2025 (6) TMI 955 - AT - Income Tax

Cooperative Society Wins Tax Deduction Battle: Section 80P(2)(a)(i) Interpreted Broadly to Support Sector Growth

ITO, Aayakar Bhawan, Haldia Versus Contai Co-operative Agriculture and Rural Development Bank Limited.

ITO, Aayakar Bhawan, Haldia Versus Contai Co-operative Agriculture and Rural Development Bank Limited. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in the appeals were:Whether the assessee, a co-operative society registered under the Co-operative Societies Act and Rules, is entitled to claim deduction under Section 80P(2)(a)(i) of the Income Tax Act for the assessment year 2018-19.Whether the income earned by the assessee from activities not strictly related to primary agricultural credit society or primary co-operative agriculture and rural development bank disqualifies it from claiming the said deduction.Whether the provisions of Section 80P(4) of the Income Tax Act and the CBDT Circular No. 6/2010 restrict the deduction under Section 80P only to entities registered under Reserve Bank of India regulations and engaged exclusively in agricultural credit activities.Whether the Revenue's disallowance of Rs. 5,06,94,148/- by invoking Section 80P was justified in the facts and circumstances of the case.Whether the assessee's operation of banking-like services such as RTGS and NEFT facilities affects its eligibility for deduction under Section 80P.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Eligibility of the Assessee for Deduction under Section 80P(2)(a)(i)Relevant Legal Framework and Precedents: Section 80P(2)(a)(i) of the Income Tax Act provides deduction to primary agricultural credit societies or primary co-operative agriculture and rural development banks on their income from specified activities. The CBDT Circular No. 6/2010 clarified that deduction under Section 80P is available only to such primary agricultural credit societies or primary co-operative agriculture and rural development banks. The proviso under Section 80P(4) excludes cooperative banks engaged in banking business licensed by the RBI from the benefit of this deduction.The Tribunal relied heavily on the judgment of the Hon'ble Apex Court in the case of Mavllayi Services Co-operative Bank Ltd. & Ors. vs. CIT, which elucidated the scope of Section 80P and interpreted the provisions liberally in favor of co-operative societies.Court's Interpretation and Reasoning: The Tribunal noted that the assessee is a co-operative society registered under the Co-operative Societies Act and Rules and is not regulated by the Reserve Bank of India. The Tribunal emphasized that Section 80P is a benevolent provision enacted to encourage and promote the credit of the cooperative sector and must be read liberally and reasonably. The Tribunal rejected the Revenue's attempt to restrict the deduction by implying the word 'agriculture' into Section 80P(2)(a)(i) where it is not explicitly mentioned.The Tribunal further held that Section 80P(4) is to be read as a proviso excluding cooperative banks engaged in banking business licensed by the RBI, which does not apply to the assessee. Hence, the assessee is entitled to the deduction under Section 80P(2)(a)(i) notwithstanding that some loans may be given to non-members or for non-agricultural purposes, subject to the condition that profits attributable to such non-member loans cannot be deducted.Key Evidence and Findings: The assessee's registration under the Co-operative Societies Act, absence of RBI license, and its stated objects of providing financial activities to members mainly for agricultural purposes were considered. The assessee's submissions that it does not provide banking facilities such as cheque, RTGS, or NEFT directly (though it operates margin technology services through WBSCRD) were noted.Application of Law to Facts: The Tribunal applied the legal principles from the Apex Court judgment and the statutory provisions to the facts, concluding that the assessee fits within the ambit of entities eligible for deduction under Section 80P(2)(a)(i).Treatment of Competing Arguments: The Revenue argued that the assessee's income from various activities not related to primary agricultural credit society disqualified it from deduction and that the CBDT Circular restricted the benefit to RBI-regulated entities. The Tribunal rejected these contentions, holding that the deduction should not be restricted by implication and that the proviso under Section 80P(4) excludes only RBI-licensed cooperative banks, not the assessee.Conclusions: The assessee is entitled to claim deduction under Section 80P(2)(a)(i) for the income earned from its activities as a primary agricultural credit society.Issue 2: Validity of Disallowance of Rs. 5,06,94,148/- by the Assessing OfficerRelevant Legal Framework and Precedents: The Assessing Officer disallowed an amount exceeding Rs. 5 crore by denying deduction under Section 80P. The legal framework is the same as discussed above, with the addition that disallowance must be justified by statutory provisions and judicial precedents.Court's Interpretation and Reasoning: The Tribunal found no infirmity in the CIT(A)'s order allowing the deduction and setting aside the disallowance. The Tribunal held that the AO's disallowance was not tenable as it was contrary to the legal position established by the Apex Court and the statutory interpretation of Section 80P.Key Evidence and Findings: The Tribunal considered the submissions of the assessee, the nature of its activities, and the absence of RBI regulation. The Tribunal also noted that the assessee's revised return declared the same income and that the AO's disallowance was based on an incorrect interpretation of Section 80P.Application of Law to Facts: Applying the correct legal interpretation, the Tribunal held that the disallowance was not justified.Treatment of Competing Arguments: The Revenue's argument that the deduction was restricted by the CBDT Circular and the nature of the assessee's activities was rejected.Conclusions: The disallowance of Rs. 5,06,94,148/- was set aside, and the deduction under Section 80P was allowed.Issue 3: Operation of Banking-like Services (RTGS/NEFT) and Its Impact on EligibilityRelevant Legal Framework and Precedents: The question was whether the assessee's use of RTGS and NEFT facilities through WBSCRD affects its status under Section 80P. The legal framework includes the Reserve Bank of India Act and the Income Tax Act provisions.Court's Interpretation and Reasoning: The Tribunal accepted the assessee's submission that it is not regulated by the Banking Regulation Act, 1949, does not have RBI codes such as BSR or IFSC, and does not provide direct banking facilities such as cheques, RTGS, or NEFT to customers. The fact that RTGS is operated through WBSCRD was held not to violate the norms of Section 80P(2)(a)(i).Key Evidence and Findings: The assessee's affidavit and submissions regarding the nature of its banking services and technology platforms were considered.Application of Law to Facts: Since the assessee is not engaged in banking business licensed by RBI and does not provide direct banking services, the operation of RTGS/NEFT through an intermediary does not affect its eligibility for deduction.Treatment of Competing Arguments: The Revenue's contention that such activities disqualify the assessee was rejected.Conclusions: The assessee's operation of RTGS/NEFT facilities through WBSCRD does not affect its entitlement to deduction under Section 80P.3. SIGNIFICANT HOLDINGSThe Tribunal affirmed the order of the CIT(A) and dismissed the Revenue's appeals, holding as follows:'To sum up, therefore, the ratio decidendi of Citizen Co-operative Society Ltd. (supra) must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by parliament to encourage and promote the credit of the cooperative 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 cooperative banks which are cooperative societies engaged in banking business i.e. engaged in lending money to member of the public, which have a license in this behalf from the RBI, judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm's way, all the assessee 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 profit attributable to such loans obviously cannot be deducted.'The Tribunal established the core principle that Section 80P should be construed liberally in favor of cooperative societies registered under the Co-operative Societies Act and that the restriction to 'primary agricultural credit societies' should not be read with implied limitations not found in the statute.The Tribunal conclusively held that the assessee, though engaged in some non-agricultural activities and operating certain banking-like services through intermediaries, is entitled to the deduction under Section 80P(2)(a)(i), and the Revenue's disallowance was unsustainable.