All three conditions of 5(1)(ccv) are to be satisfied cumulatively by a society for being termed as co-operative bank

Brief- In the case of The Quepem Urban Co-operative Credit Society Ltd vs. ACIT High Court of Bombay at Goa held that All three conditions of 5(1)(ccv) are to be satisfied cumulatively by a society for being termed as co-operative bank. Which are as follows :-(1) Its principal business or primary object should be business of Banking; (2) Its paid up share capital and reserves should not be less than rupees one lakh. (3)Its bye-laws do not permit admission of any other cooperative society as its member.

Brief about the case

The three appeals filed by the appellant were identical in facts and issue arising there from was similar, therefore facts of appeal no.22/2015 were only dealt with. The appellant was a Co-operative society registered under the Goa Co-operative Societies Act, 2001. The return of income relevant to A.Y. 2008-09 was filed by the appellant claiming benefit of entire income u/s 80P(2)(a)(i) of the Act, resulting in Nil taxable income which was disallowed by the A.O. while making assessment u/s 143 on the ground that appellant being primary co-operative bank was covered by the provisions of section 80P(4) of act, hence not entitled to such deduction. Being aggrieved the appellant preferred an appeal before CIT(A) who allowed the appellant’s appeal holding that the appellant was not a Co-operative Bank but a Co-operative Credit Society, thus not hit by the provision of Section 80P(4). Against the order of CIT(A), Revenue preferred an appeal to the Tribunal. The Tribunal allowed the appeal of the Revenue and held that appellant was a Co-operative Bank and therefore, not entitled to the benefit of section 80(P)(2)(i) and restored the order of A.O. Being aggrieved with the order of the Tribunal, the assessee filed an appeal before the High Court. The appeal was admitted by the Court on the following substantial question of law.

Substantial question of law

“Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in law in holding that the Appellant is a Co-operative Bank and hence, it is not entitled to deduction under Section 80P(2)(a)(i) by virtue of Section 80P(4) of the Act ?”

Contention of the Assessee

The Ld. Counsel submitted that the appellant was admittedly a co-operative society registered under the Co-operative Society Act and was engaged in providing credit facilities to its members. The Tribunal erroneously hold the appellant to be a primary co-operative bank on the ground that it satisfy all the three conditions (1), (2) and (3) of section 5(1)(ccv) of the Banking Regulation Act, 1949. The appellant society does not satisfy condition (1) and (3) above viz. Banking was not its primary object nor its principal business nor does it prohibit any other cooperative society from becoming its member. It was further submitted that in the absence of banking license issued to the appellant by the RBI under Banking Regulation Act, the appellant cannot be held to have its principal business as banking business which was supported by decision of the Karnakata High Court in Commissioner of Income Tax and another vs. Sri Biluru Gurubasva Pattina Sahakari Sangha Niyamitha Bagalkot (2014) 369 ITR 86.

Contention of Revenue

The ld. counsel submitted the fact that the appellant was doing business along with non-members. No matter how small the transaction was, it would by itself disqualify the appellant from enjoying the exemption u/s 80P(2)(a)(i) of the Act as the section specifically provides that the deduction there-under will be available only in case of co-operative society which is providing facilities to its members.

Held by the High Court

The only dispute lies between the parties was on the fact whether the appellant was a co-operative bank? Section 80P of the Act, prescribes the meaning of co-operative bank as was assigned to it in Chapter V of the Banking Regulation Act, 1949. A cooperative bank as defined in Section 5(cci) of Banking Regulation Act mean a State Cooperative Bank, a Central Cooperative Bank and a primary cooperative bank. Admittedly, the appellant was not a State Cooperative Bank, a Central Cooperative Bank. Thus what was to be examined was whether the appellant was a primary Cooperative Bank as defined in Para V of the Banking Regulation Act. Section 5(ccv) of the Banking Regulation Act defines a primary cooperative bank to mean a cooperative society which cumulatively satisfies the following three conditions:

(1) Its principal business or primary object should be business of Banking;

(2) Its paid up share capital and reserves should not be less than rupees one lakh.

(3)Its bye-laws do not permit admission of any other cooperative society as its member

It was accepted position that condition No.(2) was satisfied as the share capital was in an excess of rupees one lakh. Therefore the issue that arose for consideration was whether the appellant satisfies condition No.(1) and (3) above.

Section 5b of the Banking Regulation Act defines banking to mean accepting of deposits for the purpose of lending or investment, of deposit of money from the public repayable on demand or otherwise. The Tribunal order found the fact that the appellant did deal with non members in a few cases by seeing deposits. This fact of accepting deposits from non-members was also recorded by the CIT(A) which was not disputed by the appellant that in a few cases they have dealt with non members. However so far as accepting deposits from non members was concerned it was submitted that the Bye-law 43 only permits the society to accept deposits from its members. It was undisputed that the transactions with non members were insignificant/miniscule. The contention of Revenue that the appellant was not entitled to the benefit of Section 80P(2)(a)(i) of the Act in view of the fact that it deals with non-members cannot be upheld for the reason that Section 80P(1) of the Act restricts the benefits of deduction of income of co-operative society to the extent it is earned by providing credit facilities to its members. Therefore, to the extent the income earned is attributable to dealings with the non-members are concerned the benefit of Section 80P of the Act would not be available. On the above basis it cannot be concluded that the appellant’s principal business was of accepting deposits from public and therefore it was in banking business. The impugned order of Tribunal erroneously relies upon bye-law 43 of the society which enables the society to receive deposits to conclude that it can receive deposits from public. The impugned order of Tribunal sets out the object clause of the appellant, which has 24 objects but there-after draws no sequiter to conclude that the primary object was banking.

So far as condition No.3 was concerned it was admitted fact the bye-laws of the appellant society originally in bye-law 9(d) clearly provided that no co-operative society shall be admitted to the membership of the society. Thus earlier there was a bar but the same was amended w.e.f. 12 January, 2001 so as to permit a society to be admitted to the membership of the society. Therefore for the subject assessment years there was no prohibition to admitting a society to its membership. According to Tribunal, a society and a co-operative society are clearly words of different and distinct significance and as per bye laws the membership was only open to society and not to a co-operative society. It was rightly pointed out on behalf of the appellant the word society as referred in bye-law 9(d) would include the co-operative society as the definition of a society under the Co-operative Act was ‘a co-operative society registered under the Cooperative Act’. This was a mandatory condition i.e. the bye laws must specifically prohibit admission of any other cooperative society to its membership. The Revenue has not been able to show any such prohibition in the bye laws of the appellant.

Thus, the three conditions as provided under Section 5 (CVV) of the Banking Regulation Act, 1949, were to be satisfied cumulatively and except condition (2) the other two qualifying conditions were not satisfied, therefore, appellant cannot be considered to be a co-operative bank for the purposes of Section 80P(4) of the Act. Thus, the appellant was entitled to the benefit of deduction available under Section 80P(2)(a)(i) of the Act. Accordingly, the substantial question of law as framed is answered in the negative i.e. in favour of the appellant and against the respondent-Revenue.