Deduction u/s 80P(2)(a)(i) allowable despite loans by co-operative societies to members not related to agriculture.
ABCAUS Case Law Citation
ABCAUS 3440 (2021) (01) SC
Important case law relied referred:
Chirakkal Service Co-operative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker.)
Perinthalmanna Service Co-operative Bank Ltd. v. ITO and Anr.(2014) 363 ITR 268 (Ker.)
Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017) 9 SCC 364
In this case, appeals had been filed by co-operative societies who have been registered as ‘primary agricultural credit societies’, together with one ‘multi-State co-operative society’ whose claim of deduction u/s 80P of the Income Tax Act 1961 (the Act) was denied.
The question raised was as to deductions that can be claimed under section 80P(2)(a)(i) of the Act and in particular, whether these assessees are entitled to such deductions after the introduction of section 80P(4) of the Act by section 19 of the Finance Act, 2006 (21 of 2006) with effect from 01.04.2007.
All these assessees, was stated to be providing credit facilities to their members for agricultural and allied purposes, had been classified as primary agricultural credit societies by the Registrar of Co-operative Societies under the Kerala Co-operative Societies Act, 1969 (“Kerala Act”), and were claiming a deduction under section 80P(2)(a)(i) of the Act, which had been granted to them up to Assessment Year 2007-08.
The Assessing Officer (AO) denied their claims for deduction, relying upon section 80P(4) of the Act, holding that as per the Audited Receipt & Disbursal Statement of the assessees, agricultural credits that were given by the assessee-societies to its members were negligible.
The High Court, after considering section 80P(4) of the Act, various provisions of the Kerala Act, the Banking Regulation Act, 1949, the bye-laws of the Societies, etc., 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 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.
However, the Department contended that the judgment of the Hon’ble High Court was rendered per incuriam by not having noticed the earlier decision of another Division Bench wherein it was held that the revisional authority was justified in saying that an inquiry has to be conducted into the factual situation as to whether a co-operative bank is in fact conducting business as a co-operative bank and not as a primary agricultural credit society, and depending upon whether this was so for the relevant assessment year, the assessing officer would then allow or disallow deductions claimed under section 80P of the IT Act, notwithstanding that mere nomenclature or registration certificates issued under the Kerala Act would show that the assessees are primary agricultural credit societies.
The Full Bench of the High Court, 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. It was held that if it is found that as a matter of fact agricultural credits amount to a negligible amount, then it would be open for the assessing officer, applying the provisions of section 80P(4) of the Act, to state that as the co-operative society in question – though registered as a primary agricultural credit society is not, in fact, functioning as such, the deduction claimed under section 80P(2)(a)(i) of the Act must be refused.
The Hon’ble Supreme Court stated that the limited object of section 80P(4) is to exclude co-operative banks that functional par with other commercial banks i.e. which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking.
The Hon’ble Supreme Court stated that under Banking Regulation Act, 1949 no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.
Section 80P is a benevolent provision
The Hon’ble Supreme Court opined that Section 80P of the Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee.
The Hon’ble Supreme Court stated that 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 Revenue in the present case by adding the word “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is 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 have a licence in this behalf from the RBI.
Deduction u/s 80P allowable despite loans to members not related to agriculture.
The Hon’ble Supreme Court held that the impugned Full Bench judgment was wholly incorrect in its reading the judgment of the Hon’ble Supreme Court. Clearly, therefore, once section 80P(4) was out of harm’s way, all the assessees in the present case were entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture.
For loans to non-members, related profits cannot be deducted.
Also, the Apex Court stated that in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.
Further, the Hon’ble Supreme Court observed that Kerala Act expressly permits loans to non-members. Thus, the giving of loans by a primary agricultural credit society to non-members was not illegal.
Resultantly, the impugned Full Bench judgment was set aside.
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