# THE MAVILAYI SERVICE COOPERATIVE BANK LTD. & ORS v. COMMISSIONER OF INCOME TAX, CALICUT & ANR

- **Citation:** [2021] 1 S.C.R. 78
- **Court:** Supreme Court of India
- **Decided:** 2021-01-12
- **Case number:** Civil Appeal Nos.7343-7350 of 2019
- **Bench:** R. F. Nariman, Navin Sinha, K. M. Joseph
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-mavilayi-service-cooperative-bank-ltd-ors-v-commissioner-of-income-tax-34730
- **Pages:** 52

## Headnote

Income Tax Act, 1961: s.80P(2) - Deduction for Cooperative
Societies - Assessees registered as 'Primary Agriculture Credit
Societies' under Kerala Cooperative Societies Act, 1969 - They are
stated to be providing credit facilities to their members for
agricultural and allied purposes - Claim for deduction under
s.80P(2)(a) - Whether assessees are entitled to such deductions
after introduction of s.80P(4) by s.19 of Finance Act, 2006 w.e.f.
1.4.2007 - Held: Assessees are entitled to benefit of deduction
contained in s.80P(2)(a)(i), notwithstanding that they may also be
giving loans to their members which are not related to agriculture -
In case it is found that there are instances of loans given to nonmembers, profits attributable to such loans are not deductible.
Income Tax Act, 1961: s.80P(2) - Beneficial provision - Held:
s.80P must be construed with the object of furthering the cooperative movement generally - s.80P, 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 - A 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 s.80P(2)(a)(i) when it is not there - Further,
s.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 - Considering the definition of
'member' under the Kerala Act, loans given to such nominal members
would qualify for the purpose of deduction under s.80P(2)(a)(i) -
Thus, giving of loans by a primary agricultural credit society to
non-members is not illegal - Interpretation of statutes.
 [2021] 1 S.C.R. 78
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Disposing of the appeals, the Court
HELD : 1. Interpretation of Section 80P of the IT Act.
The marginal note to Section 80P which reads "Deduction in
respect of income of co-operative societies" indicates the general
"drift" of the provision. Secondly, for purposes of eligibility for
deduction, the assessee must be a "co-operative society". A cooperative society is defined in Section 2(19) of the IT Act, as
being a co-operative society registered either under the Cooperative Societies Act, 1912 or under any other law for the time
being in force in any State for the registration of co-operative
societies. This, therefore, refers only to the factum of a cooperative society being registered under the 1912 Act or under
the State law. For purposes of eligibility, it is unnecessary to probe
any further as to whether the co-operative society is classified as
X or Y. Thirdly, the gross total income must include income that
is referred to in sub-section (2). Fourthly, sub-clause (2)(a)(i) then
speaks of a co-operative society being "engaged in" carrying on
the business of banking or providing credit facilities to its
members. What is important qua sub-clause (2)(a)(i) is the fact
that the co-operative society must be "engaged in" the providing
credit facilities to its members. Fifthly, the burden is on the
assessee to show, by adducing facts, that it is entitled to claim
the deduction under Section 80P. Therefore, the assessing officer
under the IT Act cannot be said to be going behind any registration
certificate when he engages in a fact-finding enquiry as to whether
the co-operative society concerned is in fact providing credit
facilities to its members. Such fact finding enquiry (see section
133(6) of the IT Act) would entail examining all relevant facts of
the co-operative society in question to find out whether it is, as a
matter of fact, providing credit facilities to its members, whatever
be its nomenclature. Once this task is fulfilled by the assessee,
by placing reliance on such facts as would show that it is engaged
in providing credit facili

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_Characters 0–39,891 of 113,807. This is a partial read: ask again with offset=39891 for what follows._

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THE MAVILAYI SERVICE COOPERATIVE
BANK LTD. & ORS.
v.
COMMISSIONER OF INCOME TAX, CALICUT & ANR.
(Civil Appeal Nos.7343-7350 of 2019)
JANUARY 12, 2021
[R. F. NARIMAN, NAVIN SINHA AND K. M. JOSEPH, JJ.]
Income Tax Act, 1961: s.80P(2) - Deduction for Cooperative
Societies - Assessees registered as 'Primary Agriculture Credit
Societies' under Kerala Cooperative Societies Act, 1969 - They are
stated to be providing credit facilities to their members for
agricultural and allied purposes - Claim for deduction under
s.80P(2)(a) - Whether assessees are entitled to such deductions
after introduction of s.80P(4) by s.19 of Finance Act, 2006 w.e.f.
1.4.2007 - Held: Assessees are entitled to benefit of deduction
contained in s.80P(2)(a)(i), notwithstanding that they may also be
giving loans to their members which are not related to agriculture -
In case it is found that there are instances of loans given to nonmembers, profits attributable to such loans are not deductible.
Income Tax Act, 1961: s.80P(2) - Beneficial provision - Held:
s.80P must be construed with the object of furthering the cooperative movement generally - s.80P, 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 - A 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 s.80P(2)(a)(i) when it is not there - Further,
s.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 - Considering the definition of
'member' under the Kerala Act, loans given to such nominal members
would qualify for the purpose of deduction under s.80P(2)(a)(i) -
Thus, giving of loans by a primary agricultural credit society to
non-members is not illegal - Interpretation of statutes.
 [2021] 1 S.C.R. 78
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Disposing of the appeals, the Court
HELD : 1. Interpretation of Section 80P of the IT Act.
The marginal note to Section 80P which reads "Deduction in
respect of income of co-operative societies" indicates the general
"drift" of the provision. Secondly, for purposes of eligibility for
deduction, the assessee must be a "co-operative society". A cooperative society is defined in Section 2(19) of the IT Act, as
being a co-operative society registered either under the Cooperative Societies Act, 1912 or under any other law for the time
being in force in any State for the registration of co-operative
societies. This, therefore, refers only to the factum of a cooperative society being registered under the 1912 Act or under
the State law. For purposes of eligibility, it is unnecessary to probe
any further as to whether the co-operative society is classified as
X or Y. Thirdly, the gross total income must include income that
is referred to in sub-section (2). Fourthly, sub-clause (2)(a)(i) then
speaks of a co-operative society being "engaged in" carrying on
the business of banking or providing credit facilities to its
members. What is important qua sub-clause (2)(a)(i) is the fact
that the co-operative society must be "engaged in" the providing
credit facilities to its members. Fifthly, the burden is on the
assessee to show, by adducing facts, that it is entitled to claim
the deduction under Section 80P. Therefore, the assessing officer
under the IT Act cannot be said to be going behind any registration
certificate when he engages in a fact-finding enquiry as to whether
the co-operative society concerned is in fact providing credit
facilities to its members. Such fact finding enquiry (see section
133(6) of the IT Act) would entail examining all relevant facts of
the co-operative society in question to find out whether it is, as a
matter of fact, providing credit facilities to its members, whatever
be its nomenclature. Once this task is fulfilled by the assessee,
by placing reliance on such facts as would show that it is engaged
in providing credit facilities to its members, the assessing officer
must then scrutinize the same, and arrive at a conclusion as to
whether this is, in fact, so. Sixthly, the expression "providing credit
facilities to its members" does not necessarily mean agricultural
credit alone. Section 80P being a beneficial provision must be
construed with the object of furthering the co-operative movement
THE MAVILAYI SERVICE COOPERATIVE BANK LTD. v.
COMMISSIONER OF INCOME TAX, CALICUT
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generally, and section 80P(2)(a)(i) must be contrasted with section
80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must
also further be contrasted with sub-clause (b), which speaks only
of a "primary" society engaged in supplying milk etc. thereby
defining which kind of society is entitled to deduction, unlike the
provisions contained in section 80P(2)(a)(i). Also, the proviso to
section 80P(2), when it speaks of sub-clauses (vi) and (vii), further
restricts the type of society which can avail of the deductions
contained in those two sub-clauses, unlike any such restrictive
language in Section 80P(2)(a)(i). Once it is clear that the cooperative society in question is providing credit facilities to its
members, the fact that it is providing credit facilities to nonmembers does not disentitle the society in question from availing
of the deduction. The distinction between eligibility for deduction
and attributability of amount of profits and gains to an activity is a
real one. Since profits and gains from credit facilities given to
non-members cannot be said to be attributable to the activity of
providing credit facilities to its members, such amount cannot be
deducted. Seventhly, section 80P(2)(c) also makes it clear that
section 80P is concerned with the co-operative movement
generally and, therefore, the moment a co-operative society is
registered under the 1912 Act, or a State Act, and is engaged in
activities which may be termed as residuary activities i.e. activities
not covered by sub-clauses (a) and (b), either independently of
or in addition to those activities, then profits and gains attributable
to such activity are also liable to be deducted, but subject to the
cap specified in sub-clause (c). The reach of sub-clause (c) is
extremely wide, and would include co-operative societies engaged
in any activity, completely independent of the activities mentioned
in sub-clauses (a) and (b), subject to the cap of INR 50,000/- to
be found in sub-clause (c)(ii). This puts paid to any argument that
in order to avail of a benefit under Section 80P, a co-operative
society once classified as a particular type of society, must
continue to fulfil those 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 Rs.50,000/- under sub-clause
(c).Eighthly, sub-clause (d) also points in the same direction, in
that interest or dividend income derived by a co-operative society
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from investments with other co-operative societies, are also
entitled to deduct the whole of such income, the object of the
provision being furtherance of the co-operative movement as a
whole. [Paras 27, 28, 29, 30, 32-35][117-E-F; 118-A-E; 119-D-H;
120-A-H; 121-A]
Kerala State Cooperative Marketing Federation Ltd.
and Ors. v. CIT (1998) 5 SCC 48 : [1998] 3 SCR 443;
K.P. Varghese v. Income Tax Officer, Ernakulam and
Anr. (1981) 4 SCC 173 : [1982] 1 SCR 629 ;
Commissioner of Income Tax, Madras v. Ponni Sugars
and Chemicals Ltd. (2008) 9 SCC 337 : [2008] 13
SCR 570 ; Udaipur Sahkari Upbhokta Thok Bhandar
Ltd. v. CIT (2009) 8 SCC 393 : [2009] 11 SCR 90
- relied on.
Assistant Commissioner of Income Tax v. A.K. Menon
and Ors. (1995) 5 SCC 200 : [1995] 2 Suppl. SCR
181 ; Titan Medical Systems (P) Ltd. v. Collector of
Customs, New Delhi (2003) 9 SCC 133 ; Vadilal
Chemicals Ltd. v. State of A.P. and Ors.(2005) 6 SCC
292 : [2005] 2 Suppl. SCR 1 - referred to.
2. The limited object of section 80P(4) is to exclude cooperative banks that function at 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 cooperative bank must be engaged in the business of banking as
defined by section 5(b) of the Banking Regulation Act, 1949, which
means the accepting, for the purpose of lending or investment,
of deposits of money from the public. Likewise, under section
22(1)(b) of the Banking Regulation Act, 1949 as applicable to cooperative societies, 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. [Para 39][122-D-G]
THE MAVILAYI SERVICE COOPERATIVE BANK LTD. v.
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3. Section 80P of the IT 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. A
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. [Para 45][127-A-D]
4. Once section 80P(4) is out of harm's way, all the
assessees in the present case are 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. Also, 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.
Considering the definition of 'member' under the Kerala Act,
loans given to such nominal members would qualify for the
purpose of deduction under section 80P(2)(a)(i). Thus, the giving
of loans by a primary agricultural credit society to non-members
is not illegal unlike the facts in Citizen Cooperative Society
Ltd.[Paras 45-47][127-D-H; 128-A-C; G-H]
Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad
(2017) 9 SCC 364 : [2017] 9 SCR 361 - distinguished.
CIT, Mysore v. Indo Mercantile Bank [1959] Supp. (2)
SCR 256 ; Tribhovandas Haribhai Tamboli v. Gujarat
Revenue Tribunal (1991) 3 SCC 442 : [1991] 2 SCR
802 ; J.K. Industries Ltd. v. Chief Inspector of Factories
and Boilers (1996) 6 SCC 665 : [1996] 6 Suppl. SCR
798 ; Union of India v. Dileep Kumar Singh (2015) 4
SCC 421 : [2015] 2 SCR 882 ; B. Shama Rao v. Union
Territory, Pondicherry [1967] 2 SCR 650; State of
Orissa v. Sudhanshu Sekhar Misra and Ors. [1968] 2
SCR 154 - relied on.
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U.P. Cooperative Cane Unions' Federation Ltd.,
Lucknow v. Commissioner of Income Tax, Lucknow-I
(1997) 11 SCC 287 ; Dalbir Singh v. State of Punjab
[1979] 3 SCR 1059 ; 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.) ; Assam
Cooperative Apex Marketing Society Ltd. Assam v.
Additional Commissioner ofIncome Tax, Assam (1994)
Supp. (2) SCC 96 - referred to.
Case Law Reference
(1994) Supp. (2) SCC 96
referred to
Para 16
[1967] 2 SCR 650
relied on
Para 23
[1968] 2 SCR 154
relied on
Para 24
[1979] 3 SCR 1059
referred to
Para 25
[1982] 1 SCR 629
relied on
Para 27
[2008] 13 SCR 570
relied on
Para 30
[1995] 2 Suppl. SCR 181
referred to
Para 31
(2003) 9 SCC 133
referred to
Para 31
[2005] 2 Suppl. SCR 1
referred to
Para 31
[2009] 11 SCR 90
relied on
Para 32
[1998] 3 SCR 443
relied on
Para 33
[1959] Supp. (2) SCR 256
relied on
Para 41
[1991] 2 SCR 802
relied on
Para 42
[1996] 6 Suppl. SCR 798
relied on
Para 43
[2015] 2 SCR 882
relied on
Para 44
(1997) 11 SCC 287
referred to
Para 46
[2017] 9 SCR 361
distinguished
Para 47
THE MAVILAYI SERVICE COOPERATIVE BANK LTD. v.
COMMISSIONER OF INCOME TAX, CALICUT
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CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 73437350 of 2019.
From the Judgment and Order dated 19.03.2019 of the High Court
of Kerala at Ernakulam in ITA Nos. 97 of 2016, 11 and 69 of 2017 and
72 to 76 of 2017.
With
Civil Appeal No. 8315 of 2019 and Civil Appeal No.____of 2021
(@ SLP(C) NO.___of 2021) (Diary No. 31268 of 2019).
Balbir Singh, ASG, Shyam Divan, Arvind P. Datar, Sr. Advs., M.
Gireesh Kumar, Arun Raj S., Ankur S. Kulkarni, Renjith B. Marar, Ms.
Lakshmi N. Kaimal, Biju Vigneswar, Ms. Surabhi Santosh, Rahul
Unnikrishnan, Arun Poomulli, Biju Vigneswar, Ms. Surabhi Santosh, Ms.
Meera M., Ms. Gargi Khanna, P.V. Yogeshwaran, Mrs. Anil Katiyar,
Advs. for the appearing parties.
The Judgment of the Court was delivered by
R. F. NARIMAN, J.
1. I.A. Nos.192273 and 192277 of 2019 are allowed. Leave
granted in the Special Leave Petition arising out of Diary No.31268 of
2019.
2. These appeals have been filed by co-operative societies who
have been registered as 'primary agricultural credit societies', together
with one 'multi-State co-operative society', and raise important questions
as to deductions that can be claimed under section 80P(2)(a)(i) of the
Income-Tax Act, 1961 ("IT Act"); and in particular, whether these
assessees are entitled to such deductions after the introduction of section
80P(4) of the IT Act by section 19 of the Finance Act, 2006 (21 of 2006)
with effect from 01.04.2007. It may be stated at the outset that all these
assessees, who are stated to be providing credit facilities to their members
for agricultural and allied purposes, have 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 IT Act,
which had been granted to themupto Assessment Year 2007-08.
3. However, with the introduction of section 80P(4) of the IT Act,
the scenario changed. In respect of the assessees before us, the assessing
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officer denied their claims for deduction, relying upon section 80P(4) of
the IT Act, holding that as per the Audited Receipt & Disbursal Statement
furnished by the assessees in these cases, agricultural credits that were
given by the assessee-societies to its members were found to be negligible
- the credits given to such members being for purposes other than
agricultural credit. The decisions of the assessing officers were
challenged up to the Kerala High Court. Before the High Court, the
assessees relied upon a decision of a Division Bench of the Kerala High
Court in Chirakkal Service Co-operative Bank Ltd. v. CIT (2016)
384 ITR 490 (Ker.), where in a batch of appeals challenging assessments
completed under section 147 read with 143(3)/144 of the IT Act, the
High Court, after considering section 80P(4) of the IT Act, various
provisions of the Kerala Act, the Banking Regulation Act, 1949, the byelaws 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 creditsociety, the authorities under
the IT 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. This being the case, the High Court in Chirakkal
(supra) held that since all the assessees were registered as primary
agricultural creditsocieties, they would be entitled to the deductions under
section 80P(2)(a)(i) read with section 80P(4) of the IT Act.
4. However, the Department contended that the judgment in
Chirakkal (supra) was rendered per incuriam by not having noticed
the earlier decision of another Division Bench of the Kerala High Court
in Perinthalmanna Service Co-operative Bank Ltd. v. ITO and
Anr. (2014) 363 ITR 268 (Ker.), where, in an appeal challenging orders
under section263 of the IT Act, 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 aprimary agricultural creditsociety,
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 creditsocieties.
These divergent decisions led to a reference order dated 09.07.2018 to
a Full Bench of the Kerala High Court.
THE MAVILAYI SERVICE COOPERATIVE BANK LTD. v.
COMMISSIONER OF INCOME TAX, CALICUT [R. F. NARIMAN, J.]
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5. The Full Bench of the Kerala High Court, by the impugned
judgment dated 19.03.2019, referred to section 80P of the IT Act, various
provisions of the Banking Regulation Act and the Kerala Act and held
that the main object of a primary agricultural creditsociety which exists
at the time of its registration, must continue at all times including for the
assessment year in question.Notwithstanding the fact that the primary
agricultural creditsociety is registered as such under the Kerala Act, yet,
the assessing officer must be satisfied that in the particular assessment
year its main object is, in fact, being carried out. If it is found that as a
matter of fact agricultural credits amount to a negligible amount, thenit
would be open for the assessing officer, applying the provisions of section
80P(4) of the IT Act, to state that as the co-operative society in question
- though registered as a primary agricultural creditsociety -is not, in
fact, functioning as such, the deduction claimed under section 80P(2)(a)(i)
of the IT Act must be refused.This conclusion was reached after referring
to several judgments, but relying heavily upon the judgment of this Court
in Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017)
9 SCC 364. Thus, the conclusion of the Full Bench was as follows:
"33. In view of the law laid down by the Apex Court in Citizen
Co-operative Society [397 ITR 1] it cannot be contended that,
while considering the claim made by an assessee society for
deduction under section 80P of the IT Act, after the introduction
of sub-section (4) thereof, the Assessing Officer has to extend
the benefits available,merely looking at the class of the society as
per the certificate ofregistration issued under the Central or State
Co-operative Societies Actand the Rules made thereunder. On
such a claim for deduction under section 80P of the IT Act, the
Assessing Officer has to conduct an enquiry into the factual
situation as to the activities of the assessee society and arrive at a
conclusion whether benefits can be extended ornot in the light of
the provisions under sub-section (4) of section80P.
34.In Chirakkal [384 ITR 490] the Division Bench held that the
appellant societies having been classified as Primary Agricultural
Credit Societies by the competent authority under the KCS Act, it
has necessarily to be held that the principal object of such societies
is to undertake agricultural credit activities and to provide loans
and advances for agricultural purposes, the rate of interest on
such loans and advances to be at the rate to be fixed by the
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Registrar of Co-operative Societies under the KCS Act and having
its area of operation confined to a Village, Panchayat or a
Municipality and as such, they are entitled for the benefit of subsection (4) of section 80P of the IT Act to ease themselves out
from the coverage of section 80P and that, the authorities under
the IT Act cannot probe into any issues or such matters relating
to such societies and that, Primary Agricultural Credit Societies
registered as such under the KCS Act and classified so, under
that Act, including the appellants are entitled to such exemption.
35. In Chirakkal [384 ITR 490] the Division Bench expressed a
divergent opinion, without noticing the law laid down in Antony
Pattukulangara [2012 (3) KHC 726] and Perinthalmanna [363
ITR268]. Moreover, the law laid down by the Division Bench in
Chirakkal [384 ITR 490] is not good law, since, in view of the law
laid down by the Apex Court in Citizen Co-operative Society [397
ITR 1], on a claim for deduction under section 80P of the Income
Tax Act,by reasonof sub-section (4) thereof, the Assessing
Officerhas to conduct an enquiry into the factual situation as to
the activities of the assessee Society and arrive at a conclusion
whether benefits can be extended or not in the light of the
provisions under sub-section (4) of section 80P of the IT Act. In
view of the law laid down by the Apex Court in Citizen CoOperative Society [397 ITR 1] the law laid down by the Division
Bench in Perinthalmanna [363 ITR 268] has to be affirmed and
we do.
36. In view of the law laid down by the Apex Court in Ace Multi
Axes Systems' case (supra), since each assessment year is a
separate unit, the intention of the legislature is in no manner defeated
by not allowing deduction under section 80P of the IT Act, by
reason of sub-section (4) thereof, if the assessee society ceases
to be the specified class of societies for which the deduction is
provided, even if it was eligible in the initial years.
The question referred to the Full Bench is answered as above.
Registry shall list the appeals before appropriate Bench as per
roster."
6. Being aggrieved by the Full Bench judgment, the Appellant
assessees are now before us.
THE MAVILAYI SERVICE COOPERATIVE BANK LTD. v.
COMMISSIONER OF INCOME TAX, CALICUT [R. F. NARIMAN, J.]
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7. Shri Shyam Divan, learned Senior Advocate leading the charge
on behalf of the assessees, has argued that the advent of section 80P(4)
of the IT Act has not led to any change insofar as the Appellant assessees
are concerned.He read to us in copious detail the provisions of section
80P, various provisions contained in the Banking Regulation Act, 1949
and the various provisions of the Kerala Act andrules made thereunder,
together with the bye-laws of some of the assessees before us.His main
argument, based upon the language of section 80P(1) and (2), is that
section 80P is a beneficial provision which is meant to further the cooperative movement in India. For this purpose, certain income of a cooperative society, once it is registered under a State Act, becomes
deductible from its gross total income.According to him, the moment a
co-operative society that is registered as such is engaged in providing
credit facilities to its members, the inquiry of an assessing officer stops
there. He argued thatthe Full Bench was wholly 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. He therefore argued that the moment a co-operative society
is registered under the said Act, whatever be its classification, so long as
it provides credit facilities to its members - which need not be credit
facilities related to agriculture -it is entitled to a deduction contained in
section 80P(2)(a)(i) of the IT Act. A distinction must be drawn, therefore,
between eligibility for deduction, and whether the whole of the amounts
of profits and gains of business attributable to any one or more such
activities under the sub-section is to be given. He argued, stating that if
credit facilities were given to non-members, for example, suchcredit
facility would not be attributable to the activity of providing credit facilities
to members and would, therefore, not be entitled to deduction under
section 80P. He also brought to our notice the other provisions in section
80P, such as in section 80P(2)(b), where the Society must be a "primary"
society engaged in supplying milk, etc. before it can claim any deduction,
which is absent in section 80P(2)(a)(i). He then argued, placing reliance
upon the speech of the Finance Minister dated 28.02.2006 moving the
amendment to section 80P by introducing sub-section (4) thereof, that
the object of the amendment was to remove co-operative banks from
section 80P(1) and (2) as such banks, like any other commercial bank,
are lending amounts to members of the general public and that, therefore,
merely by being co-operative banks, should not be entitled to avail of the
deductions given under section 80P. According to him, since none of the
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assessees are co-operative banks licenced by the Reserve Bank of India
("RBI") to carry on banking business, section 80P(4) has no application.
He argued that any inquiry into whether the assessee is a primary
agricultural credit society so as to be outside section 80P(4) should not,
in any manner, cut down the beneficial provision contained in section
80P(1) and (2), as section 80P(4) is in the nature of a proviso which
cannot cut down the main enacting part.In any case, he argued that
once a registration certificate stating that the assessee is a primary
agricultural credit society is given by the Registrar under the Kerala
Act, then short of such certificate being cancelled under the Kerala Act
and rules thereunder, the assessing officer, who is an authority for purposes
of collection of revenue, cannot possibly go into whether, in substance,
the society continues to be a primary agricultural credit society.He relied
upon various judgments of this Court to buttress his submissions.He also
relied upon a circular, being Circular 14/2006 dated 28.12.2006 containing
explanatory notes to the Finance Act, 2006, and the letter of the Central
Board of Direct Taxation ("CBDT")dated 09.05.2008, both of which
made it clear that if a co-operative society cannot be said to be a cooperative bank, then the provisions of section 80P(4) would have no
application.
8. Shri Diwan's second broad submission was that the Full Bench
of the Kerala High Court completely misread this Court's judgment in
Citizen Cooperative Society Ltd. (supra). He contended that if the
judgment is seen closely, all the assessees' contentions in law were
answered in their favour. However, on facts, it was held that since the
co-operative society in that case carried on business illegally i.e. by giving
loans to nominal members who had no place under the statute under
which it was registered, and was also giving loans to the members of the
general public, it could not be said to be a co-operative society at all, as
a result of which the findings of fact of all the authorities below were not
interfered with by the Supreme Court. There was no argument, neither
was there any finding by the Court in that case, that the assessing officer
is entitled to go behind a certificate given under a particular statute.
Indeed, he pointed out that both under the Banking Regulation Act, 1949
and the Kerala Act, if any dispute arose as to 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 under the Banking
Regulation Act, 1949, and the Registrar, Co-operative Societies, who is
to decide on classification under Rule 15 of the Kerala Co-operative
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Societies Rules 1969. Thus, according to him, the judgment in Citizen
Cooperative Society Ltd. (supra) is directly in his client's favour on
the applicability of section 80P(4), which has been completely missed by
the Full Bench.
9. Shri Arvind Datar, learned Senior Advocate appearing on behalf
of some of the assessees, supported the submissions of Shri Divan, and
argued that all co-operative societies, once they are registered under a
State Act, are entitled to deductions under section 80P. The extent of the
deduction would depend upon attributability and not eligibility for
deduction. Once it is found, having regard to letters issued by the RBI in
the present case stating that the Appellants cannot be classified as cooperative banks, and once it is found that licences have not been given
to function as 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.
10. Shri Balbir Singh, learned Additional Solicitor General appearing
on behalf of the Revenue, refuted all the arguments made by the learned
Senior Advocates for the assessees.According to him, the Full Bench
was wholly correct in stating that a mere certificate of registration as a
primary agricultural credit society would not avail.For the assessment
year in question, the assessing officer has to be satisfied that the assessee
is "engaged in" activities as a primary agricultural credit society i.e. in
giving loans for agricultural and allied purposes to its members. He read
from some of the assessing officers' orders the fact that loans given for
agricultural purposes by the aforesaid societies were negligible, the main
business being that of banking, as such loans were given for purposes
other than agricultural credit. He also read copiously from the various
Acts, rules and bye-laws to buttress his submission that in actual fact,
since the Appellants were no longer doing business as primary agricultural
credit societies, they would be disentitled to any deduction under Section
80P after the advent of Section 80P(4). According to him, the classification
of a co-operative society under the State Act, which is expressly referred
to in Section 2(19) of the IT Act,is of primary importance, and once
classified as a primary agricultural credit society, it is only if activities
relatable to agriculture are carried out that eligibility for deduction would
arise in the first place undersection 80P(1) and (2). The whole object of
section 80P would be defeated if the Division Bench in Chirakkal (supra)
was held to be correct in law, as then, despite being engaged in activities
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other than agricultural credit, a society undeserving of any deduction
would still get such deduction contrary to what was sought to be achieved
by section 80P(4) of the IT Act. According to him, the Supreme Court
judgment in Citizen Cooperative Society Ltd. (supra) was correctly
read by the Full Bench, as permitting an assessing officer to get to the
real facts of a case in order to conclude as to whether activities of a
primary agricultural credit society were, in fact, being carried out in the
assessment year in question. For this purpose, he referred to several
provisions of the IT Act, which give very vast powers of investigation
into the facts of any given case and, in particular, relied upon section
133(6) of the IT Act. He also relied upon several judgments of this
Court which would show that mere registration as a primary agricultural
credit society is not enough, the expression "engaged in" meaning that
there must be a continuing obligation on such society to carry out its
main objects from year to year, and if does not do so, it would be disentitled
to any deduction under Section 80P(4). He further argued, relying upon
judgments of this Court, that the burden is on the assessee to establish
by facts, in every assessment year, that it is entitled to the deduction
under Section 80P; and if it cannot adduce facts to show that it is in fact
carrying on its business as a primary agricultural credit society in the
assessment year in question, it would not discharge such burden, and
would, therefore, be unable to avail of any deduction under Section 80P.
He also relied upon certain RBI Press releases of the year 2017 cautioning
the public not to deal with such societies who, though unlicenced, are in
fact carrying on banking business.
11. Having heard learned counsel for the assessees as well as for
the Revenue, it is first important to set out sections 2(19) and 80P of the
Income Tax Act, which read as follows:
"2. In this Act, unlessthe context otherwise requires,-
xxx xxx xxx
(19). "co-operative society" means a co-operative society
registered under the Co-operative Societies Act, 1912 (2 of 1912),
or under any law for the time being in force in any State for the
registration of co-operative societies."
"80P. Deduction in respect of income of co-operative
societies.-(1) Where, in the case of an assessee being a cooperative society, the gross total income includes any income
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referred to in sub-section (2), there shall be deducted, in accordance
with and subject to the provisions of this section, the sums specified
in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following,
namely:-
(a) in the case of a co-operative society engaged in-
(i) carrying on the business of banking or providing credit
facilities to its members, or
(ii) a cottage industry, or
(iii) the marketing of agricultural produce grown by its members,
or
(iv)the purchase of agricultural implements, seeds, livestock
or other articles intended for agriculture for the purpose of
supplying them to its members, or
(v) the processing, without the aid of power, of the agricultural
produce of its members, or
(vi)the collective disposal of the labour of its members, or
(vii) fishing or allied activities, that is to say, the catching, curing,
processing, preserving, storing or marketing of fish or the
purchase of materials and equipment in connection therewith
for the purpose of supplying them to its members,
the whole of the amount of profits and gains of business attributable
to any one or more of such activities:
Provided that in the case of a co-operative society falling under
sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the
society restrict the voting rights to the following classes of its
members, namely:-
(1) the individuals who contribute their labour or, as the case
may be, carry on the fishing or allied activities;
(2) the co-operative credit societies which provide financial
assistance to the society;
(3) the State Government;
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(b) in the case of a co-operative society, being a primary society
engaged in supplying milk, oilseeds, fruits or vegetables raised
or grown by its members to-
(i)
a federal co-operative society, being a society engaged in
the business of supplying milk, oilseeds, fruits, or
vegetables, as the case may be; or
(ii) the Government or a local authority; or
(iii) a Government company as defined in section 617 of the
Companies Act, 1956 (1 of 1956), or a corporation
established by or under a Central, State or Provincial Act
(being a company or corporation engaged in supplying milk,
oilseeds, fruits or vegetables, as the case may be, to the
public),
the whole of the amount of profits and gains of such business;
(c) in the case of a co-operative society engaged in activities
other than those specified in clause (a) or clause (b) (either
independently of, or in addition to, all or any of the activities
so specified), so much of its profits and gains attributable to
such activities as does not exceed,-
(i)
where such co-operative society is a consumers' co
operative society, one hundred thousand rupees; and
(ii)
in any other case, fifty thousand rupees.
Explanation.-In this clause, "consumers' co-operative society"
means a society for the benefit of the consumers;
(d)
in respect of any income by way of interest or dividends
derived by the co-operative society from its investments with
any other co-operative society, the whole of such income;
(e)
in respect of any income derived by the co-operative society
from the letting of go downs or warehouses for storage,
processing or facilitating the marketing of commodities, the
whole of such income;
(f)
in the case of a co-operative society, not being a housing
society or an urban consumers' society or a society carrying
on transport business or a society engaged in the performance
of any manufacturing operations with the aid of power, where
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the gross total income does not exceed twenty thousand
rupees, the amount of any income by way of interest on
securities or any income from house property chargeable
under section 22.
Explanation.-For the purposes of this section, an "urban
consumers' co-operative society" means a society for the
benefit of the consumers within the limits of a municipal
corporation, municipality, municipal committee, notified area
committee, town area or cantonment.
(3) In a case where the assessee is entitled also to the deduction
under section 80HH or section 80HHA or section 80HHB or
section 80HHC or section 80HHD or section 80-I or section 80IA, the deduction under sub-section (1) of this section, in relation
to the sums specified in clause (a) or clause (b) or clause (c) of
sub-section (2), shall be allowed with reference to the income, if
any, as referred to in those clauses included in the gross total
income as reduced by the deductions under section 80HH, section
HHA, section 80HHB, section HHC, section 80HHD, section
80-I, section 80-IA, section 80J and section 80JJ.
(4) The provisions of this section shall not apply in relation to any
co-operative bank other than a primary agricultural credit society
or a primary co-operative agricultural and rural development bank.
Explanation.-For the purposes of this sub-section,-
(a) "co-operative bank" and "primary agricultural credit
society" shall have the meanings respectively assigned to
them in Part V of the Banking Regulation Act, 1949 (10
of 1949);
(b) "primary co-operative agricultural and rural development
bank" means a society having its area of operation confined
to a taluk and the principal object of which is to provide
for long-term credit for agricultural and rural development
activities."
12. The relevant provisions of the Banking Regulation Act, 1949,
insofar asit has bearing on the facts of these cases are also set out as
follows:
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"3. Act to apply to co-operative societies in certain cases.-
Nothing in this Act shall apply to-
(a) a primary agricultural credit society;
(b) a co-operative land mortgage bank; and
(c) any other co-operative society, except in the manner and to
the extent specified in Part V."
"56.