Loan by primary agricultural credit society to its nominal members would qualify for deduction u/s 80P(2)(a)(i): SC

While hearing an appeal against an order passed by the Kerala High Court denying deduction under Section 80P to a cooperative society, the Supreme Court of India observed that loans given by cooperative credit societies to nominal members would qualify for the purpose of deduction under Section 80P(2)(a)(i) of the Income Tax Act 1961.

A Larger Bench of Justice RF Nariman, Justice Navin Sinha and Justice KM Joseph, so observed that a proviso to a provision could be used to cut down the language of the main enactment where such language is clear, or to exclude by implication what the main enactment clearly states.

The Appellants-Assessees were represented by Mr. Arvind P Datar, Senior Advocate, whereas the Respondent-Revenue was represented by Mr. Balbir Singh, Additional Solicitor General.

 TheAppellants-Assessees are cooperative societies which are registered as primary agricultural credit societies engaged in providing credit facilities to their members for agricultural and allied purposes. On assessment for the relevant period, the Revenue observed that the agricultural credit given by these societies to their members was negligible and that credits given to such members were for purposes other than agricultural credit. Hence the deduction under Section 80P was disallowed.

Subsequently, the High Court of Kerala 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 Income Tax 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. Hence the Assessees were held to be entitled to the deduction under Section 80P.

The Revenue then placed reliance on a past judgment of the Kerala High Court wherein the Bench upheld the action of the Revisional Authority in inquiring into whether a cooperative bank was indeed conducting business as such and not as a primary agricultural credit society. It was held that deductions were to be allowed based on the activities of the assessee therein, notwithstanding that the Assessee’s nomenclature or registration certificate classified it as a primary agricultural credit society.

Considering the divergence in views, the matter in the present case was referred to a Larger Bench of the Kerala High Court, which then 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. The Larger Bench held that even though the main objective of a primary agricultural credit society which exists at the time of registration must continue at all times, nevertheless, the Assessing Officer must also be satisfied that the main objective is being fulfilled during the relevant Assessment Year.

Applying this reasoning, the Larger Bench of the High Court observed that since the Assessee had given out only negligible amount of agricultural credits, the deduction under Section 80P(2)(a)(i) was rightly denied, as the Assessee was although registered as a cooperative society, it was not functioning as one.

On hearing the contentions of both parties, the Larger Bench of the Supreme Court observed that decision of the Supreme Court in Citizen Cooperative Society Ltd. ought to have been followed by the Larger Bench of the High Court. The Bench further observed that Section 80P was a benevolent provision enacted to encourage and promote credit of the co-operative sector in general must be read liberally and reasonably. The Larger Bench further observed that in case of any ambiguity, the issue had to be resolved in favour of the Assessee. (Para 45)

The Larger Bench further observed that 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 Respondent-Revenue in the present case by adding the word “agriculture” into Section 80P(2)(a)(i) when it is not there originally.

Further, Section 80P(4) was 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 carried a licence in this behalf from the RBI, the Larger Bench added.

With these observations, the Larger Bench of the Supreme Court observed that the Larger Bench of the Kerala High Court had mis-read the judgment in Citizen Cooperative Society Ltd. and that the Assessee in the present case was entitled for deduction under Section 80P. Nevertheless, the Larger Bench also observed that no deduction could be allowed in respect of profits arising from loans by the Assessee to non-members.

Cause Title: The Mavilayi Service Cooperative Bank Ltd & Ors vs. Commissioner of Income Tax, Calicut & Anr. [Civil Appeal Nos. 7343-7350 Of 2019 / 2023-Enterslice-4-SC-IT]

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