Cooperative Society Not Doing Banking Business But Providing Credit Facilities To Members Eligible For Sec 80P Deduction Under Income Tax Act: Supreme Court

The Supreme Court has held that if a cooperative society does not transact the business of banking as defined in Section 5 (b) of the Banking Regulation Act, 1949 (BR Act), it would not be a cooperative bank. Thus, if a co-operative society is not a ‘co-operative bank’ within the meaning of Section 56 of the BR Act, then such an entity would be entitled to deduction under Section 80P of the Income Tax Act, the court has ruled.

“But on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 (National Bank for Agriculture and Rural Development Act), then it would not be entitled to the benefit of deduction under sub-section (4) of Section 80P of the Act,” the bench of Justices B.V. Nagarathna and Ujjal Bhuyan said.

The bench was dealing with the issue whether deduction under Section 80P of the Income Tax Act was available to the Kerala Co-operative Agricultural and Rural Development Bank, which was registered as a co-operative society under the Kerala Co-operative Societies Act, 1969.

Section 80P, which provides for deduction in respect of income of co-operative societies, was amended with effect from 01.04.2007 and Section 80P (4) was inserted. The said provision provides that Section 80P shall not apply to any ‘co-operative bank’, other than: (1) a primary agricultural credit society or (2) a primary co-operative agricultural and rural development bank.

The court remarked that it is only when a co-operative society is conducting ‘banking business’ in terms of Section 5(b) of the BR Act, that it would become a ‘co-operative bank’ and in such a case, Section 22 of the BR Act would apply and the society would require a licence from RBI to run a co-operative bank. The court added that Section 80P(2) of the Income Tax Act makes a clear distinction between business of banking on the one hand and providing credit facilities to its members by co-operative society on the other.

Noting that Section 56 of the BR Act defines only three co-operative banks, namely, state co-operative bank, central co-operative bank and primary co-operative bank, the court said: “If a co-operative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci).”

The court further remarked that a bank can be a scheduled bank which is not a ‘state co-operative bank’ or a ‘co-operative bank’ within the meaning of Section 80P(4) of the Income Tax Act. However, a co-operative society which is not a ‘state co-operative bank’ within the meaning of the NABARD Act, would not be a co-operative bank under Section 56 of the BR Act. Therefore, it would be entitled to the benefit of deduction under Section 80P of the Income Tax Act, the court said.

“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 5(c) of the BR Act, 1949 on obtaining licence under Section 22 of the said Act,” the bench said.

The court observed that the assessee-cooperative society was not a cooperative bank, and neither was it declared as a cooperative bank- either under the provisions of NABARD Act, 1981 or the Kerala Co-operative Societies Act, 1969. Since the assessee was a scheduled bank which was not a state cooperative bank or a co-operative bank within the meaning of the BR Act, the court concluded that it was entitled to the benefit of deduction under Section 80P of the Income Tax Act.

Facts of the case:

The assessee, Kerala State Co-operative Agricultural and Rural Development Bank Ltd, claimed deduction under Section 80P (2)(a)(i) of the Income Tax Act which was denied by the Assessing Officer. The Assessing Officer held that the assessee was a “co-operative bank” and thus, was hit by the provisions of Section 80P(4). The Commissioner of Income Tax (Appeals) (CIT(A)) confirmed the disallowance in appeal. In the appeal filed before the Income Tax Appellate Tribunal (ITAT), the Tribunal held that the assessee was not entitled for exemption under Section 80P (2). The appeal against the ITAT’s findings was also dismissed by the Kerala High Court. Against this, the assessee filed a Special Leave Petition (SLP) before the Supreme Court.

It was the case of the assessee that it was not a co-operative bank within the meaning of Section 80P of the Income Tax Act. It claimed that it was an apex ‘co-operative society’ engaged in providing credit facilities to its members, who were all co-operative societies.

Supreme Court’s Analysis:

The court referred to its decision in Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd. vs. Maharashtra State Cooperative Bank Ltd., (2003) 11 SCC 66.

In Apex Co-operative Bank (2003), the top court had categorically held that under Section 56 of the BR Act, only three co-operative banks have been defined, namely, (1) state co-operative bank, (2) central co-operative bank and (3) primary co-operative bank, which are covered under Sections 56 (c)(i)(cci) and 56 (c)(i)(ccvii) of the BR Act read with the provisions of the NABARD Act, 1981. Thus, it is only these three banks which are co-operative banks which require a licence from the RBI under the BR Act to engage in banking business, the court said.

“If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act, 1981, it would not be a co-operative bank within the meaning of Section 56 of BR Act, 1949 irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act,” the court observed.

The bench further observed that in Apex Co-operative Bank, it was further stated that if a bank has to be a state cooperative bank, there has to be a declaration made by the State Government in terms of Section 2(u) of NABARD Act, 1981.

While noting that the assessee-cooperative bank had not been declared as a state cooperative bank under the provisions of NABARD Act, the court concluded that it was not a cooperative bank so as to require a licence under Section 22 of the BR Act for carrying on the banking business.

The court referred to Section 80 (2)(a)(i) of the Income Tax Act which states that if a co-operative society is engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities shall be deducted. The court remarked that the said sub-section makes a clear distinction between business of banking on the one hand and providing credit facilities to its members by co-operative society on the other. “Thus, the definition of banking under Section 5(b) of the BR Act must be borne in mind as opposed to providing credit facilities to its members,” the court said.

The court thereafter noted that the expressions ‘co-operative bank’ and ‘primary agricultural credit society’ as well as ‘primary co-operative agricultural and rural development bank’ are defined in the Explanation to Section 80P (4) as having the meanings assigned to them in Part V of the BR Act. Further, by virtue of Section 5(ccvii) of the BR Act, the term state co-operative bank is to be understood as defined in NABARD Act, 1981.

While holding that the assessee was not a co-operative bank and neither had it been so declared under the provisions of NABARD Act or the Kerala Co-operative Societies Act, the bench concluded that it was a co-operative credit society under Section 80P(2)(a)(i) of the Income Tax Act whose primary object was to provide financial accommodation to its members, who were all co-operative societies. Thus, it was entitled to the benefit of deduction under Section 80P of the Income Tax Act, the court held.

“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,” the court ruled.

“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 court said.

Case Title: KERALA STATE CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK LTD. KSCARDB VS. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.

Citation : 2023 LiveLaw (SC) 786; 2023INSC830

Counsel for the parties: Mr. Krishnan Venugopal, Sr. Adv. Mr. Deepak Prakash, Adv. Mr. Biju P Raman, AOR Ms. Divyangana Malik, Adv. Ms. Vishnupriya, Adv. Mr. Krishnan Venugopal, Sr. Adv. Mr. Deepak Prakash, AOR Mr. Krishnan Agarwal, Adv. Mr. Kamal Singh Bisht, Adv. Mr. Pawan Kr. Dabas, Adv. Mr. Raneev Dahiya, Adv. Ms. Shrutii Srivastava, Adv. Mr. Nachiketa Vajpayee, Adv. Ms. Divyangna Malik, Adv. Ms. Vishnu Priya, Adv. Mr. Shyam Nair, Adv. Mr. Rahul Lakhera, Adv. Mr. Vardaan Kapoor, Adv; Mr. N Venkatraman, A.S.G. Mrs. Sonia Mathur, Sr. Adv. Mr. Raj Bahadur Yadav, AOR Mr. S A Haseeb, Adv. Mrs. Praveena Gautam, Adv. Mr. H R Rao, Adv. Mrs. Nisha Bagchi, Adv.

Banking Regulation Act, 1949; Income Tax Act, 1961; National Bank for Agriculture and Rural Development Act,1981

The Supreme Court has held that if a cooperative society does not transact the business of banking as defined in Section 5 (b) of the Banking Regulation Act, 1949 (BR Act), it would not be a cooperative bank. Thus, if a co-operative society is not a ‘co-operative bank’ within the meaning of Section 56 of the BR Act, then such an entity would be entitled to deduction under Section 80P of the Income Tax Act, the court has ruled.

“But on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 (National Bank for Agriculture and Rural Development Act), then it would not be entitled to the benefit of deduction under sub-section (4) of Section 80P of the Act,” the court said.

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