2023 (9) TMI 761 - SC - Income Tax

Co-operative society providing credit to member societies gets Section 80P deduction, not classified as co-operative bank under NABARD Act

KERALA STATE CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK LTD. KSCARDB Versus THE ASSESSING OFFICER, TRIVANDRUM AND ORS.

KERALA STATE CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK LTD. KSCARDB Versus THE ASSESSING OFFICER, TRIVANDRUM AND ORS. - [2023] 458 ITR 384 ... 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the appellant, a co-operative society, qualifies as a 'co-operative bank' under sub-section (4) of Section 80P of the Income Tax Act, 1961, thereby affecting its eligibility for deductions under the same section.Whether the principles established in the case of Mavilayi Service Co-operative Bank apply to the appellant's situation.What is the appropriate order given the findings on the above issuesRs.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Whether the appellant is a 'co-operative bank' under Section 80P(4) of the Income Tax Act, 1961.Relevant legal framework and precedents:Section 80P of the Income Tax Act, 1961, provides deductions for co-operative societies but excludes co-operative banks, except primary agricultural credit societies and primary co-operative agricultural and rural development banks, under sub-section (4).The Banking Regulation Act, 1949, defines 'co-operative bank' as a state co-operative bank, central co-operative bank, or primary co-operative bank.The NABARD Act, 1981, provides definitions for state co-operative banks and central co-operative banks.Previous judgments, including Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd. and Citizen Co-operative Society Ltd., were considered.Court's interpretation and reasoning:The court analyzed whether the appellant transacts banking business as defined in Section 5(b) of the Banking Regulation Act, 1949, which involves accepting deposits from the public.It was determined that the appellant does not require a banking license under Section 22 of the Banking Regulation Act, 1949, as it does not conduct banking business.The appellant is not a state co-operative bank as per the NABARD Act, 1981, and thus not a co-operative bank under Section 80P(4).Key evidence and findings:The appellant is a co-operative society providing credit facilities to its members, which are other co-operative societies, not the public.The appellant is not declared a state co-operative bank by the Kerala State Government.Application of law to facts:The appellant's activities do not align with those of a co-operative bank as defined under the relevant acts, thus not falling under the exclusion in Section 80P(4).Treatment of competing arguments:The respondent argued that the appellant functions as a co-operative bank, but the court found this argument unsubstantiated based on the statutory definitions and the appellant's operations.Conclusions:The appellant is not a co-operative bank within the meaning of Section 80P(4) and is entitled to deductions under Section 80P.Issue 2: Applicability of the Mavilayi Service Co-operative Bank judgment.Relevant legal framework and precedents:The judgment in Mavilayi Service Co-operative Bank emphasized a liberal interpretation of Section 80P to encourage co-operative societies.Court's interpretation and reasoning:The court reiterated that Section 80P is a benevolent provision and should be applied liberally to promote co-operative societies.Conclusions:The principles from Mavilayi Service Co-operative Bank support the appellant's eligibility for deductions under Section 80P.3. SIGNIFICANT HOLDINGSVerbatim quotes of crucial legal reasoning:'Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee.''The appellant is not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the BR Act, 1949.'Core principles established:A co-operative society that does not conduct banking business as defined in the Banking Regulation Act, 1949, is not a co-operative bank and is eligible for deductions under Section 80P.Final determinations on each issue:The appellant is not a co-operative bank under Section 80P(4) and is entitled to the deductions under Section 80P of the Income Tax Act, 1961.The appeals filed by the appellant are allowed, and the orders of the Kerala High Court and other authorities are set aside, affirming the appellant's entitlement to the benefit of deduction under Section 80P.