[2023] 12 S.C.R. 318 : 2023 INSC 830
KERALA STATE CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK LTD. KSCARDB
v.
THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
(Civil Appeal No(s).10069 of 2016)
SEPTEMBER 14, 2023
[B.V. NAGARATHNA* AND UJJAL BHUYAN, JJ.]
Issue for consideration: Whether the appellant-assessee, a
co-operative society, is entitled to claim deduction of the whole
of its profits and gains of business attributable to the business of
banking or providing credit facilities to its members who are all
co-operative societies u/s.80P, Income Tax Act, 1961.
Income Tax Act, 1961 – s.80P – Appellant, if a co-operative
bank within the scope and meaning of sub-section (4) of
s.80P and thus, not eligible to the benefit of deduction as
provided therein:
Held: No – Appellant is not a co-operative bank within the meaning
of sub-section (4) of s.80P of the 1961 Act – Appellant is a cooperative credit society u/s.80P(2)(a)(i) of the 1961 Act whose
primary object is to provide financial accommodation to its members
who are all other co-operative societies and not members of the
public – If a cooperative society does not transact the business
of banking as defined in clause (b) of s.5 of the BR Act, 1949, it
would not be a cooperative bank – Then the definitions under the
NABARD Act, 1981 would not apply – If a co-operative society
is not a co-operative bank, then such an entity would be entitled
to deduction but on the other hand, if it is a co-operative bank
within the meaning of s.56 of BR Act, 1949 r/w the provisions of
NABARD Act, 1981 then it would not be entitled to the benefit of
deduction under sub-section (4) of s.80P of the 1961 Act – In the
present case, although the appellant society is an apex cooperative
society within the meaning of the State Act, 1984, it is not a cooperative bank within the meaning of s.5(b) r/w s.56 of the BR Act,
1949 – Order(s) of the Kerala High Court and other authorities to
the contrary set aside – Appellant is not a co-operative bank and
neither has it been so declared under the provisions of NABARD
Act, 1981 or the State Act – Appellant entitled to the benefit of
* Author
[2023] 12 S.C.R. 319
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
deduction u/s.80P of the 1961 Act – Banking Regulation Act,
1949 – ss.2(c), 5, 56 – National Bank for Agriculture and Rural
Development Act, 1981 – ss.2(d), (u), (v)-(x) – Kerala Co-operative
Societies Act, 1969 – s.110 – Kerala State Co-Operative Agricultural
Development Banks Act, 1984 – s.2(a), (d), (iA) – TravancoreCochin Co-operative Societies Act, 1951 – s.10 – Reserve Bank
of India Act, 1934. [Paras 15.8, 15.12 and 15.13]
Income Tax Act, 1961 – s.80P(2)(a)(i) – Distinction between
business of banking and providing credit facilities to its
members by co-operative society:
Held: s.80P speaks about deduction in respect of income of
cooperative societies from the gross total income referred to in
sub-section (2) of the said Section – From the said income, there
shall be deducted, in accordance with the provisions of s.80P, sums
specified in subsection (2), in computing the total income of the
assessee for the purpose of payment of income tax – Sub-section
(2) of s.80P enumerates various kinds of co-operative societies –
Sub-section (2)(a)(i) states that if a co-operative society is engaged
in carrying on the business of banking or providing credit facilities
to its members, the whole of the amount of profits and gains of
business attributable to any one or more of such activities shall
be deducted – The sub-section makes a clear distinction between
business of banking on the one hand and providing credit facilities
to its members by co-operative society on the other – Thus, the
definition of banking u/s.5(b) of the BR Act must be borne in mind
as opposed to providing credit facilities to its members – Banking
Regulation Act, 1949 – s.5(b). [Para 15.1]
Income Tax Act, 1961 – s.80P(4):
Held: Sub-section (4) of s.80P in the present form is in the nature
of an exception which states that the provisions of s.80P shall
apply in relation to any co-operative bank other than a primary
agricultural credit society or a primary co-operative agricultural
and rural development bank – The expressions co-operative
bank and primary agricultural credit society as well as primary
co-operative agricultural and rural development bank are defined
in the Explanation as co-operative bank and primary agricultural
credit society having the meanings respectively assigned to them
in Part V of the BR Act, 1949 – Banking Regulation Act, 1949.
[Para 15.2]
320 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
Banking Regulation Act, 1949 – ss.5(b), (c), 22, 56(o) – ‘banking
company’ – ‘banking’:
Held: Banking company in s.5(c) means any company which
transacts the business of banking in India – “Banking” is defined
in s.5(b) to mean the accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawal by cheque, draft, order or
otherwise – Therefore, a banking company must transact banking
business vis-à-vis the public – Thus, in the first place a co-operative
society must be engaged in banking business as defined in s.5(b)
– For that, s.22 speaks about licence to be obtained by a bank to
do banking business which is modified as per clause (o) of s.56
which states that no cooperative 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 Reserve Bank, subject to such
conditions, if any, as the Reserve Bank may deem fit to impose –
Secondly, a co-operative society must obtain a licence u/s.22, only
if it functions as a co-operative bank and not otherwise – Thus, a
co-operative society including a co-operative credit society which
is not a co-operative bank does not require a licence to function
as such. [Para 15.4]
Banking Regulation Act, 1949 – ss.5(b), 56(c)(i)(cci):
Held: If a co-operative society is not conducting the business of
banking as defined in clause (b) of s.5, BR Act, 1949, it would not
be a co-operative bank and not so within the meanings of a state
co-operative bank, a central co-operative bank or a primary cooperative bank in terms of s.56(c)(i)(cci) – Whereas a co-operative
bank is in the nature of a banking company which transacts the
business of banking as defined in clause (b) of s.5 of the BR Act,
1949 – National Bank for Agriculture and Rural Development Act,
1981 – ss.2(d), (u), (v)-(x). [Para 15.8]
Income Tax Act, 1961 – s.80P(4) – Object and purpose –
Discussed.
Banking Regulation Act, 1949 – s.56 – Object:
Held: Having regard to the Explanation to sub-section (4) of s.80P,
it is necessary to consider Chapter V of the BR Act, 1949 which
states that the said Act shall apply to co-operative societies subject
to modifications made thereunder – s.56 begins with a non-obstante
clause which states that notwithstanding anything contained in any
other law for the time being in force, the provisions of the said
[2023] 12 S.C.R. 321
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
Act, shall apply to, or in relation to, co-operative societies as they
apply to, or in relation to, banking companies subject to certain
modifications – The object of s.56 is to provide a deeming fiction
by equating a co-operative society to a banking company if it is a
co-operative bank within the meaning of the said provision – This
is because Chapter V of the BR Act, 1949, deals with application
of the Chapter to co-operative societies which are co-operative
banks within the meaning of the said chapter – For the purpose
of these cases, what is relevant is that throughout the BR Act,
1949, unless the context otherwise requires, references to a
“banking company” or “the company” or “such company” shall be
construed as references to a co-operative bank – Therefore, while
considering the meaning of a co-operative bank inherently, such a
cooperative society must be a banking company then only it would
be construed as a co-operative bank requiring a licence u/s.22 of
BR Act, 1949 in order to function as such a bank – Income Tax
Act, 1961 – s.80P(4). [Paras 15.4 and 15.9]
Banking Regulation Act, 1949 – s.56 – ‘co-operative bank’ –
National Bank for Agriculture and Rural Development Act,
1981 – s.2(u) – Banking Regulation Act, 1949 – ss.2(c), and 22:
Held: When the definition of “co-operative bank” in s.56 of BR Act,
1949 is viewed in terms of s.2(u) of the NABARD Act, 1981, it is
clear that only a state co-operative bank would be within the scope
and meaning of a banking company u/s.2(c) of the BR Act, 1949
on obtaining licence u/s.22 of the said Act. [Para 15.14]
Mavilayi Service Co-operative Bank Limited vs.
Commissioner of Income Tax, Calicut, (2021) 7 SCC 90;
Apex Co-operative Bank of Urban Bank of Maharashtra
and Goa Ltd. vs. Maharashtra State Co- operative Bank
Ltd., (2003) 11 SCC 66:[2003] 4 Suppl. SCR 1071;
Thalappalam Service Coop. Bank Ltd. vs. State of
Kerala, (2013) 16 SCC 82:[2013] 14 SCR 475; Union
of India vs. Rajendra N. Shah, 2021 SCC OnLine SC
474; Citizen Co-operative Society Ltd. vs. Commissioner
of Income Tax, (2017) 9 SCC 364:[2017] 9 SCR 361;
Kerala State Coop. Mktg. Federation Ltd. vs. CIT, (1998)
5 SCC 48:[1998] 3 SCR 443 – referred to.
A.P. Varghese vs. The Kerala State Co-operative Bank
Ltd. AIR 2008 Ker 91 – referred to.
CIT vs. Punjab State Coop. Bank Ltd., (2008) 300 ITR
24 – referred to.
322 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
CIVIL APPELLATE JURISDICTION : Civil Appeal No.10069 of 2016
[From the Judgment and Order dated 08.08.2016 of the Commissioner
of Income Tax (Appeals), Trivandrum in I.T.A. No.08 of 2016
(Assessment Year 2013-2014)]
With
Civil Appeal Nos.5005-5007 of 2019, 5889, 5890, 5891 of 2023 and
3881-3882 of 2019
N Venkataraman, A.S.G., Krishnan Venugopal, Mrs. Sonia Mathur, Sr.
Advs., Deepak Prakash, Krishnan Agarwal, Raneev Dahiya, Pawan
Kr. Dabas, Rahul Lakhera, Nachiketa Vajpayee, Ms. Divyangna Malik,
Ms. Vishnu Priya, Shyam Nair, Biju P Raman, Ms. Divyagana, Raj
Bahadur Yadav, S A Haseeb, Mrs. Praveena Gautam, H R Rao, Mrs.
Nisha Bagchi, V. Chandrashekhara Bharathi, Ms. Shruti Shiv Kumar,
Ms. Amritha C. Mouli, Rahul Vijaya Kumar, Siddharth Sinha, Advs.
for the appearing parties.
The Judgment of the Court was delivered by
NAGARATHNA, J.
Leave granted in those Special Leave Petitions where it has not yet been
granted.
2. These appeals arise out of analogous proceedings against the
appellant/assessee, and, inter alia, impugn the judgement dated
26.11.2015 passed by the Kerala High Court; the order dated
08.08.2016 passed by the Commissioner of Income Tax (Appeals),
Trivandrum and the order dated 07.02.2019 passed by the Income
Tax Appellate Tribunal (‘ITAT’).
3. The issue involved in these cases is, whether, the appellant/assessee,
a co-operative society, is entitled to claim deduction of the whole
of its profits and gains of business attributable to the business of
banking or providing credit facilities to its members who are all cooperative societies under Section 80P of the Income Tax Act, 1961
(hereinafter referred to as “the Act”, for the sake of brevity).
Since the question of law involved in these proceedings are common,
the facts only in SLP(C) No(s). 2737 of 2016 impugning the judgement
of the High Court of Kerala dated 26.11.2015 are narrated.
[2023] 12 S.C.R. 323
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
4. The facts, in a nutshell, are that the appellant/assessee is a Statelevel Agricultural and Rural Development Bank governed by as a
co-operative society under the Kerala Co-operative Societies Act,
1969 (hereinafter referred to as the “State Act, 1969” for the sake of
brevity) and is engaged in providing credit facilities to its members
who are co-operative societies only. Initially in the year 1951, the
appellant/assessee got registered under Section 10 of the TravancoreCochin Co-operative Societies Act, 1951 (for short, “State Act, 1951”).
On 04.10.1956, the appellant received a Registration Certificate
bearing No. 4017 from the Registrar of Co-operative Societies,
Trivandrum, recognizing it as a co-operative Central Land Mortgage
Bank incorporated on the basis of limited liability under Section 10
of the State Act, 1951 (X of 1952). The office of the Registrar of Cooperative Societies, Trivandrum further addressed a communication
dated 17.11.1961 bearing No. 36444/61.PR2 including the rules
relating to Retirement Benefit Fund and Staff Benefit Fund for Kerala
Co-operative Central Mortgage Bank Ltd.
5. The Kerala Co-operative Societies Act, 1969 was enacted in order
to, inter alia, provide for the orderly development of the co-operative
sector in the State and to unify the law relating to co-operative
societies in the State. Vide Section 110 of the State Act, 1969, the
State Act, 1951 (X of 1952) was repealed. Therefore, the appellant/
assessee came to be registered and regulated under the State Act,
1969. The appellant/assessee being the Kerala State Co-operative
Agricultural and Rural Development Bank Ltd., Thiruvananthapuram,
is also included in Schedule I of the State Act, 1969 as regards the
application of the Section 80(3A) thereof that postulates that when
direct recruitments ‘is resorted to’ the same ‘shall be made from
a select list of candidates furnished by the Kerala Public Service
Commission.’
6. The State Act, 1969 defines “co-operative society with limited liability”
in Section 2(g) as a society in which the liability of its members for the
debts of the society in the event of its being wound up is limited by its
bye-laws (i) to the amount, if any, unpaid on the shares respectively
held by them; or (ii) to such amount as they may, respectively,
undertake to contribute to the assets of the society.
7. It would also be apposite to take note of the Kerala State Co-Operative
Agricultural Development Banks Act, 1984 (for short, “State Act,
324 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
1984”). This Act was passed ‘to facilitate the more efficient working
of Co-operative “Agricultural and Rural Development Banks” in the
State of Kerala.’
8. Section 2(a) of the State Act, 1984 defines “Agricultural and Rural
Development Bank” to mean “the Kerala Co-operative Central Land
Mortgage Bank Limited, registered under Section 10 of the State Act,
1951 (X of 1952), and provides that the same shall be known as
the “Kerala State Co-operative Agricultural and Rural Development
Bank Limited” which is the name of the appellant herein. Section
2(d) thereof defines “co-operative society” to mean a co-operative
society registered or deemed to be registered under the State Act,
1969 (21 of 1969). It is apposite to note that Section 2(iA) of the
said Act defines “Rural Development” to mean any activity intended
to promote the development in rural area and includes the following
developmental activities: i) Development of handicrafts and other
crafts; ii) Small Industries; iii) Cottage and Village Industries; iv)
Industries in tiny and decentralized section; and v) Rural housing
needs of the rural-population.
9. Having considered the evolution of the statutory framework that
governs the appellant/assessee, it would be appropriate to briefly
state relevant facts giving rise to these appeals.
9.1 On 27.10.2007 the appellant/assessee filed its Return of
Income for the Assessment Year 2007-08 of Rs. 27,18,052
claiming deduction under Section 80P (2)(a)(i) of the Act. Upon
scrutiny, on 22.12.2009 an Assessment Order under Section
143(3) of the Act, was passed by the Assessing Officer for
the Assessment Year 2007-08, disallowing the deduction of
Rs. 36,39,87,058 under Section 80P(2)(a)(i) holding that the
appellant/assessee is neither a primary agricultural credit society
nor a primary co-operative agricultural and rural development
bank. The Assessing Officer held the appellant/assessee is a
“co-operative bank” and thus, was hit by the provisions of Section
80(P)(4) and was not entitled to the benefit of Section 80(P)
(2) of the Act. The Assessing Officer observed that with effect
from 01.04.2007, Section 80P was amended by the insertion
of sub-section (4) as per which the provisions of Section 80P
shall not apply to any co-operative bank other than a primary
[2023] 12 S.C.R. 325
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
agricultural credit society or a primary co-operative agricultural
and rural development bank. The Assessing Officer declared
the appellant/assessee to be neither a primary agricultural
credit society nor a primary co-operative agricultural and rural
development bank, thus, the appellant/assessee’s claim was hit
by Section 80P (4) of the Act. The total income was assessed
at Rs. 36,69,47,233.
9.2 Aggrieved by the Assessment Order dated 27.12.2009, the
appellant/assessee filed an appeal before the Commissioner of
Income Tax (Appeals) (“CIT(A)”). The CIT(A) vide Order dated
30.07.2010 confirmed the disallowance made by the Assessing
Officer. The CIT (A) was of the view that the appellant/assessee
is actively playing the role of a development bank in the State
and is no longer a land mortgage bank but is a development
bank. The appellant/assessee may have earlier been a land
mortgage bank but by virtue of a shift in its activities has become
a development bank and is now governed by the State Act,
1984 and thus, it is in the business of banking as it satisfies all
the tests that are required to qualify as a “co-operative bank”.
CIT (A) further observed that with the insertion of Section 80P
(4), co-operative banks are placed at par with other commercial
banks and the appellant/assessee who is in the business of
banking through its primary co-operative banks is definitely
a co-operative bank within the meaning of Section 80P (4).
Consequently, the appeal was dismissed.
9.3 Being aggrieved by the Order passed by CIT(A), the appellant/
assessee filed further appeal before the Income Tax Appellate
Tribunal (“ITAT”). The ITAT vide Order dated 23.02.2011 partly
allowed the appeal and held that the appellant/assessee is a
co-operative bank and is not a primary agricultural credit society
or a primary co-operative agricultural and rural development
bank and is consequently hit by the provision of Section 80P
(4), thus, the deduction claimed was rightly denied. However,
the ITAT also clarified to the extent that the appellant/assessee
is acting as a State Land Development Bank which falls within
the purview of the National Bank for Agriculture and Rural
Development Act, 1981 (“NABARD Act, 1981”, for short) and is
326 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
exigible for financial assistance from NABARD. Therefore, the
appellant/assessee’s claim merits acceptance and it would be
entitled to deduction under Section 80P(2)(a)(i) on the income
relatable to its lending activities as such a bank.
9.4 Aggrieved by the Order passed by the ITAT in only partly allowing
its appeal, the appellant/assessee preferred an appeal being
ITA No. 103 of 2011 against the ITAT’s Order dated 23.02.2011.
The issue raised by the appellant/assessee was with respect
to the ITAT’s finding that the appellant/assessee was neither
a primary agricultural credit society nor a primary co-operative
agricultural and rural development bank, hence, not entitled for
exemption of its income under Section 80P(2)(a)(i) of the Act.
9.5 On 26.11.2015, the Kerala High Court dismissed the Assessee’s
Appeal, ITA No. 103 of 2011, holding that the ITAT’s findings
do not warrant any interference as the case did not involve
any substantial question of law. Against the Judgment dated
26.11.2015, the appellant/assessee preferred a Special Leave
Petition (C) bearing No. 2737 of 2016. This Court vide Order
dated 01.02.2016, issued notice and granted stay of recovery of
demand made by the Income Tax Authorities from the appellant/
assessee for the AY 2007-08.
Submissions:
10. The submissions of learned senior counsel for the appellant and
learned ASG for the respondent are as under:
10.1 Learned senior advocate, Sri Krishnan Venugopal, at the outset,
submitted that the appellant is aggrieved by the impugned
orders declining to extend the benefit of deduction under
Section 80P of the Act. He submitted that sub-section (4) of
Section 80P is in the nature of an exception which was added
subsequently to Section 80P and the said sub-section excludes
a ‘co-operative bank’ from the benevolent provision. However,
the appellant is not a co-operative bank within the meaning
of the said sub-section. On the other hand, the appellant is a
‘co-operative society’ engaged in providing credit facilities to
its members who are not individuals but are other co-operative
societies and the appellant is an apex co-operative society.
[2023] 12 S.C.R. 327
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
10.2 Highlighting the genesis of the appellant, it was submitted that
the appellant was first registered as a co-operative society
under the State Act, 1951 and was recognised as a co-operative
central land mortgage bank and when the State Act, 1969 was
enacted, it was recognised as a co-operative society under
the said enactment. The State Act, 1951 was repealed by
Section 110 of the State Act, 1969. Section 2(g) of the State
Act, 1969 defines a co-operative society with limited liability.
That on the enactment of the State Act, 1984, Section 2(a)
thereof defines “agricultural and rural development bank” to
mean the Kerala Co-operative Central Land Mortgage Bank
Limited, registered under Section 10 of the State Act, 1951
which is known as “Kerala State Co-operative Agricultural and
Rural Development Bank Limited”. Therefore, the appellant
is not a co-operative bank within the meaning of Section 80P
of the Act.
10.3 Referring to Explanation (a) to sub-section (4) of Section 80P
of the Act which states that a co-operative bank shall have
the same meaning assigned to it in Part V of the Banking
Regulation Act, 1949 (hereinafter referred to as “BR Act, 1949”,
for the sake of convenience), Part V of the BR Act, 1949 which
applies to co-operative banks was adverted to. That Section 56
in Part V of the said Act begins with a non-obstante clause and
it states that notwithstanding anything contained in any other
law for the time being in force, the provisions of the BR Act,
1949 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 the said Act,
unless the context otherwise requires references to a ‘banking
company’ shall be construed as reference to a ‘co-operative
bank’. Further, a co-operative bank is defined to mean a state
co-operative bank, a central co-operative bank and a primary
co-operative bank; that these expressions have the meaning
respectively assigned to them in the NABARD Act, 1981.
10.4 It was contended that the appellant bank is not a banking
company within the meaning of Section 5(c) of the BR Act,
1949 which defines a “banking company” to be any company
which transacts the business of banking in India and Section
328 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
5(b) defines “banking” to mean the accepting, for the purpose
of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque,
draft, order or otherwise. That the appellant is a co-operative
society and not a co-operative bank. That initially the appellant
was registered as land mortgage bank under the provision of
the State Act, 1951. That if an entity is engaged in banking
business then it would be construed as referring to a cooperative bank in which case, under Section 22 of the BR Act,
1949, it is necessary for a company to hold a licence issued
by the Reserve Bank if it has to carry on banking business in
India and such licence is issued subject to such conditions
as the Reserve Bank may think fit to impose. That in the
instant case, the appellant is not a licenced company under
the provisions of the Reserve Bank of India Act, 1934 (“RBI
Act”, for short) as the appellant does not transact ‘banking
business’ and therefore, does not require any licence under
the RBI Act. Reliance was placed on Section 3 of the BR Act,
1949 as it stood earlier which stated that the said Act would
not apply, inter alia, to (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. It was submitted that the appellant is a cooperative credit society engaged in providing credit facilities to
its members and its members are other co-operative societies
which are in the nature of primary societies. The appellant is
not carrying on the business of banking within the meaning
of Section 80P(2)(a)(i) of the Act. That only a co-operative
society which is engaged in the business of banking and is
a co-operative bank within the meaning of Part V of the BR
Act, 1949 would come within the scope of the exclusion under
sub-section (4) of Section 80P of the Act.
10.5 In this context, our attention was drawn to Section 56(o) of
the BR Act, 1949 which states that under Section 22, no cooperative society shall carry out banking business in India
unless it is a co-operative bank and holds a licence issued
in that behalf by the Reserve Bank. That in the instant case,
the appellant does not hold any licence as per Section 22 of
[2023] 12 S.C.R. 329
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
the BR Act, 1949 and in fact such a licence is not required for
the appellant to conduct its business as the appellant is not
conducting banking business within the meaning of BR Act,
1949. Therefore, the appellant bank does not come under the
provisions of Chapter V of the BR Act, 1949. It was submitted
that the Reserve Bank of India reports and the RTI replies
categorically indicate that the appellant is not included under
the scope of the provisions of the RBI Act.
10.6 In this regard, learned senior counsel, Sri Krishnan Venugopal,
took us through various documents appended to the paper
book in order to buttress his submission that appellant is not
a co-operative bank within the meaning of Chapter V of the
BR Act, 1949.
10.7 It was next contended that the judgment of this Court in Mavilayi
Service Co-operative Bank Limited vs. Commissioner of
Income Tax, Calicut, (2021) 7 SCC 90 (“Mavilayi Service
Co-operative Bank”) squarely applies to the case of the
appellant inasmuch as, in the said judgment, the touchstone,
on the basis of which an entity could be considered to be a
co-operative bank or not within the meaning of provision of
BR Act, 1949, has been elucidated. Learned senior counsel
urged that impugned orders may be set aside by applying the
ratio of the judgment in Mavilayi Service Co-operative Bank.
That such an approach has been adopted by the Assessing
Officer as per the remand report.
10.8 Per contra, learned ASG, N. Venkataraman, appearing for
the respondents, at the outset, vehemently contended that
the appellant is “a co-operative bank” and not simply a land
mortgage bank. That Section 80P(2)(a)(i) of the Act applies
to a co-operative society engaged in carrying on business of
banking or providing credit facilities to its members. That the
appellant herein is engaged in the business of banking and
is a co-operative bank within the meaning of Part V of the
BR Act, 1949 and the argument of the appellant that it is not
a co-operative bank, is incorrect. According to learned ASG,
the status of the appellant is in dispute, as, according to the
respondent, the appellant is a co-operative bank while the
330 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
appellant has contended that it is not doing banking business
and therefore is not a co-operative bank but is a co-operative
credit society. Distinguishing the judgment of this Court in
Mavilayi Service Co-operative Bank, it was submitted that
the status of the appellant therein was not in dispute as it
was registered as a primary agriculture society together with
one multi-state co-operative society and therefore such a
society did not require Reserve Bank of India licence but the
appellant is not a primary agriculture credit society but a cooperative bank which is excluded from the benefit of deduction
in respect of its income under the provisions of the Act. It was
therefore submitted that the judgment of this Court in Mavilayi
Service Co-operative Bank does not apply to the appellant
herein. In this regard, learned ASG submitted that any central
or state co-operative bank is a co-operative bank within the
meaning of Section 56 of BR Act, 1949 as it is engaged in
banking business. That the appellant is a state co-operative
bank. Therefore, sub-section (4) of Section 80P excludes the
benefit of deduction in respect of income to such an entity. It
was submitted that impugned orders are just and proper and
do not call for any interference in these appeals which lack
merit and therefore the same may be dismissed.
10.9 By way of reply, learned senior counsel for the appellants
reiterated that the appellant is not engaged in banking business
at all and it receives funds from National Bank for Agriculture
and Rural Development and in turn lends money to its member
societies and in that sense is an apex bank. Reliance was
placed on Section 2(d) of NABARD Act, 1981 to contend that a
central co-operative bank is a principal co-operative society in
a district in a state, the primary object of which is the financing
of other co-operative societies in that district. The appellant is
definitely not a central co-operative bank. That the appellant
is also not a state co-operative bank whose primary object is
the financing of other co-operative societies within the state
as per Section 2(u) of the NABARD Act, 1981. That the Kerala
State Co-operative Bank is an apex bank coming within the
meaning of clause (u) of Section 2 of NABARD Act, 1981 but
not the appellant herein. It was submitted that the appellant
is a scheduled bank functioning within the State of Kerala as
[2023] 12 S.C.R. 331
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
per the Second Schedule of the RBI Act read with Section
2(e) and Section 42 of the said Act. Section 2(e) defines a
scheduled bank in the Second Schedule of RBI Act. The
appellant is bound by the mandate of Section 42 in terms of
cash reserves to be kept with the bank.
10.10 That on a reading of Section 42(1)(d) it becomes clear that a
scheduled bank is distinct from a state co-operative bank as
well as a co-operative bank inasmuch as the aggregate of the
liabilities of a scheduled bank which is not a state co-operative
bank shall be reduced by the aggregate of the liabilities of
such co-operative bank and other bank or institutions to a
scheduled bank. Thus, a bank can be a scheduled bank which
is not a state co-operative bank or a co-operative bank within
the meaning of sub-section (4) of the Section 80P of the Act.
The appellant herein is a scheduled bank which is not a state
co-operative bank or a co-operative bank within the meaning
of the BR Act, 1949.
10.11 Reliance was placed on Apex Co-operative Bank of Urban
Bank of Maharashtra and Goa Ltd. vs. Maharashtra State
Co-operative Bank Ltd., (2003) 11 SCC 66 (“Apex Cooperative Bank of Urban Bank of Maharashtra and Goa
Ltd.”) with particular reference to paragraphs 11 to 13 and
18 and the case of A.P. Varghese vs. The Kerala State Cooperative Bank Ltd. reported in AIR 2008 Ker 91 (“A.P.
Varghese”) wherein the definition of co-operative bank as
per section 56(cci) of the BR Act, 1949 was considered with
particular reference to paragraphs 7 and 8, to contend that the
Kerala State Co-operative Bank is a state co-operative bank
as defined under the provisions of the NABARD Act, 1981
and the district co-operative banks are central co-operative
banks as defined in that Act. Hence, they are co-operative
banks falling within the notification dated 28.01.2003 issued
under the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (for short,
“SARFAESI Act, 2002”). It was contended that the Kerala
State Co-operative Bank is a state co-operative bank which
is an apex bank. That a state co-operative bank, central cooperative bank in the co-operative sector is engaged in the
332 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
business of banking but the appellant herein is not engaged
in the business of banking within the meaning of BR Act,
1949 and is thus entitled to the benefit of deduction even as
per sub-section (4) of Section 80P of the Act as it is not a
co-operative bank.
10.12 In this regard, our attention was drawn to the provisions of
State Act, 1969, namely, Section 2(rb) which defines a “state
co-operative bank”; Section 2(ia) which defines a “district
co-operative bank”; Section 2(ra) which defines a state cooperative agricultural and rural development bank and Section
2(oc) which defines a primary co-operative agricultural and
rural development bank.
10.13 It was further submitted that the appellant herein is Kerala State
Co-operative Agricultural and Rural Development Bank which
is as defined in Section 2(ra) of the State Act, 1969 and which
is an apex bank having only primary co-operative agricultural
and rural development banks as its members as defined
under Section 2(oc) of the State Act, 1969 and functioning in
accordance with the State Act, 1984. That Section 2(a) of the
State Act, 1984, defines agricultural and rural development
bank to mean the Kerala Co-operative Central Land Mortgage
Bank Limited, registered under Section 10 of the State Act, 1951
which is known as “Kerala State Co-operative Agricultural and
Rural Development Bank Limited”. This bank is different from
“Kerala State Co-operative Bank” which is a state co-operative
bank defined under the NABARD Act, 1981. Therefore, the
benefit of Section 80P of the Act was sought by the appellant.
Points for Consideration:
11. Having heard learned senior counsel for the petitioner and learned
ASG for the respondent, the following points would arise for our
consideration:
i) Whether the appellant is a “co-operative bank” within the
meaning of sub-section (4) of Section 80P of the Act?
ii) Whether the ratio of the judgment in Mavilayi Service Cooperative Bank and the tests laid down therein apply to the
case of the appellant herein?
[2023] 12 S.C.R. 333
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
iii) What order?
The aforesaid points are inter-connected and shall be considered
together.
Legal Framework:
12. At the outset, it would be necessary to garner together the several
relevant provisions applicable in the present case.
i) The Income Tax Act, 1961 (‘the Act’, for short):
Section 80P of the Act reads as under:
“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 the agricultural produce of 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
334 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
of fish or the purchase of materials and equipment
In connection therewith for the purpose of supplying
them to its members,
the whole of the amount of profits and gains of business
attributable to any one or more of such activities ;
Provided that in the case of a co-operative society falling under
sub-clause (vi), or sub-clause (vii), the rules and bye-laws of
the society restrict the voting rights to the following classes of
its members, namely:-
(1) the individuals who contribute their labour or, as the case
may be, carry on the fishing or allied activities;
(2) the co-operative credit societies which provide financial
assistance to the society;
(3) the State Government’
(b) in the case of 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 of 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,-
[2023] 12 S.C.R. 335
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
(i) where such co-operative society is a consumers’
co-operative society, one hundred thousand rupees.
(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.
(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- 1 or section 80-IA or
section 80J, or section 80JJ, the deduction under sub-section (1) of
this section, in relation to the sums specified in clause (a) or clause
(b) or clause (c) of sub- section (2), shall be allowed with reference
to the income, if any, as referred to in those clauses included in the
gross total income as reduced by the deductions under section
80HH, section 80HHA, section 80HHB, section 80HHC, section
80HHD, section 80- 1, section 80-IA, section 80J and 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.
336 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
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.
ii) The Banking Regulation Act, 1949 (BR ACT, 1949):
The relevant provisions of the BR Act, 1949 are extracted as under.
Section 3 of the said Act as it stood at the relevant point of time reads
as follows:
3. Act to apply to certain co-operative societies in certain
cases.—Nothing in this Act shall apply to—
(a) a primary agricultural credit society; or
(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.
X X X
5. Interpretation.— In this Act, unless there is anything repugnant
in the subject or context,
X X X
(b) “banking” means the accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawal by cheque, draft, order or
otherwise;
(c) “banking company” means any company which transacts the
business of banking in India.
Explanation.—Any company which is engaged in the manufacture of
goods or carries on any trade and which accepts deposits of money
from the public merely for the purpose of financing its business as
such manufacturer or trader shall not be deemed to transact the
business of banking within the meaning of this clause;
[2023] 12 S.C.R. 337
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
X X X
22. Licensing of banking companies.—(1) Save as hereinafter
provided, no company shall carry on banking business in India
unless it holds a licence issued in that behalf by the Reserve Bank
and any such licence may be issued subject to such conditions as
the Reserve Bank may think fit to impose.
(2) Every banking company in existence on the commencement of
this Act, before the expiry of six months from such commencement,
and every other company before commencing banking business in
India, shall apply in writing to the Reserve Bank for a licence under
this section:
Provided that in the case of a banking company in existence on
the commencement of this Act, nothing in sub-section (1) shall be
deemed to prohibit the company from carrying on banking business
until it is granted a licence in pursuance of this section or is by notice
in writing informed by the Reserve Bank that a licence cannot be
granted to it:
Provided further that the Reserve Bank shall not give a notice as
aforesaid to a banking company in existence on the commencement
of this Act before the expiry of the three years referred to in subsection (1) of section 11 or of such further period as the Reserve
Bank may under that sub-section think fit to allow.
(3) Before granting any licence under this section, the Reserve
Bank may require to be satisfied by an inspection of the books of
the company or otherwise that the following conditions are fulfilled,
namely:—
(a) that the company is or will be in a position to pay its present
or future depositors in full as their claims accrue;
(b) that the affairs of the company are not being, or are not likely
to be, conducted in a manner deterimental to the interests of
its present or future depositors;
(c) that the general character of the proposed management of
the company will not be prejudicial to the public interest or the
interest of its depositors;
338 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
(d) that the company has adequate capital structure and earning
prospects;
(e) that the public interest will be served by the grant of a licence
to the company to carry on banking business in India;
(f) that having regard to the banking facilities available in the
proposed principal area of operations of the company, the
potential scope for expansion of banks already in existence
in the area and other relevant factors the grant of the licence
would not be prejudicial to the operation and consolidation
of the banking system consistent with monetary stability and
economic growth;
(g) any other condition, the fulfilment of which would, in the opinion
of the Reserve Bank, be necessary to ensure that the carrying
on of banking business in India by the company will not be
prejudicial to the public interest or the interests of the depositors.
(3A) Before granting any licence under this section to a company
incorporated outside India, the Reserve Bank may require to be
satisfied by an inspection of the books of the company or otherwise
that the conditions specified in sub-section (3) are fulfilled and that
the carrying on of banking business by such company in India will be
in the public interest and that the Government or law of the country
in which it is incorporated does not discriminate in any way against
banking companies registered in India and that the company complies
with all the provisions of this Act applicable to banking companies
incorporated outside India.
(4) The Reserve Bank may cancel a licence granted to a banking
company under this section —
(i) if the company ceases to carry on banking business in India; or
(ii) if the company at any time fails to comply with any of the
conditions imposed upon it under sub-section (1); or
(iii) if at any time, any of the conditions referred to in sub-section
(3) and sub-section (3A) is not fulfilled:
Provided that before cancelling a licence under clause (ii) or clause
(iii) of this sub-section on the ground that the banking company
has failed to comply with or has failed to fulfil any of the conditions
[2023] 12 S.C.R. 339
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
referred to therein, the Reserve Bank, unless it is of opinion that the
delay will be prejudicial to the interests of the company’s depositors
or the public, shall grant to the company on such terms as it may
specify, an opportunity of taking the necessary steps for complying
with or fulfilling such condition.
(5) Any banking company aggrieved by the decision of the Reserve
Bank cancelling a licence under this section may, within thirty days
from the date on which such decision is communicated to it, appeal
to the Central Government.
(6) The decision of the Central Government where an appeal has
been preferred to it under sub-section (5) or of the Reserve Bank
where no such appeal has been preferred shall be final.
X X X
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 co-operative bank, a
central co-operative bank and a primary co-operative bank;
340 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
(ccii) “co-operative credit society” means a co-operative 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 cooperative 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
(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 co-operative society out of
funds provided by the State Government for the purpose;
(ccv) “primary co-operative bank” 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;
[2023] 12 S.C.R. 341
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
(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 co-operative 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;
(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 co-operative 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 co-operative 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);”
X X X
(o) in section 22,—
(i) for sub-sections (1) and (2) the following sub-sections shall be
substituted, namely:—
342 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
“(1) Save as hereinafter provided, no co-operative society shall
carry on banking business in India unless—
(a) [***]
(b) it is a co-operative bank and holds a licence issued in that
behalf by the Reserve Bank, subject to such conditions, if any,
as the Reserve Bank may deem fit to impose:
Provided that nothing in this sub-section shall apply to a
co-operative society, not being a primary credit society or
a co-operative bank carrying on banking business at the
commencement of the Banking Laws (Application to Cooperative Societies) Act, 1965 (23 of 1965), for a period of one
year from such commencement.
Provided further that nothing in this sub-section shall apply to
a primary credit society carrying on banking business on or
before the commencement of the Banking Laws (Amendment)
Act, 2012, for a period of one year or for such further period
not exceeding three years, as the Reserve Bank may, after
recording the reasons in writing for so doing, extend.
(2) Every co-operative society carrying on business as a cooperative bank at the commencement of the Banking Laws
(Application to Co-operative Societies) Act, 1965 (23 of 1965)
shall before the expiry of three months from the commencement,
every co-operative bank which comes into existence as a result
of the division of any other co-operative society carrying on
business as a co-operative bank, or the amalgamation of two
or more co-operative societies carrying on banking business
shall, before the expiry of three months from its so coming into
existence, every primary credit society which had become a
primary co-operative bank on or before the commencement of
the Banking Laws (Amendment) Act, 2012, shall before the
expiry of three months from the date on which it had become a
primary co-operative bank and every co-operative shall before
commencing banking business in India, apply in writing to the
Reserve Bank for a licence under this section:
Provided that nothing in clause (b) of sub-section (1) shall be deemed
to prohibit—
[2023] 12 S.C.R. 343
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
(i) a co-operative society carrying on business as a co-operative
bank at the commencement of the Banking Law (Application
to Co-operative Societies) Act, 1965 (23 of 1965); or
(ii) a co-operative bank which has come into existence as a result
of the division of any other co-operative society carrying on
business as a co-operative bank, or the amalgamation of two
or more co-operative societies carrying on banking business
at the commencement of the Banking Laws (Application to
Co-operative Societies) Act, 1965 (23 of 1965) or at any time
thereafter; or
(iii) [***]
from carrying on banking business until it is granted a licence in
pursuance of this section or is, by a notice in writing notified by the
Reserve Bank that the licence cannot be granted to it.];
(ii) sub-section (3A) shall be omitted;
(iii) in sub-section (4) in clause (iii) the words, brackets, figures and
letter “and sub-section (3A)” shall be omitted;
iii) National Bank for Agriculture and Rural Development Act, 1981
(‘NABARD Act, 1981’, for short):
The relevant provisions of NABARD Act, 1981 are extracted as under
for immediate reference:
2. Definitions.- In this Act, unless the context otherwise requires, -
X X X
(d) “central co-operative bank” means the principal co-operative
society in a district in a State, the primary object of which is the
financing of other co-operative societies in that district:
Provided that in addition to such principal society in a district, or
where there is no such principal society in a district, the State
Government may declare any one or more cooperative societies
carrying on the business of financing other co-operative societies
in that district to be also or to be a central co-operative bank or
central co-operative banks within the meaning of this definition;
X X X
344 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
(u) “State co-operative bank” means the principal co-operative
society in a State, the primary object of which is the financing
of other co-operative societies in the State:
Provided that in addition to such principal society in a State,
or where there is no such principal society in a State, the
State Government may declare any one or more cooperative
societies carrying on business in that State to be also or to be
a State cooperative bank or State co-operative banks within
the meaning of this definition;
(v) “State land development bank” means the co-operative society
which is the principal land development bank (by whatever
name called) in a State and which has as its primary object
the providing of long-term finance for agricultural development:
Provided that, in addition to such principal land development
bank in a State, or where there is no such bank in a State,
the State Government may declare any cooperative society
carrying on business in that State and authorised by the byelaws of such cooperative society to provide long-term finance
for agricultural development to be also or to be a State land
development bank within the meaning of this definition;
(w) words and expressions used herein and not defined but defined
in the Reserve Bank of India Act, 1934, (2 of 1934), shall have
the meanings respectively assigned to them in that Act;
(x) words and expressions used herein and not defined either in
this Act or in the Reserve Bank of India Act, 1934 (2 of 1934),
but defined in the Banking Regulation Act, 1949 (10 of 1949),
shall have the meanings respectively assigned to them in the
Banking Regulation Act, 1949.”
iv) The Reserve Bank of India Act, 1934 (RBI Act):
The relevant provisions of the RBI Act are extracted as under for
immediate reference:
“2.Definitions.- In this Act, unless there is anything repugnant in the
subject or context,-
X X X
(e) “scheduled bank” means a bank included in the Second Schedule;”
[2023] 12 S.C.R. 345
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
v) The Kerala Co-Operative Societies Act, 1969 (State Act, 1969):
The relevant provisions of the State Act, 1969 are extracted as under
for immediate reference:
“2. Definitions.- In this Act, unless the context otherwise requires—
X X X
(g) “co-operative society with limited liability” means a society in
which the liability of its members for the debts of the society in the
event of its being wound up is limited by its bye-laws-
(i) to the amount, if any, unpaid on the shares respectively held
by them; or
(ii) to such amount as they may, respectively, undertake to contribute
to the assets of the society;
X X X
(ia) District Co-operative Bank” means a Central Society having
jurisdiction over one revenue district and having as its members
Primary Agricultural Credit Societies, Urban Co-operative Banks
and the principal object of which is to raise funds to be lent to its
members, including nominal or associate members, which existed
under this Act, immediately before the commencement of the Kerala
Co-operative Societies (Amendment) Act, 2019 and which has ceased
to exist after the commencement of the said Amendment Act.”
X X X
(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;
X X X
346 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
(ra) “State Co-operative Agricultural and Rural Development Bank”
means an apex society having only Primary Co- operative Agricultural
and Rural Development Banks as its members and functioning in
accordance with the provisions contained in the Kerala State Cooperative Agricultural and Rural Development Banks Act, 1984 (20
of 1984)”
(rb) a State Co-operative Bank means an apex society having only
district co-operative banks as its members.
X X X
“110. Repeal and savings.- The Madras Co-operative Societies Act,
1932 (VI of 1932), as in force in the Malabar district referred to in
sub-section (2) of section 5 of the States Re- organisation Act, 1956
(Central Act 37 of 1956) and the Travancore-Cochin Co-operative
Societies Act, 1951 (X of 1952), are hereby repealed.
(2) Notwithstanding the repeal of the Madras Co-operative Societies
Act, 1932 and the Travancore-Cochin Co-operative Societies Act,
1951 and without prejudice to the provisions of sections 4 and 23
of the Interpretation and General Clauses Act, 1125 (VII of 1125),—
(i) all appointments, rules and orders made, notifications and
notices issued, and suits and other proceedings instituted
,under any of the Acts hereby repealed shall, so far as may
be, be deemed to have been respectively made, issued and
instituted under this Act;
(ii) any society existing in the State on the date of the commencement
of this Act which has been registered or deemed to be registered
under any of the aforesaid repealed Acts shall be deemed to
be registered under this Act, and the bye-laws of such society
shall, so far as they are not inconsistent with the provisions of
this Act, continue in force until altered or rescinded.”
vi) The Kerala State Co-Operative Agricultural Development Banks
Act, 1984 (State Act, 1984):
The relevant provisions of the State Act, 1984 are extracted as under
for immediate reference:
[2023] 12 S.C.R. 347
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
“(2) Definitions.- In this Act, unless the context otherwise requires,-
(a) “Agricultural and Rural Development Bank” means the Kerala
Co-operative Central Land Mortgage Bank Limited, registered
under section 10 of the Travancore-Cochin Co-operative
Societies Act, 1951 (X of 1952), which shall hereafter be
known as the “Kerala State Co-operative Agricultural and Rural
Development Bank Limited”;
X X X
(ka) “Kerala State Co-operative Bank” means an apex society having
Primary Agricultural Credit Societies and Urban Co-operative
Banks as its members including nominal or associate members
of the District Co-operative Banks who shall continue as nominal
or associate members of the Kerala State Co-operative Bank;
X X X
(iA) “Rural Development” means any activity intended to promote
the development in rural area and intends the following
developmental activities-
(1) Development of handicrafts and other crafts;
(2) Small Industries;
(3) Cottage and Village industries;
(4) Industries in tiny and decentralized section;
(5) Rural housing needs of the rural-population.
Judicial Precedent:
13. The relevant judgments of this Court as well as the Kerala High
Court, having a bearing on the issues raised in these appeals could
be adverted to at this stage:
a) In Thalappalam Service Coop. Bank Ltd. vs. State of Kerala,
(2013) 16 SCC 82, this Court has referred to Entry 32 of List II
of Seventh schedule of the Constitution in paragraph 26 which
reads as under:
26. The cooperative society is a State subject under Schedule VII
List II Entry 32 to the Constitution of India. Most of the States in
India enacted their own Cooperative Societies Act with a view to
348 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
provide for the orderly development of the cooperative sector in the
State to achieve the objects of equity, social justice and economic
development, as envisaged in the directive principles of State policy,
enunciated in the Constitution of India. For cooperative societies
working in more than one State, the Multi-State Cooperative Societies
Act, 1984 was enacted by Parliament under Schedule VII List I
Entry 44 of the Constitution. The cooperative society is essentially
an association of persons who have come together for a common
purpose of economic development or for mutual help.
(Emphasis by us)
Entry 32 of List II of Seventh Schedule of the Constitution reads
as under:
“32. Incorporation, regulation and winding up of corporations, other
than those specified in List I, and universities; unincorporated trading,
literary, scientific, religious and other societies and associations;
co-operative societies.”
b) This Court in Union of India vs. Rajendra N. Shah, 2021 SCC
OnLine SC 474 while considering the vires of the constitution
(Ninety Seventh Amendment) Act, 2011 has reiterated the
aforesaid position of law.
c) In Apex Co-operative Bank of Urban Bank of Maharashtra
and Goa Ltd., this Court on considering Section 56 of the
BR Act, 1949 along with Section 22 thereof, observed that
the Reserve Bank of India has the right to issue licences to
companies to carry out banking business and no company can
carry on a banking business unless it holds a licence issued
by the Reserve Bank of India. After the amendment to Section
22 of the said Act, certain types of co-operative societies, as
were brought within the purview of the BR Act, 1949, could be
issued a licence by the Reserve Bank of India. Under Section
22, the term “co-operative society” would include all types of
co-operative societies. This Court observed that in other words,
no co-operative society can carry on banking business unless
it falls within the permitted categories set out in Section 22.
The term “co-operative bank” has been defined under Section
5(cci) as a state co-operative bank, a central co-operative bank
[2023] 12 S.C.R. 349
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
and a primary co-operative bank. Thus, the term “co-operative
bank” does not include all co-operative societies. It only includes
the abovementioned three types of societies which function as
banks. By virtue of Section 5(ccvii), the term state co-operative
bank is to be understood as defined in NABARD Act, 1981.
Thus, unless a co-operative society is a state co-operative
bank or a central co-operative bank or a primary co-operative
bank as defined under NABARD Act, 1981, no licence can be
issued by Reserve Bank of India.
It was further explained by this Court that under Section 22(1), a primary
credit society can carry on banking business. However, if a co-operative
society is not a primary credit society, then, to carry on banking business,
it must be a co-operative bank and hold a licence issued by Reserve
Bank of India. Therefore, a co-operative society other than a primary
credit society, has to apply to Reserve Bank of India for licence before
it can commence banking business. However, this does not mean that
Reserve Bank of India can give to any or all co-operative societies, a
banking licence. Reserve Bank of India can give a licence as provided in
Section 22(1) only to a co-operative bank, which is defined under Section
56 of the said Act.
It was further observed by this Court that when a term is specifically defined
in a statute, then, for purposes of that statute, that term cannot bear a
meaning assigned to it in another statute. One cannot ignore the specific
definition given in the BR Act, 1949 and apply some other definition set
out in some other statute. Therefore, a co-operative bank must have the
meaning assigned to it in Section 5(cci) of BR Act, 1949. Reserve Bank
of India cannot go by any other meaning given to the term “co-operative
bank” for purposes of licensing under BR Act, 1949. Reserve Bank of
India has to go by the meaning given to this term in the said Act only.
Therefore, it was concluded that the Reserve Bank of India, by virtue of
its power under Section 22 cannot grant a licence to any co-operative
society unless it is a state co-operative bank or a central co-operative
bank or a primary co-operative bank. For that it would be necessary that
a declaration under the NABARD Act, 1981 be first obtained.
While considering the definition of co-operative society and state cooperative bank under Section 2(f) and Section 2(u) respectively of the
NABARD Act, 1981, it was observed that under the NABARD Act, 1981,
350 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
co-operative society is a society which is registered or deemed to be
registered under the Co-operative Societies Act, 1912 or any other law
relating to co-operative societies for the time being in force in any State.
In the context of the appellant therein, it was observed that the said
entity had not registered under the Co-operative Societies Act, 1912. The
question thus was, whether, the appellant therein was a society registered
under any other law relating to co-operative societies for the time being
in force in any State which would include all laws relating to co-operative
societies which are in force in any State. While interpreting Section 2(f)
of the NABARD Act, 1981 which defines co-operative society, this Court
held that it is only co-operative societies registered under local or State
laws relating to co-operative societies which would be covered under
the said definition. If it is a state co-operative bank, then there would be
a declaration only by the State Government. If a declaration is by the
State Government, it must be in respect of a society which is registered
in that State and which can be regulated by the Registrar of Co-operative
Societies of that State. It was concluded that the words “in any State”
in Section 2(f) of NABARD Act, 1981 would mean that the co-operative
society must be registered under the law in force in any State in which it
wants to operate. It was also observed that use of words “Co-operative
Societies Act, 1912” in the NABARD Act, 1981 also indicates that the
definition is restricted to societies registered under the law relating to
co-operative societies in the State in which they want to operate. Thus,
the term “any other law relating to co-operative societies for the time
being in force in any State” necessarily means only a State law. Further,
under the NABARD Act, 1981, a state co-operative bank has to be the
principal co-operative society in the State, the primary object of which
must be financing other co-operative societies in that State. The proviso
to Section 2(u) of NABARD Act, 1981 enables the State to declare, in
addition to an existing principal society in the State or where there is no
principal society in the State, any one or more co-operative banks as
State co-operative banks. However, this does not mean that the State
Governments can, at their whims and fancies, declare any co-operative
society to be a “State co-operative bank”. Before such a declaration can
be made, the State Government must necessarily be satisfied- (a) that
it is a principal co-operative society in the State; (b) that it is carrying on
business in the State; and (c) that the business is of financing other cooperative societies in that State.
[2023] 12 S.C.R. 351
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
Further, elucidating on the expression “carrying on business in the State” it
was held that the same means carrying on banking business only. Further,
reading of the provisions would make it clear that what is necessary is
that the co-operative society must be carrying on the business of financing
other co-operative societies. The proviso has to be read in light of the
main provision. If read in light of the main provision, it is clear that even
though banking business, as understood in the strict sense, may not be
carried on, yet the business of financing other co-operative societies in
the State must be carried on.
It was ultimately observed that the Reserve Bank of India could not have
granted the licence to the appellants in the said case unless they were first
declared to be a state co-operative bank under the NABARD Act, 1981.
Since, such a declaration was struck down, the Reserve Bank of India
could not have issued licence to carry on banking business. Therefore,
Reserve Bank of India would have to cancel the licence granted by it to
the appellant therein. Hence, a direction was issued to the Reserve Bank
of India to forthwith revoke the banking licence granted to the appellants
therein.
d) In A.P. Varghese, while considering Section 56 of the BR Act,
1949 in the context of co-operative bank which has been defined
to mean a state co-operative bank, a central co-operative bank
and a primary co-operative bank which have been assigned the
definitions under NABARD Act, 1981 and while considering the
definitions of clause (u) and (d) in Section 2 of NABARD Act,
1981, it was observed, inter alia, that a state co-operative bank
is one defined in Section 2(rb) of the State Act, 1969 to mean
an apex society having only district co-operative banks as its
members. District co-operative bank as defined in clause (ia)
of Section 2 of the said Act, is a central society, the principal
object of which is to raise funds to be lent to its members, with
jurisdiction over one revenue district and having as its members
any type of primary societies and federal and central societies
having headquarters in such district.
Therefore, Kerala State Co-operative Bank is a “state co-operative bank”
as defined in the NABARD Act, 1981 and the district co-operative banks
are central co-operative banks as defined in that Act. Hence, they are
“co-operative banks” as defined in Section 5 (cci) of BR Act, 1949, falling
within the BR Act, 1949.
352 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
It was further observed that co-operative banks are further divided into
apex banks and other banks. The Kerala State Co-operative Bank is an
apex bank and the district co-operative banks are other banks. The primary
object or business of the state co-operative bank, the district co-operative
banks and the urban banks in the co-operative sector is the transaction
of banking business.
Further, it was observed that the provisions of the SARFAESI Act and
particularly Section 13 thereof are also applicable to the institutions,
namely, the Kerala State Co-operative Bank Ltd., the district co-operative
banks and the urban co-operative banks.
e) In Citizen Co-operative Society Ltd. vs. Commissioner
of Income Tax, (2017) 9 SCC 364 (“Citizen Co-operative
Society Ltd.”), appellant therein was a co-operative society
which was denied benefit of Section 80P on the ground that it
is a co-operative society of the nature covered by sub-section
(4) of Section 80P of the Act and, therefore, disentitled to get
the benefit. The question, therefore, was whether the appellant
therein was barred from getting deduction in view of subsection (4) of Section 80P of the Act. The assessee therein
was established in the year 1997, initially, as a mutually aided
co-operative credit society registered under Section 5 of the
Andhra Pradesh Mutually Aided Co-operative Societies Act,
1995. As operations of the assessee over the years increased
manifold and as the society spread its activities over the States
of the erstwhile Andhra Pradesh, Maharashtra and Karnataka,
the assessee was registered under the Multi-State Co-operative
Societies Act, 2002. Assessing officer held that the deduction
in respect of income of co-operative societies under Section
80P of the Act was not admissible to the appellant therein as
the said appellant was carrying on banking business for the
public at large and for all practical purposes, it was acting like
a co-operative bank governed by the BR Act, 1949 and its
operation was not only confined to its members but outsiders
as well. The appellant therein being aggrieved by the dismissal
of its appeal by the High Court which had affirmed the order of
the Income Tax Appellate Tribunal, had approached this Court.
[2023] 12 S.C.R. 353
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
On considering the rival submissions, this Court observed that sub-clause
(1) of clause (a) of sub-section (2) of Section 80P recognises two kinds
of co-operative societies, namely, (i) those carrying on the business of
banking and; (ii) those providing credit facilities to its members. In this
regard, reliance was placed on Kerala State Coop. Mktg. Federation
Ltd. vs. CIT, (1998) 5 SCC 48. Also, reference was made to CIT vs.
Punjab State Coop. Bank Ltd., (2008) 300 ITR 24 which is a judgment
of the Punjab and Haryana High Court and it was observed that Section
80P of the Act is a benevolent provision which is enacted by Parliament
in order to encourage and promote growth of co-operative sector in the
economic life of the country. Therefore, such a provision has to be read
liberally, reasonably and in favour of the assessee with a view to effectuate
the object of the Legislature and not to defeat it. Therefore, all those
co-operative societies which fall within the purview of the Section 80P
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). Sub-section (4) of Section 80P inserted by the Finance Act, 2006 is
in the nature of a proviso and such a deduction under the said Section
shall not be admissible to a co-operative bank. Thus, co-operative banks
are now specifically excluded from the ambit of Section 80P of the Act.
The appellant therein was not a co-operative bank and it did not require
a licence of the Reserve Bank of India to conduct its business. Therefore,
it would not come within the mischief of sub-section (4) of Section 80P
of the Act. However, the appellant therein was held to be not entitled to
the benefit under Section 80P of the Act as it was a co-operative society
meant only for its members and providing credit facilities to its member
only. There were resident members or ordinary members but there were
also another category of members called nominal members who were
making deposits with the appellant therein for the purpose of obtaining
loans, etc. and, they were not members in real sense. Most of the business
of the appellant therein was with this second category of persons i.e.
members of the general public who had been giving deposits which were
kept in fixed deposits with a motive to earn maximum returns. Therefore,
this Court held that the depositors and borrowers being distinct, doctrine
of mutuality also did not apply to the activities of the appellant therein.
354 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
f) In Mavilayi Service Co-operative Bank, the appeals before this
Court were filed by the co-operative societies which had been
registered as “primary agricultural credit societies”, together with
one “multi-state co-operative society” raising the question as to,
whether, deductions could be claimed under Section 80P(2)(a)(i)
of the Act and in particular, whether the assessees are entitled
to such deductions after the introduction of Section 80P(4)
of the Act by Section 19 of the Finance Act, 2006 with effect
from 01.04.2007. It was noted that the appellants therein were
providing credit facilities to their members for agricultural and
allied purposes and had been classified as primary agricultural
credit societies by the Registrar of Co-operative Societies under
State Act, 1969, had claimed a deduction under Section 80P(2)
(a)(i) of the Act which had been granted up to assessment year
2007-2008. However, with the introduction of Section 80P(4) of
the Act, the Assessing Officer denied their claims for deduction,
relying upon the said provision.
The Full Bench of the Kerala High Court ultimately held that if the assesseesocieties ceased to be specific class of society for which deduction is
provided, by reason of sub-section (4) of Section 80P of the Act the
deduction could not be allowed. The Full Bench of the Kerala High Court
accordingly answered the question. Being aggrieved, the assessees
approached this Court. It was argued before this Court by the assessees
that co-operative societies which are registered under the said Act are
entitled to deductions under Section 80P. That the insertion of sub-section
(4) to Section 80P of the Act had not led to any change insofar as the
assessees therein were concerned. 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, it is entitled to a
deduction contained in Section 80P(2)(a)(i) of the Act. A distinction was
said to be drawn 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 could be given.
On the other hand, in the said case, it was argued on behalf of the revenue
that a society undeserving of any deduction cannot get a deduction
contrary to what has been sought to be achieved by Section 80P(4) of
the Act. That the judgment of this Court in Citizen Co-operative Society
Ltd. was correctly read by the Full Bench of the Kerala High Court which
[2023] 12 S.C.R. 355
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
is to the effect that the Assessing Officer must assess 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 which such an entity must 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. If it was unable to discharge such burden
then such a society cannot avail of any deduction under Section 80P of
the Act. This Court considered the definition of co-operative society under
clause (19) of Section 2 of the Act in the context of Section 80P of the Act,
specially in light of sub-section (4) thereof as well as Sections 3 and 56
of the BR Act, 1949 and the provisions of State Act, 1969 as well as the
bye-laws of some of the societies and observed in paragraph 18 as under:
“18. 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.”
Further, this Court referred to various judgments of this Court including
Citizen Co-operative Society Ltd. as discussed in paragraphs 24 to 24.5
of the judgment and held that Full Bench of the Kerala High Court had
not properly understood the ratio in Citizen Co-operative Society Ltd.
Also, an analysis of Section 80P was made particularly of sub-section (4)
of the said Section in paragraphs 24 to 24.5 and paragraphs 39 to 43.
Paragraphs 24 to 24.5 and paragraphs 39 to 43 are extracted as under:
24. An analysis of this judgment would show that the question of
law that was reflected in para 5 of the judgment was answered in
favour of the assessee. The following propositions may be culled
out from the judgment in Citizen Coop. Society case:
24.1. That Section 80-P 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;
24.2. That once the assessee is entitled to avail of deduction, the
entire amount of profits and gains of business that are attributable
356 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
to any one or more activities mentioned in sub-section (2) of Section
80-P must be given by way of deduction;
24.3. That this Court in Kerala State Coop. Mktg. Federation Ltd. has
construed Section 80-P 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;
24.4. This is for the reason that when the legislature wanted to restrict
the deduction to a particular type of cooperative society, such as is
evident from Section 80-P(2)(b) qua milk cooperative societies, the
legislature expressly says so — which is not the case with Section
80-P(2)(a)(i)
24.5. That Section 80-P(4) is in the nature of a proviso to the
main provision contained in Sections 80-P(1) and (2). This proviso
specifically excludes only cooperative banks, which are cooperative
societies who must possess a licence from RBI to do banking
business. Given the fact that the assessee in that case was not so
licensed, the assessee would not fall within the mischief of Section
80-P(4).
X X X
39. Coming to the provisions of Section 80-P(4), it is important to
advert to the speech of the Finance Minister dated 28-2-2006, which
reflects the need for introducing Section 80-P(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 80-P of the Income
Tax Act. However, I propose to exclude all other cooperative banks
from the scope of that section.”
40. 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:
[2023] 12 S.C.R. 357
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
“Withdrawal of tax benefits available to certain cooperative banks
***
22.2. The cooperative banks are functioning on a par with other
commercial banks, which do not enjoy any tax benefit. Therefore
Section 80-P has been amended and a new sub-section (4) has
been inserted to provide that the provisions of the said section shall
not apply in relation to any cooperative bank other than a primary
agricultural credit society or a primary cooperative agricultural and
rural development bank. The expressions “cooperative bank”, “primary
agricultural credit society” and “primary cooperative agricultural and
rural development bank” have also been defined to lend clarity to
them.”
41. A clarification by the CBDT, in a letter dated 9-5-2008, is also
important, and states as follows:
“Subject.—Clarification regarding admissibility of deduction under
Section 80-P of the Income Tax Act, 1961.
***
2. In this regard, I have been directed to state that sub-section
(4) of Section 80-P provides that deduction under the said section
shall not be allowable to any cooperative bank other than a primary
agricultural credit society or a primary cooperative agricultural and
rural development bank. For the purpose of the said sub-section,
cooperative 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, “Cooperative Bank”
means a State Cooperative bank, a Central Cooperative Bank and
a primary cooperative bank.
4. Thus, if the Delhi Co-op Urban T & C Society Ltd. does not fall
within the meaning of “Cooperative Bank” as defined in Part V of
the Banking Regulation Act, 1949, sub-section (4) of Section 80-P
will not apply in this case.
5. Issued with the approval of Chairman, Central Board of Direct
Taxes.”
358 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
42. The above material would clearly indicate that the limited object
of Section 80-P(4) is to exclude cooperative banks that function on a
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 cooperative bank cannot be a primary agricultural credit
society, as such cooperative 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
cooperative societies, no cooperative society shall carry on banking
business in India, unless it is a cooperative bank and holds a licence
issued in that behalf by RBI. As opposed to this, a primary agricultural
credit society is a cooperative society, the primary object of which is
to provide financial accommodation to its members for agricultural
purposes or for purposes connected with agricultural activities.
43. As a matter of fact, some primary agricultural credit societies
applied for a banking licence to 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 RBI in a letter dated 25-10-
2013 as follows:
“Application for licence
Please refer to your application dated 10-4-2013 requesting for a
banking licence. 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 18-10-2013 that in terms of
Section 3 of the Banking Regulation Act, 1949 (AACS), PACS are
not entitled for obtaining a banking licence. Hence, your society
does not come under the purview of Reserve Bank of India. RCS
will issue the necessary guidelines in this regard.”
Consequently, the judgment of the Full Bench of the Kerala High Court
was set aside by observing that Section 80P of the Act, being a benevolent
provision enacted by Parliament to encourage and promote the credit of
co-operative sector in general must be read liberally and reasonably, and if
there is any ambiguity, in favour of the assessee. A deduction that is given
[2023] 12 S.C.R. 359
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
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
said case by adding the word “agriculture” into Section 80P(2)(a)(i) when
it is not there. Further, sub-section (4) of Section 80P had to be read as
a proviso, which specifically excludes co-operative banks which are cooperative societies engaged in banking business i.e., engaged in lending
money to members of the public, which have a licence in this behalf from
Reserve Bank of India. Therefore, the benefit of deduction was extended
to the assessee in the said case notwithstanding that they may also be
giving loans to the members which are not related to agriculture. Also, in
case it was found that there are instances of loans being given to nonmembers, profits attributable to such loans obviously cannot be deducted.
Analysis:
14. We shall now analyse the aforesaid judgments in a common
conspectus.
14.1 In Apex Co-operative Bank of Urban Bank of Maharashtra
and Goa Ltd., it was categorically held that under Section 56
of the BR Act, 1949 only three co-operative banks have been
defined, namely, state co-operative bank, central co-operative
bank and primary co-operative bank which are covered under
Section 56 (cci) read with (ccvii) read with the provisions of
the NABARD Act, 1981. Thus, it is only these three banks
which are co-operative banks which require a licence under
the BR Act, 1949 to engage in banking business. If any bank
does not fall within the nomenclature of the aforesaid three
banks as defined under the NABARD Act, 1981, it would not
be a co-operative bank within the meaning of Section 56 of
BR Act, 1949 irrespective of whatever nomenclature it may
have or structure it may possess or incorporated under any
Act. It was further stated that if a bank has to be a state
co-operative bank, there has to be a declaration made by
the State Government in terms of Section 2(u) of NABARD
Act, 1981. Hence, it is necessary to go into the question as
to, whether, the appellant herein has been so declared as a
state co-operative bank. This question would need not detain
us for long as the Kerala High Court in A.P. Varghese had
categorically stated that the “Kerala State Co-operative Bank” is
a “state co-operative bank” as defined under the NABARD Act,
360 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
1981. Therefore, the appellant bank has not been declared as
a state co-operative bank under the provisions of NABARD Act,
1981. Further, in the case of Mavilayi Service Co-operative
Bank, this Court observed that a co-operative bank would
engage in banking business on obtaining a licence under
Section 22(1b) of the BR Act, 1949. In the instant case, the
appellant herein is not a co-operative bank having regard to
the aforesaid conspectus of the provisions so as to require a
licence under the aforesaid provision for carrying on banking
business. In the circumstances, the question could still arise
as to whether the appellant herein is entitled to benefit of
deduction under Section 80P of the Act.
14.2 In Mavilayi Service Co-operative Bank, it has been observed
that Section 80P of the Act is a beneficial provision which
was enacted in order to encourage and promote the growth
of the co-operative sector generally in the economic life of
the country and therefore, has to be read liberally in favour of
the assessee. That once the assessee is entitled to avail of
deduction, the entire amount of profits and gains of business
that are attributable to any one or more activities mentioned
in sub-section (2) of Section 80P must be given by way of
deduction vide Citizen Co-operative Society. This is because
sub-section (4) of Section 80P is in the nature of a proviso to
the main provision contained in sub-sections (1) and (2) of
Section 80P. The proviso excludes co-operative banks, which
are co-operative societies which must possess a licence from
the Reserve Bank of India to do banking business. In other
words, if an entity does not require a licence to do banking
business within the definition of banking under Section5(b)
of the BR Act, 1949, then it would not fall within the scope of
sub-section (4) of Section 80P.
14.3 While analysing Section 80P of the Act in depth, the following
points were noted by this Court:
i) Firstly, the marginal note to Section 80P which reads
“Deduction in respect of income of co-operative societies” is
significant as it indicates the general “drift” of the provision.
ii) Secondly, for purposes of eligibility for deduction, the
assessee must be a “co-operative society”.
[2023] 12 S.C.R. 361
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
iii) Thirdly, the gross total income must include income that
is referred to in sub-section (2).
iv) Fourthly, sub-clause (2)(a)(i) speaks of a co-operative
society being “engaged in”, inter alia, carrying on the
business of banking or providing credit facilities to its
members.
v) Fifthly, the burden is on the assessee to show, by adducing
facts, that it is entitled to claim the deduction under Section
80P.
vi) Sixthly, the expression “providing credit facilities to
its members” does not necessarily mean agricultural
credit alone. It was highlighted that the distinction
between eligibility for deduction and attributability of
amount of profits and gains to an activity is a real one.
Since profits and gains from credit facilities given to nonmembers cannot be said to be attributable to the activity
of providing credit facilities to its members, such amount
cannot be deducted.
vii) Seventhly, under Section 80P(1)(c), the co-operative
societies must be registered either under Co-operative
Societies Act, 1912, or a State Act and may be engaged
in activities which may be termed as residuary activities
i.e. activities not covered by sub-clauses (a) and (b),
either independently of or in addition to those activities,
then profits and gains attributable to such activity are also
liable to be deducted, but subject to the cap specified in
sub-clause (c).
viii) Eighthly, sub-clause (d) states that where interest or
dividend income is derived by a co-operative society from
investments with other co-operative societies, the whole
of such income is eligible for deduction, the object of the
provision being furtherance of the co-operative movement
as a whole.
14.4 In paragraph 42 of Mavilayi Service Co-operative Bank, this
Court observed that the object and purpose of sub-section
(4) of Section 80P is to exclude only co-operative banks that
362 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
function on par with other commercial banks i.e. which lend
money to members of the public. That on a reading of Section
3 read with Section 56 of the BR Act, 1949, the primary cooperative bank cannot be a primary agricultural credit society.
As such co-operative bank must be engaged in the business of
banking as defined by Section 5(b) of the BR Act, 1949, which
means accepting, for the purpose of lending or investment, of
deposits of money from the public. Also under Section 22(1)
(b) of the BR Act, 1949, no co-operative society can carry on
banking business in India, unless it is a co-operative bank and
holds a licence issued in that behalf by Reserve Bank of India.
It was pointed out that as opposed to the above, a primary
agricultural credit society is a co-operative society, the primary
object of which is to provide financial accommodation to its
members for agricultural purposes or for purposes connected
with agricultural activities.
14.5 It was further observed in the said case that some primary
agricultural credit societies had sought for banking licence
from Reserve Bank of India but the same was turned down
by observing that such a society was not carrying on the
business of banking and that it did not come under the purview
of Reserve Bank of India requiring a licence for its business.
14.6 Thereafter in paragraph 48 of the judgment, it was observed
that a deduction that is given without any reference to any
restriction or limitation cannot be restricted or limited by
implication. That sub-section (4) of Section 80P which is in the
nature of a proviso specifically excludes co-operative banks
which are co-operative societies engaged in banking business
i.e. engaged in lending money to members of the public, which
have a licence in this behalf from Reserve Bank of India.
15. It is on the aforesaid touchstone that these appeals must now be
further considered from the point of view of the applicable provisions
of law.
15.1 Section 80P speaks about deduction in respect of income of
co-operative societies from the gross total income referred to
in sub-section (2) of the said Section. From the said income,
there shall be deducted, in accordance with the provisions of
[2023] 12 S.C.R. 363
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
Section 80P, sums specified in sub-section (2), in computing
the total income of the assessee for the purpose of payment
of income tax. Sub-section (2) of Section 80P enumerates
various kinds of co-operative societies. Sub-section (2)(a)(i)
states that if a co-operative society is engaged in carrying
on the business of banking or providing credit facilities to its
members, the whole of the amount of profits and gains of
business attributable to any one or more of such activities
shall be deducted. The sub-section makes a clear distinction
between business of banking on the one hand and providing
credit facilities to its members by co-operative society on the
other. Thus, the definition of banking under Section 5(b) of
the BR Act must be borne in mind as opposed to providing
credit facilities to its members.
15.2 Section 80P was inserted to the Act with effect from 01.04.1968,
however, sub-section (4) was reinserted with effect from
01.04.2007, in the present form. Earlier sub-section (4) was
omitted with effect from 01.04.1970. Sub-section (4) of Section
80P in the present form is in the nature of an exception which
states that the provisions of Section 80P shall apply in relation
to any co-operative bank other than a primary agricultural
credit society or a primary co-operative agricultural and rural
development bank. The expressions co-operative bank and
primary agricultural credit society as well as primary cooperative agricultural and rural development bank are defined
in the Explanation as co-operative bank and primary agricultural
credit society having the meanings respectively assigned to
them in Part V of the BR Act, 1949.
15.3 The controversy in this case is, whether, the appellant entity
is a co-operative bank and if so, it would be covered within
the scope and meaning of sub-section (4) of Section 80P and
therefore, would not be eligible to the benefit of deduction as
provided therein.
15.4 Having regard to the Explanation to sub-section (4) of
Section 80P, it is necessary to consider Chapter V of the BR
Act, 1949 which states that the said Act shall apply to cooperative societies subject to modifications made thereunder.
364 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
Section 56 begins with a non-obstante clause and states that
notwithstanding anything contained in any other law for the
time being in force, the provisions of the said Act shall apply
to, or in relation to, co-operative societies as they apply to,
or in relation to banking companies subject to the following
modifications, namely,
● in clause (a) throughout the said Act, unless the context
otherwise requires,- (i) references to a “banking company”
or “the company” or “such company” shall be construed
as references to a co-operative bank.
● in clause (c), it is stated that in Section 5 as per clause (cci),
“co-operative bank” means a state co-operative bank, a
central co-operative bank and a primary co-operative bank.
● clause (ccv) defines “primary co-operative bank” while
clause (ccvii) defines “central co-operative bank” and
“state co-operative bank” to have the meanings assigned
to them in the NABARD Act, 1981.
Since the expression ‘banking company’ is defined under the BR
Act, 1949, it would be useful to consider the definition of banking
company in Section 5(c) thereof which means any company which
transacts the business of banking in India. “Banking” is defined in
Section 5(b) of the said Act to mean the accepting, for the purpose
of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft,
order or otherwise. Therefore, a banking company must transact
banking business vis-à-vis the public. Thus, in the first place a cooperative society must be engaged in banking business as defined
in Section 5(b) of the said Act. For that, Section 22 of the BR Act,
1949, speaks about licence to be obtained by a bank to do banking
business which is modified as per clause (o) of Section 56 thereof
which states that 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 Reserve Bank, subject to such conditions,
if any, as the Reserve Bank may deem fit to impose. Secondly, a
co-operative society must obtain a licence under Section 22 of the
BR Act, 1949, only if it functions as a co-operative bank and not
otherwise. Thus, a co-operative society including a co-operative
[2023] 12 S.C.R. 365
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
credit society which is not a co-operative bank does not require a
licence to function as such.
15.5 Further, Section 2(d) of NABARD Act, 1981 defines central cooperative bank while Section 2(u) defines a state co-operative
bank to mean the principal co-operative society in a State,
the primary object of which is financing of other co-operative
societies in the State which means, it is in the nature of an
apex co-operative bank having regard to the definition under
Section 56 of the BR Act, 1949, in relation to co-operative bank.
The proviso states that in addition to such principal society
in a State, or where there is no such principal society in a
State, the State Government may declare any one or more
co-operative societies carrying on business of banking in that
State to be also or to be a state co-operative bank or state cooperative banks within the meaning of the definition. Section
2(v) of NABARD Act, 1981 defines state land development
bank to mean the co-operative society which is the principal
land development bank (by whatever name called) in a State
and which has as its primary object the providing of long-term
finance for agricultural development.
15.6 Section 2(w) states that words and expressions used in the
NABARD Act, 1981 which are not defined therein but defined
in the RBI Act, shall have the meanings respectively assigned
to them in that Act. Section 2(x) of the said Act states that
words and expressions used in the NABARD Act, 1981 and
not defined either in the said Act or in the RBI Act, but defined
in the BR Act, 1949, shall have the meanings respectively
assigned to them in the BR Act, 1949. Therefore, we revert
back to BR Act, 1949.
15.7 What is central to the controversy in this batch of cases is,
whether, the appellant bank is a co-operative bank. What is
of significance to know is, a state co-operative bank or central
co-operative bank under the NABARD Act, 1981 is essentially
a principal co-operative society either in a district or in a State,
respectively, the primary object of which is the financing of other
co-operative societies in the district or the State respectively.
Further, NABARD Act, 1981 does not define banking business.
366 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
Hence, reliance is to be placed, on the definition of banking
business in terms of clause (w) of Section 2 of NABARD Act,
1981 which means the RBI Act has to be seen. When the RBI
Act is perused, it is noted that clause (i) of Section 2 defines
“co-operative bank”, “co-operative credit society”, “director”,
“primary agricultural credit society”, “primary co-operative bank”
and “primary credit society” to have the meanings respectively
assigned to them in Part V of the BR Act, 1949. Therefore, we
have to again fall back on Part V of the BR Act, 1949 which
has defined a co-operative bank in Section 56 (c)(i)(cci) to be
a state co-operative bank, a central co-operative bank and
a primary co-operative bank and central co-operative bank
and state co-operative bank to have the same meanings as
NABARD Act, 1981.
15.8 Since the words ‘bank’ and ‘banking company’ are not defined
in the NABARD Act, 1981, the definition in sub-clause (i) of
clause (a) of Section 56 of the BR Act, 1949 has to be relied
upon. It states that a co-operative society in the context of a
co-operative bank is in relation to or as a banking company.
Thus, co-operative bank shall be construed as references
to a banking company and when the definition of banking
company in clause (c) of Section 5 of the BR Act, 1949 is
seen, it means any company which transacts the business
of banking in India and as already noted banking business is
defined in clause (b) of Section 5 to mean the accepting, for
the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise. Thus, it is only
when a co-operative society is conducting banking business
in terms of the definition referred to above that it becomes
a co-operative bank and in such a case, Section 22 of the
BR Act, 1949 would apply wherein it would require a licence
to run a co-operative bank. In other words, if a co-operative
society is not conducting the business of banking as defined
in clause (b) of Section 5 of the BR Act, 1949, it would not be
a co-operative bank and not so within the meanings of a state
co-operative bank, a central co-operative bank or a primary
co-operative bank in terms of Section 56(c)(i)(cci). Whereas
[2023] 12 S.C.R. 367
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
a co-operative bank is in the nature of a banking company
which transacts the business of banking as defined in clause
(b) of Section 5 of the BR Act, 1949. But if a co-operative
society does not transact the business of banking as defined
in clause (b) of Section 5 of the BR Act, 1949, it would not be
a co-operative bank. Then the definitions under the NABARD
Act, 1981 would not apply. If a co-operative society is not a
co-operative bank, then such an entity would be entitled to
deduction but on the other hand, if it is a co-operative bank
within the meaning of Section 56 of BR Act, 1949 read with
the provisions of NABARD Act, 1981 then it would not be
entitled to the benefit of deduction under sub-section (4) of
Section 80P of the Act.
15.9 Section 56 of the BR Act, 1949 begins with a non-obstante
clause which states that notwithstanding anything contained in
any other law for the time being in force, the provisions of the
said Act, shall apply to, or in relation to, co-operative societies
as they apply to, or in relation to, banking companies subject to
certain modifications. The object of Section 56 is to provide a
deeming fiction by equating a co-operative society to a banking
company if it is a co-operative bank within the meaning of the
said provision. This is because Chapter V of the BR Act, 1949,
deals with application of the Chapter to co-operative societies
which are co-operative banks within the meaning of the said
chapter. For the purpose of these cases, what is relevant is
that throughout the BR Act, 1949, unless the context otherwise
requires, - references to a “banking company” or “the company”
or “such company” shall be construed as references to a cooperative bank. Therefore, while considering the meaning of
a co-operative bank inherently, such a co-operative society
must be a banking company then only it would be construed
as a co-operative bank requiring a licence under Section 22
of BR Act, 1949 in order to function as such a bank.
15.10 Further, while considering the definition of a co-operative bank
under Section 56(cci) of the BR Act, 1949, to mean a state
co-operative bank, a central co-operative bank and a primary
co-operative bank which is defined in (ccviii) thereof, to have
meanings respectively assigned to them in the NABARD Act,
368 [2023] 12 S.C.R.
SUPREME COURT REPORT: DIGITAL
1981 would imply that if a state co-operative bank is within
the meaning of NABARD Act, 1981 then it would be excluded
from the benefit under Section 80P of the Act. Conversely, if
a co-operative society is not a co-operative bank within the
meaning of Section 56 of the BR Act, 1949, it would be entitled
to the benefit of deduction under Section 80P of the Act.
15.11 Looked at from another angle, a co-operative society which is
not a state co-operative bank within the meaning of NABARD
Act, 1981 would not be a co-operative bank within the meaning
of Section 56 of the BR Act, 1949. In the instant case, as
already noted in A.P. Varghese case, the Kerala State Cooperative Bank being declared as a state co-operative bank by
the Kerala State Government in terms of NABARD Act, 1981
and the appellant society not being so declared, would imply
that the appellant society is not a state co-operative bank.
15.12 In fact, in Citizen Co-operative Society Ltd., this Court held
that the appellant therein was having both members as well
as nominal members who were depositing and availing loan
facilities from the appellant therein and therefore, appellant
therein was not entitled to the benefit of Section 80P of the Act
as it was functioning as a co-operative bank. But, the appellant
herein is not a co-operative bank and neither has it been so
declared under the provisions of NABARD Act, 1981 or the
State Act. On the other hand, under the provisions of State
Act, 1969, the Kerala State Co-operative Bank has been so
declared by the Government of Kerala as a co-operative bank.
15.13 Further, under the provisions of the State Act, 1984, ‘agricultural
and rural development bank’ means the Kerala Co-operative
Central Land Mortgage Bank Limited, registered under Section
10 of the Travancore-Cochin Co-operative Societies Act, 1951,
which shall be known as Kerala State Co-operative Agricultural
and Rural Development Bank Limited i.e. the appellant herein.
Thus, from a conjoint reading of all the relevant statutory as
alluded to hereinabove, it is quite clear that the appellant is not
a co-operative bank within the meaning of sub-section (4) of
Section 80P of the Act. The appellant is a co-operative credit
society under Section 80P(2)(a)(i) of the Act whose primary
[2023] 12 S.C.R. 369
KSCARDB v. THE ASSESSING OFFICER, TRIVANDRUM AND ORS.
object is to provide financial accommodation to its members
who are all other co-operative societies and not members of
the public.
15.14 Therefore, when the definition of “co-operative bank” in Section
56 of BR Act, 1949 is viewed in terms of Sections 2(u) of the
NABARD Act, 1981, it is clear that only a state co-operative
bank would be within the scope and meaning of a banking
company under Section 2(c) of the BR Act, 1949 on obtaining
licence under Section 22 of the said Act.
Conclusion:
In the instant case, although the appellant society is an apex co-operative
society within the meaning of the State Act, 1984, it is not a co-operative
bank within the meaning of Section 5(b) read with Section 56 of the BR
Act, 1949.
In the result, the appeals filed by the appellant are allowed and the order(s)
of the Kerala High Court and other authorities to the contrary are set
aside. Consequently, we hold that the appellant is entitled to the benefit of
deduction under Section 80P of the Act. The questions for consideration
are answered accordingly.
Parties to bear their respective costs.
Headnotes prepared by: Divya Pandey Result of the case : Appeals allowed.
