InCivil Appeal No. 10069 of 2016 -SC- Co-operative societies providing financial accommodation to members eligible for tax deduction under Section 80P of Income Tax Act, rules Supreme Court
Justice B.V. Nagarathna & Justice Ujjal Bhuyan [14-09-2023]

Read Order:Kerala State Co-Operative Agricultural and Rural Development Bank Ltd. Kscardb V. The Assessing Officer, Trivandrum and Ors

Chahat Varma

New Delhi, September 18, 2023: In a significant ruling, the Supreme Court has ruled that a co-operative society that provides financial accommodation to its members, who are all other co-operative societies and not members of the public, is entitled to claim income tax deduction under Section 80P of the Income Tax Act, 1961.

The facts, in a nutshell, was that the Kerala State Co-Operative Agricultural and Rural Development Bank Ltd. (appellant) was a State-level Agricultural and Rural Development Bank operating as a co-operative society under the Kerala Co-operative Societies Act, 1969. Their primary function was to provide credit facilities exclusively to cooperative societies. The central issue revolved around whether the appellant, as a co-operative society, could claim deductions for the profits generated from their banking and credit facilitation services to their cooperative society members under Section 80P of the Income Tax Act.

The division bench comprising of Justice B.V. Nagarathna and Justice Ujjal Bhuyan examined the decision rendered inApex Coop Bank Of Urban Bank Of Mah.&goa v. Maharashtra State Coop Bank [LQ/SC/2003/1077], wherein it was categorically held that under Section 56 of the Banking Regulation Act, 1949 (BR Act), only three cooperative banks have been defined, namely:State co-operative bank, Central co-operative bank and Primary co-operative bank. These three banks are covered under Section 56 (cci) read with (ccvii) read with the provisions of the National Bank for Agriculture and Rural Development Act, 1981 (NABARD). Thus, it is only these three banks which are co-operative banks which require a license under the BR Act,to engage in banking business. If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act, it would not be a co-operative bank within the meaning of Section 56 of BR Act, irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act.

The bench also observed that Section 80P of the Income Tax Act was a beneficial provision which had been enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, had to be read liberally in favour of the assessee.

Further, the bench referred to The Mavilayi Service Cooperative Bank Ltd. &Ors v. Commissioner of Income Tax, Calicut &Anr [LQ/SC/2021/21], in which it was observed that the purpose of subsection (4) of Section 80P was to exclude only co-operative banks that function like commercial banks, i.e., those that lend money to the public. The bench also noted that on a reading of Section 3 read with Section 56 of the BR Act, a primary co-operative bank cannot be a primary agricultural credit society. As such, a co-operative bank must be engaged in the business of banking as defined by Section 5(b) of the BR Act, which means accepting deposits of money from the public for the purpose of lending or investment.

The bench concluded that the appellant was not a co-operative bank within the meaning of subsection (4) of Section 80P of the Act because it was a co-operative credit society whose primary object was to provide financial accommodation to its members who were all other co-operative societies and not members of the public.

The bench stated that when the definition of co-operative bank in Section 56 of the BR Act, is viewed in terms of Section 2(u) of the NABARD Act,it is clear that only a state co-operative bank would be within the scope and meaning of a banking company under Section 2(c) of the BR Act, on obtaining a license under Section 22 of the said Act.

Thus, the bench ruled that although the appellant society was an apex co-operative society within the meaning of the State Act, 1984, it was not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the BR Act. Consequently, the court held that the appellant was entitled to the benefit of deduction under Section 80P of the Income Tax Act.