Brief facts of the case
These appeals were filed by the cooperative societies registered as ‘primary agricultural credit societies’, together with one ‘multi-state co-operative society’ and raised questions concerning deductions under Section 80P(2)(a)(i) of the Income Tax Act, 1961 (IT Act), and in particular, whether these assesses are entitled to such deductions under Section 80P(4) of the IT Act.
All these assessees, who are providing credit facilities to their members for agricultural and allied purposes, have been classified as primary agricultural credit societies under Kerala Co-operative Societies Act, 1969 (Kerala Act), and were granted deductions under Section 80P(2)(a)(i) of the IT Act. However, the scenario changed with the introduction of 80P(4) of the IT Act. The assessing officer denied claims for the deduction, relying on 80P(4) of the IT Act.
This decision of the assessing officer was challenged in the Kerala High Court. The High Court gave the decision against the assessees because it found that despite being registered as a primarily agricultural society, the functioning was not as such, thus denied deduction under section 80P(2)(a)(i) of the IT Act. Now, the appellant, Mavilayi Services Cooperative Bank Ltd.& Ors. filed this appeal to this decision.
The language of Section 80P(1) and (2) indicates that section 80P is a beneficial provision that is meant to further co-operative movement in India. For this, once a cooperative society is registered under the State Act, certain income is deductible from the gross total income. The moment a co-operative society engages in providing credit facilities to its members, inquiry of assessing officers stops there.
The Court opined that the Full Bench of High Court was incorrect in adding credit facilities related to agriculture, as no such thing is contained in Section 80P(2)(a)(i), as contrasted with sections 80P(2)(a)(iii) to (v) of the IT Act. The credit facilities given to non-members was not entitled to deduction under Section 80P.
Relying on the speech of the Finance Minister, while moving the amendment to Section 80P by introduction subsection (4), the object of the amendment was to remove co-operative banks from section 80P(1) and (2) as such banks, are lending to the general public, thus, not entitled to avail deduction under section 80P.
None of the assessees are co-operative banks licensed by the RBI to carry on baking business, section 80P(4) has no application. It was, further, argued that the benefits provided under Section 80P(1) and (2) cannot be cut down by the provision under Section 80P(4) because it is like proviso, which cannot cut down the main enacting part.
The assessing officer, who was the revenue authority, cannot go into whether, in substance, the society was a primary agricultural credit society, in case certificate stating that assessee was a primarily agricultural society is canceled under the Kerala Act.
The Judgement of Citizen Cooperative Society Ltd. was misread by the Kerala High Court, the facts of this case did not align with the given circumstances. In this case, there were no findings that the assessing officer is entitled to go behind a certificate given under a particular statute.
In case any dispute arose as to the classification of a society as being a primary agricultural credit society versus being a co-operative bank, it is the RBI alone who is to decide such dispute. The judgment of Citizen Cooperative Society Ltd. was directly in favor of assessees on the applicability of section 80P(4).
It was found that licenses have not been given to the function as to co-operative banks, all these societies qualify under Section 80P(2)(a)(i) for deductions to be granted, section 80P(4) having no application as they are not and cannot be stated to be co-operative banks.
It was argued that the mere certificate of registration as a primary agricultural credit society would not avail. For the assessment year in question, the assessing officer should have ensured that the assessee is engaged in activities as a primary agricultural credit society i.e., giving loans for agricultural and allied purposes. However, from the assessing officers’ orders, it was found that the loans given for agricultural purposes were negligible, the main business being that of banking. The appellants no longer did business as primary agricultural credit societies, and consequently, they would be disentitled to deduction under Section 80P after the advent of Section 80P(4).
Once a society is classified as a primary agricultural credit society, it would be entitled to deductions under section 80P(1) and (2), only if activities relatable to agriculture are carried out. The object of Section 80P would be defeated, if Division Bench in Chirakkal was held to be correct in law, as then, despite being engaged in activities other than agricultural credit and undeserving of any deduction would still get deduction contrary to what was sought to be achieved by section 80P(4).
He argued that Citizen Cooperative Society Ltd. was correctly read by the High Court, as permitting the assessing officer to get to the real facts of the case to conclude whether activities of primary agricultural credit society were being carried out in the assessment year. Further, mere registration as primary agricultural credit society is not sufficient, the term “engaged in” means that there must be continuing obligation on such society to carry out its main objects from year to year, it does not do, disentitled to any deduction under Section 80P(4).
The burden is on the assessee to establish that it is entitled to the deduction under Section 80P every year, it cannot, not entitled to the deduction.
Observation by the Court
The Court observed that in the case of Kerala State Cooperative Marketing Federation Ltd. vs. CIT (1998), it was held that the expression “agricultural produce of its members” would mean agricultural produce belonging to its members, which would include agricultural produce purchased by members from another agriculturist, along with the products produced by the members.
Further, in the case of Citizen Cooperative Society Ltd., an assessee who was initially established as a cooperative credit society under the Andhra Pradesh Cooperative Societies Act, and later as the operation expanded, the assessee got registered under the Multi-State Cooperative Societies Act, 2002. The Court held that the appellant was not barred from claiming deduction under Section 80P(4) of the IT Act.
The Court looked into the interpretation of Section 80P of the IT Act.
Firstly, the marginal note to Section 80P which reads “Deduction in respect of income of cooperative societies” is important, in that it indicates the general “drift” of the provision.
Secondly, for purposes of eligibility for the deduction, the assessee must be a co-operative society. A co-operative society is defined in Section 2(19) of the IT Act. For purposes of eligibility, it is unnecessary to probe into whether the co-operative society is classified as X or Y.
The gross total income must include income that is referred to in sub-section (2).
Sub-clause 2(a)(i) speaks of a co-operative society being “engaged in” carrying on the banking or providing credit facilities to its members. It is important qua sub-clause 2(a)(i) that co-operative societies must be “engaged in” providing credit facilities to their members. It was right pointed in the case of Commissioner of Income Tax, Madras vs. Ponni Sugars and Chemicals Ltd. that the expression “engaged in” would necessarily entail an examination of all the facts of the case.
As held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT (2009), the burden is on the assessee to show, by adducing facts that it is entitled to claim deduction under Section 80P. Therefore, the assessing officers need not go behind any certificate of registration while engaging in any inquiry as to whether the concerned co-operative society is providing credit facilities to its members. However, it will examine all relevant facts of the co-operative society and conclude.
Once it is clear co-operative is providing credit to its members, the fact that it is providing credit to non-members does not disentitle the society from availing the deduction. The distinction needs to be made between eligibility for deduction and attributability of the number of profits and gains to an activity. Since the profit from credit facilities given to non-members is not eligible to be deducted because it is not attributable to the activity of providing credit facilities to its members.
In the case Kerala State Cooperative Marketing Federation Ltd. and Ors. it was held that the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone.
After a cooperative society gets registered, it must continue to fulfill its objects alone. If such objects are only partially carried out, and the society conducts any other legitimate type of activity, such co-operative society would only be entitled to a maximum deduction of ₹ 50,000 under sub-clause (c).
Subclause(d) allows the deduction of income derived from interest or dividend, the object of this provision is to further the movement of the co-operative society.
For understanding Section 80P(4), the speech of Finance Minister, while introducing Section 80P(4), should be stated, in which he said that Cooperative banks are lending like any other banks or lending institution, thus should pay tax on their profits, but Primary agricultural credit Society will continue to stand on the special footing and exempt from tax under Section 80P of the IT Act.
According to the definition of ‘member’ given under the Kerala Act, loans given to nominal members would qualify for deduction under Section 80P(2)(a)(i).
The decision of the Court
The Court set aside the Judgment of the High Court and the appeals and all pending applications were disposed of. These appeals were placed before appropriate benches of the Kerala High Court for disposal on merits.
Click here to read The Mavilayi Service Cooperative Bank Ltd. & Ors Vs. Commissioner of Income Tax, Calicut & Anr.
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