Benefit of Deduction in Section 80P of Income Tax Act to be construed liberally: SC

Loans to members of co-operative societies not related to agriculture can also included for deduction.

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

Civil Appeal Nos. 7343-7350 of 2019 with Civil Appeal No.8315 of 2019 and Civil Appeal No. of 2021.

Decided on January 12, 2021.

Counsel for the Appellants: Shri Shyam Divan, Shri Arvind Datar

Counsel for the Respondents: Shri Balbir Singh (Additional Solicitor General)

The current litigation was decided by a three-judge bench of the Supreme Court consisting of Justice R. F. Nariman, Justice Navin Sinha and Justice K.M. Joseph.

These appeals were filed by co-operative societies, classified as ‘primary agricultural credit societies’ by the Registrar of Co-operative Societies under the Kerala Co-operative Societies Act, 1969 (Kerala Act), and were claiming a deduction under Section 80P(2)(a)(i) of the Income-Tax Act, 1961 (IT Act), which had been denied to them due to the introduction of Section 80P(4) of the IT Act by Section 19 of the Finance Act, 2006. In respect of the appellant-assessees, the assessing officer had denied their claims for deduction, by relying on Section 80P(4) of the IT Act, holding that agricultural credits that were given by the assessee-societies to its members were found to be negligible – the credits given to such members being for purposes other than agricultural credit. The decisions of the assessing officers were challenged up to the Kerala High Court.

The Full Bench of the Kerala High Court, by the impugned judgment dated 19.03.2019, held that the main object of a primary agricultural credit society which exists at the time of its registration, must continue at all times including for the assessment year in question. If it is found that as a matter of fact agricultural credits amount to a negligible amount, then it would be open for the assessing officer to state that as the co-operative society in question, though registered as a primary agricultural credit society is not functioning as such, the deduction claimed under Section 80P(2)(a)(i) of the IT Act must be refused. This conclusion was reached after referring to several judgments, but relying heavily upon the judgment of this Court in Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad, (2017) 9 SCC 364. Being aggrieved by the above judgment, the Appellant-assessees approached the Supreme Court.

Shri Shyam Divan, learned Senior Advocate on behalf of the assessees, argued that the Full Bench was wholly incorrect in adding credit facilities related to agriculture, as no such thing is contained in Section 80P(2)(a)(i), as contrasted with Sections 80P(2)(a)(iii) to (v) of the IT Act. He therefore argued that the moment a co-operative society is registered under the said Act, so long as it provides credit facilities to its members, it is entitled to a deduction contained in Section 80P(2)(a)(i) of the IT Act. He urged that a distinction must be drawn, therefore, between eligibility for deduction, and whether the whole of the amounts of profits and gains of business attributable to any one or more such activities under the sub-section is to be given. With reference to the speech of the Finance Minister dated 28.02.2006 wherein it was stated that co-operative banks lend amounts to the public and should not be entailed for deductions, the Counsel stated that since none of the assessees are co-operative banks licenced by the Reserve Bank of India to carry on banking business, Section 80P(4) has no application.

Shri Divan contended that the judgment of this Court in Citizen Cooperative Society Ltd. (supra) was directly in his client’s favour on the applicability of Section 80P(4), which has been completely missed by the Full Bench. He pointed out that both under the Banking Regulation Act, 1949 and the Kerala Act, if any dispute arose as to classification of a society as being a primary agricultural credit society versus being a co-operative bank, it is the RBI alone who is to decide such dispute under the Banking Regulation Act, 1949, and the Registrar, Co-operative Societies, under Rule 15 of the Kerala Co-operative Societies Rules, 1969.

Shri Arvind Datar, learned Senior Advocate appearing on behalf of some of the assessees, supported the submissions of Shri Divan, and argued that all co-operative societies, once they are registered under a State Act, are entitled to deductions under Section 80P. The extent of the deduction would depend upon attributability and not eligibility for deduction.

Shri Balbir Singh, learned Additional Solicitor General appearing on behalf of the Revenue, argued that the Full Bench was wholly correct in stating that a mere certificate of registration as a primary agricultural credit society would not avail, that the assessing officer has to be satisfied that the assessee is “engaged in” activities as a primary agricultural credit society. He stated that since the Appellants were no longer doing business as primary agricultural credit societies, they would be disentitled to any deduction under Section 80P after the advent of Section 80P(4). He also relied upon several judgments of this Court which would show that mere registration as a primary agricultural credit society is not enough, the expression “engaged in” meaning that there must be a continuing obligation on such society to carry out its main objects from year to year, and if does not do so, it would be disentitled to any deduction under Section 80P(4). He further argued that the burden is on the assessee to establish that it is entitled to the deduction under Section 80P.

The Court heard learned counsel for the assessees as well as for the Revenue, and perused all the records.

At the onset, the Court noted:

It is important to note that though the main object of the primary agricultural society in question is to provide financial assistance in the form of loans to its members for agricultural and related purposes, yet, some of the objects go well beyond, and include performing of banking operations “as per rules prevailing from time to time”, opening of medical stores, running of showrooms and providing loans to members for purposes other than agriculture. (Para 15)

At this juncture, the Court referred to a number of judgments of this Court on the provisions of Section 80P, including Assam Cooperative Apex Marketing Society Ltd. Assam v. Additional Commissioner of Income Tax, Assam (1994) Supp. (2) SCC 96 and Kerala State Cooperative Marketing Federation Ltd. and Ors. v. CIT (1998) 5 SCC 48, finally addressing the judgment in Citizen Cooperative Society Ltd. (supra).

The Court set aside the Full Bench’s judgment as faulty and dealt with the interpretation of Section 80P as follows:

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. 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. (Para 45)

The Court set aside the judgment of the High Court.

View/Download judgment: The Mavilayi Service Cooperative Bank Ltd. & Ors. v. Commissioner of Income Tax, Calicut & Anr.

Jhanavi M