Setting aside the Kerala High Court Judgment, it was held that from now Cooperative Societies registered as primary agricultural credit societies are entitled to deductions under section 80P(2)(a)(i) of the Income-Tax Act, even when they may also be giving loans to their members which are not related to agriculture. This was held in the case of The Mavilayi Service Cooperative Bank ltd. & ors vs. Commissioner of Income Tax, Calicut & Anr [Civil Appeal No. 7343-7350 OF 2019] presided over by the bench of Hon’ble Justice RF Nariman, Justice Navin Sinha and Justice KM Joseph.
In the instant case, Kerala High court was faced with a situation where it was to be decided whether the appellant is entitled to deductions under section 80P(2)(a)(i) of the Income-Tax Act after the introduction of section 80P(4) by section 19 of the Finance Act, 2006 (21 of 2006) with effect from 01.04.2007 and referring to the case of Chirakkal Service Co-operative Bank Ltd. vs. CIT, HC had decided that primary agricultural credit societies are not entitled to deductions under 80 P of the Income Tax Act if they are giving loans to the members from non-agriculture sector.
Section 80 P of the Income Tax Act deals with the deduction of income of cooperative societies and sub-section (4) of the said provision states that 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 banks and therefore SC had to interpret the whole provision so as to come to a conclusion.
Setting aside the judgment of HC, Supreme Court contended that Section 80 P is a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general and hence it must be read liberally and reasonably and if there is any ambiguity, in favor of the assessee.
SC Contended that primary agricultural credit societies are not treated as ‘banks’ under the Banking Regulation Act 1949 and that the RBI has also said that such societies cannot be classified as banks. 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. Therefore, primary agricultural credit societies will not come under the exception under Section 80P(4).
Allowing the appeals of the societies SC stated “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”.