Cooperative Society Not Doing Banking Business But Providing Credit Facilities To Members Eligible For Sec 80P Deduction Under Income Tax Act: Supreme Court

The Supreme Court has held that if a cooperative society does not transact the business of banking as defined in Section 5 (b) of the Banking Regulation Act, 1949 (BR Act), it would not be a cooperative bank. Thus, if a co-operative society is not a ‘co-operative bank’ within the meaning of Section 56 of the BR Act, then such an entity would be entitled to deduction under Section 80P of the Income Tax Act, the court has ruled.“But on the other hand, if it is a co-operative bank within the meaning of Section 56 of BR Act, 1949 read with the provisions of NABARD Act, 1981 (National Bank for Agriculture and Rural Development Act), then it would not be entitled to the benefit of deduction under sub-section (4) of Section 80P of the Act,” the bench of Justices B.V. Nagarathna and Ujjal Bhuyan said.The bench was dealing with the issue whether deduction under Section 80P of the Income Tax Act was available to the Kerala Co-operative Agricultural and Rural Development Bank, which was registered as a co-operative society under the Kerala Co-operative Societies Act, 1969.Section 80P, which provides for deduction in respect of income of co-operative societies, was amended with effect from 01.04.2007 and Section 80P (4) was inserted. The said provision provides that Section 80P shall not apply to any ‘co-operative bank’, other than: (1) a primary agricultural credit society or (2) a primary co-operative agricultural and rural development bank.The court remarked that it is only when a co-operative society is conducting ‘banking business’ in terms of Section 5(b) of the BR Act, that it would become a ‘co-operative bank’ and in such a case, Section 22 of the BR Act would apply and the society would require a licence from RBI to run a co-operative bank. The court added that Section 80P(2) of the Income Tax Act makes a clear distinction between business of banking on the one hand and providing credit facilities to its members by co-operative society on the other.Noting that Section 56 of the BR Act defines only three co-operative banks, namely, state co-operative bank, central co-operative bank and primary co-operative bank, the court said: “If a co-operative society is not conducting the business of banking as defined in clause (b) of Section 5 of the BR Act, 1949, it would not be a co-operative bank and not so within the meanings of a state co-operative bank, a central co-operative bank or a primary co-operative bank in terms of Section 56(c)(i)(cci).”The court further remarked that a bank can be a scheduled bank which is not a ‘state co-operative bank’ or a ‘co-operative bank’ within the meaning of Section 80P(4) of the Income Tax Act. However, a co-operative society which is not a ‘state co-operative bank’ within the meaning of the NABARD Act, would not be a co-operative bank under Section 56 of the BR Act. Therefore, it would be entitled to the benefit of deduction under Section 80P of the Income Tax Act, the court said.“When the definition of “co-operative bank” in Section 56 of BR Act, 1949 is viewed in terms of Sections 2(u) of the NABARD Act, 1981, it is clear that only a state co-operative bank would be within the scope and meaning of a banking company under Section 5(c) of the BR Act, 1949 on obtaining licence under Section 22 of the said Act,” the bench said.The court observed that the assessee-cooperative society was not a cooperative bank, and neither was it declared as a cooperative bank- either under the provisions of NABARD Act, 1981 or the Kerala Co-operative Societies Act, 1969. Since the assessee was a scheduled bank which was not a state cooperative bank or a co-operative bank within the meaning of the BR Act, the court concluded that it was entitled to the benefit of deduction under Section 80P of the Income Tax Act.Facts of the case:The assessee, Kerala State Co-operative Agricultural and Rural Development Bank Ltd, claimed deduction under Section 80P (2)(a)(i) of the Income Tax Act which was denied by the Assessing Officer. The Assessing Officer held that the assessee was a “co-operative bank” and thus, was hit by the provisions of Section 80P(4). The Commissioner of Income Tax (Appeals) (CIT(A)) confirmed the disallowance in appeal. In the appeal filed before the Income Tax Appellate Tribunal (ITAT), the Tribunal held that the assessee was not entitled for exemption under Section 80P (2). The appeal against the ITAT’s findings was also dismissed by the Kerala High Court. Against this, the assessee filed a Special Leave Petition (SLP) before the Supreme Court.It was the case of the assessee that it was not a co-operative bank within the meaning of Section 80P of the Income Tax Act. It claimed that it was an apex ‘co-operative society’ engaged in providing credit facilities to its members, who were all co-operative societies.Supreme Court’s Analysis:The court referred to its decision in Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd. vs. Maharashtra State Cooperative Bank Ltd., (2003) ...

Cooperative Society Not Doing Banking Business But Providing Credit Facilities To Members Eligible For Sec 80P Deduction Under Income Tax Act: Supreme Court

Parina Katyal

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