A Full Bench of the Hon’ble Supreme Court comprising Justices J. R.F. Nariman, Navin Sinha, and K.M. Joseph in the matter of The Mavilayi Service Cooperative Bank Ltd. and Ors. v. Commissioner of Income Tax, Calicut and Anr, REED 2021 SC 01007 faced an interesting question that Co-operative Societies engaged in providing credit, whether entitled to the deductions under Income Tax Act, 1961 or not? The brief facts of the case, the issues involved, and the ruling analysis are discussed below.
The Appeals were filed by Co-operative societies registered as ‘Primary agricultural credit societies, together with one ‘multi- state co-operative society’. These societies are classified under the Kerala Co-operative Societies Act, 1969 (“Kerala Act”) and were claiming deductions under 80P(2)(a)(i) of the Income Tax Act, 1961 which was granted them up to the assessment year of 2007-2008.
As the Section 80P(4) of the Income Tax Act was introduced, this scenario changed, according to this section, as per the Audited report and Disbursal statement furnished by the assesses, the agricultural credit that was given by the assessee-societies to its members was negligible – the credit for purposes apart from agricultural credit.
Procedural History
The decisions of the assessing officer were challenged before the Kerala High Court, the decision of the division bench relied on Chirakkal Service Co-operative Bank Ltd. v. CIT, where a batch of appeals against the assessment under section147 and 143(3)/144 of the Income Tax Act, Kerala Act, Banking Regulation Act, 1949, society Bye-laws, etc. were examined and it was held that since all the assesses were registered as primary agricultural credit societies, they would be entitled to the deductions under 80P(2) and 80P(4) of the Income Tax Act, the Department, however, contended this decision by pointing out that the bench missed on the judgment passed in Perinthalmanna Service Co-operative Bank Ltd. v. ITO and Anr. Where it was held that the revisional authority was free to enquire if the co-operative bank was conducting business as a co-operative bank and not as a primary agricultural credit society, and then decide on deductions, notwithstanding what nomenclature they were registered under. These divergent decisions led to a reference order dated 9.07.2018 to a Full Bench of Kerala High Court.
The Full Bench referred to Section 80P of the Income Tax Act, provisions of Banking Regulation Act, and the Kerala Act and held that the main object of an agricultural society at the time of registration must continue at all times, including the time of assessment. The assessing officer must be satisfied over the same point, if the amount of the agricultural credits to a negligible amount, the assessing officer is free to apply provisions of section 80P(4) of the Income Tax Act, this conclusion relied on the judgment in Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad.
Final Judgment and Reasoning
The counsel for the assessee argued that the advent of section 80P(4) of the Income Tax Act did not lead to any change in this case. His main argument was that section 80P was a beneficial provision, and the moment a co-operative society is registered under a state Act and is engaged in providing credit to its members is where the assessing officer’s enquiry stops. He argued that no such thing as adding credit facilities related to agriculture, is contained in section 80P(2)(a)(iii) to (v) of the IT Act, he argued that as soon as a society is registered, as long as it provides credit facilities, is entitled to the deductions. A distinction needs to be drawn between eligibility for the deduction, and whether the whole amount of profit of the business is attributable to only one such activity. Since none of the assesses is a co-operative bank licensed by the RBI, section 80P(4) does not apply. Until the Registration has been cancelled under the Kerala Act, the assessing officer has the only authority to collect revenue and not go into whether the objective is being maintained.
He contended that the full bench misread the judgment in Citizen Cooperative Society Ltd. where the cooperative society conducted its business illegally by giving credit to non-members, He pointed out under the Banking Regulation Act,1949 and the Kerala Act, if any dispute arose regarding the classification of a society, it is the Reserve Bank India (RBI) alone who can decide such dispute.
The counsel on behalf of some of the assesses supported the above arguments and argued that once all co-op societies registered under the state act, were entitled to deductions. This deduction would depend on attributability and not on eligibility.
The Additional Solicitor General appearing on behalf of the revenue refuted all the arguments. He contended that a mere certificate of registration would not avail, the assessing officer has to be satisfied that the assessee is indeed engaged in its objective, and from those same reports, it was found that the loans given by these societies were negligible and for non-agricultural purposes and were hence, disentitled to deductions. The whole object of 80P would be defeated if undeserving societies got deductions and the High Court bench was correct in its reading of the Citizen Cooperative society Judgment. He justified the powers of the Assessing Officer by referring to various sections of the IT Act. Under section 80P the society must be “engaged in” i.e. continually following its objective.
The court after having heard these arguments considered section 2(19) and 80P of the Income Tax Act, provision of sections 3 and 56 of the Banking Regulations Act, 1949, The Kerala Act, Bye-laws of some of the societies, a sample set of Mavilayi Service Co-operative Bank Ltd. was taken. The court examined its judgments pertaining to section 80P like Assam Cooperative Apex Marketing Society Ltd. Assam v. Additional Commissioner of Income Tax, Assam which the court acknowledged started on a wrong foot. They referred to Kerala State Cooperative Marketing Federation Ltd. and Ors. v. CIT and Citizen Cooperative Society Limited Judgment. They also considered the Ratio Decidendi of various Judgments pertaining to Cooperative societies and Tax deductions.
After assessing all the evidence and relevant sections, rules, and judgments, the court concluded that the Full Bench Judgment should be set aside and all appeals to be placed before appropriate benches of the Kerala High Court. The court reasoned that:
The marginal note in section 80P on “Deduction in respect of income of co-operative societies” is important and indicates the general “drift” of the provision.
For eligibility for deduction the society must be a co-operative as defined under section 2(19) of the IT Act, it is unnecessary to probe as to the classification of the society.
The gross total income must include all income referred to in sub-section (2).
According to section (2)(a)(i), society must be engaged in providing credit facilities, this exercise needs to be undertaken.
The statutory provision involved in this case does not require the Appellants to be primary agricultural credit societies to claim a deduction under 80P.
The burden is on the assessee to show that it is entitled to claim deductions under section 80P, therefore, the assessing officer is not required to engage in a fact-finding enquiry, the officer is required only to scrutinize the submission made by the assessee and arrive at a conclusion.
The term “providing credit facilities to its members” does not necessarily mean agricultural credit alone. section 80P being a beneficial provision must be constructed for the object of furthering the co-operative movement, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing the deduction.
Section 80P(1)(c) and sub-clause (d) make it clear that the section is considered with the co-operative movement, and therefore, the moment society is registered under state act and is engaged in residuary activities, the profits attributed to such activities are liable to deductions. The court also acknowledged the distinction between attributability and eligibility.
The Finance Minister's speech dated 28.02.2006, circular dated 28.12.2006, and clarification by CBDT indicate that the object of section 80P(4) is to exclude co-operative banks that function at par with commercial banks. Section 80P is a benevolent provision to encourage co-operative credit. It was also found that the Full Bench of Kerala High Court was incorrect in reading its judgment of Citizen Cooperative Society Limited and was hence set aside.