Supreme Court: Primary Agricultural Credit Societies are not same as Banks

Supreme Court: Primary Agricultural Credit Societies are not same as Banks

The Supreme Court Bench of Justices RF Nariman, Navin Sinha and KM Joseph has set aside the judgment passed by Kerala High Court and ruled that Co-operative Societies registered as primary agricultural credit societies are entitled to deductions under Section 80P (2)(a)(i) of the Income-Tax Act, (IT Act) even when they may also be lending loans to their members which are not related to agriculture.

The Kerala High Court had passed the judgment that societies are not entitled to the deduction under Section 80P when loans are lent to members for non-agricultural purposes. The Apex Court however dissented and observed the judgment of the Kerala High Court as 'wholly incorrect'.

The issue in this case – The Mavilayi Service Co-operative Bank Ltd & Ors. vs. Commissioner of Income Tax, Calicut & Anr. – was whether – Co-operative societies which have been registered as 'primary agricultural credit societies' are entitled to such deductions under section 80P(2)(a)(i) of the IT Act after the introduction of section 80P(4) of the IT Act by section 19 of the Finance Act, 2006 with effect from 1st April, 2007.

The Apex Court opined that Section 80P is a 'benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general' and hence it must be read 'liberally and reasonably, and if there is ambiguity, in favour of the assessee'.

The bench interpreting Section 80P highlighted the certain principles:

The Court ruled that the marginal note to Section 80P which reads, deduction in respect of income of co-operative societies is important, as it indicated the general drift of the provision.

It added that for purposes of eligibility for deduction, the assesse must be a 'co-operative society' as defined under Section 2(19) of the IT Act and the gross total income must include income that is referred to in sub-section 2. Further, sub-clause (2)(a)(i) with which direct concerned was present, speaks of a co-operative society being 'engaged in' carrying on the business of banking or providing credit facilities to its members.

The Court went on to add that the Assessing Officer (AO) 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.

According to the Court, 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 generally, and section 80P(2)(a)(i) must be contrasted with section 80(2)(a)(iii) to (v), which expressly speaks for agriculture.

Further, 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 deducted, but subject to the cap specified in sub-clause (c).

Sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society 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.

The Supreme Court also highlighted the fact that primary agricultural credit societies are not treated as 'banks' under the Banking Regulation Act 1949 and that the Reserve Bank of India has also stated that such societies cannot be termed as banks. 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.

Therefore, primary agricultural credit societies will not come under the exception under Section 80P (4).

While allowing the appeals of the societies, Supreme Court observed,

"Thus, the giving of loans by a primary agricultural credit society to non-members is not illegal. 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."