TaxTMI 
TaxTMI 
2021 (1) TMI 488
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....ogeshwaran, Adv. Mrs. Anil Katiyar, AOR JUDGMENT 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 Cooperative 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 them up to Assessment Ye....
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....ent 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. These divergent decisions led to a reference order dated 09.07.2018 to a Full Bench of the Kerala High Court. 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 credit society 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 credit society 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, then it would be open for the assessing officer, applying the provisions of sectio....
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..... 35. In Chirakkal [384 ITR 490] the Division Bench expresseda divergent opinion, without noticing the law laid down in Antony Pattukulangara [2012 (3) KHC 726] and Perinthalmanna [363 ITR 268]. 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 reason of sub-section (4) thereof, 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 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 deduc....
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.... 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 subsection (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 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....
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.... Rule 15 of the Kerala Co-operative 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 co-operative 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 le....
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....rimary 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, unless the context otherwise requires, xxx xxx x....
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....-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....
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....ltural and rural development activities." 12. The relevant provisions of the Banking Regulation Act, 1949, insofar as it has bearing on the facts of these cases are also set out as follows: "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. Act to apply to co-operative societies subject to modifications.-The provisions of this Act, as in force for the time being, shall apply to, or in relation to, co-operative societies as they apply to, or in relation to, banking companies subject to the following modifications, namely:- (a) throughout this Act, unless the context otherwise requires,- (i) references to a "banking company" or "the company" or "such company" shall be construed as references to a co-operative bank, (ii) references to "commencement of this Act" shall be construed as references to commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23....
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.... (2) the paid-up share capital and reserves of which are not less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose; (ccvi) "primary credit society" means a co-operative society, other than a primary agricultural credit society,- (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose. Explanation.-If any di....
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.... of funds to be lent to its members; (oc) "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; Provided that no Primary Co-operative Agricultural and Rural Development Bank shall be registered without the bifurcation of assets and liabilities of the existing societies having the area of operation in more than one Taluk and the societies shall restrict their operation in the area of the respective society on such bifurcation." "3. Registrar.- (1)The Government may appoint a person to be the Registrar of Co-operative Societies for the State. (2) The Government may by general or special order confer on any person all or any of the powers of the Registrar under this Act. 4. Societies which may be registered.- Subject to the provisions of this Act, a co-operative society which has as its object the promotion of the economic interests of its members or of the interests of the public in accordance with co-operative principles, or a society established w....
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.... by him, which shall be conclusive evidence that the said society is duly registered under this Act. (2) Notwithstanding anything contained in subsection (1), where the Registrar is satisfied that the original registration certificate is irrecoverably lost and the duplicate certificate could not be issued as the files or records regarding the registration of the co-operative society was lost, after registration, the Registrar shall issue a certificate stating the registration number and date of registration of a cooperative society, on the basis of the details available in the audit certificate and the records available with the Registrar, signed and sealed by him, which shall be conclusive proof that the said society is duly registered and it shall be treated as a certificate of registration." Rules "15. Classification of societies according to types.- After the registration of a society the Registrar shall classify the society into one or other of the following types according to the principal object provided in the bye-laws: TYPES EXAMPLES Credit Societies Short term / Medium term (1) Apex Kerala State Co-operative Bank Limited (2) Centr....
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....mbers 12. Formation and functioning of Farmers Club for farmers. 13.Provide short-term, medium-term, long-term loans and loans approved as per special scheme of Registrar, NABARD or such agencies to members of society. 14. To promote the habit of thrift, self-sufficiency, mutual help etc. among members and formulation and implementation of schemes relating to it. Mobilisation of various types of deposits from members. 15. Provide financial and technical help for self-employed to do the business profitably. 16. Perform all the banking operations as per the rules prevailing from time to time. 17. To construct or hire and receive rent in advance for any building and material alteration for the smooth functioning of bank. Purchase of assets with the prior approval of Registrar. 18.To let out own buildings of bank to others. 19. Act as an agent for procurement and supply of essential articles to the public at reasonable prices, opening of fair shops and consumer stores trading of articles directed by the Registrar from time to time. 20. Opening of medical stores for supply of essential medicines at reasonab....
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....ural products. 39. To accept financial assistance for Central Government, State Government, NCDC and other governmental or semigovernmental agencies. 40.To establish a library in the society. 41. To set up small scale industries unit. 42.To be a partner or leader in the consortium scheme or other schemes suggested by Central or State Government or Co-Operative Department or to formulate complete other schemes with their approval. 43.To provide microfinance loans like Linkage loans, cash credits and other short term loans like Muttathe Mulla etc to self-help groups and Kudumbasrees." 15. It is important to note that though the main object of the primary agricultural society in question is to provide financial assistance in the form of loans to its members for agricultural and related purposes, yet, some of the objects go well beyond, and include performing of banking operations "as per rules prevailing from time to time", opening of medical stores, running of showrooms and providing loans to members for purposes other than agriculture. 16. At this juncture, it is important to refer to some of the decisions of this Court on the provi....
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....CC 48 overruled the aforesaid judgment. The question which arose before the Court in this case was the identical question that arose in Assam Cooperative Apex Marketing Society Ltd. Assam (supra), the avatar of the provision, however, having changed to section 80P(2) (a)(iii) of the IT Act. This Court, after setting out the classes of societies covered by section 80P, then held: "7. We may notice that the provision is introduced with a view to encouraging and promoting growth of cooperative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a cooperative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. The ex....
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....mary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk cooperative society, but no such distinction is made with reference to a banking business which provides trade facilities to its members. It is clear, therefore, that the legislature did not intend to limit the scope of exemption only to those which are primary societies. If a small agricultural cooperative society does not have any marketing facilities it can certainly become a member of an apex society which may market the produce of its members. It was submitted on behalf of the Department that the member societies themselves do not raise the agricultural produce. The societies only market the produce raised by their members and do not themselves raise agricultural produce. The language adopted in Section 80-P(2)(a)(iii) with which we are concerned will admit the interpretation that the society engaged in marketing of agricultural produce of its members as agricultural produce "belonging to" its members which is not necessarily raised by such member. Thus, when the provisions of Section 80-P of the Act admit of a wider exemption there is no reason to cut down the scope o....
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.... order to encourage and promote growth of cooperative sector in the economic life of the country. It was done pursuant to the declared policy of the Government. Therefore, such a provision has to be read liberally, reasonably and in favour of the assessee (see Bajaj Tempo Ltd. v. CIT [(1992) 3 SCC 78]). It is also trite that such a provision has to be construed as to effectuate the object of the legislature and not to defeat it (see CIT v. Mahindra and Mahindra Ltd. [(1983) 4 SCC 392]). Therefore, it hardly needs to be emphasised that all those cooperative societies which fall within the purview of Section 80-P of the Act are entitled to deduction in respect of any income referred to in sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the amount of profits and gains of business attributable to any one or more of such activities which are mentioned in sub-section (2). 19. Since we are concerned here with sub-clause (i) of clause (a) of sub-section (2), it recognises two kinds of cooperative societies, namely: (i) those carrying on the business of banking and; (ii) those providing credit facilities to its members. ....
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....o, in our view, if the income of a society is falling within any one head of exemption, it has to be exempted from tax notwithstanding that the condition of other heads of exemption are not satisfied. A reading of the provisions of Section 80-P of the Act would indicate the manner in which the exemption under the said provisions is sought to be extended. Whenever the legislature wanted to restrict the exemption to a primary cooperative society, it was so made clear as is evident from clause (f) with reference to a milk cooperative society that a primary society engaged in supplying milk is entitled to such exemption while denying the same to a federal milk cooperative society." The aforesaid judgment of the High Court correctly analyses the provisions of Section 80-P of the Act and it is in tune with the judgment of this Court in Kerala State Coop. Mktg. Federation Ltd. [(1998) 5 SCC 48] 22. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a cooperative bank. However, if it is a primary agricultural credit society or a primary cooper....
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....e appellant, it is remarked by the assessing officer that the activity of the appellant is in violation of the Cooperative Societies Act. Moreover, it is a cooperative credit society which is not entitled to deduction under Section 80-P(2)(a)(i) of the Act. 25. It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the assessing officer, our purpose would be served by taking note of the following portion of the discussion: "As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality: (i) that no person can earn from him; (ii) that there a profit motivation; (iii) and that there is no sharing of profit. It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20-12-2010]. [Though the bank formed the third party vis-à-vis the assessee entitled be....
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....operative societies, the legislature expressly says so - which is not the case with section 80P(2)(a)(i); (V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are cooperative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4). 22. However, considering that the learned Senior Advocate appearing for the Revenue argued that the concurrent findings of fact in that case were that most of the business of the assessee was conducted illegally with nominal members, who could not be members of such society under the Andhra Pradesh Act, and considering also that, as the assessee engaged in granting loans to the general public, it could not be treated as a co-operative society meant only for its members and providing credit facilities to its members, the appeal by the assessee would fail. It is important to note that no argument was made by the counsel for the assessee in Citizen Cooperative Society Ltd. ....
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....se does not lay down any legal principle of general applicability. A decision on a question of sentence depending upon the facts and circumstances of a particular case, can never be regarded as a binding precedent, much less "law declared" within the meaning of Article 141 of the Constitution so as to bind all courts within the territory of India. According to the well-settled theory of precedents every decision contains three basic ingredients: "(i) findings of material facts, direct and inferential. An inferential finding of facts is the inference which the Judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the combined effect of (i) and (ii) above." For the purposes of the parties themselves and their privies, ingredient (iii) is the material element in the decision for it determines finally their rights and liabilities in relation to the subject-matter of the action. It is the judgment that estops the parties from reopening the dispute. However, for the purpose of the doctrine of precedents, ingredient (ii) is the vital....
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....tion in respect of income of co-operative societies" is important, in that it indicates the general "drift" of the provision. This was so held by this Court in K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. (1981) 4 SCC 173 as follows: "9. This interpretation of sub-section (2) is strongly supported by the marginal note to Section 52 which reads "Consideration for transfer in cases of understatement". It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section or, to use the words of Collins, M.R. in Bushel v. Hammond [(1904) 2 KB 563] to show what the section is dealing with. It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section (vide Bengal Immunity Company Limited v. State of Bihar [(1955) 2 SCR 603])." 28. Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". A co-operative society is def....
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....is submission, learned counsel for the Appellants cited the following judgments, namely, Assistant Commissioner of Income Tax v. A.K. Menon and Ors. (1995) 5 SCC 200 (paragraph 4); Titan Medical Systems (P) Ltd. v. Collector of Customs, New Delhi (2003) 9 SCC 133 (paragraph 12); and Vadilal Chemicals Ltd. v. State of A.P. and Ors. (2005) 6 SCC 292 (paragraphs 20 to 23), for the proposition that it is the RBI alone under the Banking Regulation Act, 1949, and the Registrar alone under the Kerala Act who can look into questions as to whether a primary agricultural credit society is, or is not, a co-operative bank, and whether a society's classification as primary agricultural credit society ought to continue or be re-classified as a co-operative bank. Neither argument applies to the facts of these cases, given that the statutory provision involved does not require the Appellants to be primary agricultural credit societies to claim a deduction under section 80P(2)(a)(i) in the first place. 32. Fifthly, as has been held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT (2009) 8 SCC 393 at paragraph 23, the burden is on the assessee to show, by adducing facts, that it is entitled t....
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....be deducted. 34. Seventhly, section 80P(1)(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 cooperative 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 maxi....
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....iety or a primary co-operative agricultural and rural development bank. For the purpose of the said sub-section, co-operative bank shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949. 3. In part V of the Banking Regulation Act, "Co-operative Bank" means a State Co-operative bank, a Central Co-operative Bank and a primary Co-operative bank. 4. Thus, if the Delhi Co-op Urban T & C Society Ltd. doesnot fall within the meaning of "Co-operative Bank" as defined in part V of the Banking Regulation Act, 1949, subsection(4) of section 80P will not apply in this case. 5. Issued with the approval of Chairman, Central Board of Direct Taxes." 39. The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative 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 co-operative bank must be engaged in the business of banking as defined by se....
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.... considered with relation to the principal matter to which it stands as a proviso". Therefore it is to be construed harmoniously with the main enactment. (Per Das, C.J.) in Abdul Jabar Butt v. State of Jammu & Kashmir [(1957) SCR 51, 59] . Bhagwati, J., in Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax [(1955) 2 SCR 483, 493] said: "It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other." Lord Macmillan in Madras & Southern Maharatta Railway Co. v. Bezwada Municipality [(1944) LR 71 IA 113, 122] laid down the sphere of a proviso as follows: "The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where, as in the present case, the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude from it by implication what....
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....pretation of a proviso that the enacting part or the main part of the section be construed first without reference to the proviso and if the same is found to be ambiguous only then recourse may be had to examine the proviso as has been canvassed before us. On the other hand an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially. 34. A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be a part of the main provision. A proviso must, therefore, be considered in relation to the principal matter to which it stands as a proviso. A proviso should not be read as if providing something by way of addition to the main provision which is foreign to the main provision itself. 35. Indeed, in some cases, a proviso, may be an exception to the main provision though it cannot be inconsistent with what is expressed in the main provision and if it is so, it w....
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.... that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause, the stand we have taken is sound. To expand the enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction." 45. To sum up, therefore, the ratio decidendi of Citizen Cooperative 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 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 ....