M/S KOTTAYAM SERVICE CO-OP BANK LTD,KANNUR vs. ITO WARD 2, KANNUR

Heard both the parties. Case files perused. 2. It emerges at the outset with the able assistance coming from both the parties that the learned lower authorities have disallowed the & 37/Coch/2023 Kottayam SCB Ltd. assessee’s sec.80P deduction claim(s) herein thereby treating it as a cooperative bank than a cooperative society.

Learned DR submits that the assessee has been rightly taken as a cooperative bank and therefore, not entitled for the impugned deduction u/sec.80P(4) of the Act. She quotes Mavilayi Service Co-operative Bank Ltd., vs., CIT [2021] 431 ITR 1 (SC).

We have given thoughtful consideration to the Revenue’s foregoing objection to the assessee’s section 80P deduction claim. The first and foremost issue regarding the same herein is as to whether this assessee is a co-operative society or co-operative bank; within the meaning of section 80P(2) of the Act, so as to be eligible for the impugned deduction. It is in this backdrop we find that the hon'ble jurisdictional high court (supra) had decided the instant issue against the assessee and in favour of the department that such a co-operative bank is not considered as co-operative society and therefore not eligible for section 80P deduction which admittedly got overruled in Mavilayi Service Co-operative Bank Ltd. v. CIT [2021] 431 ITR 1 (SC).

We further notice that the question of co-operative bank vis-à-vis a co-operative society; for the purpose of the impugned deduction, further arose before their lordships in the Kerala State Cooperative Agricultural and Rural Development Bank [2023] 458 ITR 384 (SC) as well. The department therein was identical as in the “Mavilayi” case. We find that their lordships have taken note of all the relevant statutory provisions deciding the issue in assessee’s favour as under: - & 37/Coch/2023 Kottayam SCB Ltd. “14. We shall now analyse the aforesaid judgments in a common conspectus. 14.1. In Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd., it was categorically held that under Section 56 of the BR Act, 1949 only three co-operative banks have been defined, namely, state co-operative bank, central co-operative bank and primary co- 51 operative bank which are covered under Section 56 (cci) read with (ccvii) read with the provisions of the NABARD Act, 1981. Thus, it is only these three banks which are co-operative banks which require a licence under the BR Act, 1949 to engage in banking business. If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act, 1981, it would not be a co-operative bank within the meaning of Section 56 of BR Act, 1949 irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act. It was further stated that if a bank has to be a state cooperative bank, there has to be a declaration made by the State Government in terms of Section 2(u) of NABARD Act, 1981. Hence, it is necessary to go into the question as to, whether, the appellant herein has been so declared as a state co-operative bank. This question would need not detain us for long as the Kerala High Court in A.P. Varghese had categorically stated that the “Kerala State Co-operative Bank” is a “state co-operative bank” as defined under the NABARD Act, 1981. Therefore, the appellant bank has not been declared as a state cooperative bank under the provisions of NABARD Act, 1981. Further, in the case of Mavilayi Service Co-operative Bank, this Court observed that a co-operative bank would engage in banking business on obtaining a licence under Section 22(1b) of the BR Act, 1949. In the instant case, the appellant herein is not a co-operative bank having regard to the aforesaid conspectus of the provisions so as to require a licence under the aforesaid provision for carrying on banking business. In the 52 circumstances, the question could still arise as to whether the appellant herein is entitled to benefit of deduction under Section 80P of the Act. 14.2. In Mavilayi Service Co-operative Bank, it has been observed that Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the co- operative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee. That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in subsection (2) of Section 80P must be & 37/Coch/2023 Kottayam SCB Ltd. given by way of deduction vide Citizen Co-operative Society. This is because sub-section (4) of Section 80P is in the nature of a proviso to the main provision contained in subsections (1) and (2) of Section 80P. The proviso excludes co-operative banks, which are co- operative societies which must possess a licence from the Reserve Bank of India to do banking business. In other words, if an entity does not require a licence to do banking business within the definition of banking under Section5(b) of the BR Act, 1949, then it would not fall within the scope of sub-section (4) of Section 80P. 14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court: i) Firstly, the marginal note to Section 80P which reads “Deduction in respect of income of co-operative societies” is significant as it indicates the general “drift” of the provision. ii) Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”. iii) Thirdly, the gross total income must include income that is referred to in sub-section (2). iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative society being “engaged in”, inter alia, carrying on the business of banking or providing credit facilities to its members. v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. vi) Sixthly, the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non- members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted. vii) Seventhly, under Section 80P(1)(c), the co-operative societies must be registered either under Co-operative Societies Act, 1912, or a State Act and may be 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). viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other co-operative societies, the whole of such income is eligible for & 37/Coch/2023 Kottayam SCB Ltd. deduction, the object of the provision being furtherance of the co- operative movement as a whole. 14.4. In paragraph 42 of Mavilayi Service Co-operative Bank, this Court observed that the object and purpose of sub-section (4) of Section 80P is to exclude only co-operative banks that function on par with other commercial banks i.e. which lend money to members of the public. That on a reading of Section 3 read with Section 56 of the BR Act, 1949, the 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 Section 5(b) of the BR Act, 1949, which means accepting, for the purpose of lending or investment, of deposits of money from the public. Also under Section 22(1)(b) of the BR Act, 1949, no cooperative society can carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by Reserve Bank of India. It was pointed out that as opposed to the above, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. 14.5. It was further observed in the said case that some primary agricultural credit societies had sought for banking licence from Reserve Bank of India but the same was turned down by observing that such a society was not carrying on the business of banking and that it did not come under the purview of Reserve Bank of India requiring a licence for its business. 14.6. Thereafter in paragraph 48 of the judgment, it was observed that a deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication. That subsection (4) of Section 80P which is in the nature of a proviso specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from Reserve Bank of India.

It is on the aforesaid touchstone that these appeals must now be further considered from the point of view of the applicable provisions of law. 15.1. Section 80P speaks about deduction in respect of income of cooperative societies from the gross total income referred to in sub- section (2) of the said Section. From the said income, there shall be deducted, in accordance with the provisions of Section 80P, sums specified in subsection (2), in computing the total income of the & 37/Coch/2023 Kottayam SCB Ltd. assessee for the purpose of payment of income tax. Sub-section (2) of Section 80P enumerates 56 various kinds of co-operative societies. Sub-section (2)(a)(i) states that if a co-operative society is engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities shall be deducted. The sub-section makes a clear distinction between business of banking on the one hand and providing credit facilities to its members by co-operative society on the other. Thus, the definition of banking under Section 5(b) of the BR Act must be borne in mind as opposed to providing credit facilities to its members. 15.2. Section 80P was inserted to the Act with effect from 01.04.1968, however, sub-section (4) was reinserted with effect from 01.04.2007, in the present form. Earlier sub-section (4) was omitted with effect from 01.04.1970. Sub-section (4) of Section 80P in the present form is in the nature of an exception which states that the provisions of Section 80P shall 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 and primary agricultural credit society as well as primary co-operative agricultural and rural development bank are defined in the Explanation as co-operative bank and primary agricultural credit society having the meanings respectively assigned to them in Part V of the BR Act, 1949. 15.3. The controversy in this case is, whether, the appellant entity is a co-operative bank and if so, it would be covered within the scope and 57 meaning of sub-section (4) of Section 80P and therefore, would not be eligible to the benefit of deduction as provided therein. 15.4. Having regard to the Explanation to sub-section (4) of Section 80P, it is necessary to consider Chapter V of the BR Act, 1949 which states that the said Act shall apply to co-operative societies subject to modifications made thereunder. Section 56 begins with a non- obstante clause and states that notwithstanding anything contained in any other law for the time being in force, the provisions of the said Act 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, • in clause (a) throughout the said 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 cooperative bank.

Learned DR could hardly dispute the very factual position in this regard that the assessee neither carries any banking activity(ies) with the public at large nor has it got any banking license under the provisions of the Banking Regulation Act, 1949. Their lordships’ above extracted discussion has duly considered the State Cooperative law provisions to conclude that before the department holds a co-operative society as a co-operative bank, the case has to be examined under sec.5(b) read with section 56 of the Banking Regulation Act, 1949.

So far as the assessee’s claim qua its impugned income derived from a co-operative bank is concerned, we indeed have the benefit of the hon'ble jurisdictional high court’s detailed judgement in Pr. CIT vs. Peroorkada Service Co-op. Bank Ltd. [2022] 442 ITR 141 (Ker) having rejected the & 37/Coch/2023 Kottayam SCB Ltd. Revenue’s identical arguments. That being the case, we accept the assessee’s impugned section 80P deduction claim in principle and leave it open for the learned Assessing Officer to verify all necessary facts, in consequential computation as per law. Ordered accordingly.

Our attention is next invited to the learned lower authorities action making sec.40(a)(ia) read with Rule 194C and sec.36(i)(viia) disallowance(s) assessment year-wise, respectively. There would be hardly any dispute that such a disallowance(s) under the revenue expenditure head only adds to the assessee’s profits which are already eligible for sec.80P deduction going by CBDT’s circular no.37/2016. All these corresponding substantive grounds in these appeals also follow the suit therefore.

Delay of 2023 days in filing the instant appeal is condoned as per assessee’s solemn averments in light of Collector, Land Acquisition vs., MST Katiji [1987] 167 ITR 471 (SC) having settled the law long back that all such technical aspects must make a way for the cause of substantial justice.

These assessee’s twin appeals ITA.Nos.36 & 37/Coch/2023are allowed for statistical purposes in above terms. A copy of this common order be placed in the respective case files. Order pronounced in the open court on 25th day of September, 2024.