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

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the appellant, a co-operative society, qualifies as a "co-operative bank" under sub-section (4) of Section 80P of the Income Tax Act, 1961, thereby affecting its eligibility for deductions under the same section.
• Whether the principles established in the case of Mavilayi Service Co-operative Bank apply to the appellant's situation.
• What is the appropriate order given the findings on the above issues?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the appellant is a "co-operative bank" under Section 80P(4) of the Income Tax Act, 1961.

• Relevant legal framework and precedents:
  
  • Section 80P of the Income Tax Act, 1961, provides deductions for co-operative societies but excludes co-operative banks, except primary agricultural credit societies and primary co-operative agricultural and rural development banks, under sub-section (4).
  • The Banking Regulation Act, 1949, defines "co-operative bank" as a state co-operative bank, central co-operative bank, or primary co-operative bank.
  • The NABARD Act, 1981, provides definitions for state co-operative banks and central co-operative banks.
  • Previous judgments, including Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd. and Citizen Co-operative Society Ltd., were considered.
  
  
• Court's interpretation and reasoning:
  
  • The court analyzed whether the appellant transacts banking business as defined in Section 5(b) of the Banking Regulation Act, 1949, which involves accepting deposits from the public.
  • It was determined that the appellant does not require a banking license under Section 22 of the Banking Regulation Act, 1949, as it does not conduct banking business.
  • The appellant is not a state co-operative bank as per the NABARD Act, 1981, and thus not a co-operative bank under Section 80P(4).
  
  
• Key evidence and findings:
  
  • The appellant is a co-operative society providing credit facilities to its members, which are other co-operative societies, not the public.
  • The appellant is not declared a state co-operative bank by the Kerala State Government.
  
  
• Application of law to facts:
  
  • The appellant's activities do not align with those of a co-operative bank as defined under the relevant acts, thus not falling under the exclusion in Section 80P(4).
  
  
• Treatment of competing arguments:
  
  • The respondent argued that the appellant functions as a co-operative bank, but the court found this argument unsubstantiated based on the statutory definitions and the appellant's operations.
  
  
• Conclusions:
  
  • The appellant is not a co-operative bank within the meaning of Section 80P(4) and is entitled to deductions under Section 80P.
  
  

Issue 2: Applicability of the Mavilayi Service Co-operative Bank judgment.

• Relevant legal framework and precedents:
  
  • The judgment in Mavilayi Service Co-operative Bank emphasized a liberal interpretation of Section 80P to encourage co-operative societies.
  
  
• Court's interpretation and reasoning:
  
  • The court reiterated that Section 80P is a benevolent provision and should be applied liberally to promote co-operative societies.
  
  
• Conclusions:
  
  • The principles from Mavilayi Service Co-operative Bank support the appellant's eligibility for deductions under Section 80P.
  
  

3. SIGNIFICANT HOLDINGS

• Verbatim quotes of crucial legal reasoning:
  
  • "Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee."
  • "The appellant is not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the BR Act, 1949."
  
  
• Core principles established:
  
  • A co-operative society that does not conduct banking business as defined in the Banking Regulation Act, 1949, is not a co-operative bank and is eligible for deductions under Section 80P.
  
  
• Final determinations on each issue:
  
  • The appellant is not a co-operative bank under Section 80P(4) and is entitled to the deductions under Section 80P of the Income Tax Act, 1961.
  
  

The appeals filed by the appellant are allowed, and the orders of the Kerala High Court and other authorities are set aside, affirming the appellant's entitlement to the benefit of deduction under Section 80P.