The Mavilayi Service Cooperative Bank Ltd. & Ors. vs Commissioner of Income Tax, Calicut & Anr.

HELD : 1. Interpretation of Section 80P of the IT Act. The marginal note to Section 80P which reads “Deduction in respect of income of co-operative societies” indicates the general “drift” of the provision. Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”. A cooperative society is defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Cooperative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a cooperative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y. Thirdly, the gross total income must include income that is referred to in sub-section (2). Fourthly, sub-clause (2)(a)(i) then speaks of a co-operative society being “engaged in” carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co-operative society must be “engaged in” the providing credit facilities to its members. Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. Therefore, the assessing officer under the IT Act cannot be said to be going behind any registration certificate when he engages in a fact-finding enquiry as to whether the co-operative society concerned is in fact providing credit facilities to its members. Such fact finding enquiry (see section 133(6) of the IT Act) would entail examining all relevant facts of the co-operative society in question to find out whether it is, as a matter of fact, providing credit facilities to its members, whatever be its nomenclature. Once this task is fulfilled by the assessee, by placing reliance on such facts as would show that it is engaged in providing credit facilities to its members, the assessing officer must then scrutinize the same, and arrive at a conclusion as to whether this is, in fact, so. Sixthly, the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone. Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and section 80P(2)(a)(i) must be contrasted with section 80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must also further be contrasted with sub-clause (b), which speaks only of a “primary” society engaged in supplying milk etc. thereby defining which kind of society is entitled to deduction, unlike the provisions contained in section 80P(2)(a)(i). Also, the proviso to section 80P(2), when it speaks of sub-clauses (vi) and (vii), further restricts the type of society which can avail of the deductions contained in those two sub-clauses, unlike any such restrictive language in Section 80P(2)(a)(i). Once it is clear that the cooperative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to nonmembers does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. Seventhly, section 80P(2)(c) also makes it clear that section 80P is concerned with the co-operative movement generally and, therefore, the moment a co-operative society is registered under the 1912 Act, or a State Act, and is engaged in activities which may be termed as residuary activities i.e. activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c). The reach of sub-clause (c) is extremely wide, and would include co-operative societies engaged in any activity, completely independent of the activities mentioned in sub-clauses (a) and (b), subject to the cap of INR 50,000/- to be found in sub-clause (c)(ii). This puts paid to any argument that in order to avail of a benefit under Section 80P, a co-operative society once classified as a particular type of society, must continue to fulfil those objects alone. If such objects are only partially carried out, and the society conducts any other legitimate type of activity, such co-operative society would only be entitled to a maximum deduction of Rs.50,000/- under sub-clause (c).Eighthly, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies, are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co-operative movement as a whole. [Paras 27, 28, 29, 30, 32-35][117-E-F; 118-A-E; 119-D-H; 120-A-H; 121-A]

Kerala State Cooperative Marketing Federation Ltd. and Ors. v. CIT (1998) 5 SCC 48 : [1998] 3 SCR 443; K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. (1981) 4 SCC 173 : [1982] 1 SCR 629 ;

Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Ltd. (2008) 9 SCC 337 : [2008] 13 SCR 570 ; Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT (2009) 8 SCC 393 : [2009] 11 SCR 90 – relied on.

Assistant Commissioner of Income Tax v. A.K. Menon and Ors. (1995) 5 SCC 200 : [1995] 2 Suppl. SCR

181 ; Titan Medical Systems (P) Ltd. v. Collector of Customs, New Delhi (2003) 9 SCC 133 ; Vadilal

Chemicals Ltd. v. State of A.P. and Ors.(2005) 6 SCC

292 : [2005] 2 Suppl. SCR 1 – referred to.

2. The limited object of section 80P(4) is to exclude cooperative banks that function at par with other commercial banks i.e. which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such cooperative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to cooperative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. [Para 39][122-D-G]

3. 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. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative 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. [Para 45][127-A-D]

4. 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. Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i). Thus, the giving of loans by a primary agricultural credit society to non-members is not illegal unlike the facts in Citizen Cooperative Society Ltd.[Paras 45-47][127-D-H; 128-A-C; G-H]

Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017) 9 SCC 364 : [2017] 9 SCR 361 – distinguished. CIT, Mysore v. Indo Mercantile Bank [1959] Supp. (2) SCR 256 ; Tribhovandas Haribhai Tamboli v. Gujarat Revenue Tribunal (1991) 3 SCC 442 : [1991] 2 SCR

802 ; J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers (1996) 6 SCC 665 : [1996] 6 Suppl. SCR

798 ; Union of India v. Dileep Kumar Singh (2015) 4 SCC 421 : [2015] 2 SCR 882 ; B. Shama Rao v. Union Territory, Pondicherry [1967] 2 SCR 650; State of Orissa v. Sudhanshu Sekhar Misra and Ors. [1968] 2 SCR 154 – relied on.

U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 ; Dalbir Singh v. State of Punjab [1979] 3 SCR 1059 ; Chirakkal Service Co-operative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker.) ;

Perinthalmanna Service Co-operative Bank Ltd. v. ITO and Anr. (2014) 363 ITR 268 (Ker.) ; Assam

Cooperative Apex Marketing Society Ltd. Assam v. Additional Commissioner ofIncome Tax, Assam (1994) Supp. (2) SCC 96 – referred to.