Primary Agricultural Credit Society Entitled To Deduction U/s 80P Income Tax Act Even If They Give Loans To Members For Non-Agricultural Activities : Supreme Court

The Supreme Court has held that Cooperative Societies registered as primary agricultural credit societies are entitled to deductions under section 80P(2)(a)(i) of the Income-Tax Act,even when they may also be giving loans to their members which are not related to agriculture

A bench comprising Justices RF Nariman, Navin Sinha and KM Joseph set aside the judgment of Kerala High Court (Full Bench) which had held that such societies are not entitled to the deduction under Section 80P when loans are given to members for non-agricultural purposes. The apex court observed that the judgment of the Kerala High Court Full Bench as "wholly incorrect".

"Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction", the judgment authored by Justice Nariman observed.

The bench also observed that the giving of loans by a primary agricultural credit society to non-members is not illegal and held that the only effect of it is that profits attributable to such loans cannot be deducted under Section 80P.

"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", the judgment of the SC said.

Section 80P Income Tax Act

Section 80P deals with deduction in respect of income of co-operative societies. The provision reads thus:

Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

Sub-Section (2) states that the sums referred to in sub-section (1) shall be the following, namely:—(i) 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.

Sub-Section (4) of 80P provides that the provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Kerala HC Judgments

The issue in this case was whether the appellant- primary agricultural credit societies are entitled to such deductions under section 80P(2)(a)(i) of the Income-Tax Act after the introduction of section 80P(4) of the IT Act by section 19 of the Finance Act, 2006 (21 of 2006) with effect from 01.04.2007.

A Division Bench in Chirakkal Service Co-operative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker.),had held that once a Co-operative Society is classified by the Registrar of Co-operative Societies under the Kerala Act as being a primary agricultural credit society, the authorities under the IT Act cannot probe into whether agricultural credits were in fact being given by such societies to its members, thereby going behind the certificate so granted. It was held in Chirakkal that, since all the assesses were registered as primary agricultural credit societies, they would be entitled to the deductions under section 80P(2)(a)(i) read with section 80P(4) of the IT Act.

The Full Bench of Justices PR Ramachandra Menon, Anil Narendran and Devan Ramachandran, in the judgment impugned in this appeal, while overruling the above case, held thus:

In view of the law laid down by the Apex Court in Citizen Co-operative Society [397 ITR 1] it cannot be contended that, while considering the claim made by an assessee society for deduction under section 80P of the IT Act, after the introduction of sub-section (4) thereof, the Assessing Officer has to extend the benefits available, merely looking at the class of the society as per the certificate of registration issued under the Central or State Co-operative Societies Act and the Rules made thereunder. On such a claim for deduction under section 80P of the IT Act, the Assessing Officer has to conduct an enquiry into the factual situation as to the activities of the assessee society and arrive at a conclusion whether benefits can be extended or not in the light of the provisions under sub-section (4) of section 80P.

Supreme Court's view

The Supreme Court said that Section 80P is a "benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general" and hence it must be read "liberally and reasonably, and if there is ambiguity,in favour of the assessee".

The Apex Court bench observed that the judgment in Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017) 9 SCC 364. does not hold that the assessing officer can go behind the registration of a society and arrive at a conclusion that the society in question is carrying on illegal activities. The bench, interpreting Section 80P, noted as follows:

1. Firstly, the marginal note to Section 80P which reads "Deduction in respect of income of co-operative societies" is important, in that it indicates the general "drift" of the provision.
2. Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". A co-operative society is 50 defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative 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 co-operative 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.
3. Thirdly, the gross total income must include income that is referred to in sub-section (2).
4. Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, 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...the statutory provision involved does not require the Appellants to be primary agricultural credit societies to claim a deduction under section 80P(2)(a)(i) in the first place
5. Fifthly, as has been held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT (2009) 8 SCC 393 at paragraph 23, 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.
6. Sixthly, what is important to note is that, as has been held in Kerala State Cooperative Marketing Federation Ltd. and Ors. (supra) 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 co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society 54 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.
7. Seventhly, section 80P(1)(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 cooperative society once classified as a particular type of society, must 55 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).
8. 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

The Supreme Court also took note of the fact that primary agricultural credit societies are not treated as 'banks' under the Banking Regulation Act 1949 and that the RBI has also said that such societies cannot be classified as banks. The limited object of section 80P(4) is to exclude co-operative banks that function at par with other commercial banks i.e. which lend money to members of the public. Therefore, primary agricultural credit societies will not come under the exception under Section 80P(4).

Allowing the appeals of the societies, the SC said :

"...all the assessees in the present case are entitled to the benefit of the deduction contained in section80P(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"

While setting aside the High Court judgment, the bench observed thus:

To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra), must be given effect to. 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.

CASE : MAVILAYI SERVICE COOPERATIVE BANK LTD.VS. COMMISSIONER OF INCOME TAX, CALICUT & ANR. [CIVIL APPEAL NOS. 7343-7350 OF 2019] 
CORAM: Justices RF Nariman, Navin Sinha and KM Joseph
COUNSEL: Sr. Adv Shyam Divan, Sr. Adv Arvind Datar, ASG Balbir Singh
CITATION: LL 2021 SC 15

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