( Expert )
11 January 2012
Licensing of Existing Primary (Urban) Co-operative Credit societies/Banks :
In 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. The existing unlicensed primary (urban) cooperative banks can carry on banking business till they are refused a licence by the Reserve Bank of India.(SOURCE : Brochure explaining RBI role and functions in brief under the title Urban Bank Department of RBI)
All urban Co operative credit society and Pat-Pedhis by virtue of provisions of [Note :Part V contains amendement in definition ] - Section 5(ccii),5(ccv) and 5(ccvi) of Banking Regulation Act, 1949.
Further, Section 5A of Banking regulation Act,1949 overrides Bye laws of the co op credit society whose principal business of a primary credit society is the transaction of banking business and When its paid up capital and reserves attain the level of Rs.1 lakh, a primary credit society automatically becomes a primary cooperative bank. Once the urban Co operative credit society and Pat-Pedhis are classified as Bank then they are not eligible for benefit provided under section 80P of the Income Tax Act,1961, from Assessment Year 2007-08 by virtue of Section 80P(4) read with section 2(24)(viia) both of income Tax Act, 1961.
Vide para 7 of Citizen Co-operative Society Ltd. v. Additional Commissioner of Income-tax *, Range 9, Hyderabad  8 TAXMANN.COM 27 (HYD) The assessee’s counsel contention is that once the share capital and reserves exceed Rs. 1.0 lakhs the society has to transform itself into Cooperative Bank.
Applicability of Section 269SS of Income Tax Act, 1961 :
Vide Para 5.20 of the Citizen Co-operative Society Ltd. v. Additional Commissioner of Income-tax *, Range 9, Hyderabad  8 TAXMANN.COM 27 (HYD) The meaning of the word ‘banking company’ is explained in Explanation 1 to the said section. According to the Explanation (1) any company to which the Banking Regulation Act 1949 applies. Sub-section (1) of section 5 defines the work ‘banking company’ to mean ‘any company which transacts business of bank in India’. Section 56 of the Act substitutes the word ‘company’ by the ‘Cooperative society ’. Therefore, even a cooperative society for which the provisions of section 56 apply shall be a banking company. Further, section 9 of the Multi State Cooperative Act, 2002 mentions that any society registered under the Multi State Cooperative Act shall be a body corporate by its name. Therefore it is a body corporate by its name. Therefore it is a body corporate within the meaning of the provisions of Multi State Cooperative Societies Act, 2002. In view of the above, the assessee is a banking company for the purposes of the Banking Regulation Act 1949 and hence the provisions of section 269SS have no application.
Further, vide para 8 in the case of [Salgaon Sanmitra Sahakari Pathpedhi Ltd. v. Additional Commissioner of Income-tax, Ward-17(3),Mumbai. - [12 Taxmann.com 246 (2011)] the assessee society was classified as 'cooperative bank' [ to argue that Section 269SS do not apply to bank] under section 12(1) of the Maharashtra Cooperative Society Act, 1960 as per the registration certificate issued by the Assistant Registrar, Cooperative Society, Mumbai.
Further, Federation doing Banking Activities with co operative credit societies or Pat Pedhi’s who are its members and located in urban area is also not entitled for benefit provided under section 80P of the Income Tax Act,1961, from Assessment Year 2007-08 by virtue of Section 80P(4) read with section 2(24)(viia) both of income Tax Act, 1961. The said view is Kerala State Co-operative Agricultural Rural Development Bank Ltd., Statue, Trivandrum-695001. Vs. The Assistant Commissioner of Income-tax, Circle-1(2), Trivandrum vide ITA No. 506/Coch/2010 & S.P. No.67/Coch/2010 For AY 2007-08.[unreported but available on internet].
Further, There is no aspect of mutuality in the case of the assessee registered under the Co-operative Societies Act as one of the objectives of a co-operative society will be to make profits and declare dividends to its members. In the case of a mutual concern, there is no room for such intention of making profit and distribute the same among the members.[ Sri Laxminarayana Swamy Co-Operative Society Ltd. v. Income-tax Officer  4 ITR(TRIB.) 27 (BANG.)][ Totgar's Co-operative Sale Society Ltd. v. ITO  322 ITR 283 (SC) ; 229 CTR 209].
Applicability of Section 44AB of income Tax Act,1961 :
Once it is held to be Bank then turnover or gross receipt if exceeds Rs. 60 lakh/Rs. 15 Lakh then the Tax audit is compulsory and failure to get accounts audited would attract penalty under section 271B of Income tax Act, 1961.
Note : Please also refer point no. 4 of page 15 of Banking regulation Amendment Bill No. 18 of 2011 introduced in the loksabha.