While overruling the Kerala High Court judgment, the Supreme Court has held that Kerala State Co-operative Agricultural and Rural Development Bank Ltd. is eligible for Section 80P deduction under the Income Tax Act.

After analysing the statutory framework and judicial precedents applicable to cooperatives including coordinate bench ruling in Mavilayi Service Cooperative Bank, the Supreme Court clarified that the Assessee is an apex cooperative society under Kerala State Co-operative (Agricultural and Rural Development Banks) Act, 1984 but not a co-operative bank as per the Banking Regulation Act, 1949, and therefore, will be entitled to the benefit of deduction under Section 80P of Income Tax Act, 1961.

The Two Judge Bench comprising of Justice B.V. Nagarathna and Justice Ujjal Bhuyan observed that “under the provisions of the State Act, 1984, ‘agricultural and rural development bank’ means the Kerala Cooperative Central Land Mortgage Bank Limited, registered under Section 10 of the Travancore-Cochin Co-operative Societies Act, 1951, which shall be known as Kerala State Co-operative Agricultural and Rural Development Bank Limited i.e. the appellant herein. Thus, from a conjoint reading of all the relevant statutory as alluded to hereinabove, it is quite clear that the appellant is not a co-operative bank within the meaning of sub-section (4) of Section 80P of the Act. The appellant is a co-operative credit society under Section 80P(2)(a)(i) of the Act whose primary object is to provide financial accommodation to its members who are all other co-operative societies and not members of the public”.

Further, the Bench added that “when the definition of “co-operative bank” in Section 56 of BR Act, 1949 is viewed in terms of Sections 2(u) of the NABARD Act, 1981, it is clear that only a state co-operative bank would be within the scope and meaning of a banking company under Section 2(c) of the BR Act, 1949 on obtaining licence under Section 22 of the said Act”.

Senior Advocate Krishnan Venugopal, along with AORs Deepak Prakash and Biju P Raman appeared for the Assessee, while the Revenue was represented by ASG N. Venkataraman, Senior Advocate Sonia Mathur along with AOR Raj Bahadur Yadav.

As per the brief facts of the case, the Assessee for the Assessment year 2007-08 claimed deduction under Section 80P(2)(a)(i) which was disallowed on the premise that Assessee is neither a primary agricultural society nor a primary co-operative agricultural and rural development bank but a ‘co-operative bank’, thus, hit by the exclusion of Section 80P(4). Both CIT(A) and ITAT upheld the applicability of Section 80P(4) which was also upheld by Kerala High Court.

After considering the submission, the Bench pointed that Section 80P(4) carved out an exception to Section 80P(1) and (2) which excludes co-operative banks which must possess licence from RBI to do banking business.

However, if the Assessee does not requires any licence from RBI, it would not be hit by Section 80P(4).

Relying on the Co-ordinate Bench ruling in Mavilayi Service Co-operative Bank, the Bench observed that a co-operative bank is in the nature of banking company which transacts banking business as stipulated in Section 5(b) of the Banking Regulation Act, 1949, but if a co-operative society does not transact banking business as defined in the said section, it would not be a co-operative bank and fall outside the purview of Section 80P(4).

The Apex Court highlighted that the conjoint reading of all the relevant statutory provisions under BR Act, NABARD Act and Kerala State Acts clearly stipulates that the Assessee is not a co-operative bank within the meaning of Section 80P(4) and is a co-operative society whose primary object is to provide financial accommodation to its members who are co-operative societies and not members of the public.

Relying on the Co-ordinate Bench ruling in Citizen Co-operative Society case, wherein it was held that once the Assessee is entitled to avail the deduction, the entire amount of profit and gains of business that are attributable to any one or more activities mentioned in Section 80P(2) since Section 80P(4) is in the nature of a proviso to the main provision contained and excludes co-operative banks alone, the Apex Court allowed the Assessee’s appeal.

Cause Title: KERALA STATE CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK LTD. v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS. [Neutral Citation: 2023: INSC: 830]

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Justice BV NagarathanaJustice Ujjal BhuyanSection 80P of Income Tax Act

Pankaj Bajpai