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The Commissioner Of Income Tax And Ors. v. The Mercantile Co-Operative Credit Society Ltd.
Case Summary: Income Tax Appeal No.100110 of 2014
Court: High Court of Karnataka, Dharwad Bench
Date: 21st September, 2015
Judges: The Honourable Mr. Justice Anand Byrareddy and The Honourable Mrs. Justice S. Sujatha
Factual and Procedural Background
The appeal arises from an order dated 13.06.2014 of the Income Tax Appellate Tribunal (ITAT), Panaji Bench, which allowed an appeal filed by the assessee for the assessment year 2007-08. The appellants before the High Court are the Commissioner of Income Tax and the Income Tax Officer, Belgaum (Revenue). The respondent is The Mercantile Co-operative Credit Society Limited, Belgaum (the Society), a co-operative society registered under the Karnataka State Co-operative Societies Act, 1956.
For AY 2007-08, the Society filed a return declaring nil total income after claiming deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Assessing Officer (AO) denied the deduction on the ground that the Society's activities fell within the scope of banking business as defined in Section 2(24)(vii a) of the Income Tax Act and, by reference to the Explanation to Section 80P(4), that a "co-operative bank" and a "primary agricultural credit society" should be understood as in Part V of the Banking Regulation Act, 1949 (BR Act). The AO observed that the Society's bye-laws showed activities in the nature of banking—receiving deposits from members and giving loans to members—and concluded that the Society satisfied the conditions under Section 56(ccv) of the BR Act and thus was a primary co-operative bank. Consequently, the AO held the Society to be ineligible for deduction under Section 80P.
The Society appealed to the Commissioner of Income Tax (Appeals), who allowed the appeal. The Revenue then appealed to the ITAT. The ITAT examined whether the Society was a "primary co-operative bank" under the BR Act and held that all three conditions required to qualify as a primary co-operative bank were not satisfied. The Tribunal concluded that the Society was not a primary co-operative bank and therefore Section 80P(4) was not applicable; the Society was entitled to deduction under Section 80P(2)(a)(i). The Revenue is before this Court under Section 260A of the Income Tax Act challenging the ITAT's order.
Legal Issues Presented
- Whether the benefit of deduction, under Section 80P(2)(a)(i) of the IT Act, could be denied to the assessee on the footing that, though the respondent was said to be a Co-operative Society, it was in fact a co-operative bank, within the meaning as assigned to such bank under Part V of the BR Act.
- Whether the Authorities under the IT Act were competent and possessed the jurisdiction to resolve the
Arguments of the Parties
Appellant's (Revenue) Arguments
- The Assessing Officer's position (advanced on behalf of the Revenue) was that the Society's activities amounted to banking as defined in the Income Tax Act and the BR Act.
- Reference was made to the Explanation to Section 80P(4) which imports the meanings assigned in Part V of the Banking Regulation Act, 1949, so that a primary co-operative bank (or primary agricultural credit society) should be understood as per the BR Act.
- The AO relied on the Society's bye-laws showing receipt of deposits and provision of loans, and cited the conditions in Section 56(ccv) (as recorded in the opinion) of the BR Act, concluding the Society satisfied the criteria to be treated as a primary co-operative bank and therefore ineligible for deduction under Section 80P.
Respondent's (Society) Arguments
- The Society claimed entitlement to deduction under Section 80P(2)(a)(i) and challenged the Assessing Officer's characterisation before the Commissioner of Income Tax (Appeals), which was allowed by that authority.
- Before the ITAT the Society's position (accepted by the Tribunal) effectively was that not all statutory conditions to qualify as a primary co-operative bank under the BR Act were satisfied—specifically, the Tribunal found that one of the requisite conditions (relating to bye-laws and membership of other co-operative societies) was not satisfied—so the Society was not a primary co-operative bank and was entitled to the deduction.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The portion of the opinion provided recounts the factual matrix, the Assessing Officer's reasoning, the Commissioner (Appeals) having allowed the Society's appeal, and the ITAT's detailed analysis of whether the Society qualified as a primary co-operative bank under the BR Act. The ITAT's analysis (as recorded in the opinion) proceeded by examining the three conditions referenced in the BR Act (referred to in the text as Section 5(ccv) and earlier as Section 56(ccv) of the BR Act):
- The Tribunal found the first condition was satisfied because the Society was carrying on banking business by accepting deposits from persons who are not members.
- The Tribunal found the second condition was satisfied because the paid up share capital and reserves exceeded Rs. 1 lakh.
- The Tribunal found the third condition—relating to the bye-laws and whether other co-operative societies could be members—was not satisfied because the bye-laws permitted other co-operative societies to become members.
On that basis the ITAT concluded that not all three conditions for classification as a primary co-operative bank were complied with; it therefore held the Society was not a primary co-operative bank, Section 80P(4) did not apply, and the Society was entitled to deduction under Section 80P(2)(a)(i).
The provided text does not contain the High Court's detailed step-by-step legal analysis or its resolution of the framed questions of law. The High Court's narrative, as presented, stops after framing the questions of law for consideration.
Holding and Implications
This information was not available in the provided opinion.
1IN THE HIGH COURT OF KARNATAKA
DHARWAD BENCH
DATED THIS THE 21ST DAY OF SEPTEMBER, 2015
THE HONOURABLE MR.JUSTICE ANAND BYRAREDDY
THE HONOURABLE MRS.JUSTICE S.SUJATHA
INCOME TAX APPEAL NO.100110 OF 2014
BETWEEN
1. The Commissioner of Income Tax,
Dr. B.R. Ambedkar Road,
Belgaum.
2. The Income Tax Officer,
Ward –2(1),
Belgaum.
... APPELLANTS.
(By SHRI Y V RAVIRAJ, ADVOCATE)
The Mercantile Co-operative
Credit Society Limited,
Kadolkar Galli,
Belgaum.
... RESPONDENT.
(RESPONDENT SERVED BUT UNREPRESENTED)
2This ITA is filed under Section 260A of the Income Tax
Act, 1961, against the order passed in ITA No.24/PNJ/2014
dated 13.06.2014 for the assessment year 2007-08 on the file of
the Income Tax Appellate Tribunal, Panaji Bench, Panaji,
allowing the appeal filed by the assessee.
This appeal having been heard and reserved and coming
on for pronouncement of judgment, this day, Anand Byrareddy
J., delivered the following:
JUDGMENT
This appeal is by the revenue under the Income Tax Act,
1961 (Hereinafter referred to as the 'IT Act, for brevity). The
assessee is said to be a Co-operative Society registered under
the Karnataka State Co-operative Societies Act, 1956,
(Hereinafter referred to as the ‘KCS Act’, for brevity).
2. The appeal pertains to the Assessment year 2007-08.
The respondent - Society had filed its return of income for the
assessment year 2007-08 and after claiming deduction under
Section 80 P(2) (a) (i) of the IT Act, the total income was
declared as 'nil'.
The Assessing Officer had however, opined that the
assessee was not entitled to the deduction, as claimed, for the
reason, inter alia, that the activity of the respondent was
3covered by Section 2 (24 (vii a) of the IT Act, which requires
the inclusion of profits and gains of any business of banking
(including providing credit facilities) carried on by a co-
operative society.
Reference was made to the Explanation appended to
Section 80 P (4) - which lays down that a co-operative bank and
a primary agricultural credit society, shall have the same
meaning assigned to them in Part V of the Banking Regulation
Act, 1949 (Hereinafter referred to as the 'BR Act' , for brevity.)
It was held that the Bye -laws of the Assessee indicated that
their primary object was transactions that were apparently in the
nature of banking. In that, the assessee was receiving deposits
from its members and providing loans to other members and
hence it satisfied all the three conditions contemplated under
Section 56 (ccv) of the BR Act. For this premise, the Assessing
Officer had proceeded on the basis that a primary co-operative
bank, meant a Co-operative Society. Therefore, the Assessing
Officer held that the respondent - society being a primary co-
4operative bank, was not eligible for deduction under Section 80
P of the IT Act.
3. The respondent - Society had then preferred an appeal
before the Commissioner of Income Tax (Appeals) challenging
the above order of the Assessing Officer. The same was said to
have been allowed.
The appellant - Revenue had then approached the Income
Tax Appellate Tribunal. The Tribunal having accepted the case
of the respondent, it was held that:
i) The assessee – Society had satisfied condition no.1
mentioned in Section 5(ccv) of the BR Act, to become primary
co-operative bank as the assessee is carrying on banking
business by accepting deposits from persons who are not
members.
ii) The second condition was also satisfied by the
assessee since paid up share capital and reserves is more than
Rs.1 lakh.
iii) With regard to the last condition, i.e., the bye-laws of
the society whether permits other co-operative society to
5become a member, the Tribunal held that the said condition is
not satisfied since the bye-laws of the society permits other co-
operative society to become its member.
The Tribunal held that the assessee – Society is not to be
regarded to be a primary co-operative bank as all the three basic
conditions are not complied with and therefore, it is not a co-
operative bank and the provisions of section 80P(4) are not
applicable in the case of the assessee and the assessee is entitled
for deduction under Section 80P(2)(a)(i).
Hence, the Revenue is in appeal before this Court.
4. The questions of law that arise for our consideration in
this appeal are :
i. Whether the benefit of deduction, under Section 80 P
(2) (a) (i) of the IT Act, could be denied to the assessee on the
footing that, though the respondent was said to be a Co-
operative Society, it was in fact a co-operative bank, within the
meaning as assigned to such bank under Part V of the BR Act.
ii. Whether the Authorities under the IT Act were
competent and possessed the jurisdiction to resolve the
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