1. Recently, Hon’ble Supreme Court delivered judgment in the case of PCIT v. M/s. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Limited – Civil Appeal No. 8719/2022, dated 20/04/2023. In this case, the assessee was a cooperative credit society engaged in the business of providing credit facilities to its members. The assessee claimed deduction u/s. 80P(2)(a)(i) of the Income Tax Act, 1961 (the Act). The Assessing Officer disallowed the deduction claimed by the assessee u/s. 80P(2)(a) of the Act holding that the assessee is a cooperative bank and hence not eligible to claim deduction as per Section 80P(4) of the Act. The CIT(A) held in the favour of the assessee holding that assessee is a cooperative credit society and not a cooperative bank, hence eligible for deduction u/s. 80P of the Act. The ITAT, High Court and Supreme Court upheld the view of CIT(A).

2. The Hon’ble Supreme Court, while dismissing the appeal filed by the Revenue, inter alia held as under:

“Apart from the fact that against the relied upon decision in the case of M/s. Quepem Urban Co-operative Credit Society Ltd. (supra),the Special Leave Petition has been dismissed, having heard learned counsel appearing on behalf of the respective parties, the issue involved in the present appeal is squarely covered against the Revenue in view of the decision of this Court in Mavilayi Service Cooperative Bank Limited and Others Vs. Commissioner of Income Tax, Calicut and Another (2021) 7 SCC 90. This Court, in the aforesaid decision has specifically observed and held that primary Agricultural Credit Societies cannot be termed as Co-operative Banks under the Banking Regulation Act and, therefore, such credit societies shall be entitled to exemption under Section 80(P)(2) of the Income Tax Act, 1961.

Ms. Aakansha Kaul, learned counsel appearing on behalf of the appellant/Revenue has tried to submit that the respondent/ Assessee will fall under the definition of Co operative Bank as their activity is to give credit/loan. However, it is required to be noted that merely giving credit to its members only cannot be said to be the Co operative Banks/Banks under the Banking Regulation Act. The banking activities under the Banking Regulation Act are altogether different activities. There is a vast difference between the credit societies giving credit to their own members only and the Banks providing banking services including the credit to the public at large also.

There are concurrent findings recorded by CITA, ITAT and the High Court that the respondent/Assessee cannot be termed as Banks/Cooperative Banks and that being a credit society, they are entitled to exemption under Section 80(P)(2) of the Income Tax Act. Such finding of fact is not required to be interfered with by this Court in exercise of powers under Article 136 of the Constitution of India. Even otherwise, on merits also and taking into consideration the CBDT Circulars and even the definition of Bank under the Banking Regulation Act, the respondent/Assessee cannot be said to be Co- operative Bank/Bank and, therefore, Section 80(P)(4) shall not be applicable and that the respondent/Assessee shall be entitled to exemption/benefit under Section 80(P)(2) of the Income Tax Act.”

3. In the judgment of Annsaheb (supra), Hon’ble Supreme Court relied upon the case of Mavilayi Service Cooperative Bank Limited and Others v. CIT (2021) 431 ITR 1 wherein it was held as under:

“xxx…

39. The above material would clearly indicate that the limited object of section 80P(4) is to exclude co-operative banks that function at par with other commercial banks i.e. which lend money to members of the public. Thus, if the Banking Regulation Act, 1949 is now to be seen, what is clear from section 3read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, under section 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by the RBI. As opposed to this, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.

xxx…

45. To sum up, therefore, the ratio decidendi of Citizen Co-operative Society Ltd. (supra), must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are 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 the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2) (a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.”

4. The genesis of this controversy can be traced back to Finance Act, 2006 which inserted provisions of S. 80P(4) of the Act wef 01/04/2007. Income Tax Authorities, after this amendment, started taking a vies that the cooperative societies engaged in the business of providing credit facilities to its members would also fall under the term “cooperative banks” and consequently not eligible to claim deduction u/s. 80P of the Act. This misinterpretation gave rise to huge litigation across the country. Now the controversy is settled with the Hon’ble Apex Court holding that cooperative credit societies could not be characterised as cooperative banks and hence eligible to claim the deduction u/s. 80P of the Act.

5. Provisions of S. 80P(4) read:

Section 80P(4) of the Act:

“(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Explanation.—For the purposes of this sub- section,—

1. “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);
2. “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.”

6. Memorandum explaining the clauses of Finance Bill 2006 which inserted this provision reads:

“Withdrawal of tax benefits available to certain co-operative banks

Section 80 P, inter alia, provides for a deduction from the total income of the Co- operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.

The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. It is, therefore, proposed to amend section 80P by inserting a new sub-section (4) so as to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. It is also proposed to define the expressions “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank”.

It is also proposed to insert a new sub-clause (viia ) in clause (24) of the said section so as to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of ‘income’.

This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.”

Apparently, the objective behind the introduction of sub-section (4) to Section 80P of the Act is to bring in parity between the commercial banks that are not eligible for deduction u/s. 80P of the Act and the cooperative banks that are functioning at par with such commercial banks but enjoying full tax exemption. However, the intended object was to withdraw tax exemption from co-operative bank alone. Credit co-operative societies were to continue to enjoy tax exemption u/s 80(2) of the Act. The amendment was not at all intended to deny benefit of S. 80P to cooperative societies that are engaged in the business of providing credit facilities to its members.

7. In fact immediately after the insertion of S. 80P(4), Central Board of Direct Tax vide its clarification No. 133/06/2007- TPL dated 9th May, 2007, clarified that the existing sub-section 80P (2)(a)(i) shall be applicable to a co-operative society carrying on credit facility to its members. If the intention of the legislature was not to grant deduction u/5 80P (2)(a)(i) to co-operative societies carrying on the business of providing credit facilities to its members, then this section would have been deleted.

8. In order to correctly interpret and understand the provisions of S. 80P(4) of the Act, it is apposite to understand the meaning of the word “cooperative bank” used in Section 80P(4) of the Act. The Explanation to Section 80P(4) of the Act refers to the definitions provided under Part V of the Banking Regulation Act, 1949. The relevant definitions prescribed under Part V of the Banking Regulation Act, 1949 read:

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

(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);

The definitions of “central co-operative bank” and “state co-operative bank” as prescribed under Section 2 of National Bank for Agriculture and Rural Development Act, 1981 is reproduced as under:

“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 co- operative 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;

(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 co-operative societies carrying on business in that State to be also or to be a State co- operative bank or State co-operative banks within the meaning of this definition;”

(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;

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;

(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 co-operative societies for the time being in force;

(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;

9. A perusal of the relevant provisions of Banking Regulations Act, 1949 reveals that Co-operative bank is defined in clause (cci) of s.5 (as inserted by sec. 56 of the said Act) and co-operative credit society is not included therein but its identity is kept separate by way of independent definition as per clause (ccii) of Sec. 5 of the Banking Regulation Act, 1949. On plain reading of the Banking Regulations Act, nowhere it is suggested that the term “Co-operative Bank” also includes ‘Co-Operative Credit Society”. It is well settled principle in the interpretation of the ‘taxing provisions’ that the same are to be strictly construed and there is no room for any intendment. There is no presumption as to tax. Nothing is to be read or nothing is to be implied. One has to fairly look into language used by the Parliament. The Parliament has adopted the definition of the Co-operative Bank by reference to Banking Regulations Act. Co-operative Credit Society is distinct and separate from the co-operative Bank nor can it be coloured as a Primary Co-operative Bank within the meaning of Banking Regulations Act. As per the definition of Primary Co-operative Bank in view of cl. (cci) of sec 5 of the Banking Regulations Act, 1949, in case primary objects or principle business is transaction of banking business, the society will be primary co-operative bank. In case it is not so the society shall not be a primary co-operative bank and consequently, the same shall not be a co-operative bank as defined in Part V of the Banking Regulation Act 1949.

10. In order to invoke Section 80P(4) of the Act, it is to be established that the assessee cooperative society falls within the definition of “cooperative bank” as prescribed under Part V of Banking Regulation Act, 1949. As defined under Part V of the Banking Regulation Act, 1949, a cooperative bank means a state cooperative bank, a central cooperative bank and a primary cooperative bank. AS against the same, a cooperative society is considered as a primary cooperative bank only if all the following 3 conditions are fulfilled:

1. the primary object or principal business of which is the transaction of banking business;
2. the paid-up share capital and reserves of which are not less than one lakh of rupees; and
3. the bye-laws of which do not permit admission of any other co- operative society as a member:

11. No co-operative society can carry on the business of banking unless it has requite statutory permissions from prescribed authorities. In this context, it is relevant to understand the meaning of the word “banking”. The word “banking” has been defined under Section 5(b) of the Banking Regulation Act, 1949. The same has been reproduced as under:

“banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise;

12. Further, Section 22 of the Banking Regulation Act, 1949 requires the cooperative societies to get licence from Reserve Bank of India for carrying on banking business. The relevant extract of Section 22 of the Banking Regulation Act, 1949 reads:

“(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:”

Thus, without obtaining a license from the Reserve Bank of India, no cooperative society can carry on banking business in India. The basic requirement of being a primary cooperative bank is to carry on banking business as its primary business. Hon’ble Karnataka High Court in the case of CITv. Sri Biluru Gurubasava Pattina Sahakari Sangha Niyamitha Bagalkot – [2015] 56 taxmann.com 280 (Karnataka) in this context held as under:

“8… Therefore, as the assessee is not a co-operative bank carrying on exclusively banking business and as it does not possess a licence from the Reserve Bank of India to carry on business, it is not a co-operative bank. It is a co-operative society which also carries on the business of lending money to its members which is covered under section 80P(2)(a)(i),i.e., carrying on the business of banking for providing credit facilities to its members. The object of the aforesaid amendment is not to exclude the benefit extended under section 80P(1) to such society.”

13. The predominant test for banking therefore, is acceptance of deposit from public. When the primary business of any cooperative society is to “accept the deposits from public for the purpose of lending to public or investment”, then such cooperative society can be held as a cooperative bank. But if any cooperative society is engaged primarily in the business of accepting and lending the money only with its members and not with general public, such business cannot be considered as banking business and resultantly such cooperative society cannot be considered as a cooperative bank so as to apply provisions of S. 80P(4) of the Act. Even if a cooperative society has entered into transactions with non-members which are insignificant/ miniscule, then also such cooperative society cannot be considered as a cooperative bank as held in the case of Quepem Urban Co-operative Credit Society Ltd. v. ACIT – [2015] 58 taxmann.com 113 (Bombay) as the primary business of such cooperative society is not to accept the deposits from general public. In such case, the cooperative society will only get deduction u/s. 80P of the Act to the extent of income earned from transactions with its members.

14. Thus, a co-operative society not primarily engaged in the business of banking as defined in the Banking Regulation Act, 1949 and not holding a valid licence from Reserve Bank of India to carrying on business of banking cannot be considered as a cooperative bank so as to apply section 80P(4) of the Act.

15. In the end, one can only hope that now with series of judgments by Supreme Court and High Courts, the controversy is put to rest and co-operative society carrying on the business of providing credit facilities to its members are not denied the benefit of S.80P(2) of the Act.