligible for deduction of Rs. 36,76,329/- u/s 80P(2)(a)(i) of the Act.
5. The assessee carried the matter in appeal before the ld. CIT(A). The assessee submitted that the Assessing Officer has treated the assessee as 'Primary Agricultural Credit Society'. It was submitted that section 80P(4) does not deal with Primary Agricultural Credit Society. In fact, section 80P(4) in the Explanation, defines in clause(a) 'Co-operative Bank' and ' Primary Agricultural Credit Society' and in clause (b) 'Primary Co-operative and Rural Development Bank'. Further, in the Explanation to section 80P(4), in clause (a), it has been mentioned that both the terms shall have the meanings assigned to them in Part V of the Banking Regulation Act, 1949 (BR Act). Thus, the assessee does not fall within the meaning of 'Co-operative Bank' or ' Primary Co-operative and Rural Development Bank' so as to fall within clause(b) to the Explanation. Hence, what is left for consideration is as to under what definition the assessee falls. In other words, whether the assessee falls within the meaning of 'Co-operative Bank' or Primary Agricultural Credit' Society'. It was submitted that under the BR Act, section 5(cci), Co-operative Bank means "a State Co-operative Bank, a Central Co-operative Bank and a Primary Co-operative Bank". Further section 5(ccv), a Co-operative Bank means —
| "(1) | The primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities(including the marketing of crops) and | |
| (2) | 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."
6. It was, therefore, submitted that admittedly, the assessee was not a State Co-operative Bank, a Central Co-operative Bank and a Primary Co-operative Bank, as defined under BR Act, does not fit into first limb of clause (a) to Explanation to section 80P(4). It was further submitted that it has to be seen whether the assessee falls within the meaning of the second limb of clause (a) of Explanation to section 80P(4). It was argued that undisputedly the assessee does not fit into that definition also due to the following reasons:
| "(a) | First, all the conditions, being cumulative, are not satisfied in the case of the assessee. | |
| (b) | The first condition, that the principal business is to provide financial accommodation to its members for agricultural purposes, is not satisfied, for the bye-laws do not say so. | |
| (c) | The second condition, that the bye-laws do not permit admission of any other co-operative society as a member, is not satisfied, for the bye-laws, in clause 5(1)(a) specifies that notwithstanding anything contained in this bye-law, it shall be competent for the financing bank to take shares in the bank to such extent as may be necessary. Such shares shall be redeemable at the discretion of the financing bank." |
7. It was, therefore, submitted that the finding by the Assessing Officer that the assessee was not eligible for deduction u/s 80P in view of the provisions of sub-section(4) of section 80P was not sustainable in the eyes of law and the assessee was entitled for deduction un 80P(2)(a)(i) of the Act.
8. Regarding the Assessing Officer's observation that the assessee was in the business of banking, it was submitted that –
| "(A) | Reference to Part-V of the BR Act was opposite to the case of the assessee. | |
| (B) | Section 56 of the BR Act deals with 'Act to apply to co-operative societies subject to modifications'. | |
| (C) | Section 22(1) of the BR Act as applicable to Co-operative Societies was as under: |
| (1) | Save as hereinafter provided, no co-operative society shall carry on the banking business in India unless – |
| (a) | It is a primary credit society, or | |
| (b) | It is a co-operative bank and holds a license issued in that behalf by the Reserve Bank, subject to such conditions, if any, as the Reserve Bank may deed fit to impose |
| PROVIDED THAT nothing in this sub-section shall apply to a co-operative society, not being a primary credit society or a Co-operative Bank carrying on banking business at the commencement of the Banking Laws(Application to Co-operative Societies) Act, 1965[23 of 1965], for a period of one year from such commencement. | ||
| (D) | It can be seen that no license is required for banking business in the case of a co-operative society which is a primary credit society, whereas for other co-operative societies to carry on banking business, they should be co-operative banks and they should hold license issued in that behalf by the Reserve Bank of India. [AIR 2003 KER 299]. | |
| (E) | The assessee, admittedly, does not fall under 'Primary Credit Society' as defined in section 5(cci) of the BR Act." |
Therefore, it was argued that the assessee, admittedly, does not also fall within the meaning of 'Co-operative Bank' as defined in section 5(cci) of the BR Act and does not hold a license issued in that behalf by the RBI. Hence, it cannot be said that the assessee has been carrying on the banking business and it cannot denied deduction u/s 80P of the Act by invoking sub-section(4).
9. It was further submitted that the Mumbai Bench of the Tribunal in the case of Apex Urban Co-operative Bank of Maharashtra & Goa v. ITO[2011] 16 taxmann.com 302/[2012] 134 ITD 118 (Mum.) has held that the assessee's income cannot be considered as from the business of banking on the reason that the assessee is not having any license to do the business of banking. It was further submitted that for the other activities of the assessee, support was drawn from the above decision for the principle that the assessee should be in the business of banking to engage in any one or more of the forms of business as listed in section 6 of the BR Act.
10. It was further argued that section 22 of the BR Act prohibits Co-operative societies from carrying on banking business. The term 'co-operative society' as used in section 22 would include all types of co-operative societies. In other words, no co-operative society can carry on banking business unless it falls within the permitted categories set out in section 22. The term 'co-operative bank' has been defined in section 5(cci) as a State Co-operative Bank, a Central Co-operative Bank and a Primary Co-operative Bank. Therefore, the term 'co-operative bank' does not include all co-operative societies. It only includes the above mentioned three types of societies. By virtue of section 5(ccvii) the term 'State Co-operative Bank' is to be understood as a State Co-operative Bank or a Central Co-operative Bank or a Primary Co-operative Bank as defined under the NABARD Act. Thus, unless a co-operative society is a State Co-operative Bank or a Central Co-operative Bank or a Primary Co-operative Bank (as defined under the NABARD Act), no license can be issued by RBI.
11. It was argued that if a co-operative society is not a primary credit society, then to carry on banking business, it must be a co-operative bank and hold a license issued by RBI. Section 22(2) merely emphasizes that a co-operative society, other than a primary credit society, has to apply to RBI for license before it can commence banking business. However, this does not mean that RBI can give to any or all co-operative societies, a banking license. RBI can only give a license as provided in section 22(1) i.e to a co-operative bank. Further, in regard to the finding of the Assessing Officer and the admitted fact that the assessee, in the return of income, has mentioned the business as one of banking, it was submitted that the mere presence of the word 'bank' either in the return of income or its name is not determinative of its character.
12. It was further submitted u/s 5(b) of the Act, the term 'banking' has been defined as "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". Thus, in essence, the banking business is receiving money on current ac for deposit from the public repayable on demand and withdrawable by cheque, drafts or otherwise. In other words, the essence of the relationship of banker and customer is the affording of the facility to the customer to draw funds from the bank by issuing cheques. This is the primary characteristic of a banking business. Without it, the business is not banking as known.
13. It was further argued that to put it otherwise, an ordinary money lender who does not accept money on terms enabling a depositor to draw cheques upon him would not, therefore, be a bank or banker properly so called. The provisions of the Act would, therefore, apply only to limited class of cases where the bank or banker allows withdrawal of money by issue of cheques. Therefore, it is abundantly clear that the essence of banking is the relationship which is brought into existence at the time of the deposit; that is the core of banking. It is true that the essence of banking covers every possible phase or combination of deposit, custody, investment, loan, exchange, issue and transmission of money, creation and transfer of credit and other connected activities but if the essential characteristic of banking, namely, the power to receive deposits from the public which are repayable in the manner indicated in section 5(1)(b) of the Banking Companies Act is absent and merely the power of granting loans is retained and exercised does not make the company a banking company. In conclusion, it was submitted that the assessee is not a Primary Credit Society, it is not a Primary Agricultural Credit Society, it is not a Co-operative Bank as it does not hold any license issued by RBI. It has not done business of banking. It has the primary object of providing financial accommodation to its members and has been doing so and hence, does fall under 'Co-operative Credit Society' as defined in section 5(ccii) of the BR Act. Hence, action of the Assessing Officer in denying the benefit of deduction to the assessee as one providing credit facilities to its members u/s 80P(2)(a)(i) of the Act, more particularly invoking section 80P(4) of the Act is against law and the claim of the assessee is legally sustainable.
14. The ld. CIT(A), after considering the above arguments of the assessee, allowed the claim of the assessee by observing as under:
"6. I have gone through the submissions made by the appellant and the order of the Assessing Officer. The main motto of the appellant is lending for its members. Subsection (4) of Section 80P provides that deduction under the said section shall not be available to any cooperative bank other than a Primary Agricultural Cooperative Credit Society or rural development bank. For the purpose of the said subsection, cooperative bank shall have the meaning assigned to it in Part 5 of the Banking Regulation Act, 1949. In Part 5 of the Banking Regulation Act, cooperative credit means a State Cooperative Bank, a Central Cooperative Bank and a Primary Cooperative bank. From the above section, it is clear that the provisions of Section 80P(4) as 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 cooperative society carrying on credit facility to its members. This view is clarified by Central Board of Direct Taxes vide its clarification No.133/06/07/TPL dated 9th May 2007. The difference between Cooperative bank and Cooperative society are as follows:
| Nature | Cooperative Society registered under Banking Regulation Act, 1949. | Cooperative Society registered under Karnataka Cooperative Society Act, 1959 | |
| Registration | Under the Banking Regulation Act, 1949 and Cooperative Societies Act, 1959 | Cooperative 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 order, gift cheques, lockers, bank guarantees, etc. 3. Cooperative 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 cooperative society. 2. Society cannot open Savings Bank account, current account, issue letter of credit, discounting bills of exchange, issue cheques, demand drafts, pay orders, gift cheques, lockers, bank guarantees, etc. 3. Society cannot act as clearing agent for cheques, DDs, pay orders and other forms. 4. Society is bound to follow the rules and regulations as specified by in the Cooperative Societies Act. | |
| Filing of returns | Cooperative 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 bank. | |
| Use of words | The word 'bank', banking' can be used by a cooperative bank. | The word 'bank' 'banker', 'banking' cannot be used by a cooperative society. |
New proviso to Section 80P(4) is brought into the statute for application only to cooperative banks and not to credit cooperative societies. The intention of legislature of bringing in cooperative bank into taxation structure was mainly to bring in par with commercial banks. The Hon'ble ITAT, 'B' Bench, Bangalore in the case of the ACIT, Circle-3(1), Bangalore v. M/s Bangalore Commercial Transport Credit Cooperative Society Limited held that "the provisions of Section 80P(4) are applicable only to cooperative banks and not to credit cooperative societies". Further, the ITAT, Bangalore 'A' Bench in the case of M/s Yeshwantpur Credit in ITA No.737/Bang/2011 relied on the decision of the ITAT in the case of theAClT, Circle-3(1), Bangalore v. M/s Bangalore Commercial Transport Credit Cooperative Society Limited and held that if the assessee is a credit cooperative society, it is entitled to deduction u/s 80P(2)(a)(i). As seen from the facts of the case, they are identical with those of the observations and findings of the Bangalore Tribunal in the case of the M/s Bangalore Commercial Transport Credit Cooperative Society Limited and is entitled to deduction u/s 80P(2)(a)(i)."
15. The ld. D.R supported the order of the Assessing Officer whereas the ld. AR of the assessee reiterated the submissions made before the ld. CIT(A) and supported the order of the ld. CIT(A.)
16. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, deduction claimed u/s 80P of the Act by the assessee was denied by the Assessing Officer on the grounds that firstly, with effect from 1.4.2007 sub-section (4) of section 80P was inserted to provide that deduction u/s 80P shall not be allowed in case of a Co-operative Bank and secondly, that the assessee has two sets of members (i) normal members who became members by paying Rs. 10/- and Rs. 1/-with voting rights; and (ii) nominal members who became members by paying a nominal amount of Rs. 5/- and Rs. 2/- without voting rights and are the assessee's customers.
17. On appeal, the ld. CIT(A) allowed the deduction u/s 80P of the Act to the assessee by observing that new sub-section(4) was brought into the statute for prohibiting deduction to Co-operative Banks only and not to Co-operative Credit Societies. He listed out difference between a Co-operative Society registered under the Banking Regulation Act, 1949 and a Co-operative Society registered under the Karnataka Co-operative Society Act, 1959. The ld. CIT(A) opined that the facts of the instant case were similar to the facts of the case before the Bangalore Bench of the Tribunal in the case of ACIT v. Bangalore Commercial Transport Credit Cooperative Society Ltd. [IT Appeal No. 1069 (Bang.) of 2010, dated 8-4-2011] and therefore, following the same, he allowed the appeal of the assessee.
18. Before us, the ld. D.R could not point out any specific error in the order of the ld. CIT(A). No material could be brought before us to show that the assessee was a Co-operative Bank within the meaning of sub-section(4) of section 80P and not a Co-operative Credit Society. No material was brought before us to show that the provision of accepting nominal members was not in accordance with the Co-operative Societies Act or Rules or the persons who were made nominal members were, in fact, not the members of the assessee-society. In the above circumstances, we do not find any good reason to interfere with the order of the ld. CIT(A) which has been passed following the order of the Tribunal as stated in his order and quoted above. Thus, the grounds of appeal of the Revenue are dismissed.
19. The cross objection filed by the assessee is simply in support of the order of the CIT(A). Thus, there being no grievance of the assessee against the order of the CIT(A), the cross objection filed is infructuous and hence, dismissed.
20. In the result, both, the appeal of the Revenue and the cross objection of the assessee are dismissed.
POOJARegards
Prarthana Jalan
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