Loans Given By Co-Operative Banks To Their Nominal Members Qualify For Deduction U/s 80P(2)(A)(I), Reiterates Bangalore ITAT

While considering the definition of 'member' under the Kerala Act, as per which loans given to nominal members would qualify for purpose of deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961, the Bangalore ITAT directed the AO to grant relief to the assessee by allowing the claim of deduction under said provision.

Relying on the decision of Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd. v. CIT (2021) 123 taxmann.com 161 (SC), the Bench comprising Beena Pillai (Judicial Member) and Chandra Poojari (Accountant Member) observed that, “Section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business, i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench Judgement is wholly incorrect in its reading of Citizen Co-operative Society Limited (supra). Clearly, therefore, once Section 80P(4) is out of harm's way, all the Assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture.” (Para 7)

As per the brief facts of the case, the assesee had earned interest and dividend on investment in South Canara District Co-op. Bank. Assessee society has claimed deduction u/s. 80P on the interest and dividend earned through investments in South Canara District Co-op. Bank. The assessee had claimed that, as the society is engaged in the business of providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to such activities is deductible under section 80P and accordingly claimed exemption u/s. 80P(2)(a)(i). The AO observed that in the computation of income filed, the assessee had declared Total Income after claiming deduction u/s 80P(2)(a) of the Act. The said deduction was claimed by the assessee in respect of the amount of profits attributable to the activity of providing credit facilities to its members. Hence, the AO disallowed the entire claim.

The Coram noted that the disallowance has been made in the hands of the assessee as assessee was also having nominal members from whom deposits were taken and credit facilities were provided.

The Coram also noted that the expression "Members" is not defined in the Income-tax Act, and hence it is necessary to construe the expression "Members" in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act.

The Bench further observed that the limited object of Section 80P(4) is to exclude co-operative banks that function at par with other commercial banks, i.e. which lend money to members of the public.

The Coram reiterated while referring the Supreme Court decision in the case of Mavilayi Service Cooperative Bank Ltd. v. CIT reported in (2021) 123 taxmann.com 161 (SC) that, “if the Banking Regulation Act, 1949 is not to be seen, what is clear from Section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment of deposits of money from the public.”

The Bench further added that, “Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a cooperative bank and holds a license issued in that behalf by the RBI.”

Therefore, relying on the previous decisions of the Apex Court, the ITAT allowed the assessee's appeal.

Counsel for Appellant/ Taxpayer: Sheetal Borkar

Counsel for Respondent/ Department: Parithivel

Case Title: M/s. Charvaka Seva Sahakari Bank Ltd. verses Income Tax Officer

Case Number: ITA No. 901/Bang/2023

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