ITO, BAGALKOT vs. M/S RAMALINGESHWAR CREDIT CO-OP SOCIETY LTD.,, BAGALKOT

This appeal by the revenue is directed against the order of the CIT(A), Belagavi dated 03-06-2015 for the assessment year 2012-13.

“1. The ld.CIT(A) erred in law and on facts in not appreciating the fact that the assessee is a co-operative society which fulfills all the three conditions of being held a primary co-op. bank, as specified in sec.5(CCV) of the banking regulation Act, 1949.

2. The ld.CIT(A) erred in law and on facts in not appreciating the definition of a co-op.bank, wherein the explanation to sec.80p(4) of the IT Act clarifies that the co-op. bank shall have the meaning assigned to it in part-V of the Banking Regulation Act.

3. The ld.CIT(A) erred in law and on facts in not appreciating the fact that the assessee society being a credit co-op. society which is engaged in banking business is a primary co-op. bank within the definition of sec.5(ccv) of the Banking Regulation Act, 1949 and as such, is not eligible for deduction u/s 80P(2)(i) of the IT Act, 1961. 4. The ld. CIT(A) erred in not appreciating thefacts of the case and also relying upon thez decision of the High Court of Karnataaka in CIT Vs Sri Biluru Gurubasava Pattin Sahakari Sangh Niyamitt, Bagalkot in dated 5.2.2014 and other decisions, ignoring the decision of the ITAT, Panaji Bench. The Hon’ble Bench in the case of Sri Durdundeshwar was urban co-op.credit society Ltd. has upheld the stand of the department and has categorically distinguished the decision of Sri Biluru Gurubasava Pattin Sahakari Sangh Niyamit, in various cases of co-op. societies”.

2.1 The assessee is a Co-operative Society registered under the provisions of Karnataka State Co-operative Act, 1959 filed its return of income for the assessment year 2012-13 on 12-02-2013, declaring the total income at ‘NIL’ after claiming deduction a sum of Rs.67,84,013/- u/s 80P(2)(a)(i) of the Act. Against the said return of income the assessment was completed u/s 143(3) of the Act, vide order dated 20-10-2014, the AO had disallowed the assessee’s claim for deduction u/s 80P(2)(a)(i)of the Act and determined the total income at Rs.67,84,013/-.

“6. I have carefully perused and considered the aforesaid submission made by the appellant and the contents of the Assessment Order passed by the Assessing Officer. I have also perused the case laws relied upon by the appellant and the Assessing Officer. The main plank of argument of the Assessing Officer has been that after careful analysis of Section 80P(4) read with section 2(24)(viia) of the Income-tax Act, 1961 and Part V of the Banking Regulation Act and the facts of the case, the appellant assessee co-operative credit society is held to be a 'Primary Co-operative Bank' hence is not eligible for deduction under sec.80P(2)(a)(i) in view of the newly inserted provisions of section 80P(4). The assessing Officer has arrived at a conclusion that if a cooperative society satisfies all the three conditions as laid down in the definition as given u/s 5(ccv) in Part V of the Banking Regulation Act, 1949, then it becomes a "primary co-operative bank", 2nd therefore deduction u/s 8013(2)(a)(i) can be denied by virtue of Sec.80P(4).

6.1 The relevant part of Section 80P of the LT Act under which the appellant cooperative society has claimed deduction reads as under: "Deduction in respect of Income of co-operative societies. 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 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 co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or (ii)……………………….. the whole of the amount of profits and gains of business attributable to any one or more of such activities:

6.1.1 The clause (4) of sec.BOP inserted by the Finance Act,2006 w.e.f. 01- 04-2007, which has been invoked by the Assessing Officer to deny deduction to the appellant co-operative society reads as under:

(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 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 agricultural and rural development activities.

By virtue of introduction of clause (4) in sec.80P, the 'Co-operative banks' have been taken out of the purview of exemption granted under sec.80P whereas other entities/cooperative societies specified in other clauses of sec.8013 continue to enjoy such exemptions. The Explanation to sec.80P provides that "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).

6.1.2 Following the provisions of aforesaid Explanation to sec.SOP, the Assessing Officer, with a view to find out the definition of "co-operative bank" has taken recourse to the relevant provisions of The Banking Regulation Act,1949.

Sl.No. Category Clause/section of the Definition Banking Regulation Act, 1 2 3 4 1 Co-operative Clause (cci) of section 5 Co-operative Bank means a State Co- Bank operative Bank and a Primary co- operative Bank 2 Primary Clause (ccv) of section 5 Co Primary Co-operative bank means a Co operative Bank Operative Society other than a Pr i m a r y a g r i c u l t u r a l c r e d i t s o c i e t y ( 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 lakhs of rupees and(3) the bye laws of which do not permit admission of any other co-operative society as a member 3 Primary Credit Clause (ccvi) of section 5 Primary Co-operative Society means a Society co-operative 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 lakhs of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member.

The Assessing Officer has thus mentioned that the 'Co-operative Bank' includes 'Primary Co-operative Bank' and 'Primary Co-operative Bank' means Co-operative Society -the primary object or principal business of which is the transaction of banking business;the paid up share capital and reserves of which are not less than one lakhs of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member.

6.1.3 The Assessing Officer has concluded that the appellant co-operative society satisfies all the above mentioned three conditions and therefore it is held to be a 'Primary Co-operative Bank' and hence its claim of deduction u/s 80P(2)(a)(i) has been denied u/s 80P(4). Before arriving at this conclusion the Assessing Officer has also referred to the newly inserted provisions of Sec.2(24)(viia), inserted by the Finance Act,2006 w.e.f. 01-04- 2007 which reads as under: "(24) "Income" includes – (viia) The profits and gains of any business of banking (including ‘ providing credit facilities) carried on by a co-operative society with its members; The Assessing Officer has contended that the purpose of introduction of these provisions was to tax the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members. The Assessing Officer has also referred to the definition of 'Banking' as provided in sec. 5(b) of the Banking Regulation Act,1949 which reads as under:

"(b)aanking" means the accepting for the purpose of lending or investment, of deposit of money from pubic, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise."

The A.O has come to the conclusion that the appellant co-operative society is doing banking business as 'providing credit facilities to members' is akin to banking business and since the membership is open to public, it is accepting deposits from public which can be withdrawn by any one of the specified means within the meaning of above mentioned definition of banking.

6.1.4. Similar issue is also involved in a number of cases pertaining to credit co-operative societies which are also in appeal and they have all contested the action of the AO is invoking the provisions of Sec. 80P(4) in their respective cases on the basis of various contentions discussed herein below:

6.2 The appellants on the other hand has challenged the interpretation of Sections 801)(2), 80P(4) and relevant provision of the Banking Regulation Act, 1949 as adopted by the A.O in his Assessment Order. The appellants have also contended that the intention of the legislature as revealed by the speech of the Finance Minister was not to deny deduction to all the cooperative societies by introduction of sec.80P(4).

6.2.1 It has also been a contention of the appellants that to fulfill the first condition for becoming a 'Primary Co-operative Bank', the society should carry on the business of banking as per the definition of 'banking' in Banking Regulation Act, 1949. The appellants have also contended that the respective appellant assessee society registered under the Karnataka Co-Operative Societies Act, 1959 is carrying on the business of providing credit facility to its members and is not allowed to issue cheques, drafts, pay orders,etc. As per the Banking Regulation Act, permission of Reserve Bank of India is required to issue cheques, drafts and pay orders, etc. and the respective appellant has not obtained any such license/permission from the Reserve Bank of India to carry on the business of banking.

6.2.2 The appellant cooperative societies have contended that the explanatory note to the memorandum explaining the provisions in the Finance Bill, 2006 wherein the Hon'ble Finance Minister explains the reasons for withdrawal of tax benefits available to certain cooperative banks, the relevant portion of the said notes is reproduced herein below: "Section 80P, inter alia, provides for a deduction from the total income of the cooperative societies engaged in the business of banking or providing credit facilities to its members, or business of cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc. 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) so as to provide that the provisions of the said section shall not apply in relation to any co- operative bank other than primary credit society or a primary co- operative 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 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'

This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." The appellants have thus contended that it was clear that the intention of the Finance Minister was to tax 'co-operative banks' only.

6.2.3 The appellants have relied on the decision in the cases of (i) Karnataka High Court (Dharwad Bench )Order in the case of CIT Vs Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha . Bagalkot ITA 5006/2013 dt 5th Feb 2014 wherein apart from the deciding on section 263 it has also held, on section 80P that " As the assessee is not a cooperative bank carrying on exclusively banking business and as it does not possess a licence from Reserve bank of India to carry on business, it is not a Cooperative Bank.

(ii) The Karnataka High Court decision in the case of The Commissioner of Income Tax (A), Mysore & Others Vs General

Insurance Employees Cooperative Credit Society Ltd dt 27.6.2014. (iii) Karnataka High Court decision in the case of Vasavi Multipurpose Souharda Sahakari Niyamita, ITA No. 505/2013 dated 27/06/2014.

(iv) CIT Vs Jafari Mom in Vikas Coop Credit Society Ltd ITA 442,143 & 863 of 2013 of Gujarat High Court.

(iv) Taramani mahila Coop Credit Society Vs ITO Ward 1(2), Belgaum ITA 229 & 230 /PNJ/2013 dt 28.2.2014

(v) ITAT Bangalore B Bench decision vide for the Asst Year 2007-08 of M/s Bangalore Commercial Transport Coop Society Ltd, Bangalore.

(v) ITO Vs Yeshwantpur Credit Coop Society Ltd Dt 11.4.2012 rendered by ITAT A Bench, Bangalore

(i) M/s Jayaiakshmi Mahila Vividodeshagala Souharada Sahakari Ltd & Another in to 03/PNJ/2012 and ITA 04 to 06/PNJ/2012.

The appellants have claimed that in all these cases it was held that income earned by co-operative society from its act of lending money to members shall be eligible for exemption under section 80P(2)(a)(i) of the Act.

7. The important aspects relating to the issues in this case have been considered and decided by various ITATs across the country. The jurisdictional ITAT of Bangalore bench in a number of cases while deciding the issue in favour of the assessees has held that The cooperative societies are not doing banking business and therefore, the provisions of section 80P(4) are not applicable to them. The jurisdictional ITAT Panjim bench has also in a number of cases where the assessee cooperative society engaged in providing credit facilities to its member.; and rwt accepting deposit from public as evidenced from their bye laws or the cooperative societies accepting other cooperative societies as members have held that those cooperative societies are entitles to the benefit of deduction u/s 80P(2)(a)(i) of the I.T. Act.

'Therefore, the intention of the legislature is clear. 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 co- operative agricultural and rural development bank. They did not want to extend the said benefit to a Co-operative bank which is exclusively carrying on banking business i.e. the purport of this amendment. Therefore, as the assessee is not a Cooperative bank carrying on exclusively banking business 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 8013(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 In the instant case, when the status of the assessee is a Co-operative society and is not a Co-operative bank, the order passed by the Assessing Authority extending the benefit of exemption from payment of tax under section 80P(2)(a)(i) of the Act is correct.

8.2 The fact that the appellant is a cooperative society registered under the Karnataka Co operative Societies Act,1959 engaged in providing credit facilities to its members has been clearly mentioned by the A.0 in para 3 of his aforesaid assessment order. It is also not the case of the assessing officer that the assessee is registered with the RBI as a bank. In its aforesaid submissions dated 27-04-2015 the assessee has clearly stated with the help of necessary evidence and an affidavit dated 04/05/2015 to this effect that the assessee is a cooperative society registered under the Karnataka Co operative Societies Act, 1959 engaged in providing credit facilities only to its members and it does not posses any banking licence from the RBI. It is therefore, clear that the assessee case is squarely covered by the aforesaid decisions of the jurisdictional High Court of Karnataka in the cwsaes ofSri biluru Gurubasav Pattina Sahakari Sangha Niyamitha, supra, which was followed in the case of General insurance Employees Co-operative Credit Society Ltd and Karnataka High Court decision ni the case of Vqasavi Multipurpose Souharda Sahakari Niyamitha, dated 27- 06/2014 supra. Therefore, in view of the foregoing discussion and respectfully following the aforesaid decisions of the jurisdictional High Court of Karnataka, it is held that the assessee’s case is not covered by sec.80P(4) as it is not a co- operative bank and therefore, it is entitled to exemption u/s 80P(2)(a)(i) of the IT Act”.

“ 4. Having regard to the rival contentions and the material on record, we find that the assessee is a credit co- operative society carrying on banking activity only for its members. This is also evident from the corrigendum issued by the CIT(A) cited supra. The Hon’ble High Court of Karnataka in a number of cases, including the case of M/s Vasavi Credit Co-operative Society Ltd., cited supra, has held that if the assessee is not a co-operative bank carrying exclusively banking business and it does not possess a license from the Reserve Bank of India to carry on banking business, then it is not a co-operative bank but a co-operative society which carries on business of money lending to its members who is covered u/s 80P(2)(a)(i) of the Act and therefore, is eligible for deduction u/s 80P(2)(a)(i) of the Act. The facts and circumstances of the case before us, being similar, we hold that there is no merit in the appeal of the revenue. Accordingly, the revenue’s appeal is dismissed”.

“8.1. The Hon’ble High Court of Karnataka in the case of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, supra which was followed in the cases of General Insurance Employees Co-operative Credit Society Ltd. and Karnataka High Court decision in the case of Vasavi Multipurpose Souharda Sahakari Niyamitha, dated 27/06/2014, supra, has clearly held hat a co-operative society registered as co-operative society, providing credit facilities to members and not registered with the RBI cannot be denied the exemption under section 80P(1)(i) of the IT Act. The operative part of the judgment reads as follows; “Therefore, the intention of the legislature is clear, 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 co-operative agricultural and rural development bank. They did not want to extend the said benefit to a co-operative bank which is exclusively carrying on banking business i.e the purpose of this amendment. Therefore, as the assessee is not a Co- operative bank carrying on exclusively banking business and as it does no 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………………….in the instant case, when the status of the assessee is a co-operative society and is not a co-operative bank, the order passed by the Assessing authority extending the benefit of exemption from payment of tax under section 80P(2)(a)(i) of the Act is correct”. 8.2 The fact that the appellant is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 engaged in providing credit facilities to its members has been clearly mentio0ned by the AO in para-3 of his aforesaid assessment order. It is also not the case of the AO that the assessee is registered with the RBI as a bank. In its aforesaid submissions dated 18-11-2014 the appellant has clearly stated with the help of necessary evidence and an affidavit dated 02-9- 2014 to this effect that the appellant is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959 engaged in providing credit facilities only to its members and it does not possesses any banking licence from the RBI. It is therefore, clear that the appellant’s case is squarely covered by the aforesaid decisions of the jurisdictional High Court of Karnataka in the cases of Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha, supra which was followed in the case of General Insurance Employees Co-operative Credit Society Ltd, and Karnataka High Court decision in the case of Vasavi Multipurpose Souharda Sahakari Niyamitha dated 7-06-2014, supra. Therefore, in view of the foregoing discussion and respectfully following the aforesaid decisions of the jurisdictional High Court of Karnataka. It is held that the appellant case is not covered by section 80P(4) as it is not a’ co-operative bank’ and therefore, it is entitled to the exemption u/s 80P(2)(a)(i) of the IT Act”.

Order pronounced in the open court on the 11th December, 2015.