Co operative Credit society providing banking or credit facility to its members is taxable under section 80P or not?
Meaning and Definitions:
1) Meaning of Co operative Society: Section 2(19) of IT Act, 1961: ‘Cooperative Society’ means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies.
2) Meaning of Urban Consumer’s Co-operative Society: Under section 80P(2) (explanation), such a society has been defined as “a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town, area or cantonment”.
3) Meaning of Co-operative bank and primary agricultural credit society: It shall have the same meaning as assigned to them in Banking Regulation Act, 1949.
4) Meaning of Primary Co-operative agricultural and rural development bank: It means a society having its area of operation confined to a taluk and the primary object of which is to provide for long term credit for agricultural and rural development activities.
5) Meaning of Consumer’s Co-operative Society: It means a society for the benefit of consumers.
A) Where 100% deduction is allowed: In the case of the following cooperative societies, full deduction is allowable in respect of following incomes:
1) Profits attributable to certain Specified Activities [Section 80P(2)(a)]: 100% of the profits, included in Gross Total Income, attributable to any one or more of the following activities are deductible to a co-operative society engaged in:
> carrying on the business of banking or providing credit facilities to its members; or
> a cottage industry; or
> the marketing of the agricultural produce grown by its members; or
> the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members; or
> the processing, without the aid of power, of the agricultural produce of its members; or
> the collective disposal of the labour of its members; or
> fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members. [Section 80P(2)(a)]
2) Income from investment with other co-operative societies [Section 80P(2)(d)]:
100% of the profits, included in Gross Total Income are deductible in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other co-operative society.
3) Section 80P(4): The deduction under Section 80P is not available for Co-operative banks from A.Y. 2007-08. It has been explained by the Finance Minister while moving the amendment that the co-operative banks were functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore Section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said 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.
B) Licensing of Existing Primary (Urban) Co-operative Credit societies/Banks : In terms of sub-section (2) of Section 22 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), the primary (urban) cooperative banks existing in the country as on March 1, 1966, (when some banking laws were applied to UCBs), were required to apply to the Reserve Bank of India. They were given three months to obtain a licence to carry on banking business. Similarly, a primary credit society which becomes a primary (urban) cooperative bank by virtue of its share capital and reserves reaching Rs. one lakh (Rs.1,00,000) and above was to apply to the Reserve Bank of India for a licence within three months from the date on which its share capital and reserves reach Rs. one lakh (Rs.1,00,000).
The existing unlicensed “primary” (urban) cooperative banks “can carry on banking business” till they are refused a licence by the Reserve Bank of India.
C) Conditions where Co operative Society will be treated as Co operative Bank: From the definition of Co-operative bank it is apparent that Co- operative bank means state‟ co-operative bank, a Central Cooperative Bank and a Primary Co-operative bank. It is not the case of the revenue that the assessee is a state Co-operative bank or Central Cooperative bank. We have therefore to find whether the assessee is a primary Co-operative bank.
The Primary Co-operative bank is defined under section 5 clause (CCV) of Banking Regulation Act 1949 as under:- “(CCV)” primary co-operative bank” means a co-operative society, other than a primary agricultural credit society-
> the primary object or principal business of which is transaction of banking business
> the paid-up share capital and reserves of which are not less than one lakh of rupees
> the bye-laws of which do not permit admission of any other cooperative society as a member
Provided that this sub-clause shall not apply to the admission of a cooperative 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.”
If the co-operative society complied with all the three conditions; firstly that the primary object or principle business transacted by it is a banking business, secondly, the paid up share capital and reserve of which are 1 lakh or more and thirdly, by laws of the co-operative society do not permit admission of any other co-operative society as a member, it will be regarded to be primary co-operative bank.
If Co-operative society does not fulfil any of the conditions, it cannot be regarded to be a primary co-operative bank and provisions of Sec. 80P(4) will not be applicable. Once, the Assessee will not fall within the provisions of Sec. 80P(4), the Assessee, in our opinion, will be eligible to get deduction u/s 80P(2)(a)(i) in respect of whole of the income which the Assessee derives from carrying on the business of banking or providing credit facilities to its members.
D) Co-operative credit society engaged in the business of banking : (Judicial view)
In many cases, the Income tax department has did not allow the deduction u/s 80P(2)(a)(i) by invoking the provisions of section 80P(4).
In this regards, first we have consider point D mentioned above. Further, again we have to check whether the business carrying out by Co-operative Credit Society is banking business or not.
Banking business has been defined u/s 5(b) of the Banking Regulation Act in the following manner :- ” 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.”
From the said definition it is clear that banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment. These deposits must be accepted from the public, not only from the members. These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise.
Further it is not necessary that the co-operative society should have a banking licence as per the definition under the Income Tax Act for carrying on banking business. If licence is not obtained it may be an illegal banking business under the other statute. What we have to see whether the nature of the business carrying on by the assessee is a banking business or not. The Income Tax in my opinion is not concerned whether the banking business carried on by the assessee is legal or illegal. The income has to be assessed u/s 14 of the Income Tax Act under the same head even if the nature of the business is illegal.
Case laws where deduction is allowed u/s 80P to the Co-operative credit societies providing credit facility to its members:
> ITAT, Poona – Jankalyan Nagri Sahakari Pat Sanstha Ltd. reported in 24 Taxmann.com (Pune Tribunal) 127
> ITAT, Panaji- Athani Taluka primary teachers’ Co-operative credit society Ltd. ITA NO. 06/PNJ/2014 on 04-07-2014
> ITAT, Bangalore – Yeshwantpur Credit co-operative Society on 11 April, 2012
> ITAT, Indore – Bhee Thrift & Credit Co- operative society on 6 August, 2012
As far as deduction u/s 80P(2)(d) is concerned, the co-operative credit society will get the deduction under said section of interest and dividend earned from investment in other Co-operative society and Co-operative Bank. Refer case law: Solitaire CHS Ltd. Vs PCIT (ITAT Mumbai) – Appeal No. ITA No.3155/Mum/2019, Date of Judgement : 29/11/2019, AY 14-15. Further, Hon’ble Jurisdictional High Court dated 1st September 2016 in case of CIT vs. Rajasthan Rajya Sahakari Kray Vikray Sangh Ltd. DB ITA Nos. 139/2002, 20/2004, 24/2004, 27/2004. The Ld. A/R has also relied upon the decision of the Hon’ble Gujarat High Court in the case of Surat Vankar Sahakari Sangh Ltd. vs. ACIT 72 taxman.com169 (Guj.) as well as the decision of the Mumbai Bench of the Tribunal dated 15.01.2016 in case of Lands End and Co-operative Housing Society Ltd. vs. ITO in ITA No. 3566/Mum/2014. Hence, the Ld. A/R has contended that a co-operative bank is primarily a co-operative society and sub-classification of cooperative societies engaged in other business activity is only for providing the benefit u/s 80P of the Act whereas for the purpose of section 80P(2)(d) the deposits/ investment made in the cooperative society includes cooperative banks. He supported the order of the Ld. CIT(A)