Supreme Court Clarifies Deduction for Cooperative Societies Providing Credit Facilities: Mavilayi Service Cooperative Bank Ltd. vs. Commissioner of Income Tax (2021)

Introduction

Date of the Judgment: 12 January 2021

Citation: (2021) INSC 12

Judges: R.F. Nariman, J., Navin Sinha, J., and K.M. Joseph, J.

Can cooperative societies providing credit facilities to their members claim tax deductions, even if those facilities aren’t solely for agricultural purposes? The Supreme Court of India addressed this crucial question in a recent judgment, clarifying the scope of Section 80P of the Income-Tax Act, 1961. This case involved multiple cooperative societies, primarily registered as primary agricultural credit societies, who were seeking deductions on their income. The core issue was whether the introduction of Section 80P(4) of the IT Act in 2007 altered their eligibility for such deductions. The judgment was delivered by a three-judge bench comprising Justices R.F. Nariman, Navin Sinha, and K.M. Joseph, with the majority opinion authored by Justice R.F. Nariman.

Case Background

The case involved several cooperative societies, including primary agricultural credit societies and one multi-state cooperative society, all registered under the Kerala Co-operative Societies Act, 1969. These societies were primarily engaged in providing credit facilities to their members. Prior to the 2007 amendment, they were granted deductions under Section 80P(2)(a)(i) of the Income-Tax Act, 1961. However, after the introduction of Section 80P(4), the assessing officers denied these deductions, arguing that the societies’ agricultural credit activities were negligible, and most loans were for non-agricultural purposes. The societies challenged these decisions, leading to a legal battle that reached the Supreme Court.

Timeline

Course of Proceedings

The assessing officers denied the deductions claimed by the cooperative societies, stating that the agricultural credit given by these societies was negligible. The societies appealed to the Kerala High Court. A Division Bench of the Kerala High Court in Chirakkal Service Co-operative Bank Ltd. v. CIT held that if a cooperative society is classified as a primary agricultural credit society by the Registrar of Cooperative Societies, it is entitled to deductions under Section 80P(2)(a)(i). However, another Division Bench in Perinthalmanna Service Co-operative Bank Ltd. v. ITO and Anr. held that an inquiry must be conducted to determine if a cooperative bank is actually conducting business as a cooperative bank and not as a primary agricultural credit society. Due to these conflicting decisions, the matter was referred to a Full Bench of the Kerala High Court. The Full Bench, relying on the Supreme Court’s judgment in Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad, ruled that assessing officers must verify if the main object of a primary agricultural credit society is being carried out in the assessment year, and can deny deductions if agricultural credits are negligible. Aggrieved by this decision, the cooperative societies appealed to the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of Section 80P of the Income-Tax Act, 1961, particularly after the introduction of sub-section (4).

Section 2(19) of the IT Act defines a “co-operative society” as one registered under the Co-operative Societies Act, 1912, or any state law for cooperative societies.

Section 80P of the IT Act provides deductions for cooperative societies. Sub-section (1) states that if a cooperative society’s gross total income includes income in sub-section (2), then those sums shall be deducted.

Section 80P(2)(a)(i) of the IT Act allows deductions for cooperative societies engaged in carrying on the business of banking or providing credit facilities to its members.

Section 80P(4) of the IT Act states that the provisions of this section shall not apply to any cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank.

Explanation to Section 80P(4) of the IT Act defines “co-operative bank” and “primary agricultural credit society” as per the Banking Regulation Act, 1949.

Section 3 of the Banking Regulation Act, 1949 states that the Act does not apply to primary agricultural credit societies.

Section 56 of the Banking Regulation Act, 1949 applies the Act to cooperative societies with certain modifications. It defines “co-operative bank” as a state co-operative bank, a central co-operative bank, and a primary co-operative bank. It also defines “primary agricultural credit society” as a cooperative society whose primary object is to provide financial accommodation to its members for agricultural purposes.

Kerala Co-operative Societies Act, 1969 defines “Primary Agricultural Credit Society” as a society whose principal object is to undertake agricultural credit activities and provide loans for agricultural purposes.

Arguments

Arguments by the Cooperative Societies:

• The cooperative societies argued that Section 80P is a beneficial provision meant to encourage the cooperative movement.
• They contended that Section 80P(2)(a)(i) does not specify that credit facilities must be exclusively for agricultural purposes.
• They claimed that once a cooperative society is registered and provides credit facilities to its members, it is eligible for deduction under Section 80P(2)(a)(i).
• They argued that Section 80P(4) only excludes cooperative banks licensed by the Reserve Bank of India (RBI), and since they are not licensed banks, it does not apply to them.
• They stated that the assessing officer cannot go behind the registration certificate issued by the Registrar of Cooperative Societies.
• They relied on the Supreme Court’s judgment in Citizen Cooperative Society Ltd., arguing that it supported their contention that Section 80P(4) does not apply to them.
• They emphasized that the extent of the deduction should depend on the attributability of income and not on eligibility.

Arguments by the Revenue:

• The Revenue argued that a mere registration certificate is not sufficient; the society must be “engaged in” providing agricultural credit.
• They contended that the main business of the societies was banking and not agricultural credit.
• They stated that the Full Bench of the Kerala High Court correctly interpreted the Supreme Court’s judgment in Citizen Cooperative Society Ltd., allowing assessing officers to examine the factual situation.
• They argued that the object of Section 80P would be defeated if societies not engaged in agricultural credit were allowed deductions.
• They relied on Section 133(6) of the IT Act, giving powers of investigation to assessing officers.
• They argued that the burden is on the assessee to establish that it is entitled to the deduction.
• They cited RBI press releases cautioning the public against dealing with unlicenced societies carrying out banking business.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether cooperative societies registered as primary agricultural credit societies are eligible for tax deductions under Section 80P(2)(a)(i) of the Income-Tax Act, 1961, if they provide credit facilities to members, regardless of whether those facilities are exclusively for agricultural purposes.
2. Whether the introduction of Section 80P(4) of the IT Act excludes these societies from claiming deductions.
3. Whether the assessing officer can go behind the registration certificate to determine if the society is actually functioning as a primary agricultural credit society.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

On the interpretation of Section 80P:

• Assam Cooperative Apex Marketing Society Ltd. Assam v. Additional Commissioner of Income Tax, Assam (1994) Supp. (2) SCC 96 (Supreme Court of India) – Overruled by Kerala State Cooperative Marketing Federation Ltd. and Ors. v. CIT, holding that agricultural produce must be produced by members alone.
• Kerala State Cooperative Marketing Federation Ltd. and Ors. v. CIT (1998) 5 SCC 48 (Supreme Court of India) – Held that “agricultural produce of its members” means agricultural produce belonging to its members, including produce purchased from other agriculturists, and that Section 80P is a beneficial provision to encourage the cooperative sector.
• Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017) 9 SCC 364 (Supreme Court of India) – The Court clarified that Section 80P is a benevolent provision that should be interpreted liberally in favor of the assessee. The Court also held that Section 80P(4) excludes cooperative banks that require a license from RBI.
• CIT v. Punjab State Coop. Bank Ltd. [2008 SCC OnLine P&H 2042] (High Court of Punjab and Haryana) – Held that Section 80P has separate and distinct heads of exemption, and if income falls under any one head, it is exempt.
• Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT (2009) 8 SCC 393 (Supreme Court of India) – Held that the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P.
• Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Ltd. (2008) 9 SCC 337 (Supreme Court of India) – Held that the expression “engaged in” entails an examination of all the facts of the case.
• K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. (1981) 4 SCC 173 (Supreme Court of India) – Held that marginal notes can indicate the drift of a section.

On the interpretation of provisos:

• CIT, Mysore v. Indo Mercantile Bank 1959 Supp. (2) SCR 256 (Supreme Court of India) – Held that a proviso qualifies the generality of the main enactment and cannot be used to cut down the language of the main enactment.
• Tribhovandas Haribhai Tamboli v. Gujarat Revenue Tribunal (1991) 3 SCC 442 (Supreme Court of India) – Held that a proviso carves out an exception to the main provision and cannot nullify the real object of the main enactment.
• J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers (1996) 6 SCC 665 (Supreme Court of India) – Held that a proviso must be construed in relation to the principal matter to which it stands as a proviso.
• Union of India v. Dileep Kumar Singh (2015) 4 SCC 421 (Supreme Court of India) – Held that a proviso does not travel beyond the provision to which it is a proviso.

On the definition of “member”:

• U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 (Supreme Court of India) – Held that the expression “members” in Section 80P(2)(a)(i) must be construed in the context of the provisions of the law enacted by the State Legislature.

On the powers of the RBI and Registrar:

• Assistant Commissioner of Income Tax v. A.K. Menon and Ors. (1995) 5 SCC 200 (Supreme Court of India)
• Titan Medical Systems (P) Ltd. v. Collector of Customs, New Delhi (2003) 9 SCC 133 (Supreme Court of India)
• Vadilal Chemicals Ltd. v. State of A.P. and Ors. (2005) 6 SCC 292 (Supreme Court of India)

Judgment

How each authority was viewed by the Court:

• Assam Cooperative Apex Marketing Society Ltd. Assam v. Additional Commissioner of Income Tax, Assam was overruled.
• Kerala State Cooperative Marketing Federation Ltd. and Ors. v. CIT was followed, emphasizing the liberal interpretation of Section 80P.
• Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad was followed and clarified, stating that it supports the position that Section 80P(4) only excludes cooperative banks licensed by the RBI.
• CIT v. Punjab State Coop. Bank Ltd. was approved, highlighting the separate heads of exemption under Section 80P.
• Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT was followed, stating that the burden is on the assessee to show that it is entitled to the deduction.
• Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Ltd. was followed, stating that the expression “engaged in” entails an examination of all the facts of the case.
• K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. was followed, stating that marginal notes can indicate the drift of a section.
• CIT, Mysore v. Indo Mercantile Bank was followed, stating that a proviso qualifies the generality of the main enactment.
• Tribhovandas Haribhai Tamboli v. Gujarat Revenue Tribunal was followed, stating that a proviso carves out an exception to the main provision.
• J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers was followed, stating that a proviso must be construed in relation to the principal matter to which it stands as a proviso.
• Union of India v. Dileep Kumar Singh was followed, stating that a proviso does not travel beyond the provision to which it is a proviso.
• U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I was followed, stating that the expression “members” must be construed in the context of state law.
• The authorities regarding the powers of the RBI and Registrar were cited, but not directly relied upon to determine the main issues, as the court noted that 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.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Beneficial Interpretation of Section 80P: The Court emphasized that Section 80P is a benevolent provision intended to encourage the cooperative sector. Therefore, it should be interpreted liberally and in favor of the assessee.
• Literal Interpretation of Section 80P(2)(a)(i): The Court noted that Section 80P(2)(a)(i) does not specify that credit facilities must be exclusively for agricultural purposes. The plain language of the provision only requires that the society be engaged in providing credit facilities to its members.
• Limited Scope of Section 80P(4): The Court clarified that Section 80P(4) is a proviso meant to exclude cooperative banks, which are entities that function like commercial banks and require a license from the RBI. It was not intended to exclude other cooperative societies that are not engaged in the business of banking.
• Rejection of the Full Bench’s Interpretation: The Court disagreed with the Full Bench of the Kerala High Court’s interpretation of Citizen Cooperative Society Ltd. The Court clarified that the ratio decidendi of that judgment supports the position that Section 80P(4) only excludes cooperative banks licensed by the RBI.
• Fact-Finding Inquiry: The Court acknowledged that assessing officers can conduct a fact-finding inquiry to determine if a society is actually engaged in providing credit facilities to its members. However, this inquiry cannot extend to questioning the validity of the registration of the society or the nature of its activities beyond the provision of credit facilities to its members.
• Distinction between Eligibility and Attributability: The Court emphasized the distinction between eligibility for deduction and the attributability of income. While the society may be eligible for deduction under Section 80P(2)(a)(i), the profits attributable to loans given to non-members cannot be deducted.

Logical Reasoning:

Conclusion

The Supreme Court set aside the judgment of the Full Bench of the Kerala High Court and clarified the interpretation of Section 80P of the Income-Tax Act, 1961. The Court held that cooperative societies registered as primary agricultural credit societies are eligible for tax deductions under Section 80P(2)(a)(i) if they provide credit facilities to their members, regardless of whether those facilities are exclusively for agricultural purposes. The Court also clarified that Section 80P(4) only excludes cooperative banks licensed by the RBI, and that the societies in question, not being licensed banks, are not excluded. The Court further stated that while assessing officers can conduct a fact-finding inquiry to determine if the society is actually engaged in providing credit facilities to its members, they cannot go behind the registration certificate to question the validity of the registration. The Court emphasized that Section 80P is a benevolent provision and should be interpreted liberally in favor of the assessee.

Impact

This judgment has significant implications for cooperative societies, particularly primary agricultural credit societies, across India. The ruling provides clarity on the eligibility criteria for tax deductions under Section 80P of the Income-Tax Act, 1961.

Key impacts include:

• Clarity on Eligibility: Cooperative societies providing credit facilities to their members, regardless of whether those facilities are exclusively for agricultural purposes, are eligible for deductions under Section 80P(2)(a)(i).
• Exclusion of Licensed Banks: Section 80P(4) only excludes cooperative banks licensed by the RBI, not other cooperative societies.
• Fact-Finding Inquiry: Assessing officers can conduct fact-finding inquiries to determine if a society is actually engaged in providing credit facilities to its members, but they cannot question the validity of the registration.
• Liberal Interpretation: The judgment reinforces the principle that Section 80P is a benevolent provision and should be interpreted liberally in favor of cooperative societies.
• Reduced Litigation: The clarification provided by the Supreme Court is expected to reduce litigation related to Section 80P deductions for cooperative societies.
• Attributability of Income: The judgment clarifies that while the society may be eligible for deduction under Section 80P(2)(a)(i), the profits attributable to loans given to non-members cannot be deducted.

Overall, this judgment is a significant victory for cooperative societies, ensuring that they can avail tax benefits under Section 80P of the Income-Tax Act, 1961, provided they meet the basic criteria of providing credit facilities to their members.