2023 (9) TMI 761 - SC - Income Tax

Deduction u/s 80P - assessee, a co-operative society - Whether entitled to claim deduction of the whole of its profits and gains of business attributable to the business of banking or providing credit facilities to its members who are all co-operative societies? - Whether the appellant is a co-operative bank within the meaning of sub-section (4) of Section 80P? - HELD THAT - Sub-clause (1) of clause (a) of sub-section (2) of Section 80P recognises two kinds of co-operative societies, namely, (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributable to any one or more of such activities which are mentioned in sub-section (2). Sub-section (4) of Section 80P inserted by the Finance Act, 2006 is in the nature of a proviso and such a deduction under the said Section shall not be admissible to a cooperative bank. Thus, co-operative banks are now specifically excluded from the ambit of Section 80P of the Act. A co-operative society which is not a state co-operative bank within the meaning of NABARD Act, 1981 would not be a co-operative bank within the meaning of Section 56 of the BR Act, 1949. In the instant case, as already noted in A.P. Varghese case 2007 (12) TMI 545 - KERALA HIGH COURT the Kerala State Co-operative Bank being declared as a state co-operative bank by the Kerala State Government in terms of NABARD Act, 1981 and the appellant society not being so declared, would imply that the appellant society is not a state co-operative bank. In fact, in Citizen Co-operative Society Ltd 2017 (8) TMI 536 - SUPREME COURT this Court held that the appellant therein was having both members as well as nominal members who were depositing and availing loan facilities from the appellant therein and therefore, appellant therein was not entitled to the benefit of Section 80P of the Act as it was functioning as a cooperative bank. But, the appellant herein is not a co-operative bank and neither has it been so declared under the provisions of NABARD Act, 1981 or the State Act. On the other hand, under the provisions of State Act, 1969, the Kerala State Co-operative Bank has been so declared by the Government of Kerala as a co-operative bank. Also under the provisions of the State Act, 1984, agricultural and rural development bank means the Kerala Cooperative Central Land Mortgage Bank Limited, registered under Section 10 of the Travancore-Cochin Co-operative Societies Act, 1951, which shall be known as Kerala State Co-operative Agricultural and Rural Development Bank Limited i.e. the appellant herein. Thus, from a conjoint reading of all the relevant statutory as alluded to hereinabove, it is quite clear that the appellant is not a co-operative bank within the meaning of sub-section (4) of Section 80P of the Act. The appellant is a co-operative credit society under Section 80P(2)(a)(i) of the Act whose primary object is to provide financial accommodation to its members who are all other co-operative societies and not members of the public. Therefore, when the definition of co-operative bank in Section 56 of BR Act, 1949 is viewed in terms of Sections 2(u) of the NABARD Act, 1981, it is clear that only a state co-operative bank would be within the scope and meaning of a banking company under Section 2(c) of the BR Act, 1949 on obtaining licence under Section 22 of the said Act. Conclusion - In the instant case, although the appellant society 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. In the result, the appeals filed by the appellant are allowed and the order(s) of the Kerala High Court and other authorities to the contrary are set aside. Consequently, we hold that the appellant is entitled to the benefit of deduction under Section 80P of the Act. The questions for consideration are answered accordingly.

Summary

Issues Involved:
1. Whether the appellant is a "co-operative bank" within the meaning of sub-section (4) of Section 80P of the Income Tax Act, 1961.
2. Whether the ratio of the judgment in Mavilayi Service Cooperative Bank and the tests laid therein apply to the case of the appellant.
3. What order should be passed.

Summary:

Issue 1: Whether the appellant is a "co-operative bank" within the meaning of sub-section (4) of Section 80P of the Income Tax Act, 1961.
The appellant is a State-level Agricultural and Rural Development Bank governed as a cooperative society under the Kerala Co-operative Societies Act, 1969. The main contention is whether the appellant, a cooperative society, is entitled to claim deduction under Section 80P of the Income Tax Act, 1961. The Assessing Officer, CIT(A), and ITAT had disallowed the deduction, holding the appellant to be a "co-operative bank" and thus hit by the provisions of Section 80P(4). The Supreme Court analyzed the definitions and provisions under the Income Tax Act, Banking Regulation Act, NABARD Act, and Kerala Cooperative Societies Act. It was concluded that the appellant is not a "co-operative bank" as it does not fulfill the criteria of engaging in banking business as defined under Section 5(b) of the Banking Regulation Act, 1949, and does not require a license under Section 22 of the said Act.

Issue 2: Whether the ratio of the judgment in Mavilayi Service Cooperative Bank and the tests laid therein apply to the case of the appellant.
The Supreme Court referred to the judgment in Mavilayi Service Cooperative Bank, which held that Section 80P of the Act is a benevolent provision enacted to encourage the growth of the cooperative sector and must be read liberally. The Court reiterated that sub-section (4) of Section 80P excludes only cooperative banks that function on par with commercial banks and lend money to the public. The Court found that the appellant does not fall under this category and thus is entitled to the benefit of Section 80P.

Issue 3: What order should be passed.
The Supreme Court allowed the appeals filed by the appellant, setting aside the orders of the Kerala High Court and other authorities. The appellant is entitled to the benefit of deduction under Section 80P of the Income Tax Act, 1961.

Conclusion:
The Supreme Court concluded that the appellant, being a cooperative credit society and not a cooperative bank, is entitled to the benefit of deduction under Section 80P of the Income Tax Act, 1961. The appeals were allowed, and the orders to the contrary were set aside.