2021 (1) TMI 488 - SC - Income Tax

Deduction u/s 80P(2)(a) (i) - the credits given to such members being for purposes other than agricultural credit - eligibility after introduction of section 80P(4) - Assessee stated to be providing credit facilities to their members for agricultural and allied purposes, have been classified as primary agricultural credit societies by the Registrar of Cooperative Societies under the Kerala Co-operative Societies Act, 1969 - HELD THAT - The ratio decidendi of Citizen Cooperative Society Ltd. 2017 (8) TMI 536 - SUPREME COURT , must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word agriculture into Section 80P(2)(a)(i) when it is not there. Section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are cooperative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (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. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted. Thus, the giving of loans by a primary agricultural credit society to nonmembers is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra). Resultantly, the impugned Full Bench judgment is set aside. The appeals and all pending applications are disposed of accordingly.

Summary

Issues Involved:

1. Eligibility of deductions under Section 80P(2)(a)(i) of the Income-Tax Act, 1961 for co-operative societies.
2. Impact of Section 80P(4) of the Income-Tax Act on the eligibility for deductions.
3. Interpretation of "engaged in" providing credit facilities to members.
4. The role of the Registrar's classification of co-operative societies.
5. The scope of judicial review of the Registrar's classification and activities of the societies.
6. The application of the principle of mutuality.
7. The effect of loans given to non-members on eligibility for deductions.
8. The legal standing of nominal members under the Kerala Co-operative Societies Act.

Detailed Analysis:

1. Eligibility of Deductions under Section 80P(2)(a)(i):

The Supreme Court discussed that the provision under Section 80P(2)(a)(i) is a beneficial provision aimed at promoting the co-operative movement in India. The Court emphasized that once a co-operative society is registered under a State Act and is engaged in providing credit facilities to its members, it qualifies for deductions under Section 80P(2)(a)(i). The Court clarified that the term "providing credit facilities to its members" does not necessarily mean agricultural credit alone.

2. Impact of Section 80P(4) of the Income-Tax Act:

Section 80P(4) was introduced to exclude co-operative banks from the benefits of Section 80P. The Court noted that co-operative banks, which function like commercial banks and lend to the public, are excluded from deductions under Section 80P. However, primary agricultural credit societies and primary co-operative agricultural and rural development banks continue to be eligible for deductions. The Court concluded that since the appellants were not co-operative banks licensed by the RBI, Section 80P(4) did not apply to them.

3. Interpretation of "Engaged in" Providing Credit Facilities:

The Court held that the term "engaged in" requires an examination of the facts to determine whether a co-operative society is genuinely providing credit facilities to its members. The assessing officer is entitled to conduct a fact-finding inquiry to ascertain this. The Court emphasized that the burden of proof lies on the assessee to demonstrate eligibility for deductions by showing that it is engaged in providing credit facilities to its members.

4. Role of the Registrar's Classification:

The Court recognized the classification by the Registrar of Co-operative Societies under the Kerala Co-operative Societies Act as significant but not conclusive for tax purposes. The assessing officer under the Income-Tax Act has the authority to examine the actual activities of the society to determine eligibility for deductions. The Court rejected the argument that the assessing officer cannot go behind the Registrar's classification.

5. Scope of Judicial Review of the Registrar's Classification and Activities:

The Court clarified that while the Registrar's classification is important, it does not preclude the assessing officer from conducting an independent inquiry into the activities of the society. The Court emphasized that the assessing officer must examine whether the society is genuinely engaged in providing credit facilities to its members, irrespective of its classification by the Registrar.

6. Principle of Mutuality:

The principle of mutuality, which requires that contributors to the surplus are also participants in the surplus, was discussed. The Court noted that if a society's activities do not adhere to this principle, it may not qualify for deductions under Section 80P. The Court highlighted that in the case of Citizen Cooperative Society Ltd., the society's activities were found to be in violation of the principle of mutuality, leading to the denial of deductions.

7. Effect of Loans to Non-Members:

The Court distinguished between eligibility for deductions and the attributability of profits and gains. It held that while providing credit facilities to non-members does not disqualify a society from deductions, profits attributable to such activities cannot be deducted. The Court emphasized that the assessing officer must scrutinize the facts to determine the extent of profits attributable to non-members and exclude them from deductions.

8. Legal Standing of Nominal Members under the Kerala Act:

The Court noted that under the Kerala Co-operative Societies Act, nominal members are considered members. Therefore, loans given to nominal members qualify for deductions under Section 80P(2)(a)(i). The Court distinguished this from the case of Citizen Cooperative Society Ltd., where nominal members were not considered members under the Andhra Pradesh Act.

Conclusion:

The Supreme Court set aside the Full Bench judgment of the Kerala High Court and held that the appellants were entitled to deductions under Section 80P(2)(a)(i). The Court emphasized that Section 80P should be interpreted liberally to promote the co-operative movement, and deductions should not be restricted by implying conditions not explicitly stated in the provision. The Court directed the Kerala High Court to dispose of the appeals on merits in light of this judgment.