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Facts
The assessee, Baroda Rajasthan Kshetriya Gramin Bank, is a Regional Rural Bank (RRB) engaged in banking activities. For AY 2020-21, it claimed a deduction under Section 80P of Rs. 211,86,64,928/-. The AO disallowed this deduction, and the CIT(A) confirmed the disallowance.
Held
The Tribunal held that Regional Rural Banks (RRBs), as corporate entities functioning at par with commercial banks, are not eligible for deduction under Section 80P, especially after the amendment by the Finance Act, 2006, which inserted sub-section (4). This amendment specifically excludes cooperative banks, other than PACS and PCARDB, from the benefit of Section 80P.
Key Issues
Whether a Regional Rural Bank (RRB) is eligible for deduction under Section 80P of the Income Tax Act, 1961, particularly in light of the amendments and exclusion provisions introduced by the Finance Act, 2006.
Sections Cited
80P, 250, 43B, 14A, 36(1)(va), 22, 32, 80P(2)(a)(i), 80P(4), 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCH “A”, JAIPUR
Before: SHRI GAGAN GOYAL & SHRI NARINDER KUMAR
This appeal by assessee is directed against the order of NFAC, Delhi dated 08.03.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2020-21. The assessee has raised the following grounds of appeal:-
1.The authorities below failed to appreciate that the appellant is a Rural Regional Bank and consequently not hit by the prohibition under section 80P(4) of the Act, on the facts and circumstances of the case.
2 The appellant is eligible to the claim of deduction under section 80P of the Act, on the facts and circumstances of the case. 3 That the Ld. CTT(A)- NFAC, has erred in facts and in law in confirming disallowance of deduction u/s. 80P (2)(a)(i) of Rs. 2,11,86,64,928/- 4 That the Ld. CIT(A)-NFAC, has erred in facts and in law in confirming the addition of Rs. 38,429/- by disallowing expenditure u/s. 36(1) (va). 5 That the appellant craves to add, amend and alter the grounds before or at the time of appellate hearing.”
The brief facts of the case are that the assessee is a Regional Rural bank (RRB) involved in the business of giving loans and accepting deposits from its customers to earn the business income during the year under consideration. The assessee was being promoted and financed by the Bank of Baroda, Rajasthan Government and Central Government. The assessee established by Central Govt. in exercise of the powers conferred by sub-section (1) of section 23A of the Regional Rural Banks Act, 1976 by amalgamating three existing regional rural banks, namely Baroda Rajasthan Gramin Bank, Hadoti Gramin Bank and Rajasthan Gramin Bank sponsored by the Bank of Baroda, Central Bank and Punjab National Bank respectively.
3. For the A.Y. under consideration, the assessee filed its return of income declaring total income at Rs. 3,83,080/- after claiming deduction u/s. 80P of the Act amounting to Rs. 211,86,64,928/-. The case of the assessee was selected for complete scrutiny under CASS. The case of the assessee was assessed after disallowing deduction claimed u/s. 80P of the Act amounting to Rs. 211,86,64,928/- in addition to other disallowances u/s. 43B and 14A of the Act. The assessee being aggrieved with this order of the AO preferred an appeal before the Ld. CIT(A), who in turn partly allowed the appeal of the assessee but confirmed the disallowance of deduction u/s. 80P of the Act. The assessee being further aggrieved preferred the present appeal before us.
4. We have gone through the order of the AO, order of the Ld. CIT(A) and submissions of the assessee alongwith grounds taken before us. It is observed that the assessee is an artificial judicial person (AJP) as the same is clear from the assessee’s PAN No. also, i.e. AAAJB1164C. The only issue before us is whether the assessee RRB incorporated as AJPis entitled to claim deduction u/s. 80P of the Act or not. The assessee is not registered either under the State Cooperative Societies Act or Central Cooperative Societies Bank. Ld. Counsel vehemently argued the matter and there was a special emphasis on section 22 and 32 of the Regional Rural Bank Act, 1976 read with section 80P(2)(a)(i) of the Income Tax Act. For better clarity and ready reference, we are reproducing herein below the relevant provisions of section 22 and 32 of the Regional Rural Bank Act, 1976 read with section 80P(2)(a)(i) of the Income Tax Act as under:
Regional Rural Bank Act, 1976:
Section 22. Regional Rural Bank to be deemed to be a cooperative society for purpose of the Income-tax Act, 1961.- For the purpose of the Income-tax Act, 1961 (43 of 1961), or any other enactment for the time being in force relating to any tax on income, profits or gains, a Regional Rural Bank shall be deemed to be a cooperative society. Section 32. Act to override the provisions of other laws. The provisions of this Act shall have effect notwithstanding anything to the contrary in any other law for the time being in force or in any contract, express or implied, or in any instrument having effect by virtue of any law other than this Act, and notwithstanding any custom or usage to the contrary. Section - 80P, Income-tax Act, 1961 - FA, 2024 Deduction in respect of income of co-operative societies. 80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely: — (a) in the case of a co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members,or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,] the whole of the amount of profits and gains of business attributable to any one or more of such activities : Provided that in the case of a co-operative society falling under sub-clause (vi), or sub- clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:— (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societieswhich provide financial assistance to the society; (3) the State Government;] (b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to— (i) a federal co-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 asdoes 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 by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income; (e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income; (f) in the case of a co-operative society, not being a housing society or an urban consumers' society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22. Explanation. —For the purposes of this section, an "urban consumers' co-operative society" means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. (3) In a case where the assessee is entitled also to the deduction undersection 80HHor section 80HHAor section 80HHBor section 80HHCor section 80HHDor section 80-Ior section 80-IA or section 80J, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH,section 80HHA,section 80HHB,section 80HHC,section 80HHD,section 80-I,section 80-IA,section 80J and section 80JJ. (4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation. —For the purposes of this sub-section, — (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "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.]
5. We have thoroughly examined the Relevant provision of RRB Act, 1976 and Income Tax Act, 1961 also. In addition to the above relevant circular issued by the CBDT also pertinent to discuss here as under:
CIRCULAR NO. 6/2010 [F.NO. 173(3)/44/2009-IT (A-I)] SECTION 80P OF THE INCOME-TAX ACT, 1961 - DEDUCTION IN RESPECT OF INCOME OF CO- OPERATIVE SOCIETIES - CLARIFICATION REGARDING ELIGIBILITY OF DEDUCTION UNDER SECTION 80P TO REGIONAL RURAL BANKS Section 80P of the Income-tax Act, 1961 provides for a deduction from the income of cooperative societies referred to in that section.
2. As Regional Rural Banks (RRB) are basically corporate entities (and not cooperative societies), they were considered to be not eligible for deduction under section 80P when the section was originally introduced. However, as section 22 of the Regional Rural Bank Act provides that a RRB shall be deemed to be cooperative society for the purposes of the Income-tax Act, 1961, in order to make such banks eligible for deduction under section 80P, CBDT issued a beneficial Circular No. 319 dated 11-1-1982, which stated that for the purpose of section 80P, a Regional Rural Bank shall be deemed to be a cooperative society.
Section 80P was amended by the Finance Act, 2006, with effect from 1-4-2007 introducing sub-section (4), which laid down specifically that the provisions of section 80P will not apply to any cooperative bank other than a Primary Agricultural Credit Society or a Primary Cooperative Agricultural and Rural Development Bank. Accordingly, deduction under section 80P was no more available to any Regional Rural Bank from assessment year 2007-08 onwards. An OM dated 25-8-2006 addressed to RBI was issued by the Board clarifying that Regional Rural Banks would not be eligible for deduction under section 80P of the Income-tax Act, 1961 from the assessment year 2007-08 onwards.
It has been bought to the notice of the Board that despite the amended provisions, some Regional Rural Banks continue to claim deduction under section 80P on the ground that they are cooperative societies covered by section 80P (1) read with Boards Circular No. 319 dated 11-1-1982.
It is, therefore, reiterated that Regional Rural Banks are not eligible for deduction under section 80P of the Income-tax Act, 1961 from the assessment year 2007-08 onwards. Furthermore, the Circular No. 319 dated 11-1-1982 deeming any Regional Rural Bank to be cooperative society stands withdrawn for application with effect from assessment year 2007-08. The field officers may take note of this position and take remedial action, if required
Section 80P has been amended by Finance Act, 2006, and sub-section (4) has been inserted. As per finding recorded by lower authorities, the assessee is neither Primary Agricultural Credit Society (PACS) nor Primary Cooperative Agricultural and Rural Development Bank (PCARDB) and hence not eligible for deduction under section 80P.A society fulfilling two conditions is a PCARDB as per Explanation to section 80P (4) of the Act (a) Area of operation confined to a taluk (b) The principal object of which is to provide for long term credit for agricultural and rural development activities. The principal object of the assessee is not PACS and the object of the assessee and the range of the activities is not confined to taluk but is extended to entire district. It is clear that the assessee is not fulfilling the second condition also. Hence, assessee is not PCARDB. Assessee is not PACS, as per the Explanation to section 80P (4) of the Act. PACS has been defined as in Part-V of the Banking Regulation Act, 1949.Primary object of principal business of PACS is to finance for agricultural purposes or purposes connected with agricultural activities. The primary object as well as activities of assessee are not confined to agricultural purposes but other purposes also. Hence, assessee is neither PACS nor PCARDB hence, no exemption is available to the assessee under section 80P of the Act. It was also submitted by the assessee during the assessment proceedings, 'the assessee is a Regional Rural Bank carrying on banking activities in the state under the provisions of section 22 of the RRB Act.It is also not in dispute that the assessee is not claiming exemption as PACS for PCARDB. To clarify the amended provisions as brought by the Finance Act, 2006, the CBDT has also issued circular dated 28-12-2006, according to which after insertion of sub- section (4) in section 80P of the Act, the benefit of provisions of section 80P of the Act shall not apply in relation to any co-operative bank other than primary agricultural credit society or primary co-operative agricultural rural development Bank. Thus, income of business of banking has been excluded under section 80P of the Act for all the co-operative societies except PACS and PCARDB. The legislative intent for insertion of sub-section (4) as per the speech of Union Finance Minister on 28-2-2006 clearly shows that co- operative Banks were excluded from the benefit of section 80P of the Act on the plea that like any other bank, the co-operative banks are also lending institution and should pay tax on their profits. Accordingly, co-operative banks were excluded from the scope of section 80P of the Act.
Section 80P of the Act, inter alia, provides for a deduction from the total income of the Co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.The co- operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore, section 80P of the Act has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" have also been defined to lend clarity to them.
This makes it clear that income of business of banking has been excluded under Section 80P of the Act for all the Co-operative societies and of course for RRBs also except PACS and PCARDB. Hence no deduction u/s. 80P of the Act is allowed to the assessee.RRBs are Banking institutions performing at par with the commercial banks and the amendment has been brought u/s. 80P (4) to withdraw such deduction for all such profit earning banks. The legislative intent is very clear from the below part of speech given by then Hon'ble Union Minister of Finance Shri P. Chidambaram on 28.02.2006 presenting the budget and proposing the said amendment: - XIV Tax Proposals Direct Taxes 166. Cooperative banks. like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt (from tax under section 80P of the Income Tax Act However, I propose to exclude all other cooperative banks from the scope of that section. From the speech it is very clear that only PACS and PCARDB have been provided a special status because of their focus on agriculture sector and it has been specifically stated that all the other co-operative banks have been excluded from the scope of the section 80P of the Act.
The assessee relied on following judicial pronouncements of various Hon’ble High Courts and the coordinate benches as under:
[2022] 138 taxmann.com 449 (All.) PCIT v. Baroda Uttar Pradesh Gramin Bank Matter in this case pertains to penalty issue u/s. 271(1)(c) of the Act and on the quantum issue before the Hon’ble High Court no reference was put forward about the Finance Minister’s Speech, which clears the legislative intent, that not only RRBs but even the Co-operative banks working on commercial basis (Not on the Principle of Co-operative) after obtaining due licenses from the Reserve Bank of India (RBI) are also categorically excluded from the purview of section 80P of the Act. Moreover, section 22 and 32 of the RRB Act, 1976 were introduced in the year 1976 and thereafter categorically a circular was issued to harmonize the provisions of RRB Act, 1976 and the Income Tax Act, 1961. Whereas the parliament in their wisdom withdrew this benefit from A.Y. 2007-08 and also issued clarificatory circular mentioned (supra). Karnataka Vikas Grameena Bank, Dated: 05.12.2022 In this pronouncement Hon’ble placed reliance on [2022] 138 taxmann.com 449 (All.) PCIT v.Baroda Uttar Pradesh Gramin Bank and that has already been differentiated by us (supra). ACIT, Jaipur vs. Jaipur Thar Gramin Bank, 802, 803/ JPR/ 2013, Dated: 21.06.2017 This pronouncement pertains to penalty matter and submitting the same will tantamount to mislead the bench by the counsel of the assessee, which is not at all appreciable and it’s a warning for future behavior. Otherwise, it may attract appropriate action against the counsel for misleading and wasting the bench’s time.
In nutshell, considering the detailed deliberation on the issue and the facts of the case in the light of applicable law, we are of firm opinion that the claim of the assessee is not tenable as per law and we do not see any infirmity in the orders of the authorities below, hence the same is confirmed and grounds taken by the assessee are dismissed.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on 6th day of February 2025.