Supreme Court: While considering whether the assessee, a co-operative society, was entitled to claim deduction of whole of its profits and gains of business attributable to banking business or providing credit facilities to its members who are all co-operative societies under Section 80-P of the Income Tax Act, 1961 (1961 Act), the Division Bench of B.V. Nagarathna* and Ujjal Bhuyan, JJ. Traced various relevant provisions to hold that the assessee being a co-operative society and not a co-operative bank was entitled to the benefit of Section 80-P of 1961 Act.
The instant appeals had challenged the orders passed by Kerala High Court, Commissioner of Income Tax (Appeals) (‘CIT(A)’) and Income Tax Appellate Tribunal (‘ITAT’).
Statutory Framework of Co-operative society in banking business
The assessee in the instant matter was a State level Agricultural and Rural Development Bank governed as a cooperative society under the Kerala Co-operative Societies Act, 1969, engaged in providing credit facilities to its member cooperative societies. Initially in 1951, the assessee got registered under Section 10 of the Travancore-Cochin Co-operative Societies Act, 1951 (‘State Act, 1951’), received a registration certificate from the Registrar of Co-operative Societies, Trivandrum on 4-10-1956 for recognition as a co-operative Central Land Mortgage Bank incorporated on the basis of limited liability under Section 10 of State Act. The office of Registrar of Co-operative Societies, Trivandrum communicated the rules related to Retirement Benefit Fund and Staff Benefit Fund for Kerala Co-operative Central Mortgage Bank Ltd vide letter dated 17-11-1961.
The Kerala Co-operative Societies Act, 1969 (‘State Act, 1969’) was enacted to provide orderly development of the State’s co-operative sector and unify law relating to co-operative societies in Kerala, whose Section 110 repealed the State Act, 1951. Thus, the assessee came to be registered under State Act, 1969. The assessee bank was also included in Schedule I of State Act, 1969 regarding application of Section 80(3A) postulating that when direct recruitments ‘is resorted to’, the same ‘shall be made from a select list of candidates furnished by the Kerala Public Service Commission.’
The Court highlighted Section 2(g) of State Act, 1969 which defines co-operative society with limited liability, Kerala State Co-operative Agricultural Development Banks Act, 1984 (‘State Act, 1984’) Section 2(a) of State Act 1984 providing for the assessee’s name, Sections 2(d) and 2(iA) of State Act, 1984.
Factual Matrix
On 27-10-2007, the assessee filed its Return of Income of Rs 27,18,052 for Assessment Year (‘AY’) 2007-08 claiming deduction under Section 80P (2)(a)(i) of 1961 Act. On 22-12-2009, an assessment order under Section 143(3) of 1961 Act was passed by the Assessing Officer for AY 2007-08 disallowing the deduction of Rs. 36,39,87,058 under Section 80P(2)(a)(i) and holding that the assessee was neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank, but a co-operative bank hit by Section 80(P)(4) and not entitled to the benefit of Section 80(P)(2) of 1961 Act based on amendment of Section 80P dated 1-04-2007. The total income was thereby assessed at Rs. 36,69,47,233.
Challenging the same, the assessee filed an appeal before CIT(A) which confirmed the disallowance made by Assessing Officer. Appeal before ITAT also didn’t succeed since it partly allowed the appeal and held that the appellant/assessee is a co-operative bank and is not a primary agricultural credit society or a primary co-operative agricultural and rural development bank and is consequently hit by the provision of Section 80P (4), thus, the deduction claimed was rightly denied, but clarified that extent to which the assessee acted as s a State Land Development Bank which falls within the purview of the National Bank for Agriculture and Rural Development Act, 1981 (‘NABARD Act’) and was exigible for financial assistance from NABARD, entitled to deduction under Section 80P(2)(a)(i). The partly favourable decision of ITAT was challenged before Kerala High Court which and dismissed without interference with ITAT’s findings. The said trail of decisions was challenged in the instant matter, while the Court had stayed recovery of demand by Income Tax Authorities vide order dated 1-02-2016.
Court’s Analysis
The Court framed the following pointers for consideration:
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Whether the assessee is a “co-operative bank” within the meaning of Section 80P(4) of 1961 Act?
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Whether the ratio of the judgment in Mavilayi Service Coop. Bank Ltd. v. CIT, (2021) 7 SCC 90 and the tests laid down therein apply to the assessee’s case?
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What order should be passed in the instant matter?
The Court scrutinised Section 80P of 1961 Act, Sections 3, 5, 22, 56 of Banking Regulation Act, 1949 (‘BR Act’), Section 2(d), 2(u), 2(v), 2(w) and 2(x) of NABARD Act, 1981, Section 2(e) of Reserve Bank of India Act, 1934, Sections 2(g) and 110 of State Act, 1969, Section 2(a) of State Act, 1984.
The Court started with reference to Entry 32 of List II of Seventh schedule of the
The Court highlighted that in Mavilayi Service Coop. Bank (supra), the appeals were filed by co-operative societies registered as ‘primary agricultural credit societies’ together with one ‘multi-state co-operative society’. The Court in the said judgment analysed Section 80P of 1961 Act and observed that the benevolent provision enacted by Parliament to encourage and promote the credit of co-operative sector in general must be read liberally and reasonably, and any ambiguity went in favour of the assessee. The benefit of deduction was extended to the assessee.
Throwing light upon Section 80P (2), the Court explained that the provision “makes a clear distinction between the business of banking on one hand and providing credit facilities to its members by co-operative society on the other. Thus, the definition of banking under Section 5(b) of the BR Act must be borne in mind as opposed to providing credit facilities to its members.” It further highlighte dthat Section 80P came into effect on 1-04-1968, while Section 80P(4) came into effect after reinsertion on 1-04-2007, omitted on 1-04-1970. The present form was an exception stating the said provisions pplicable in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
The Court expressed that “The controversy in this case is, whether the appellant entity is a co-operative bank and if so, it would be covered within the scope and meaning of sub-section (4) of Section 80P and therefore, would not be eligible to the benefit of deduction as provided therein.” Scrutinising relevant provisions, the Court stated that a co-operative society, including a co-operative credit society which is not a co-operative bank, does not require a licence from RBI to function as such. Placing reliance on Section 2(w) of NABARD ACt, 1981 and Section 2(i) of RBI Act, the Court expressed that “we have to again fall back on Part V of the BR Act, 1949 which has defined a co-operative bank in Section 56 (c)(i)(cci) to be a state co-operative bank, a central co-operative bank and a primary co-operative bank and central co-operative bank and state co-operative bank to have the same meanings as NABARD Act, 1981.” It was clarified that if a co-operative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci). And if the cooperative society does not transact the banking business as per Section 5(b) of BR Act would not be a co-operative bank and the definitions of NABARD Act would not apply.
The Court explained that “If a co-operative society is not a co-operative bank, then such an entity would be entitled to deduction but on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 then it would not be entitled to the benefit of deduction under sub-section (4) of Section 80P of the Act.” It further clarified that in the instant matter, the Kerala State Co-operative Bank, being declared a state co-operative bank by the Kerala State Government in terms of NABARD Act, 1981 and the assessee society not being so declared, would imply that the society is not a state co-operative bank.
Conclusion
The Court thereby concluded that the society in the instant matter is an apex cooperative society within the meaning of the State Act, 1984, it is not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the BR Act, 1949. The Court allowed the instant appeals, set aside the orders passed by Kerala High Court and others, and held the assessee in the instant matter entitled to benefit of deduction under Section 80P of 1961 Act.
[Kerala State Coop. Agricultural & Rural Development Bank Ltd. v. Assessing Officer, Trivandrum, 2023 SCC OnLine SC 1164, decided on 14-09-2023]
Judgment authored by: Justice B.V. Nagarathna
Justice BV Nagarathna: Igniting hope for the first ever woman Chief Justice of India
Advocates who appeared in this case :
Senior Advocate Krishnan Venugopal, Advocate Deepak Prakash, Advocate on Record Biju P Raman, Advocate Divyangana Malik, Advocate Vishnupriya, Senior Advocate Krishnan Venugopal, Advocate on Record Deepak Prakash, Advocate Krishnan Agarwal, Advocate Kamal Singh Bisht, Advocate Pawan Kr. Dabas, Advocate Raneev Dahiya, Advocate Shrutii Srivastava, Advocate Nachiketa Vajpayee, Advocate Divyangna Malik, Advocate Vishnu Priya, Advocate Shyam Nair, Advocate Rahul Lakhera, Advocate Vardaan Kapoor, Additional Solicitor General N Venkatraman, Senior Advocate Sonia Mathur, Advocate on Record Raj Bahadur Yadav, Advocate S A Haseeb, Advocate Praveena Gautam, Advocate H R Rao, Advocate Nisha Bagchi
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