‘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.

 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 7343-7350 OF 2019

THE MAVILAYI SERVICE

COOPERATIVE BANK LTD. & ORS. … Appellants

Versus

COMMISSIONER OF INCOME TAX,

CALICUT & ANR. … Respondents

WITH

CIVIL APPEAL NO.8315 OF 2019

AND

 CIVIL APPEAL NO. OF 2021

(@ SLP(C) NO._________ OF 2021)

 (DIARY NO. 31268 OF 2019)

J U D G M E N T

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.

1

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

Year 2007-08.

3. However, with the introduction of section 80P(4) of the IT Act,

the scenario changed. In respect of the assessees before us, the

assessing officer denied their claims for deduction, relying upon section

80P(4) of the IT Act, holding that as per the Audited Receipt &

2

Disbursal Statement furnished by the assessees in these cases,

agricultural credits that were given by the assessee-societies to its

members were found to be negligible – the credits given to such

members being for purposes other than agricultural credit. The

decisions of the assessing officers were challenged up to the Kerala

High Court. Before the High Court, the assessees relied upon a

decision of a Division Bench of the Kerala High Court in Chirakkal

Service Co-operative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker.),

where in a batch of appeals challenging assessments completed under

section 147 read with 143(3)/144 of the IT Act, the High Court, after

considering section 80P(4) of the IT Act, various provisions of the

Kerala Act, the Banking Regulation Act, 1949, the bye-laws of the

Societies, etc., held that once a Co-operative Society is classified by

the Registrar of Co-operative Societies under the Kerala Act as being a

primary agricultural credit society, the authorities under the IT Act

cannot probe into whether agricultural credits were in fact being given

by such societies to its members, thereby going behind the certificate

so granted. This being the case, the High Court in Chirakkal (supra)

held that since all the assessees were registered as primary

3

agricultural credit societies, they would be entitled to the deductions

under section 80P(2)(a)(i) read with section 80P(4) of the IT Act.

4. However, the Department contended that the judgment in

Chirakkal (supra) was rendered per incuriam by not having noticed the

earlier decision of another Division Bench of the Kerala High Court in

Perinthalmanna Service Co-operative Bank Ltd. v. ITO and Anr.

(2014) 363 ITR 268 (Ker.), where, in an appeal challenging orders

under section 263 of the IT Act, it was held that the revisional authority

was justified in saying that an inquiry has to be conducted into the

factual situation as to whether a co-operative bank is in fact conducting

business as a co-operative bank and not as a primary agricultural

credit society, and depending upon whether this was so for the relevant

assessment 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.

4

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 section 80P(4) of the IT Act, to state that as

the co-operative society in question – though registered as a primary

agricultural credit society – is not, in fact, functioning as such, the

deduction claimed under section 80P(2)(a)(i) of the IT Act must be

refused. This conclusion was reached after referring to several

judgments, but relying heavily upon the judgment of this Court in

Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017) 9

SCC 364. Thus, the conclusion of the Full Bench was as follows:

5

“33. In view of the law laid down by the Apex Court in Citizen

Co-operative Society [397 ITR 1] it cannot be contended

that, while considering the claim made by an assessee

society for deduction under section 80P of the IT Act, after

the introduction of sub-section (4) thereof, the Assessing

Officer has to extend the benefits available, merely looking

at the class of the society as per the certificate of

registration issued under the Central or State Co-operative

Societies Act and the Rules made thereunder. On such a

claim for deduction under section 80P of the IT Act, 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.

34. In Chirakkal [384 ITR 490] the Division Bench held that

the appellant societies having been classified as Primary

Agricultural Credit Societies by the competent authority

under the KCS Act, it has necessarily to be held that the

principal object of such societies is to undertake agricultural

credit activities and to provide loans and advances for

agricultural purposes, the rate of interest on such loans and

advances

to be at the rate to be fixed by the Registrar of Co-operative

Societies under the KCS Act and having its area of

operation confined to a Village, Panchayat or a Municipality

and as such, they are entitled for the benefit

of sub-section (4) of section 80P of the IT Act to ease

themselves out from the coverage of section 80P and that,

the authorities under the IT Act cannot probe into any issues

or such matters relating to such societies and that, Primary

Agricultural Credit Societies registered as such under the

KCS Act and classified so, under that Act, including the

appellants are entitled to such exemption.

35. In Chirakkal [384 ITR 490] the Division Bench expressed

a divergent opinion, without noticing the law laid down in

6

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 deduction under section

80P of the IT Act, by reason of sub-section (4) thereof, if the

assessee society ceases to be the specified class of

societies for which the deduction is provided, even if it was

eligible in the initial years.

The question referred to the Full Bench is answered as

above. Registry shall list the appeals before appropriate

Bench as per roster.”

6. Being aggrieved by the Full Bench judgment, the Appellant

assessees are now before us.

7. Shri Shyam Divan, learned Senior Advocate leading the

charge on behalf of the assessees, has argued that the advent of

section 80P(4) of the IT Act has not led to any change insofar as the

7

Appellant assessees are concerned. He read to us in copious detail the

provisions of section 80P, various provisions contained in the Banking

Regulation Act, 1949 and the various provisions of the Kerala Act and

rules made thereunder, together with the bye-laws of some of the

assessees before us. His main argument, based upon the language of

section 80P(1) and (2), is that section 80P is a beneficial provision

which is meant to further the co-operative movement in India. For this

purpose, certain income of a co-operative society, once it is registered

under a State Act, becomes deductible from its gross total income.

According to him, the moment a co-operative society that is registered

as such is engaged in providing credit facilities to its members, the

inquiry of an assessing officer stops there. He argued that the Full

Bench was wholly incorrect in adding credit facilities related to

agriculture, as no such thing is contained in section 80P(2)(a)(i), as

contrasted with sections 80P(2)(a)(iii) to (v) of the IT Act. He therefore

argued that the moment a co-operative society is registered under the

said Act, whatever be its classification, so long as it provides credit

facilities to its members – which need not be credit facilities related to

agriculture – it is entitled to a deduction contained in section 80P(2)(a)

8

(i) of the IT Act. A distinction must be drawn, therefore, between

eligibility for deduction, and whether the whole of the amounts of profits

and gains of business attributable to any one or more such activities

under the sub-section is to be given. He argued, stating that if credit

facilities were given to non-members, for example, such credit facility

would not be attributable to the activity of 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

9

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 beneficial provision contained in section 80P(1) and (2),

as section 80P(4) is in the nature of a proviso which cannot cut down

the main enacting part. In any case, he argued that once a registration

certificate stating that the assessee is a primary agricultural credit

society is given by the Registrar under the Kerala Act, then short of

such certificate being cancelled under the Kerala Act and rules

thereunder, the assessing officer, who is an authority for purposes of

collection of revenue, cannot possibly go into whether, in substance,

the society continues to be a primary agricultural credit society. He

relied upon various judgments of this Court to buttress his submissions.

He also relied upon a circular, being Circular 14/2006 dated 28.12.2006

containing explanatory notes to the Finance Act, 2006, and the letter of

the Central Board of Direct Taxation (“CBDT”) dated 09.05.2008, both

of which made it clear that if a co-operative society cannot be said to

10

be a co-operative bank, then the provisions of section 80P(4) would

have no application.

8. Shri Diwan’s second broad submission was that the Full Bench

of the Kerala High Court completely misread this Court’s judgment in

Citizen Cooperative Society Ltd. (supra). He contended that if the

judgment is seen closely, all the assessees’ contentions in law were

answered in their favour. However, on facts, it was held that since the

co-operative society in that case carried on business illegally i.e. by

giving loans to nominal members who had no place under the statute

under which it was registered, and was also giving loans to the

members of the general public, it could not be said to be a co-operative

society at all, as a result of which the findings of fact of all the

authorities below were not interfered with by the Supreme Court. There

was no argument, neither was there any finding by the Court in that

case, that the assessing officer is entitled to go behind a certificate

given under a particular statute. Indeed, he pointed out that both under

the Banking Regulation Act, 1949 and the Kerala Act, if any dispute

arose as to classification of a society as being a primary agricultural

credit society versus being a co-operative bank, it is the RBI alone

11

who is to decide such dispute under the Banking Regulation Act, 1949,

and the Registrar, Co-operative Societies, who is to decide on

classification under 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.

12

10. Shri Balbir Singh, learned Additional Solicitor General

appearing on behalf of the Revenue, refuted all the arguments made

by the learned Senior Advocates for the assessees. According to him,

the Full Bench was wholly correct in stating that a mere certificate of

registration as a primary agricultural credit society would not avail. For

the assessment year in question, the assessing officer has to be

satisfied that the assessee is “engaged in” activities as a primary

agricultural credit society i.e. in giving loans for agricultural and allied

purposes to its members. He read from some of the assessing officers’

orders the fact that loans given for agricultural purposes by the

aforesaid societies were negligible, the main business being that of

banking, as such loans were given for purposes other than agricultural

credit. He also read copiously from the various Acts, rules and byelaws to buttress his submission that in actual fact, since the Appellants

were no longer doing business as primary agricultural credit societies,

they would be disentitled to any deduction under Section 80P after the

advent of Section 80P(4). According to him, the classification of a cooperative society under the State Act, which is expressly referred to in

Section 2(19) of the IT Act, is of primary importance, and once

13

classified as a primary agricultural credit society, it is only if activities

relatable to agriculture are carried out that eligibility for deduction would

arise in the first place under section 80P(1) and (2). The whole object

of section 80P would be defeated if the Division Bench in Chirakkal

(supra) was held to be correct in law, as then, despite being engaged in

activities other than agricultural credit, a society undeserving of any

deduction would still get such deduction contrary to what was sought to

be achieved by section 80P(4) of the IT Act. According to him, the

Supreme Court judgment in Citizen Cooperative Society Ltd. (supra)

was correctly read by the Full Bench, as permitting an assessing officer

to get to the real facts of a case in order to conclude as to whether

activities of a primary agricultural credit society were, in fact, being

carried out in the assessment year in question. For this purpose, he

referred to several provisions of the IT Act, which give very vast powers

of investigation into the facts of any given case and, in particular, relied

upon section 133(6) of the IT Act. He also relied upon several

judgments of this Court which would show that mere registration as a

primary agricultural credit society is not enough, the expression

“engaged in” meaning that there must be a continuing obligation on

14

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 xxx

(19). “co-operative society” means a co-operative society

registered under the Co-operative Societies Act, 1912 (2 of

1912), or under any law for the time being in force in any

State for the registration of co-operative societies.”

15

“80P. Deduction in respect of income of co-operative

societies.—(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

16

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 societies which 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 as does

not exceed,—

17

(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 go downs 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.

18

(3) In a case where the assessee is entitled also to the

deduction under section 80HH or section 80HHA or section

80HHB or section 80HHC or section 80HHD or section 80-I

or section 80-IA, 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 HHA, section

80HHB, section HHC, 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.”

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—

19

(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 of 1965);

(b) in section 2, the words and figures “the Companies

Act, 1956 (1 of 1956), and” shall be omitted;

(c) in section 5,—

(i) after clause (cc), the following clauses shall be

inserted namely:—

(cci) “co-operative bank” means a state cooperative bank, a central co-operative bank and a

primary co-operative bank;

20

(ccii) “co-operative credit society” means a cooperative society, the primary object of which is to

provide financial accommodation to its members

and includes a co-operative land mortgage bank;

(cciia) “co-operative society” means a society

registered or deemed to have been registered

under any Central Act for the time being in force

relating to the multi-State co-operative societies, or

any other Central or State law relating to cooperative societies for the time being in force;

(cciii) “director”, in relation to a co-operative

society, includes a member of any committee or

body for the time being vested with the

management of the affairs of that society;

(cciiia) “multi-State co-operative bank” means a

multi-State co-operative society which is a primary

co-operative bank;

(cciiib) “multi-State co-operative society” means a

multi-State co-operative society registered as such

under any Central Act for the time being in force

relating to the multi State co-operative societies but

does not include a national co-operative society

and a federal co-operative;

(cciv) “primary agricultural credit society” means a

co-operative society,—

(1) the primary object or principal business of

which is to provide financial accommodation to

its members for agricultural purposes or for

purposes connected with agricultural activities

(including the marketing of crops); and

21

(2) 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;

(ccv) “primary co-operative bank” means a cooperative 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 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;

22

(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 dispute arises as to the

primary object or principal business of any cooperative society referred to in clauses (cciv),

(ccv) and (ccvi), a determination thereof by the

Reserve Bank shall be final;

(ccvii) “central co-operative bank”, “primary rural

credit society” and “state co-operative bank” shall

have the meanings respectively assigned to them

in the National Bank for Agriculture and Rural

Development Act, 1981 (61 of 1981);”

13. So far as the Kerala Act and the rules framed thereunder are

concerned, the following provisions are relevant:

Act

“2. In this Act, unless the context otherwise requires,-

(f) “Co-operative Society” or “society” means a Cooperative society registered or deemed to be registered

under this Act;

23

xxx xxx xxx

(l) “member” means a person joining in the application for

the registration of a Co-operative society or a person

admitted to membership after such registration in

accordance with this Act, the rules and the bye-laws and

includes a nominal or associate member;

xxx xxx xxx

(m) “nominal or associate member” means a member who

possess only such privilege and rights of a member who is

subject only to such liabilities of a member as may be

specified in the bye-laws;

xxx xxx xxx

(oaa) “Primacy Agricultural Credit Society” means a

Service Co-operative Society, a Service Co-operative Bank,

a Farmers Service Co-operative Bank and a Rural Bank, the

principal object of which is to undertake agricultural credit

activities and to provide loans and advances for agricultural

purposes, the rate of interest on such loans and advances

shall be the rate fixed by the Registrar and having its area of

operation confined to a Village, Panchayat or a Municipality;

Provided that the restriction regarding the area of operation

shall not apply to Societies or Banks in existence at the

commencement of the Kerala Co-operative Societies

(Amendment) Act, 1999 (1 of 2000).

Provided further that if the above principal object is not

fulfilled, such societies shall lose all characteristics of a

Primary Agricultural Credit Society as specified in the Act,

Rules and Bye-laws except the existing staff strength.

xxx xxx xxx

24

(ob) “Primary Credit Society” means a society other than

an apex or central society which has as its principal object

the raising 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 with the

object of facilitating the operations of such a society, may be

registered under this Act:

Provided that no co-operative society shall be registered if it

is likely to be economically unsound, or the registration of

which have an adverse effect on development of cooperative movement.

xxx xxx xxx

25

7. Registration.- (1)If the Registrar is satisfied within a

period of ninety days from the date of the application —

(a)that the application complies with the provisions of this

Act and the rules;

(b)that the objects of the proposed society are in

accordance with section 4;

(c)that the area of operation of the proposed society and

the area of operation of another society of similar type

do not overlap;

(d)that the proposed bye-laws are not contrary to the

provisions of this Act and the rules; and

(e)that the proposed society complies with the

requirements of sound business, he may register the

society and its bye-laws within a period of ninety days

from the date of receipt of the application.

(2) Where the Registrar refuses to register a society, he

shall communicate the order of refusal together with the

reasons therefore within seven days of such order to such of

the applicants as may be prescribed.

(3) An application for registration of a society shall be

disposed of by the Registrar within ninety days from the date

of receipt of the application.

(4) Where an application for registration of a society is not

disposed of within the time specified in sub-section (3), the

applicant may make a representation,--

26

(a)before the Registrar, if the application for registration is

made to a person on whom the powers of the Registrar

is conferred under subsection (2) of section 3; or

(b)before the Government, if the application for registration

is made before Registrar,

and the Registrar or the Government, as the case may be,

shall, within sixty days from the date of receipt of such

representation, issue directions to the authority concerned to

take appropriate decision on the application for registration

and the authority concerned shall comply with such

directions.

8.Registration certificate.- (1)Where a co-operative society

is registered under this Act, the Registrar shall issue a

certificate of registration signed and sealed 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

27

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)Central District Co-operative Banks

(3)Primary (a)Primary Agricultural Credit

Societies, Service Cooperative Banks, Regional

Co-operative Banks, Rural

Banks, Farmers Service

Co-operative Banks, Urban

Co-operative Societies,

Agricultural Improvement

Societies

(b)Employees Credit

Societies

xxx xxx xxx

Note:- (i) If any question arises as to the classification of a

society, it shall be referred to the Registrar for decision and

his decision thereon shall be final.

(ii) If the Registrar alters the classification of a society from

one class of society to another or from the sub class thereof

to another, he shall issue to the society and the financing

Bank a copy of his order and the society shall fall under that

category with effect from the date of that order.”

28

14. The bye-laws of some of the Societies before us were also

referred to in the course of arguments. A sample set of the bye-laws of

Mavilayi Service Co-operative Bank Ltd., in particular bye-law 5, which

refers to the objects of the aforesaid Society, provides as follows:

“Byelaw 5.

Objects.

1. The main aim of this Primary Agricultural Credit Society is

to provide financial assistance in the form of loans to

members for agricultural purposes, marketing of agricultural

produce and promotion of agriculture.

2. Act as an agent for supply of seeds, fertilizers, pesticides,

implements for agricultural purposes and an agent for

procurement of agricultural produce.

3. Provide loans for necessities of priority sector.

4. Provide loans for the development of agriculture, trade,

small scale Industries etc.

5. Provide loans for agriculture related purposes.

6. Procurement and supply of seeds, fertilizers, pesticides,

implements.

7. Facilitate the sale of fertilizers and industrial products

either through marketing societies or directly for the benefit

members.

8. To construct or let out godowns or warehouse buildings

for keeping agricultural products of members.

29

9. Provide assistance to members for producing new types

seedlings.

10. Purchase and maintenance of newly innovated

machines and Implements like power tillers, tractors etc for

letting out to members or others.

11. Purchase and distribution of better breeds of cattle,

goats, poultry etc to members

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.

30

20. Opening of medical stores for supply of essential

medicines at reasonable prices to the public.

21. Running of showrooms for supply of home appliances,

furnitures, construction materials, textiles etc. at reasonable

prices to members.

22. Act as an agent in collection of premium of LIC, rent of

electricity board, telecom and other public sector

undertakings.

23. To associate more people to the cooperative institutions

by organising cooperative education and campaigns.

24.To borrow funds from District Cooperative Banks, Govt

and other institutions approved by Registrar.

25. To render services like collection of cheques, bills or

drafts or deposit receipts.

26. To discount cheques, bills or drafts as per the conditions

laid down by Registrar and to lend for a fixed period.

27.To create and implement welfare funds for members and

employees. To collect and deposit normal subscription

amount for members and employees and an amount

allocated by General Body from annual profits each year to

that fund. Approval of Registrar for implementing the rule is

mandatory.

28.To provide Overdraft facility, vehicle loan, loan for

purchase of home appliances or furniture or for construction

of houses, repair of houses, or for purchase of property. Sub

rule should be created and approval of Registrar is

mandatory for these purposes.

31

29. To open branches within area of operation of bank with

prior approval of Registrar for growth and expansion.

30. To provide safe deposit locker for customers.

31. To implement new facilities for the convenience of staff,

customers and members.

32. To render agency services like supply of construction

material, LPG, other petroleum products.

33. Any other activities instituted by Central Govt, State Govt

or SCB or DCB or other concerns to be carried out in

accordance with the Act.

34.To undertake and carry out developmental activities

formulated by local bodies and self-help groups to provide

loans for them.

35.To let out auditoriums.

36. To provide loans for members for constructing houses or

purchase, renovate houses or for acquiring land.

37. To formulate and implement new schemes like

aquariums, children's park, resorts etc and to take new

initiatives to attract tourist.

38.To construct godowns for various purposes of banks and

collection of agricultural 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.

32

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 provisions contained in section 80P. This Court

began on the wrong foot in Assam Cooperative Apex Marketing

Society Ltd. Assam v. Additional Commissioner of Income Tax,

Assam (1994) Supp. (2) SCC 96. In this case, the question before the

Court was as to whether the Assam Cooperative Apex Marketing

Society Ltd. was entitled to exemption under section 81(i)(c) of the IT

Act, as it then stood, in respect of income arising out of procurement of

33

paddy and other agricultural produce. Section 81 is set out in

paragraph 6 of the judgment as follows:

“81. Income of cooperative societies.— Income tax shall not

be payable by a cooperative society —

(i) in respect of the profits and gains of business carried

on by it, if it is —

(a) a society engaged in carrying on the business of

banking or providing credit facilities to its members; or

(b) a society engaged in a cottage industry; or

(c) a society engaged in the marketing of the

agricultural produce of its members; or

(d) a society engaged in the purchase of agricultural

implements, seeds, livestock or other articles intended

for agriculture for the purpose of supplying them to its

members; or

(e) a society engaged in the processing without the aid

of power of the agricultural produce of its members; or

(f) a primary society engaged in supplying milk raised

by its members to a federal milk cooperative society:

Provided that, in the case of a cooperative society

which is also engaged in activities other than those

mentioned in this clause, nothing contained herein shall

apply to that part of its profits and gains as is

attributable to such activities and as exceeds fifteen

thousand rupees;”

34

17. The expression “engaged in the marketing of the agricultural

produce of its members” came up for decision before the Court. The

Court held that the object of this provision is that the agricultural

produce that is produced by members alone would be entitled to such

deduction. It further held that this object cannot extend to traders

dealing in agricultural produce, so that if agricultural produce is bought

from other agriculturists by members but not produced by such

member itself, such produce would not qualify for deduction.

18. Shortly after this judgment, a three-Judge Bench in Kerala

State Cooperative Marketing Federation Ltd. and Ors. v. CIT (1998)

5 SCC 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

35

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 expression “marketing” is an expression of wide import.

It involves exchange functions such as buying and selling,

physical functions such as storage, transportation,

processing and other commercial activities such as

standardisation, financing, marketing intelligence etc. Such

activities can be carried on by an apex society rather than a

primary society.

8. So long as agricultural produce handled by the assessee

belonged to its members it was entitled to exemption in

respect of the profits derived from the marketing of the

same. Whether the members came by the produce because

of their own agricultural activities or whether they acquired it

by purchasing it from cultivators was of no consequence for

the purpose of determining whether the assessee was

entitled to the exemption. The only condition required for

qualifying the assessee's income for exemption was that the

assessee's business must be that of marketing, the

marketing must be of agricultural produce and that

agricultural produce must have belonged to the members of

the assessee-Society before they came up for marketing by

it, whether on its own account or on account of the members

themselves. Thus there is no scope to limit the exemption.

The cooperative societies are engaged in marketing of an

agricultural produce both of its members as well as of nonmembers. In the latter case, there is no difference between

a cooperative society or any other business organisation

and so will not be entitled to exemption. The exemption is

intended to cover all cases where a cooperative society is

engaged in marketing agricultural produce of its members.

Section 80-P(2)(a)(iii) does not in effect limit the scope of the

36

exemption to agricultural produce raised by members alone

but includes agricultural produce raised by others but

belonging to cooperative societies. The contrast in the said

provision is with reference to the marketing of agricultural

produce of the members of the society or that purchased

from non-members.

9. A reading of the provisions of Section 80-P of the Act

would indicate the manner in which the exemptions under

the said provisions are 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) referred to above 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, 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 of the provision as indicated in Assam Coop. Apex

Marketing Society case [1994 Supp (2) SCC 96].

37

19. It was therefore held that the expression “agricultural produce

of its members” would really mean agricultural produce belonging to its

members, which would include agricultural produce purchased by

members from other agriculturists. Thus, the Court declared:

“17. The attention of this Court does not seem to have been

drawn to the aforesaid decisions while deciding Assam

Coop. Society case [1994 Supp (2) SCC 96]. With respect,

we, therefore, hold that the view taken therein requires

reconsideration as stated earlier by us. In the result, the

order of the Kerala High Court following the decision of this

Court in Assam Coop. Society is reversed. We hold that the

society engaged in the marketing of agricultural produce of

its members would mean not only such societies which deal

with the produce raised by the members who are individuals

or societies which are members thereof who may have

purchased such goods from the agriculturists. Thus, we

allow the civil appeal by setting aside the order made by the

High Court and answering the question referred to us in the

affirmative in favour of the assessee and against the

Revenue. There shall be no order as to costs.”

20. We now come to the judgment of this Court in Citizen

Cooperative Society Ltd. (supra). This judgment was concerned with

an assessee who was established initially as a mutually aided

cooperative credit society, having been registered under section 5 of

the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995.

As operations of the assessee began to spread over States outside the

State of Andhra Pradesh, the assessee got registered under the Multi38

State Cooperative Societies Act, 2002 as well. The question that the

Court posed to itself was as to whether the appellant was barred from

claiming deduction in view of Section 80P(4) of the IT Act – see

paragraph 5. After setting out the findings of fact in that case, and the

income tax authorities concurrent holding that the society is carrying on

banking business and for all practical purposes acts like a co-operative

bank, this Court then held as follows:

“18. We may mention at the outset that there cannot be any

dispute to the proposition that Section 80-P of the Act is a

benevolent provision which is enacted by Parliament in

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

39

business of banking and; (ii) those providing credit facilities

to its members.

20. In Kerala State Coop. Mktg. Federation

Ltd. v. CIT [(1998) 5 SCC 48], this Court, while dealing with

classes of societies covered by Section 80-P of the Act, held

as follows:

“6. The classes of societies covered by Section 80-P of the

Act are as follows:

(a) engaged in business of banking and providing credit

facilities to its members;

***

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.”

21. In CIT v. Punjab State Coop. Bank Ltd. [2008 SCC

OnLine P&H 2042], while dealing with an identical issue, the

High Court of Punjab and Haryana held as follows:

“8. The provisions of Section 80-P were introduced with a

view to encouraging and promoting the growth of the

cooperative sector in the economic life of the country and in

pursuance of the declared policy of the Government. The

40

different heads of exemption enumerated in the section are

separate and distinct heads of exemption and are to be

treated as such. Whenever a question arises as to whether

any particular category of an income of a cooperative

society is exempt from tax, then it has to be seen whether

such income fell within any of the several heads of

exemption. If it fell within any one head of exemption…It

means that a cooperative society engaged in carrying on the

business of banking and a cooperative society providing

credit facilities to its members will be entitled for exemption

under this sub-clause. The carrying on the business of

banking by a cooperative society or providing credit facilities

to its members are two different types of activities which are

covered under this sub-clause.

***

13. So, 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

41

admissible to a cooperative bank. However, if it is a primary

agricultural credit society or a primary cooperative

agricultural and rural development bank, the deduction

would still be provided. Thus, cooperative banks are now

specifically excluded from the ambit of Section 80-P of the

Act.

23. Undoubtedly, if one has to go by the aforesaid definition

of “cooperative bank”, the appellant does not get covered

thereby. It is also a matter of common knowledge that in

order to do the business of a cooperative bank, it is

imperative to have a licence from Reserve Bank of India,

which the appellant does not possess. Not only this, as

noticed above, Reserve Bank of India has itself clarified that

the business of the appellant does not amount to that of a

cooperative bank. The appellant, therefore, would not come

within the mischief of sub-section (4) of Section 80-P.

24. So far so good. However, it is significant to point out that

the main reason for disentitling the appellant from getting

the deduction provided under Section 80-P of the Act is not

sub-section (4) thereof. What has been noticed by the

assessing officer, after discussing in detail the activities of

the appellant, is that the activities of the appellant are in

violation of the provisions of MACSA under which it is formed.

It is pointed out by the assessing officer that the assessee is

catering to two distinct categories of people. The first

category is that of resident members or ordinary members.

There may not be any difficulty as far as this category is

concerned. However, the assessee had carved out another

category of “nominal members”. These are those members

who are making deposits with the assessee for the purpose

of obtaining loans, etc. and, in fact, they are not members in

real sense. Most of the business of the appellant was with

this second category of persons who have been giving

deposits which are kept in fixed deposits with a motive to

earn maximum returns. A portion of these deposits is utilised

to advance gold loans, etc. to the members of the first

42

category. It is found, as a matter of fact, that the depositors

and borrowers are quite distinct. In reality, such activity of

the appellant is that of finance business and cannot be

termed as cooperative society. It is also found that the

appellant is engaged in the activity of granting loans to

general public as well. All this is done without any approval

from the Registrar of the Societies. With indulgence in such

kind of activity by the 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 between contributor and recipient is lost in

such case. The other ingredients of mutuality are also found

to be missing as discussed in further paragraphs.]

43

In the present case both the parties to the transaction are

the contributors towards surplus, however, there are no

participators in the surpluses. There is no common consent

of whatsoever for participators as their identity is not

established. Hence, the assessee fails to satisfy the test of

mutuality at the time of making the payments the number in

referred as members may not be the member of the Society

as such the AOP body by the Society is not covered by

concept of mutuality at all.”

26. These are the findings of fact which have remained

unshaken till the stage of the High Court. Once we keep the

aforesaid aspects in mind, the conclusion is obvious,

namely, the appellant cannot be treated as a cooperative

society meant only for its members and providing credit

facilities to its members. We are afraid such a society cannot

claim the benefit of Section 80-P of the Act.”

21. An analysis of this judgment would show that the question of

law that was reflected in paragraph 5 of the judgment was answered in

favour of the assessee. The following propositions may be culled out

from the judgment:

(I) That section 80P of the IT Act is a benevolent provision, which

was enacted by Parliament in order to encourage and promote

the growth of the co-operative sector generally in the economic

life of the country and must, therefore, be read liberally and in

favour of the assessee;

(II) That once the assessee is entitled to avail of deduction, the

entire amount of profits and gains of business that are

44

attributable to any one or more activities mentioned in subsection (2) of section 80P must be given by way of deduction;

(III) That this Court in Kerala State Cooperative Marketing

Federation Ltd. and Ors. (supra) has construed section 80P

widely and liberally, holding that if a society were to avail of

several heads of deduction, and if it fell within any one head of

deduction, it would be free from tax notwithstanding that the

conditions of another head of deduction are not satisfied;

(IV) This is for the reason that when the legislature wanted to

restrict the deduction to a particular type of co-operative society,

such as is evident from section 80P(2)(b) qua milk co-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

45

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. (supra) that the assessing officer and other authorities under the

IT Act could not go behind the registration of the co-operative society in

order to discover as to whether it was conducting business in

accordance with its bye-laws.

23. It is settled law that it is only the ratio decidendi of a judgment

that is binding as a precedent. Thus, in B. Shama Rao v. Union

Territory, Pondicherry (1967) 2 SCR 650, the majority judgment of

Shelat J., speaking for himself and other two learned Judges held:

46

“It is trite to say that a decision is binding not because of its

conclusion but in regard to its ratio and the principle laid

down therein.”

(at page 657)

24. In State of Orissa v. Sudhanshu Sekhar Misra and Ors.

(1968) 2 SCR 154, this Court held:

“A decision is only an authority for what it actually decides.

What is of the essence in a decision is its ratio and not every

observation found therein nor what logically follows from the

various observations made in it. On this topic this is what

Earl of Halsbury L.C. said in Quinn v. Leathem [[1901] AC

495]:

“Now before discussing the case of Allen v. Flood, [1898] AC

1 and what was decided therein, there are two observations

of a general character which I wish to make, and one is to

repeat what I have very often said before, that every

judgment must be read as applicable to the particular facts

proved, or assumed to be proved, since the generality of the

expressions which may be found there are not intended to

be expositions of the whole law, but governed and qualified

by the particular facts of the case in which such expressions

are to be found. The other is that a case is only an authority

for what it actually decides. I entirely deny that it can be

quoted for a proposition that may seem to follow logically

from it. Such a mode of reasoning assumes that the law is

necessarily a logical code, whereas every lawyer must

acknowledge that the law is not always logical at all.”

(at pages 162-163)

25. An illuminating discussion is to be found in the dissenting

judgment of Justice A.P. Sen in Dalbir Singh v. State of Punjab,

(1979) 3 SCR 1059. Since the dissenting judgment refers to a principle

47

of general application, not refuted by the majority, it is worth setting out

this part of the judgment as follows:

“With greatest respect, the majority decision in Rajendra

Prasad case 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 element in the decision. This indeed is the ratio

decidendi. [R.J. Walker & M.G. Walker: The English Legal

System. Butterworths, 1972, 3rd Edn., pp. 123-24] It is not

everything said by a judge when giving judgment that

constitutes a precedent. The only thing in a judge's decision

binding a party is the principle upon which the case is

decided and for this reason it is important to analyse a

decision and isolate from it the ratio decidendi. In the

48

leading case of Qualcast (Wolverhampton) Ltd.

v. Haynes [LR 1959 AC 743] it was laid down that the ratio

decidendi may be defined as a statement of law applied to

the legal problems raised by the facts as found, upon which

the decision is based. The other two elements in the

decision are not precedents. The judgment is not binding

(except directly on the parties themselves), nor are the

findings of facts. This means that even where the direct facts

of an earlier case appear to be identical to those of the case

before the court, the judge is not bound to draw the same

inference as drawn in the earlier case.”

(at pages 1073-1074)

26. Applying the aforesaid decisions, it is clear that the ratio

decidendi in Citizen Cooperative Society Ltd. (supra) would not

depend upon the conclusion arrived at on facts in that case, the case

being an authority for what it actually decides in law and not for what

may seem to logically follow from it. Thus, the statement of the

principles of law applicable to the legal problems disclosed by the facts

alone is the binding ratio of the case, which as has been stated

hereinabove, is contained in paragraphs 18 to 23 of the judgment.

Paragraphs 24 to 26, being the judgment based on the combined effect

of the statements of the principle of law applicable to the material facts

of the case cannot be described as the ratio decidendi of the judgment.

Nor can it be said that it would logically follow from the finding on facts

that the assessing officer can go behind the registration of a society

49

and arrive at a conclusion that the society in question is carrying on

illegal activities. On this score alone, the Full Bench’s understanding of

this judgment has to be faulted and is set aside.

27. However, this does not conclude the issue in the present case.

We now turn to the proper interpretation of Section 80P of the IT Act.

Firstly, the marginal note to Section 80P which reads “Deduction 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

50

defined in Section 2(19) of the IT Act, as being a co-operative society

registered either under the Co-operative Societies Act, 1912 or under

any other law for the time being in force in any State for the registration

of co-operative societies. This, therefore, refers only to the factum of a

co-operative society being registered under the 1912 Act or under the

State law. For purposes of eligibility, it is unnecessary to probe any

further as to whether the co-operative society is classified as X or Y.

29. Thirdly, the gross total income must include income that is

referred to in sub-section (2).

30. Fourthly, sub-clause (2)(a)(i) with which we are directly

concerned, then speaks of a co-operative society being “engaged in”

carrying on the business of banking or providing credit facilities to its

members. What is important qua sub-clause (2)(a)(i) is the fact that the

co-operative society must be “engaged in” the providing credit facilities

to its members. As has been rightly pointed out by the learned

Additional Solicitor General, the expression “engaged in”, as has been

held in Commissioner of Income Tax, Madras v. Ponni Sugars and

Chemicals Ltd. (2008) 9 SCC 337, would necessarily entail an

examination of all the facts of the case. This Court in Ponni Sugars

and Chemicals Ltd. (supra) held:

51

“20. In order to earn exemption under Section 80-P(2) a

cooperative society must prove that it had engaged itself in

carrying on any of the several businesses referred to in subsection (2). In that connection, it is important to note that

under sub-section (2), in the context of cooperative society,

Parliament has stipulated that the society must be engaged

in carrying on the business of banking or providing credit

facilities to its members. Therefore, in each case, the

Tribunal was required to examine the memorandum of

association, the articles of association, the returns of income

filed with the Department, the status of business indicated in

such returns, etc. This exercise had not been undertaken at

all.”

31. The learned Additional Solicitor General relied upon the

second proviso to section 2(oaa) of the Kerala Act, and argued that

given the fact that the principal object in most, if not all, of the

Appellants before us has not been fulfilled, these Appellants have lost

all characteristics of being primary agricultural credit societies. In

answer to this 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

52

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 to claim

the deduction under Section 80P. Therefore, the assessing officer

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. Such fact finding enquiry (see section 133(6) of the IT Act)

would entail examining all relevant facts of the co-operative society in

question to find out whether it is, as a matter of fact, providing credit

facilities to its members, whatever be its nomenclature. Once this task

is fulfilled by the assessee, by placing reliance on such facts as would

53

show that it is engaged in providing credit facilities to its members, the

assessing officer must then scrutinize the same, and arrive at a

conclusion as to whether this is, in fact, so.

33. Sixthly, what is important to note is that, as has been held in

Kerala State Cooperative Marketing Federation Ltd. and Ors.

(supra) 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 80P(2)(a)(iii) to (v), which expressly speaks of

agriculture. It must also further be contrasted with sub-clause (b),

which speaks only of a “primary” society engaged in supplying milk etc.

thereby defining which kind of society is entitled to deduction, unlike

the provisions contained in section 80P(2)(a)(i). Also, the proviso to

section 80P(2), when it speaks of sub-clauses (vi) and (vii), further

restricts the type of society which can avail of the deductions contained

in those two sub-clauses, unlike any such restrictive language in

Section 80P(2)(a)(i). Once it is clear that the co-operative society in

question is providing credit facilities to its members, the fact that it is

providing credit facilities to non-members does not disentitle the society

54

in question from availing of the deduction. 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.

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

55

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 maximum

deduction of Rs.50,000/- under sub-clause (c).

35. Eighthly, 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.

36. Coming to the provisions of section 80P(4), it is important to

advert to speech of the Finance Minister dated 28.02.2006, which

reflects the need for introducing section 80P(4). Shri P. Chidambaram

specifically stated:

“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.”

37. Likewise, a Circular dated 28.12.2006, containing explanatory

notes on provisions contained in the Finance Act, 2006, is also

important, and reads as follows:

56

“Withdrawal of tax benefits available to certain cooperative

banks

xxx xxx xxx

22.2. The cooperative banks are functioning at par with

other commercial banks, which do not enjoy any tax benefit.

Therefore section 80P has been amended and a new subsection (4) has been inserted to provide that the provisions

of the said section shall not apply in relation to any cooperative 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.”

38. A clarification by the CBDT, in a letter dated 09.05.2008, is

also important, and states as follows:

“Subject: Clarification regarding admissibility of deduction

under section 80P of the Income Tax Act, 1961.

xxx xxx xxx

2. In this regard, I have been directed to state that subsection(4) of section 80P provides that deduction under the

said section shall not be allowable to any co-operative bank

other than a primary agricultural credit society 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 Co57

operative Bank and a primary Co-operative bank.

4. Thus, if the Delhi Co-op Urban T & C Society Ltd. does

not 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 section 5(b) of the Banking Regulation Act, 1949, which

means the accepting, for the purpose of lending or investment, of

deposits of money from the public. Likewise, under section 22(1)(b) of

the Banking Regulation Act, 1949 as applicable to co-operative

societies, no co-operative society shall carry on banking business in

India, unless it is a co-operative bank and holds a licence issued in that

behalf by the RBI. As opposed to this, a primary agricultural credit

society is a co-operative society, the primary object of which is to

58

provide financial accommodation to its members for agricultural

purposes or for purposes connected with agricultural activities.

40. As a matter of fact, some primary agricultural credit societies

applied for a banking licence to the RBI, as their bye-laws also contain

as one of the objects of the Society the carrying on of the business of

banking. This was turned down by the RBI in a letter dated 25.10.2013

as follows:

“Application for license

Please refer to your application dated April 10, 2013

requesting for a banking license. On a scrutiny of the

application, we observe that you are registered as a Primary

Agricultural Credit Society (PACS).

In this connection, we have advised RCS vide letter dated

UBD (T) No. 401/10.00/16A/2013-14 dated October 18,

2013 that in terms of Section 3 of the Banking Regulation

Act, 1949 (AACS), PACS are not entitled for obtaining a

banking license. Hence, your society does not come under

the purview of Reserve Bank of India. RCS will issue the

necessary guidelines in this regard.”

41. A number of judgments have held that a proviso cannot be

used to cut down the language of the main enactment where such

language is clear, or to exclude by implication what the main enactment

clearly states. Thus, in CIT, Mysore v. Indo Mercantile Bank 1959

Supp. (2) SCR 256, this Court held:

59

“The proper function of a proviso is that it qualifies the

generality of the main enactment by providing an exception

and taking out as it were, from the main enactment, a

portion which, but for the proviso would fall within the main

enactment. Ordinarily it is foreign to the proper function of a

proviso to read it as providing something by way of an

addendum or dealing with a subject which is foreign to the

main enactment. “It is a fundamental rule of construction

that a proviso must be 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

clearly falls within its express terms.”

The territory of a proviso therefore is to carve out an

exception to the main enactment and exclude something

which otherwise would have been within the section. It has

60

to operate in the same field and if the language of the main

enactment is clear it cannot be used for the purpose of

interpreting the main enactment or to exclude by implication

what the enactment clearly says unless the words of the

proviso are such that that is its necessary effect. (Vide

also Corporation of City of Toronto v. Attorney-General for

Canada [(1946) AC 32, 37].”

(at page 266-267)

42. To similar effect, a two-Judge Bench of this Court in

Tribhovandas Haribhai Tamboli v. Gujarat Revenue Tribunal (1991)

3 SCC 442 held:

“6. 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

by the proviso and to no other. 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 to confine to that case. Where

the language of the main enactment is explicit and

unambiguous, the proviso can have no repercussion on the

interpretation of the main enactment, so as to exclude from

it, by implication what clearly falls within its express terms.

The scope of the proviso, therefore, is to carve out an

exception to the main enactment and it excludes something

which otherwise would have been within the rule. It has to

operate in the same field and if the language of the main

enactment is clear, the proviso cannot be torn apart from the

main enactment nor can it be used to nullify by implication

what the enactment clearly says nor set at naught the real

object of the main enactment, unless the words of the

proviso are such that it is its necessary effect.”

61

43. Another two-Judge Bench in J.K. Industries Ltd. v. Chief

Inspector of Factories and Boilers (1996) 6 SCC 665 then declared:

“33. A proviso to a provision in a statute has several

functions and while interpreting a provision of the statute,

the court is required to carefully scrutinise and find out the

real object of the proviso appended to that provision. It is not

a proper rule of interpretation 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

would be ultra vires of the main provision and struck down.

As a general rule in construing an enactment containing a

proviso, it is proper to construe the provisions together

without making either of them redundant or otiose. Even

where the enacting part is clear, it is desirable to make an

effort to give meaning to the proviso with a view to justify its

necessity.

62

36. While dealing with proper function of a proviso, this

Court in CIT v. Indo Mercantile Bank Ltd. [AIR 1959 SC 713:

(1959) 36 ITR 1] opined:

“The proper function of a proviso is that it qualifies the

generality of the main enactment by providing an exception

and taking out as it were, from the main enactment, a

portion which, but for the proviso would fall within the main

enactment. Ordinarily it is foreign to the proper function of a

proviso to read it as providing something by way of an

addendum or dealing with a subject which is foreign to the

main enactment.”

This view has held the field till date.”

44. More recently, in Union of India v. Dileep Kumar Singh

(2015) 4 SCC 421, this Court held as follows:

“20. Equally, it is settled law that a proviso does not travel

beyond the provision to which it is a proviso. Therefore, 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. This is

laid down in Dwarka Prasad v. Dwarka Das Saraf [(1976) 1

SCC 128], as follows:

“18. We may mention in fairness to counsel that the

following, among other decisions, were cited at the Bar

bearing on the uses of provisos in statutes: CIT v. IndoMercantile Bank Ltd. [AIR 1959 SC 713]; Ram Narain Sons

Ltd. v. CST [AIR 1955 SC 765]; Thompson v. Dibdin [1912

AC 533], AC p. 541; R. v. Dibdin [1910 P 57 (CA)],

and Tahsildar Singh v. State of U.P. [AIR 1959 SC 1012].

The law is trite. A proviso must be limited to the subjectmatter of the enacting clause. It is a settled rule of

construction that a proviso must prima facie be read and

63

considered in relation to the principal matter to which it is a

proviso. It is not a separate or independent enactment.

‘Words are dependent on the principal enacting words to

which they are tacked as a proviso. They cannot be read as

divorced from their context’ (Thompson v. Dibdin [1912 AC

533]). If the rule of construction is 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 there. Further, section 80P(4) is to be read as a proviso, which

proviso now specifically excludes co-operative banks which are co64

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 the RBI. Judged by this touchstone, it is clear that the

impugned Full Bench judgment is wholly incorrect in its reading of

Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once

section 80P(4) is out of harm’s way, 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.

46. It must also be mentioned here that unlike the Andhra Act that

Citizen Cooperative Society Ltd. (supra) considered, ‘nominal

members’ are ‘members’ as defined under the Kerala Act. This Court in

U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v.

Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287

referred to section 80P of the IT Act and then held:

“8. The expression “members” is not defined in the Act.

Since a cooperative society has to be established under the

provisions of the law made by the State Legislature in that

regard, the expression “members” in Section 80-P(2)(a)(i)

must, therefore, be construed in the context of the

65

provisions of the law enacted by the State Legislature under

which the cooperative society claiming exemption has been

formed. It is, therefore, necessary to construe the

expression “members” in Section 80-P(2)(a)(i) of the Act in

the light of the definition of that expression as contained in

Section 2(n) of the Cooperative Societies Act. The said

provision reads as under:

“2. (n) ‘Member’ means a person who joined in the

application for registration of a society or a person admitted

to membership after such registration in accordance with the

provisions of this Act, the rules and the bye-laws for the time

being in force but a reference to ‘members’ anywhere in this

Act in connection with the possession or exercise of any

right or power or the existence or discharge of any liability or

duty shall not include reference to any class of members

who by reason of the provisions of this Act do not possess

such right or power or have no such liability or duty;””

Considering the definition of ‘member’ under the Kerala Act, loans

given to such nominal members would qualify for the purpose of

deduction under section 80P(2)(a)(i).

47. Further, unlike the facts in Citizen Cooperative Society Ltd.

(supra), the Kerala Act expressly permits loans to non-members under

section 59(2) and (3), which reads as follows:

“59. Restrictions on loans.- (1) A society shall not make a

loan to any person or a society other than a member:

Provided that the above restriction shall not be applicable to

the Kerala State Co-operative Bank.

Provided further that, with the general or special sanction of

the Registrar, a society may make loans to another society.

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(2) Notwithstanding anything contained in sub-section (1), a

society may make a loan to a depositor on the security of his

deposit.

(3) Granting of loans to members or to non-members under

sub-section (2) and recovery thereof shall be in the manner

as may be specified by the Registrar.”

Thus, the giving of loans by a primary agricultural credit society to nonmembers is not illegal, unlike the facts in Citizen Cooperative Society

Ltd. (supra).

48. Resultantly, the impugned Full Bench judgment is set aside.

The appeals and all pending applications are disposed of accordingly.

These appeals are directed to be placed before appropriate benches of

the Kerala High Court for disposal on merits in the light of this

judgment.

…………………..………………J.

(R. F. Nariman)

……………..……………………J.

(Navin Sinha)

……………..……………………J.

(K.M. Joseph)

New Delhi.

January 12, 2021.

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