THE MAVILAYI SERVICE COOPERATIVE BANK LTD. & ORS. versus COMMISSIONER OF INCOME TAX, CALICUT & ANR. on 12 January 2021

SUPREME COURT REPORTS [2021] 1 S.C.R. 78

[2021] 1 S.C.R.

ATHE MAVILAYI SERVICE COOPERATIVEBANK LTD. & ORS.

v.

COMMISSIONER OF INCOME TAX, CALICUT & ANR.

(Civil Appeal Nos.7343-7350 of 2019)

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JANUARY 12, 2021

[R. F. NARIMAN, NAVIN SINHA AND K. M. JOSEPH, JJ.]

Income Tax Act, 1961: s.80P(2) – Deduction for CooperativeSocieties – Assessees registered as ‘Primary Agriculture CreditCSocieties’ under Kerala Cooperative Societies Act, 1969 – They arestated to be providing credit facilities to their members foragricultural and allied purposes – Claim for deduction unders.80P(2)(a) – Whether assessees are entitled to such deductionsafter introduction of s.80P(4) by s.19 of Finance Act, 2006 w.e.f.D1.4.2007 – Held: Assessees are entitled to benefit of deductioncontained in s.80P(2)(a)(i), notwithstanding that they may also begiving loans to their members which are not related to agriculture –In case it is found that there are instances of loans given to non-members, profits attributable to such loans are not deductible.

EIncome Tax Act, 1961: s.80P(2) – Beneficial provision – Held:s.80P must be construed with the object of furthering the co-operative movement generally – s.80P, being a benevolent provisionenacted by Parliament to encourage and promote the credit of theco-operative sector in general must be read liberally and reasonably,and if there is ambiguity, in favour of the assessee – A deductionFthat is given without any reference to any restriction or limitationcannot be restricted or limited by implication, as is sought to bedone by the Revenue in the present case by adding the word“agriculture” into s.80P(2)(a)(i) when it is not there – Further,s.80P(4) is to be read as a proviso, which proviso now specificallyGexcludes co-operative banks which are co-operative societiesengaged in banking business – Considering the definition of‘member’ under the Kerala Act, loans given to such nominal memberswould qualify for the purpose of deduction under s.80P(2)(a)(i) –Thus, giving of loans by a primary agricultural credit society tonon-members is not illegal – Interpretation of statutes.H

Disposing of the appeals, the Court

HELD : 1. Interpretation of Section 80P of the IT Act.

The marginal note to Section 80P which reads “Deduction inrespect of income of co-operative societies” indicates the general“drift” of the provision. Secondly, for purposes of eligibility fordeduction, the assessee must be a “co-operative society”. A co-operative society is defined in Section 2(19) of the IT Act, asbeing a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the timebeing in force in any State for the registration of co-operativesocieties. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or underthe State law. For purposes of eligibility, it is unnecessary to probeany further as to whether the co-operative society is classified asX or Y. Thirdly, the gross total income must include income thatis referred to in sub-section (2). Fourthly, sub-clause (2)(a)(i) thenspeaks of a co-operative society being “engaged in” carrying onthe business of banking or providing credit facilities to itsmembers. What is important qua sub-clause (2)(a)(i) is the factthat the co-operative society must be “engaged in” the providingcredit facilities to its members. Fifthly, the burden is on theassessee to show, by adducing facts, that it is entitled to claimthe deduction under Section 80P. Therefore, the assessing officerunder the IT Act cannot be said to be going behind any registrationcertificate when he engages in a fact-finding enquiry as to whetherthe co-operative society concerned is in fact providing creditfacilities to its members. Such fact finding enquiry (see section133(6) of the IT Act) would entail examining all relevant facts ofthe co-operative society in question to find out whether it is, as amatter of fact, providing credit facilities to its members, whateverbe its nomenclature. Once this task is fulfilled by the assessee,by placing reliance on such facts as would show that it is engagedin providing credit facilities to its members, the assessing officermust then scrutinize the same, and arrive at a conclusion as towhether this is, in fact, so. Sixthly, the expression “providing creditfacilities to its members” does not necessarily mean agriculturalcredit alone. Section 80P being a beneficial provision must beconstrued with the object of furthering the co-operative movement A

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Agenerally, and section 80P(2)(a)(i) must be contrasted with section80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It mustalso further be contrasted with sub-clause (b), which speaks onlyof a “primary” society engaged in supplying milk etc. therebydefining which kind of society is entitled to deduction, unlike theprovisions contained in section 80P(2)(a)(i). Also, the proviso toBsection 80P(2), when it speaks of sub-clauses (vi) and (vii), furtherrestricts the type of society which can avail of the deductionscontained in those two sub-clauses, unlike any such restrictivelanguage in Section 80P(2)(a)(i). Once it is clear that the co-operative society in question is providing credit facilities to itsCmembers, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availingof the deduction. The distinction between eligibility for deductionand attributability of amount of profits and gains to an activityis areal one. Since profits and gains from credit facilities given tonon-members cannot be said to be attributable to the activity ofDproviding credit facilities to its members, such amount cannot bededucted. Seventhly, section 80P(2)(c) also makes it clear thatsection 80P is concerned with the co-operative movementgenerally and, therefore, the moment a co-operative society isregistered under the 1912 Act, or a State Act, and is engaged inEactivities which may be termed as residuary activities i.e. activitiesnot covered by sub-clauses (a) and (b), either independently ofor in addition to those activities, then profits and gains attributableto such activity are also liable to be deducted, but subject to thecap specified in sub-clause (c). The reach of sub-clause (c) isextremely wide, and would include co-operative societies engagedFin any activity, completely independent of the activities mentionedin sub-clauses (a) and (b), subject to the cap of INR 50,000/- tobe found in sub-clause (c)(ii). This puts paid to any argument thatin order to avail of a benefit under Section 80P, a co-operativesociety once classified as a particular type of society, mustGcontinue to fulfil those objects alone. If such objects are onlypartially carried out, and the society conducts any other legitimatetype of activity, such co-operative society would only be entitledto a maximum deduction of Rs.50,000/- under sub-clause(c).Eighthly, sub-clause (d) also points in the same direction, inthat interest or dividend income derived by a co-operative societyH

from investments with other co-operative societies, are alsoentitled to deduct the whole of such income, the object of theprovision being furtherance of the co-operative movement as awhole. [Paras 27, 28, 29, 30, 32-35][117-E-F; 118-A-E; 119-D-H;120-A-H; 121-A]

Kerala State Cooperative Marketing Federation Ltd.and Ors. v. CIT (1998) 5 SCC 48 : [1998] 3 SCR 443;K.P. Varghese v. Income Tax Officer, Ernakulam andAnr. (1981) 4 SCC 173 : [1982] 1 SCR 629 ;Commissioner of Income Tax, Madras v. Ponni Sugarsand Chemicals Ltd. (2008) 9 SCC 337 : [2008] 13SCR 570 ; Udaipur Sahkari Upbhokta Thok BhandarLtd. v. CIT (2009) 8 SCC 393 : [2009] 11 SCR 90– relied on.

Assistant Commissioner of Income Tax v. A.K. Menonand Ors. (1995) 5 SCC 200 : [1995] 2 Suppl. SCR 181 ; Titan Medical Systems (P) Ltd. v. Collector ofCustoms, New Delhi (2003) 9 SCC 133 ; VadilalChemicals Ltd. v. State of A.P. and Ors.(2005) 6 SCC292 : [2005] 2 Suppl. SCR 1 – referred to.

2. The limited object of section 80P(4) is to exclude co-operative banks that function at par with other commercial banksi.e. which lend money to members of the public. Thus, if theBanking Regulation Act, 1949 is now to be seen, what is clearfrom section 3 read with section 56 is that a primary co-operativebank cannot be a primary agricultural credit society, as such co-operative bank must be engaged in the business of banking asdefined by section 5(b) of the Banking Regulation Act, 1949, whichmeans the accepting, for the purpose of lending or investment,of deposits of money from the public. Likewise, under section22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on bankingbusiness in India, unless it is a co-operative bank and holds alicence issued in that behalf by the RBI. As opposed to this, aprimary agricultural credit society is a co-operative society, theprimary object of which is to provide financial accommodation toits members for agricultural purposes or for purposes connectedwith agricultural activities. [Para 39][122-D-G]

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A3. Section 80P of the IT Act, being a benevolent provisionenacted by Parliament to encourage and promote the credit ofthe co-operative sector in general must be read liberally andreasonably, and if there is ambiguity, in favour of the assessee. Adeduction that is given without any reference to any restrictionor limitation cannot be restricted or limited by implication, as isBsought to be done by the Revenue in the present case by addingthe word “agriculture” into Section 80P(2)(a)(i) when it is notthere. Further, section 80P(4) is to be read as a proviso, whichproviso now specifically excludes co-operative banks which areco-operative societies engaged in banking business i.e. engagedCin lending money to members of the public, which have a licencein this behalf from the RBI. [Para 45][127-A-D]

4. Once section 80P(4) is out of harm’s way, all theassessees in the present case are entitled to the benefit of thededuction contained in section 80P(2)(a)(i), notwithstanding thatDthey may also be giving loans to their members which are notrelated to agriculture. Also, in case it is found that there areinstances of loans being given to non-members, profitsattributable to such loans obviously cannot be deducted.Considering the definition of ‘member’ under the Kerala Act,loans given to such nominal members would qualify for theEpurpose of deduction under section 80P(2)(a)(i). Thus, the givingof loans by a primary agricultural credit society to non-membersis not illegal unlike the facts in Citizen Cooperative SocietyLtd.[Paras 45-47][127-D-H; 128-A-C; G-H]

Citizen Cooperative Society Ltd. v. Asst. CIT, HyderabadF(2017) 9 SCC 364 : [2017] 9 SCR 361 – distinguished.

CIT, Mysore v. Indo Mercantile Bank [1959] Supp. (2)SCR 256 ; Tribhovandas Haribhai Tamboli v. GujaratRevenue Tribunal (1991) 3 SCC 442 : [1991] 2 SCR 802 ; J.K. Industries Ltd. v. Chief Inspector of FactoriesGand Boilers (1996) 6 SCC 665 : [1996] 6 Suppl. SCR 798 ; Union of India v. Dileep Kumar Singh (2015) 4SCC 421 : [2015] 2 SCR 882 ; B. Shama Rao v. UnionTerritory, Pondicherry [1967] 2 SCR 650; State ofOrissa v. Sudhanshu Sekhar Misra and Ors. [1968] 2SCR 154 – relied on.H

THE MAVILAYI SERVICE COOPERATIVE BANK LTD. v.COMMISSIONER OF INCOME TAX, CALICUT

U.P. Cooperative Cane Unions’ Federation Ltd.,Lucknow v. Commissioner of Income Tax, Lucknow-I(1997) 11 SCC 287 ; Dalbir Singh v. State of Punjab[1979] 3 SCR 1059 ; Chirakkal Service Co-operativeBank Ltd. v. CIT (2016) 384 ITR 490 (Ker.) ;Perinthalmanna Service Co-operative Bank Ltd. v. ITOand Anr. (2014) 363 ITR 268 (Ker.) ; AssamCooperative Apex Marketing Society Ltd. Assam v.Additional Commissioner ofIncome Tax, Assam (1994)Supp. (2) SCC 96 – referred to.

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Case Law Reference

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[2021] 1 S.C.R.

ACIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 7343-7350 of 2019.

From the Judgment and Order dated 19.03.2019 of the High Courtof Kerala at Ernakulam in ITA Nos. 97 of 2016, 11 and 69 of 2017 and72 to 76 of 2017.

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With

Civil Appeal No. 8315 of 2019 and Civil Appeal No.____of 2021(@ SLP(C) NO.___of 2021) (Diary No. 31268 of 2019).

Balbir Singh, ASG, Shyam Divan, Arvind P. Datar, Sr. Advs., M.CGireesh Kumar, Arun Raj S., Ankur S. Kulkarni, Renjith B. Marar, Ms.Lakshmi N. Kaimal, Biju Vigneswar, Ms. Surabhi Santosh, RahulUnnikrishnan, Arun Poomulli, Biju Vigneswar, Ms. Surabhi Santosh, Ms.Meera M., Ms. Gargi Khanna, P.V. Yogeshwaran, Mrs. Anil Katiyar,Advs. for the appearing parties.

DThe Judgment of the Court was delivered by

R. F. NARIMAN, J.

1. I.A. Nos.192273 and 192277 of 2019 are allowed. Leavegranted in the Special Leave Petition arising out of Diary No.31268 of2019.

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2. These appeals have been filed by co-operative societies whohave been registered as ‘primary agricultural credit societies’, togetherwith one ‘multi-State co-operative society’, and raise important questionsas to deductions that can be claimed under section 80P(2)(a)(i) of theIncome-Tax Act, 1961 (“IT Act”); and in particular, whether theseFassessees are entitled to such deductions after the introduction of section80P(4) of the IT Act by section 19 of the Finance Act, 2006 (21 of 2006)with effect from 01.04.2007. It may be stated at the outset that all theseassessees, who are stated to be providing credit facilities to their membersfor agricultural and allied purposes, have been classified as primaryagricultural credit societies by the Registrar of Co-operative SocietiesGunder the Kerala Co-operative Societies Act, 1969 (“Kerala Act”), andwere claiming a deduction under section 80P(2)(a)(i) of the IT Act,which had been granted to themupto Assessment Year 2007-08.

3. However, with the introduction of section 80P(4) of the IT Act,the scenario changed. In respect of the assessees before us, the assessing H

officer denied their claims for deduction, relying upon section 80P(4) ofthe IT Act, holding that as per the Audited Receipt & Disbursal Statementfurnished by the assessees in these cases, agricultural credits that weregiven by the assessee-societies to its members were found to be negligible– the credits given to such members being for purposes other thanagricultural credit. The decisions of the assessing officers werechallenged up to the Kerala High Court. Before the High Court, theassessees relied upon a decision of a Division Bench of the Kerala HighCourt in Chirakkal Service Co-operative Bank Ltd. v. CIT (2016)384 ITR 490 (Ker.), where in a batch of appeals challenging assessmentscompleted under section 147 read with 143(3)/144 of the IT Act, theHigh Court, after considering section 80P(4) of the IT Act, variousprovisions of the Kerala Act, the Banking Regulation Act, 1949, the bye-laws of the Societies, etc., held that once a Co-operative Society isclassified by the Registrar of Co-operative Societies under the KeralaAct as being a primary agricultural creditsociety, the authorities underthe IT Act cannot probe into whether agricultural credits were in factbeing given by such societies to its members, thereby going behind thecertificate so granted. This being the case, the High Court in Chirakkal(supra) held that since all the assessees were registered as primaryagricultural creditsocieties, they would be entitled to the deductions undersection 80P(2)(a)(i) read with section 80P(4) of the IT Act.

4. However, the Department contended that the judgment inChirakkal (supra) was rendered per incuriam by not having noticedthe earlier decision of another Division Bench of the Kerala High Courtin Perinthalmanna Service Co-operative Bank Ltd. v. ITO andAnr. (2014) 363 ITR 268 (Ker.), where, in an appeal challenging ordersunder section263 of the IT Act, it was held that the revisional authoritywas justified in saying that an inquiry has to be conducted into the factualsituation as to whether a co-operative bank is in fact conducting businessas a co-operative bank and not as aprimary agricultural creditsociety,and depending upon whether this was so for the relevant assessmentyear, the assessing officer would then allow or disallow deductionsclaimed under section 80P of the IT Act, notwithstanding that merenomenclature or registration certificates issued under the Kerala Actwould show that the assessees are primary agricultural creditsocieties.These divergent decisions led to a reference order dated 09.07.2018 toa Full Bench of the Kerala High Court.

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A5. The Full Bench of the Kerala High Court, by the impugnedjudgment dated 19.03.2019, referred to section 80P of the IT Act, variousprovisions of the Banking Regulation Act and the Kerala Act and heldthat the main object of a primary agricultural creditsociety which existsat the time of its registration, must continue at all times including for theassessment year in question.Notwithstanding the fact that the primaryBagricultural creditsociety is registered as such under the Kerala Act, yet,the assessing officer must be satisfied that in the particular assessmentyear its main object is, in fact, being carried out. If it is found that as amatter of fact agricultural credits amount to a negligible amount, thenitwould be open for the assessing officer, applying the provisions of sectionC80P(4) of the IT Act, to state that as the co-operative society in question– though registered as a primary agricultural creditsociety –is not, infact, functioning as such, the deduction claimed under section 80P(2)(a)(i)of the IT Act must be refused.This conclusion was reached after referringto several judgments, but relying heavily upon the judgment of this Courtin Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017)D9 SCC 364. Thus, the conclusion of the Full Bench was as follows:

“33. In view of the law laid down by the Apex Court in Citizen Co-operative Society [397 ITR 1] it cannot be contended that,while considering the claim made by an assessee society forEdeduction under section 80P of the IT Act, after the introductionof sub-section (4) thereof, the Assessing Officer has to extendthe benefits available,merely looking at the class of the society asper the certificate ofregistration issued under the Central or StateCo-operative Societies Actand the Rules made thereunder. Onsuch a claim for deduction under section 80P of the IT Act, theFAssessing Officer has to conduct an enquiry into the factualsituation as to the activities of the assessee society and arrive at aconclusion whether benefits can be extended ornot in the light ofthe provisions under sub-section (4) of section80P.

34. In Chirakkal [384 ITR 490] the Division Bench held that theappellant societies having been classified as Primary AgriculturalCredit Societies by the competent authority under the KCS Act, ithas necessarily to be held that the principal object of such societiesis to undertake agricultural credit activities and to provide loansand advances for agricultural purposes, the rate of interest onsuch loans and advances to be at the rate to be fixed by the G

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Registrar of Co-operative Societies under the KCS Act and havingits area of operation confined to a Village, Panchayat or aMunicipality and as such, they are entitled for the benefit of sub-section (4) of section 80P of the IT Act to ease themselves outfrom the coverage of section 80P and that, the authorities underthe IT Act cannot probe into any issues or such matters relatingto such societies and that, Primary Agricultural Credit Societiesregistered as such under the KCS Act and classified so, underthat Act, including the appellants are entitled to such exemption.

35. In Chirakkal [384 ITR 490] the Division Bench expressed adivergent opinion, without noticing the law laid down in AntonyPattukulangara [2012 (3) KHC 726] and Perinthalmanna [363ITR268]. Moreover, the law laid down by the Division Bench inChirakkal [384 ITR 490] is not good law, since, in view of the lawlaid down by the Apex Court in Citizen Co-operative Society [397ITR 1], on a claim for deduction under section 80P of the IncomeTax Act,by reasonof sub-section (4) thereof, the AssessingOfficerhas to conduct an enquiry into the factual situation as tothe activities of the assessee Society and arrive at a conclusionwhether benefits can be extended or not in the light of theprovisions under sub-section (4) of section 80P of the IT Act. Inview of the law laid down by the Apex Court in Citizen Co-Operative Society [397 ITR 1] the law laid down by the DivisionBench in Perinthalmanna [363 ITR 268] has to be affirmed andwe do.

36. In view of the law laid down by the Apex Court in Ace MultiAxes Systems’ case (supra), since each assessment year is aseparate unit, the intention of the legislature is in no manner defeatedby not allowing deduction under section 80P of the IT Act, byreason of sub-section (4) thereof, if the assessee society ceasesto be the specified class of societies for which the deduction isprovided, even if it was eligible in the initial years.

The question referred to the Full Bench is answered as above.Registry shall list the appeals before appropriate Bench as perroster.”

6. Being aggrieved by the Full Bench judgment, the Appellantassessees are now before us.

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A7. Shri Shyam Divan, learned Senior Advocate leading the chargeon behalf of the assessees, has argued that the advent of section 80P(4)of the IT Act has not led to any change insofar as the Appellant assesseesare concerned.He read to us in copious detail the provisions of section80P, various provisions contained in the Banking Regulation Act, 1949and the various provisions of the Kerala Act andrules made thereunder,Btogether with the bye-laws of some of the assessees before us.His mainargument, based upon the language of section 80P(1) and (2), is thatsection 80P is a beneficial provision which is meant to further the co-operative movement in India. For this purpose, certain income of a co-operative society, once it is registered under a State Act, becomesCdeductible from its gross total income.According to him, the moment aco-operative society that is registered as such is engaged in providingcredit facilities to its members, the inquiry of an assessing officer stopsthere. He argued thatthe Full Bench was wholly incorrect in addingcredit facilities related to agriculture, as no such thing is contained insection 80P(2)(a)(i), as contrasted with sections 80P(2)(a)(iii) to (v) ofDthe IT Act. He therefore argued that the moment a co-operative societyis registered under the said Act, whatever be its classification, so long asit provides credit facilities to its members – which need not be creditfacilities related to agriculture –it is entitled to a deduction contained insection 80P(2)(a)(i) of the IT Act. A distinction must be drawn, therefore,Ebetween eligibilityfor deduction, and whether the whole of the amountsof profits and gains of business attributableto any one or more suchactivities under the sub-section is to be given. He argued, stating that ifcredit facilities were given to non-members, for example, suchcreditfacility would not be attributable to the activity of providing credit facilitiesto members and would, therefore, not be entitled to deduction underFsection 80P. He also brought to our notice the other provisions in section80P, such as in section 80P(2)(b), where the Society must be a “primary”society engaged in supplying milk, etc. before it can claim any deduction,which is absent in section 80P(2)(a)(i). He then argued, placing relianceupon the speech of the Finance Minister dated 28.02.2006 moving theGamendment to section 80P by introducing sub-section (4) thereof, thatthe object of the amendment was to remove co-operative banks fromsection 80P(1) and (2) as such banks, like any other commercial bank,are lending amounts to members of the general public and that, therefore,merely by being co-operative banks, should not be entitled to avail of thedeductions given under section 80P. According to him, since none of theH

assessees are co-operative banks licenced by the Reserve Bank of India(“RBI”) to carry on banking business, section 80P(4) has no application.He argued that any inquiry into whether the assessee is a primaryagricultural credit society so as to be outside section 80P(4) should not,in any manner, cut down the beneficial provision contained in section80P(1) and (2), as section 80P(4) is in the nature of a proviso whichcannot cut down the main enacting part.In any case, he argued thatonce a registration certificate stating that the assessee is a primaryagricultural credit society is given by the Registrar under the KeralaAct, then short of such certificate being cancelled under the Kerala Actand rules thereunder, the assessing officer, who is an authority for purposesof collection of revenue, cannot possibly go into whether, in substance,the society continues to be a primary agricultural credit society.He reliedupon various judgments of this Court to buttress his submissions.He alsorelied upon a circular, being Circular 14/2006 dated 28.12.2006 containingexplanatory notes to the Finance Act, 2006, and the letter of the CentralBoard of Direct Taxation (“CBDT”)dated 09.05.2008, both of whichmade it clear that if a co-operative society cannot be said to be a co-operative bank, then the provisions of section 80P(4) would have noapplication.

8. Shri Diwan’s second broad submission was that the Full Benchof the Kerala High Court completely misread this Court’s judgment inCitizen Cooperative Society Ltd. (supra). He contended that if thejudgment is seen closely, all the assessees’ contentions in law wereanswered in their favour. However, on facts, it was held that since theco-operative society in that case carried on business illegally i.e. by givingloans to nominal members who had no place under the statute underwhich it was registered, and was also giving loans to the members of thegeneral public, it could not be said to be a co-operative society at all, asa result of which the findings of fact of all the authorities below were notinterfered with by the Supreme Court. There was no argument, neitherwas there any finding by the Court in that case, that the assessing officeris entitled to go behind a certificate given under a particular statute.Indeed, he pointed out that both under the Banking Regulation Act, 1949and the Kerala Act, if any dispute arose as to classification of a societyas being a primary agricultural credit society versus being a co-operativebank, it is the RBI alone who is to decide such dispute under the BankingRegulation Act, 1949, and the Registrar, Co-operative Societies, who isto decide on classification under Rule 15 of the Kerala Co-operative AB

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ASocieties Rules 1969. Thus, according to him, the judgment in CitizenCooperative Society Ltd. (supra) is directly in his client’s favour onthe applicability of section 80P(4), which has been completely missed bythe Full Bench.

9. Shri Arvind Datar, learned Senior Advocate appearing on behalfBof some of the assessees, supported the submissions of Shri Divan, andargued that all co-operative societies,once they are registered under aState Act, are entitled to deductions under section 80P. The extent of thededuction would depend upon attributability and not eligibility fordeduction. Once it is found, having regard to letters issued by the RBI inthe present case stating that the Appellants cannot be classified as co-Coperative banks, and once it is found that licences have not been givento function as co-operative banks, all these societies qualify under section80P(2)(a)(i) for deductions to be granted, section 80P(4) having noapplication as they are not and cannot be stated to be co-operative banks.

10. Shri Balbir Singh, learned Additional Solicitor General appearingDon behalf of the Revenue, refuted all the arguments made by the learnedSenior Advocates for the assessees.According to him, the Full Benchwas wholly correct in stating that a mere certificate of registration as aprimary agricultural credit society would not avail.For the assessmentyear in question, the assessing officer has to be satisfied that the assesseeEis “engaged in” activities as a primary agricultural credit society i.e. ingiving loans for agricultural and allied purposes to its members. He readfrom some of the assessing officers’ orders the fact that loans given foragricultural purposes by the aforesaid societies were negligible, the mainbusiness being that of banking, as such loans were given for purposesother than agricultural credit. He also read copiously from the variousFActs, rules and bye-laws to buttress his submission that in actual fact,since the Appellants were no longer doing business as primary agriculturalcredit societies, they would be disentitled to any deduction under Section80P after the advent of Section 80P(4). According to him, the classificationof a co-operative society under the State Act, which is expressly referredGto in Section 2(19) of the IT Act,is of primary importance, and onceclassified as a primary agricultural credit society, it is only if activitiesrelatable to agriculture are carried out that eligibility for deduction wouldarise in the first place undersection 80P(1) and (2). The whole object ofsection 80P would be defeated if the Division Bench in Chirakkal (supra)was held to be correct in law, as then, despite being engaged in activitiesH

other than agricultural credit, a society undeserving of any deductionwould still get such deduction contrary to what was sought to be achievedby section 80P(4) of the IT Act. According to him, the Supreme Courtjudgment in Citizen Cooperative Society Ltd. (supra) was correctlyread by the Full Bench, as permitting an assessing officer to get to thereal facts of a case in order to conclude as to whether activities of aprimary agricultural credit society were, in fact, being carried out in theassessment year in question. For this purpose, he referred to severalprovisions of the IT Act, which give very vast powers of investigationinto the facts of any given case and, in particular, relied upon section133(6) of the IT Act. He also relied upon several judgments of thisCourt which would show that mere registration as a primary agriculturalcredit society is not enough, the expression “engaged in” meaning thatthere must be a continuing obligation on such society to carry out itsmain objects from year to year, and if does not do so, it would be disentitledto any deduction under Section 80P(4). He further argued, relying uponjudgments of this Court, that the burden is on the assessee to establishby facts, in every assessment year, that it is entitled to the deductionunder Section 80P; and if it cannot adduce facts to show that it is in factcarrying on its business as a primary agricultural credit society in theassessment year in question, it would not discharge such burden, andwould, therefore, be unable to avail of any deduction under Section 80P.He also relied upon certain RBI Press releases of the year 2017 cautioningthe public not to deal with such societies who, though unlicenced, are infact carrying on banking business.

11. Having heard learned counsel for the assessees as well as forthe Revenue, it is first important to set out sections 2(19) and 80P of theIncome Tax Act, which read as follows:

“2. In this Act, unlessthe context otherwise requires,- xxx xxx xxx

(19). “co-operative society” means a co-operative societyregistered under the Co-operative Societies Act, 1912 (2 of 1912),or under any law for the time being in force in any State for theregistration of co-operative societies.”

“80P. Deduction in respect of income of co-operativesocieties.—(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income AB

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referred to in sub-section (2), there shall be deducted, in accordancewith and subject to the provisions of this section, the sums specifiedin sub-section (2), in computing the total income of the assessee.

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(2) The sums referred to in sub-section (1) shall be the following,namely:—

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(a) in the case of a co-operative society engaged in—

(i) carrying on the business of banking or providing creditfacilities to its members, or

(ii) a cottage industry, or

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(iii) the marketing of agricultural produce grown by its members,or

(iv) the purchase of agricultural implements, seeds, livestockor other articles intended for agriculture for the purpose ofsupplying them to its members, or D

(v) the processing, without the aid of power, of the agriculturalproduce of its members, or

(vi) the collective disposal of the labour of its members, or

(vii) fishing or allied activities, that is to say, the catching, curing,processing, preserving, storing or marketing of fish or thepurchase of materials and equipment in connection therewithfor the purpose of supplying them to its members, E

the whole of the amount of profits and gains of business attributableto any one or more of such activities:

F

Provided that in the case of a co-operative society falling undersub-clause (vi), or sub-clause (vii), the rules and bye-laws of thesociety restrict the voting rights to the following classes of itsmembers, namely:—

(1) the individuals who contribute their labour or, as the caseGmay be, carry on the fishing or allied activities;

(2) the co-operative credit societies which provide financialassistance to the society;

(3) the State Government;

H

(b) in the case of a co-operative society, being a primary societyengaged in supplying milk, oilseeds, fruits or vegetables raisedor grown by its members to—

A

(i) a federal co-operative society, being a society engaged inthe business of supplying milk, oilseeds, fruits, orvegetables, as the case may be; orB

(ii) the Government or a local authority; or

(iii) a Government company as defined in section 617 of theCompanies Act, 1956 (1 of 1956), or a corporationestablished 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 thepublic), C

the whole of the amount of profits and gains of such business;

(c) in the case of a co-operative society engaged in activitiesother than those specified in clause (a) or clause (b) (eitherindependently of, or in addition to, all or any of the activitiesso specified), so much of its profits and gains attributable tosuch activities as does not exceed,—

D

(i) where such co-operative society is a consumers’ coEoperative society, one hundred thousand rupees; and

(ii) in any other case, fifty thousand rupees.

Explanation.—In this clause, “consumers’ co-operative society”means a society for the benefit of the consumers; F

(d) in respect of any income by way of interest or dividendsderived by the co-operative society from its investments withany other co-operative society, the whole of such income;

(e) in respect of any income derived by the co-operative societyfrom the letting of go downs or warehouses for storage,processing or facilitating the marketing of commodities, thewhole of such income; G

(f) in the case of a co-operative society, not being a housingsociety or an urban consumers’ society or a society carryingon transport business or a society engaged in the performanceof any manufacturing operations with the aid of power, where H

94SUPREME COURT REPORTS

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the gross total income does not exceed twenty thousandrupees, the amount of any income by way of interest onsecurities or any income from house property chargeableunder section 22.

Explanation.—For the purposes of this section, an “urbanconsumers’ co-operative society” means a society for thebenefit of the consumers within the limits of a municipalcorporation, municipality, municipal committee, notified areacommittee, town area or cantonment.

(3) In a case where the assessee is entitled also to the deductionunder section 80HH or section 80HHA or section 80HHB orsection 80HHC or section 80HHD or section 80-I or section 80-IA, the deduction under sub-section (1) of this section, in relationto the sums specified in clause (a) or clause (b) or clause (c) ofsub-section (2), shall be allowed with reference to the income, ifany, as referred to in those clauses included in the gross totalincome as reduced by the deductions under section 80HH, sectionHHA, section 80HHB, section HHC, section 80HHD, section80-I, section 80-IA, section 80J and section 80JJ.

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

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

(a) “co-operative bank” and “primary agricultural creditsociety” shall have the meanings respectively assigned tothem in Part V of the Banking Regulation Act, 1949 (10of 1949); (b) “primary co-operative agricultural and rural developmentbank” means a society having its area of operation confinedto a taluk and the principal object of which is to providefor long-term credit for agricultural and rural developmentactivities.”

12. The relevant provisions of the Banking Regulation Act, 1949,insofar asit has bearing on the facts of these cases are also set out asfollows:

“—3. Act to apply to co-operative societies in certain cases.Nothing in this Act shall apply 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 tothe extent specified in Part V.”

“56. Act to apply to co-operative societies subject tomodifications.—The provisions of this Act, as in force for thetime being, shall apply to, or in relation to, co-operative societiesas they apply to, or in relation to, banking companies subject tothe 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 aco-operative bank,

(ii) references to “commencement of this Act” shall beconstrued as references to commencement of the BankingLaws (Application to Co-operative Societies) Act, 1965 (23of 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 insertednamely:—

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

(ccii) “co-operative credit society” means a co-operativesociety, the primary object of which is to provide financialaccommodation to its members and includes a co-operativeland mortgage bank; (cciia) “co-operative society” means a society registeredor deemed to have been registered under any Central Act A

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for the time being in force relating to the multi-State co-operative societies, or any other Central or State law relatingto co-operative 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 timebeing vested with the management of the affairs of thatsociety; (cciiia) “multi-State co-operative bank” means a multi-Stateco-operative society which is a primary co-operative bank; (cciiib) “multi-State co-operative society” means a multi-State co-operative society registered as such under anyCentral Act for the time being in force relating to the multiState co-operative societies but does not include a nationalco-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 isto provide financial accommodation to its members foragricultural purposes or for purposes connected withagricultural activities (including the marketing of crops);and

(2) the bye-laws of which do not permit admission ofany other co-operative society as a member:

Provided that this sub-clause shall not apply to theadmission of a co-operative bank as a member by reasonof such co-operative bank subscribing to the sharecapital of such co-operative society out of funds providedby the State Government for the purpose;

(ccv) “primary co-operative bank” means a co-operativesociety, other than a primary agricultural credit society,—

(1) the primary object or principal business of whichis the transaction of banking business;

(2) the paid-up share capital and reserves of whichare not less than one lakh of rupees; and

(3) the bye-laws of which do not permit admissionof any other co-operative society as a member:

Provided that this sub-clause shall not apply to theadmission of a co-operative bank as a member byreason of such co-operative bank subscribing to theshare capital of such co-operative society out offunds provided by the State Government for the purpose;

(ccvi) “primary credit society” means a co-operativesociety, other than a primary agricultural credit society,—

(1) the primary object or principal business of whichis the transaction of banking business;

(2) the paid-up share capital and reserves of whichare less than one lakh of rupees; and

(3) the bye-laws of which do not permit admissionof any other co-operative society as a member:

Provided that this sub-clause shall not apply to theadmission of a co-operative bank as a member byreason of such co-operative bank subscribing to theshare capital of such co-operative society out offunds provided by the State Government for thepurpose.

Explanation.—If any dispute arises as to theprimary object or principal business of any co-operative society referred to in clauses (cciv), (ccv)and (ccvi), a determination thereof by the ReserveBank shall be final;

(ccvii) “central co-operative bank”, “primary rural creditsociety” and “state co-operative bank” shall have themeanings respectively assigned to them in the NationalBank for Agriculture and Rural Development Act, 1981(61 of 1981);”

13. So far as the Kerala Act and the rules framed thereunderareconcerned, the following provisions are relevant:

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Act

“2. In this Act, unless the context otherwise requires,- (f) “Co-operative Society” or “society” means a Co-operativesociety registered or deemed to be registered under this Act; xxx xxx xxx

(l) “member” means a person joining in the application for theregistration of a Co-operative society or a person admitted tomembership after such registration in accordance with this Act,the rules and the bye-laws and includes a nominal or associatemember; xxx xxx xxx (m) “nominal or associate member” means a member whopossess only such privilege and rights of a member who is subjectonly to such liabilities of a member as may be specified in thebye-laws; xxx xxx xxx (oaa) “Primacy Agricultural Credit Society” means a ServiceCo-operative Society, a Service Co-operative Bank, a FarmersService Co-operative Bank and a Rural Bank, the principal objectof which is to undertake agricultural credit activities and to provideloans and advances for agricultural purposes, the rate of intereston such loans and advances shall be the rate fixed by the Registrarand having its area of operation confined to a Village, Panchayator a Municipality; Provided that the restriction regarding the area of operation shallnot apply to Societies or Banks in existence at the commencementof the Kerala Co-operative Societies (Amendment) Act, 1999 (1of 2000).

Provided further that if the above principal object is not fulfilled,such societies shall lose all characteristics of a Primary AgriculturalCredit Society as specified in the Act, Rules and Bye-laws exceptthe existing staff strength.

xxx xxx xxx

(ob) “Primary Credit Society” means a society other than anapex or central society which has as its principal object the raisingof funds to be lent to its members; (oc) “Primary Co-operative Agricultural and RuralDevelopment Bank” means a society having its area of operationconfined to a Taluk and the principal object of which is to providefor long term credit for agricultural and rural development activities; Provided that no Primary Co-operative Agricultural and RuralDevelopment Bank shall be registered without the bifurcation ofassets and liabilities of the existing societies having the area ofoperation in more than one Taluk and the societies shall restricttheir operation in the area of the respective society on suchbifurcation.”

“3. Registrar.- (1)The Government may appoint a person to bethe Registrar of Co-operative Societies for the State.

(2) The Government may by general or special order confer onany person all or any of the powers of the Registrar under thisAct.

4. Societies which may be registered.- Subject to theprovisions of this Act, a co-operative society which has as itsobject the promotion of the economic interests of its members orof the interests of the public in accordance with co-operativeprinciples, or a society established with the object of facilitatingthe operations of such a society, may be registered under this Act:

Provided that no co-operative society shall be registered if it islikely to be economically unsound, or the registration of whichhave an adverse effect on development of co-operative movement.

xxx xxx xxx

7. Registration.- (1)If the Registrar is satisfied within a periodof ninety days from the date of the application —

(a) that the application complies with the provisions of thisAct and the rules; (b) that the objects of the proposed society are in accordancewith section 4; A

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(c) that the area of operation of the proposed society and thearea of operation of another society of similar type do notoverlap; (d) that the proposed bye-laws are not contrary to the provisionsof this Act and the rules; and (e) that the proposed society complies with the requirementsof sound business, he may register the society and its byelaws within a period of ninety days from the date of receiptof the application.

(2) Where the Registrar refuses to register a society, he shallcommunicate the order of refusal together with the reasonstherefore within seven days of such order to such of the applicantsas may be prescribed.

(3) An application for registration of a society shall be disposed ofby the Registrar within ninety days from the date of receipt of theapplication.

(4) Where an application for registration of a society is not disposedof within the time specified in sub-section (3), the applicant maymake a representation,—

(a) before the Registrar, if the application for registration ismade to a person on whom the powers of the Registrar isconferred under subsection (2) of section 3; or (b) before the Government, if the application for registrationis made before Registrar, and the Registrar or the Government, as the case may be, shall,within sixty days from the date of receipt of such representation,issue directions to the authority concerned to take appropriatedecision on the application for registration and the authorityconcerned shall comply with such directions.

8. Registration certificate.- (1)Where a co-operative society isregistered under this Act, the Registrar shall issue a certificate ofregistration signed and sealed by him, which shall be conclusiveevidence that the said society is duly registered under this Act.

(2) Notwithstanding anything contained in subsection (1), wherethe Registrar is satisfied that the original registration certificate is irrecoverably lost and the duplicate certificate could not be issuedAas the files or records regarding the registration of the co-operativesociety was lost, after registration, the Registrar shall issue acertificate stating the registration number and date of registrationof a co-operative society, on the basis of the details available inthe audit certificate and the records available with the Registrar,Bsigned and sealed by him, which shall be conclusive proof that thesaid society is duly registered and it shall be treated as a certificateof registration.”

Rules

“15. Classification of societies according to types.- Afterthe registration of a society the Registrar shall classify the societyinto one or other of the following types according to the principalobject provided in the bye-laws:

C

D

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xxx xxx xxx

Note:- (i) If any question arises as to the classification of a society,it shall be referred to the Registrar for decision and his decisionthereon shall be final.

(ii) If the Registrar alters the classification of a society from oneclass of society to another or from the sub class thereof to another, G

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Ahe shall issue to the society and the financing Bank a copy of hisorder and the society shall fall under that category with effectfrom the date of that order.”

14. The bye-laws of some of the Societies before us were alsoreferred to in the course of arguments. A sample set of the bye-laws ofBMavilayi Service Co-operative Bank Ltd., in particular bye-law 5, whichrefers to the objects of the aforesaid Society, provides as follows:

“Byelaw 5.

Objects.

C1. The main aim of this Primary Agricultural Credit Society is toprovidefinancial assistance in the form of loans to members foragriculturalpurposes, marketing of agricultural produce andpromotion ofagriculture.

2. Act as an agent for supply of seeds, fertilizers, pesticides,Dimplementsfor agricultural purposes and an agent for procurementof agriculturalproduce.

3. Provide loans for necessities of priority sector.

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

E5. Provide loans for agriculture related purposes.

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

7. Facilitate the sale of fertilizers and industrial products eitherFthrough marketing societies or directly for the benefit members.8. To construct or let out godowns or warehouse buildings forkeeping agricultural products of members.

9. Provide assistance to members for producing new typesseedlings.G10. Purchase and maintenance of newly innovated machines andImplements like power tillers, tractors etc for letting out to membersorothers.

11. Purchase and distribution of better breeds of cattle, goats,poultry etc to membersH

12. Formation and functioning of Farmers Club for farmers.

13. Provide short-term, medium-term, long-term loans and loansapprovedas per special scheme of Registrar, NABARD or suchagencies tomembers of society.

14. To promote the habit of thrift, self-sufficiency, mutual helpetc. among members and formulation and implementation ofschemes relating toit. Mobilisation of various types of depositsfrom members.

15. Provide financial and technical help for self-employed to dothe business profitably.

16. Perform all the banking operations as per the rules prevailingfrom time to time.

17. To construct or hire and receive rent in advance for any buildingandmaterial alteration for the smooth functioning of bank.Purchase of assets with the prior approval of Registrar.

18. To let out own buildings of bank to others.

19. Act as an agent for procurement and supply of essential articlesto the public at reasonable prices, opening of fair shops andconsumer storestrading of articles directed by the Registrar fromtime to time.

20. Opening of medical stores for supply of essential medicines atreasonable prices to the public.

21. Running of showrooms for supply of home appliances,furnitures, construction materials, textiles etc. at reasonable pricesto members.

22. Act as an agent in collection of premium of LIC, rent ofelectricity board, telecom and other public sector undertakings.

23. To associate more people to the cooperative institutions byorganising cooperative education and campaigns.

24. To borrow funds from District Cooperative Banks, Govt andother institutions approved by Registrar.

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

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A26. To discount cheques, bills or drafts as per the conditions laiddown by Registrar and to lend for a fixed period.

27. To create and implement welfare funds for members andemployees.To collect and deposit normal subscription amount formembers and employees and an amount allocated by General BodyBfrom annual profits each year to that fund. Approval of Registrarfor implementing the rule is mandatory.

28. To provide Overdraft facility, vehicle loan, loan for purchaseof home appliances or furniture or for construction of houses,repair of houses,or for purchase of property. Sub rule should beCcreated and approval of Registrar is mandatory for these purposes.

29. To open branches within area of operation of bank with priorapproval of Registrar for growth and expansion.

30. To provide safe deposit locker for customers.

D31. To implement new facilities for the convenience of staff,customers and members.

32. To render agency services like supply of construction material,LPG, other petroleum products.

33. Any other activities instituted by Central Govt, State Govt orESCB or DCB or other concerns to be carried out in accordancewith the Act.

34. To undertake and carry out developmental activities formulatedby local bodies and self-help groups to provide loans for them.

35. To let out auditoriums.F36. To provide loans for members for constructing houses orpurchase, renovate houses or for acquiring land.

37. To formulate and implement new schemes like aquariums,children’s park, resorts etc and to take new initiatives to attracttourist.G38.To construct godowns for various purposes of banks andcollection of agricultural products.

39. To accept financial assistance for Central Government, StateGovernment, NCDC and other governmental or semi-Hgovernmental agencies.

40. To establish a library in the society.

41. To set up small scale industries unit.

42. To be a partner or leader in the consortium scheme or otherschemes suggested by Central or State Government or Co-Operative Department or to formulate complete other schemeswith their approval.

43. To provide micro finance loans like Linkage loans, cash creditsand other short term loans like Muttathe Mulla etc to self-helpgroups and Kudumbasrees.”

15. It is important to note that though the main object of the primaryagricultural society in question is to provide financial assistance in theform of loans to its members for agricultural and related purposes, yet,some of the objects go well beyond, and include performing of bankingoperations “as per rules prevailing from time to time”, opening of medicalstores, running of showrooms and providing loans to members forpurposes other than agriculture.

16. At this juncture, it is important to refer to some of the decisionsof this Court on the provisions contained in section 80P. This Court beganon the wrong foot in Assam Cooperative Apex Marketing SocietyLtd. Assam v. Additional Commissioner of Income Tax, Assam(1994) Supp. (2) SCC 96. In this case, the question before the Courtwas as to whether the Assam Cooperative Apex Marketing SocietyLtd. was entitled to exemption under section 81(i)(c) of the IT Act, as itthen stood, in respect of income arising out of procurement of paddy andother agricultural produce. Section 81 is set out in paragraph 6 of thejudgment as follows:

“81. Income of cooperative societies.— Income tax shall notbe payable by a cooperative society —

(i) in respect of the profits and gains of business carried on byit, if it is —

(a) a society engaged in carrying on the business of bankingor providing credit facilities to its members; or (b) a society engaged in a cottage industry; or

(c) a society engaged in the marketing of the agriculturalproduce of its members; or

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(d) a society engaged in the purchase of agriculturalimplements, seeds, livestock or other articles intended foragriculture for the purpose of supplying them to its members;or A

(e) a society engaged in the processing without the aid ofBpower of the agricultural produce of its members; or (f) a primary society engaged in supplying milk raised by itsmembers to a federal milk cooperative society:

Provided that, in the case of a cooperative society which isalso engaged in activities other than those mentioned in thisCclause, nothing contained herein shall apply to that part of itsprofits and gains as is attributable to such activities and asexceeds fifteen thousand rupees;”

17. The expression “engaged in the marketing of the agriculturalproduce of its members” came up for decision before the Court. TheDCourt held that the object of this provision is that the agricultural producethat is produced by members alone would be entitled to such deduction.It further held thatthis object cannot extend to traders dealing inagricultural produce, so that if agricultural produce is bought from otheragriculturists by members but not produced by such member itself, suchEproduce would not qualify for deduction.

18. Shortly after this judgment, a three-Judge Bench in KeralaState Cooperative Marketing Federation Ltd. and Ors. v. CIT(1998) 5 SCC 48 overruled the aforesaid judgment. The question whicharose before the Court in this case was the identical question that aroseFin Assam Cooperative Apex Marketing Society Ltd. Assam(supra), the avatar of the provision, however, having changed to section80P(2)(a)(iii) of the IT Act. This Court, after setting out the classes ofsocieties covered by section 80P, then held:

“7. We may notice that the provision is introduced with a view toencouraging and promoting growth of cooperative sector in theeconomic life of the country and in pursuance of the declaredpolicy of the Government. The correct way of reading the differentheads of exemption enumerated in the section would be to treateach as a separate and distinct head of exemption. Whenever aquestion arises as to whether any particular category of an income G

H

of a cooperative society is exempt from tax what has to be seenis whether income fell within any of the several heads ofexemption. If it fell within any one head of exemption, it would befree from tax notwithstanding that the conditions of another headof exemption are not satisfied and such income is not free fromtax under that head of exemption. The expression “marketing” isan expression of wide import. It involves exchange functions suchas buying and selling, physical functions such as storage,transportation, processing and other commercial activities suchas standardisation, financing, marketing intelligence etc. Suchactivities can be carried on by an apex society rather than a primarysociety.

8. So long as agricultural produce handled by the assessee belongedto its members it was entitled to exemption in respect of the profitsderived from the marketing of the same. Whether the memberscame by the produce because of their own agricultural activitiesor whether they acquired it by purchasing it from cultivators wasof no consequence for the purpose of determining whether theassessee was entitled to the exemption. The only condition requiredfor qualifying the assessee’s income for exemption was that theassessee’s business must be that of marketing, the marketing mustbe of agricultural produce and that agricultural produce must havebelonged to the members of the assessee-Society before theycame up for marketing by it, whether on its own account or onaccount of the members themselves. Thus there is no scope tolimit the exemption. The cooperative societies are engaged inmarketing of an agricultural produce both of its members as wellas of non-members. In the latter case, there is no differencebetween a cooperative society or any other business organisationand so will not be entitled to exemption. The exemption is intendedto cover all cases where a cooperative society is engaged inmarketing agricultural produce of its members. Section 80-P(2)(a)(iii) does not in effect limit the scope of the exemption toagricultural produce raised by members alone but includesagricultural produce raised by others but belonging to cooperativesocieties. The contrast in the said provision is with reference tothe marketing of agricultural produce of the members of the societyor that purchased from non-members.

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A9. A reading of the provisions of Section 80-P of the Act wouldindicate the manner in which the exemptions under the saidprovisions are sought to be extended. Whenever the legislaturewanted to restrict the exemption to a primary cooperative societyit was so made clear as is evident from clause (f) referred toabove with reference to a milk cooperative society that a primaryBsociety engaged in supplying milk is entitled to such exemptionwhile denying the same to a federal milk cooperative society, butno such distinction is made with reference to a banking businesswhich provides trade facilities to its members. It is clear, therefore,that the legislature did not intend to limit the scope of exemptionConly to those which are primary societies. If a small agriculturalcooperative society does not have any marketing facilities it cancertainly become a member of an apex society which may marketthe produce of its members. It was submitted on behalf of theDepartment that the member societies themselves do not raisethe agricultural produce. The societies only market the produceDraised by their members and do not themselves raise agriculturalproduce. The language adopted in Section 80-P(2)(a)(iii) withwhich we are concerned will admit the interpretation that thesociety engaged in marketing of agricultural produce of itsmembers as agricultural produce “belonging to” its members whichEis not necessarily raised by such member. Thus, when theprovisions of Section 80-P of the Act admit of a wider exemptionthere is no reason to cut down the scope of the provision asindicated in Assam Coop. Apex Marketing Society case [1994Supp (2) SCC 96].

F19. It was therefore held that the expression “agricultural produceof its members” would really mean agricultural produce belonging to itsmembers, which would include agricultural produce purchased bymembers from other agriculturists. Thus, the Court declared:

“17. The attention of this Court does not seem to have been drawnto the aforesaid decisions while deciding Assam Coop. Societycase [1994 Supp (2) SCC 96]. With respect, we, therefore, holdthat the view taken therein requires reconsideration as statedearlier by us. In the result, the order of the Kerala High Courtfollowing the decision of this Court in Assam Coop. Society isreversed. We hold that the society engaged in the marketing of G

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agricultural produce of its members would mean not only suchsocieties which deal with the produce raised by the members whoare individuals or societies which are members thereof who mayhave purchased such goods from the agriculturists. Thus, we allowthe civil appeal by setting aside the order made by the High Courtand answering the question referred to us in the affirmative infavour of the assessee and against the Revenue. There shall beno order as to costs.”

20. We now come to the judgment of this Court in CitizenCooperative Society Ltd. (supra). This judgment was concerned withan assessee who was established initially as a mutually aided cooperativecredit society, having been registered under section 5 of the AndhraPradesh Mutually Aided Cooperative Societies Act, 1995. As operationsof the assessee began to spread over States outside the State of AndhraPradesh, the assessee got registered under the Multi-State CooperativeSocieties Act, 2002 as well. The question that the Court posed to itselfwas as to whether the appellant was barred from claiming deduction inview of Section 80P(4) of the IT Act – see paragraph 5. After settingout the findings of fact in that case, and the income tax authoritiesconcurrent holding that the society is carrying on banking business andfor all practical purposes acts like a co-operative bank, this Court thenheld as follows:

“18. We may mention at the outset that there cannot be any disputeto the proposition that Section 80-P of the Act is a benevolentprovision which is enacted by Parliament in order to encourageand promote growth of cooperative sector in the economic life ofthe country. It was done pursuant to the declared policy of theGovernment. Therefore, such a provision has to be read liberally,reasonably and in favour of the assessee (see Bajaj TempoLtd. v. CIT [(1992) 3 SCC 78]). It is also trite that such a provisionhas to be construed as to effectuate the object of the legislatureand not to defeat it (see CIT v. Mahindra and MahindraLtd. [(1983) 4 SCC 392]). Therefore, it hardly needs to beemphasised that all those cooperative societies which fall withinthe purview of Section 80-P of the Act are entitled to deduction inrespect of any income referred to in sub-section (2) thereof. Clause(a) of sub-section (2) gives exemption of whole of the amount ofprofits and gains of business attributable to any one or more ofsuch activities which are mentioned in sub-section (2).

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19. Since we are concerned here with sub-clause (i) of clause(a) of sub-section (2), it recognises two kinds of cooperativesocieties, namely: (i) those carrying on the business of bankingand; (ii) those providing credit facilities to its members.

20. In Kerala State Coop. Mktg. Federation Ltd. v. CIT [(1998)5 SCC 48], this Court, while dealing with classes of societiescovered by Section 80-P of the Act, held as follows:

“6. The classes of societies covered by Section 80-P of the Actare as follows:

(a) engaged in business of banking and providing credit facilitiesto its members; ***

7. We may notice that the provision is introduced with a view toencouraging and promoting growth of cooperative sector in theeconomic life of the country and in pursuance of the declaredpolicy of the Government. The correct way of reading the differentheads of exemption enumerated in the section would be to treateach as a separate and distinct head of exemption. Whenever aquestion arises as to whether any particular category of an incomeof a cooperative society is exempt from tax what has to be seenis whether income fell within any of the several heads ofexemption. If it fell within any one head of exemption, it would befree from tax notwithstanding that the conditions of another headof exemption are not satisfied and such income is not free fromtax under that head of exemption.”

21. In CIT v. Punjab State Coop. Bank Ltd. [2008 SCC OnLineP&H 2042], while dealing with an identical issue, the High Courtof Punjab and Haryana held as follows:

“8. The provisions of Section 80-P were introduced with a viewto encouraging and promoting the growth of the cooperative sectorin the economic life of the country and in pursuance of the declaredpolicy of the Government. The different heads of exemptionenumerated in the section are separate and distinct heads ofexemption and are to be treated as such. Whenever a questionarises as to whether any particular category of an income of acooperative society is exempt from tax, then it has to be seen whether such income fell within any of the several heads ofexemption. If it fell within any one head of exemption…It meansthat a cooperative society engaged in carrying on the business ofbanking and a cooperative society providing credit facilities to itsmembers will be entitled for exemption under this sub-clause. Thecarrying on the business of banking by a cooperative society orproviding credit facilities to its members are two different typesof activities which are covered under this sub-clause.

***

13. So, in our view, if the income of a society is falling within anyone head of exemption, it has to be exempted from taxnotwithstanding that the condition of other heads of exemptionare not satisfied. A reading of the provisions of Section 80-P ofthe Act would indicate the manner in which the exemption underthe said provisions is sought to be extended. Whenever thelegislature wanted to restrict the exemption to a primarycooperative society, it was so made clear as is evident from clause(f) with reference to a milk cooperative society that a primarysociety engaged in supplying milk is entitled to such exemptionwhile denying the same to a federal milk cooperative society.”

The aforesaid judgment of the High Court correctly analyses theprovisions of Section 80-P of the Act and it is in tune with thejudgment of this Court in Kerala State Coop. Mktg. FederationLtd. [(1998) 5 SCC 48]

22. With the insertion of sub-section (4) by the Finance Act, 2006,which is in the nature of a proviso to the aforesaid provision, it ismade clear that such a deduction shall not be admissible to acooperative bank. However, if it is a primary agricultural creditsociety or a primary cooperative agricultural and rural developmentbank, the deduction would still be provided. Thus, cooperativebanks are now specifically excluded from the ambit of Section80-P of the Act.

23. Undoubtedly, if one has to go by the aforesaid definition of“cooperative bank”, the appellant does not get covered thereby.It is also a matter of common knowledge that in order to do thebusiness of a cooperative bank, it is imperative to have a licencefrom Reserve Bank of India, which the appellant does not possess.

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Not only this, as noticed above, Reserve Bank of India has itselfclarified that the business of the appellant does not amount to thatof a cooperative bank. The appellant, therefore, would not comewithin the mischief of sub-section (4) of Section 80-P.

24. So far so good. However, it is significant to point out that themain reason for disentitling the appellant from getting the deductionprovided under Section 80-P of the Act is not sub-section (4)thereof. What has been noticed by the assessing officer, afterdiscussing in detail the activities of the appellant, is that the activitiesof the appellant are in violation of the provisions of MACSA underwhich it is formed. It is pointed out by the assessing officer thatthe assessee is catering to two distinct categories of people. Thefirst category is that of resident members or ordinary members.There may not be any difficulty as far as this category is concerned.However, the assessee had carved out another category of“nominal members”. These are those members who are makingdeposits with the assessee for the purpose of obtaining loans, etc.and, in fact, they are not members in real sense. Most of thebusiness of the appellant was with this second category of personswho have been giving deposits which are kept in fixed depositswith a motive to earn maximum returns. A portion of these depositsis utilised to advance gold loans, etc. to the members of the firstcategory. It is found, as a matter of fact, that the depositors andborrowers are quite distinct. In reality, such activity of the appellantis that of finance business and cannot be termed as cooperativesociety. It is also found that the appellant is engaged in the activityof granting loans to general public as well. All this is done withoutany approval from the Registrar of the Societies. With indulgencein such kind of activity by the appellant, it is remarked by theassessing officer that the activity of the appellant is in violation ofthe Cooperative Societies Act. Moreover, it is a cooperative creditsociety which is not entitled to deduction under Section 80-P(2)(a)(i) of the Act.

25. It is in this background, a specific finding is also rendered thatthe principle of mutuality is missing in the instant case. Thoughthere is a detailed discussion in this behalf in the order of theassessing officer, our purpose would be served by taking note ofthe following portion of the discussion:

“As various courts have observed that the following threeconditions must exist before an activity could be brought underthe concept of mutuality:

(i) that no person can earn from him;

(ii) that there a profit motivation;

(iii) and that there is no sharing of profit.

It is noticed that the fund invested with bank which are not memberof association welfare fund, and the interest has been earned onsuch investment for example, ING Mutual Fund [as said by theMD vide his statement dated 20-12-2010]. [Though the bankformed the third party vis-à-vis the assessee entitled betweencontributor and recipient is lost in such case. The other ingredientsof mutuality are also found to be missing as discussed in furtherparagraphs.]

In the present case both the parties to the transaction are thecontributors towards surplus, however, there are no participatorsin the surpluses. There is no common consent of whatsoever forparticipators as their identity is not established. Hence, the assesseefails to satisfy the test of mutuality at the time of making thepayments the number in referred as members may not be themember of the Society as such the AOP body by the Society isnot covered by concept of mutuality at all.”

26. These are the findings of fact which have remained unshakentill the stage of the High Court. Once we keep the aforesaid aspectsin mind, the conclusion is obvious, namely, the appellant cannot betreated as a cooperative society meant only for its members andproviding credit facilities to its members. We are afraid such asociety cannot claim the benefit of Section 80-P of the Act.”

21. An analysis of this judgment would show that the question oflaw that was reflected in paragraph 5 of the judgment was answered infavour of the assessee.The following propositions may be culled outfrom the judgment:

(I)That section 80P of the IT Act is a benevolent provision,which was enacted by Parliament in order to encourage andpromote the growth of the co-operative sector generally in

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Athe economic life of the country and must, therefore, be readliberally and in favour of the assessee;

(II)That once the assessee is entitled to avail of deduction, theentire amount of profits and gains of business that areattributable to any one or more activities mentioned in subBsection (2) of section 80P must be given by way of deduction;

(III) That this Court in Kerala State Cooperative MarketingFederation Ltd. and Ors. (supra) has construed section80P widely and liberally, holding that if a society were toavail of several heads of deduction, and if it fell within anyCone head of deduction, it would be free from taxnotwithstanding that the conditions of another head ofdeduction are not satisfied;

(IV) This is for the reason that when the legislature wanted torestrict the deduction to a particular type of co-operativeDsociety, such as is evident from section 80P(2)(b) qua milkco-operative societies, the legislature expressly says sowhich is not the case with section 80P(2)(a)(i);

(V) That section 80P(4) is in the nature of a proviso to the mainprovision contained in section 80P(1) and (2).This provisoEspecifically excludes only co-operative banks, which are cooperative societies who must possess a licence from theRBI to do banking business. Given the fact that the assesseein that case was not so licenced, the assessee would not fallwithin the mischief of section 80P(4).

F22. However, considering that the learned Senior Advocateappearing for the Revenue argued that the concurrent findings of fact inthat case were that most of the business of the assesseewas conductedillegally with nominal members, who could not be members of such societyunder the Andhra Pradesh Act, and considering also that,as the assesseeengaged in granting loans to the general public, it could not be treated asGa co-operative society meant only for its members and providing creditfacilities to its members, the appeal by the assessee would fail. It isimportant to note that no argument was made by the counsel for theassessee in Citizen Cooperative Society Ltd. (supra) that theassessing officer and other authorities under the IT Act could not go H

behind the registration of the co-operative society in order to discover asto whether it was conducting business in accordance with its bye-laws.

23. It is settled law that it is only the ratio decidendi of a judgmentthat is binding as a precedent. Thus, in B. Shama Rao v. UnionTerritory, Pondicherry (1967) 2 SCR 650, the majority judgment ofShelat J., speaking for himself and other two learned Judges held:

“It is trite to say that a decision is binding not because of itsconclusion but in regard to its ratio and the principle laid downtherein.”

24. In State of Orissa v. Sudhanshu Sekhar Misra and Ors.(1968) 2 SCR 154, this Court held:

“A decision is only an authority for what it actually decides. Whatis of the essence in a decision is its ratio and not every observationfound therein nor what logically follows from the variousobservations made in it. On this topic this is what Earl of HalsburyL.C. said in Quinn v. Leathem [[1901] AC 495]:

“Now before discussing the case of Allen v. Flood, [1898] AC 1and what was decided therein, there are two observations of ageneral character which I wish to make, and one is to repeatwhat I have very often said before, that every judgment must beread as applicable to the particular facts proved, or assumed to beproved, since the generality of the expressions which may be foundthere are not intended to be expositions of the whole law, butgoverned and qualified by the particular facts of the case in whichsuch expressions are to be found. The other is that a case is onlyan authority for what it actually decides. I entirely deny that it canbe quoted for a proposition that may seem to follow logically fromit. Such a mode of reasoning assumes that the law is necessarilya logical code, whereas every lawyer must acknowledge that thelaw is not always logical at all.”

25. An illuminating discussion is to be found in the dissentingjudgment of Justice A.P. Sen in Dalbir Singh v. State of Punjab, (1979)3 SCR 1059. Since the dissenting judgment refers to a principle of general

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“With greatest respect, the majority decision in Rajendra Prasadcase does not lay down any legal principle of general applicability.A decision on a question of sentence depending upon the factsand circumstances of a particular case, can never be regarded asa binding precedent, much less “law declared” within the meaningof Article 141 of the Constitution so as to bind all courts within theterritory of India. According to the well-settled theory ofprecedents every decision contains three basic ingredients:

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“(i) findings of material facts, direct and inferential. An inferentialfinding of facts is the inference which the Judge draws from thedirect or perceptible facts; C

(ii) statements of the principles of law applicable to the legalproblems disclosed by the facts; and D

(iii) judgment based on the combined effect of (i) and (ii) above.”

For the purposes of the parties themselves and their privies,ingredient (iii) is the material element in the decision for itdetermines finally their rights and liabilities in relation to the subject-matter of the action. It is the judgment that estops the partiesfrom reopening the dispute. However, for the purpose of thedoctrine of precedents, ingredient (ii) is the vital element in thedecision. This indeed is the ratio decidendi. [R.J. Walker & M.G.Walker: The English Legal System. Butterworths, 1972, 3rd Edn.,pp. 123-24] It is not everything said by a judge when givingjudgment that constitutes a precedent. The only thing in a judge’sdecision binding a party is the principle upon which the case isdecided and for this reason it is important to analyse a decisionand isolate from it the ratio decidendi. In the leading caseof Qualcast (Wolverhampton) Ltd. v. Haynes [LR 1959 AC 743]it was laid down that the ratio decidendi may be defined as astatement of law applied to the legal problems raised by the factsas found, upon which the decision is based. The other two elementsin the decision are not precedents. The judgment is not binding(except directly on the parties themselves), nor are the findings offacts. This means that even where the direct facts of an earlier E

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case appear to be identical to those of the case before the court,the judge is not bound to draw the same inference as drawn in theearlier case.”

(at pages 1073-1074)

26. Applying the aforesaid decisions, it is clear that the ratiodecidendi in Citizen Cooperative Society Ltd. (supra) would notdepend upon the conclusion arrived at on facts in that case, the casebeing an authority for what it actually decides in law and not for whatmay seem to logically follow from it. Thus, the statement of the principlesof law applicable to the legal problems disclosed by the facts alone is thebinding ratio of the case, which as has been stated hereinabove, iscontained in paragraphs 18 to 23 of the judgment. Paragraphs 24 to 26,being the judgment based on the combined effect of the statements ofthe principle of law applicable to the material facts of the case cannot bedescribed as the ratio decidendi of the judgment. Nor can it be said thatit would logically follow from the finding on facts that the assessingofficer can go behind the registration of a society and arrive at aconclusion that the society in question is carrying on illegal activities. Onthis score alone, theFull Bench’s understanding of this judgment has tobe faulted and is set aside.

27. However, this does not conclude the issue in the present case.We now turn to the proper interpretation of Section 80P of the ITAct.Firstly, the marginal note to Section 80P which reads “Deduction inrespect of income of co-operative societies” is important, in that itindicates the general “drift” of the provision. This was so held by thisCourt in K.P. Varghese v. Income Tax Officer, Ernakulam and Anr.(1981) 4 SCC 173 as follows:

“9. This interpretation of sub-section (2) is strongly supported bythe marginal note to Section 52 which reads “Consideration fortransfer in cases of understatement”. It is undoubtedly true thatthe marginal note to a section cannot be referred to for the purposeof construing the section but it can certainly be relied upon asindicating the drift of the section or, to use the words of Collins,M.R. in Bushel v. Hammond [(1904) 2 KB 563] to show whatthe section is dealing with. It cannot control the interpretation ofthe words of a section particularly when the language of the sectionis clear and unambiguous but, being part of the statute, it prima A

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Afacie furnishes some clue as to the meaning and purpose of thesection (vide Bengal Immunity Company Limited v. State ofBihar [(1955) 2 SCR 603]).”

28. Secondly, for purposes of eligibility for deduction, the assesseemust be a “co-operative society”. A co-operative society is defined inBSection 2(19) of the IT Act, as being a co-operative society registeredeither under the Co-operative Societies Act, 1912 or under any otherlaw for the time being in force in any State for the registration of co-operative societies.This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the Statelaw. For purposes of eligibility, it is unnecessary to probe any further asCto whether the co-operative society is classified as X or Y.

29. Thirdly, the gross total income must include income that isreferred to in sub-section (2).

30. Fourthly, sub-clause (2)(a)(i) with which we are directlyDconcerned, then speaks of a co-operative society being “engaged in”carrying on the business of banking or providing credit facilities to itsmembers. What is important qua sub-clause (2)(a)(i) is the fact that theco-operative society must be “engaged in” the providing credit facilitiesto its members. As has been rightly pointed out by the learned AdditionalSolicitor General, the expression “engaged in”, as has been held inECommissioner of Income Tax, Madras v. Ponni Sugars andChemicals Ltd. (2008) 9 SCC 337, would necessarily entail anexamination of all the facts of the case. This Court in Ponni Sugarsand Chemicals Ltd. (supra) held:

“20. In order to earn exemption under Section 80-P(2) aFcooperative society must prove that it had engaged itself in carryingon any of the several businesses referred to in sub-section (2). Inthat connection, it is important to note that under sub-section (2),in the context of cooperative society, Parliament has stipulatedthat the society must be engaged in carrying on the business ofGbanking or providing credit facilities to its members. Therefore, ineach case, the Tribunal was required to examine the memorandumof association, the articles of association, the returns of incomefiled with the Department, the status of business indicated in suchreturns, etc. This exercise had not been undertaken at all.”

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31. The learned Additional Solicitor General relied upon the secondproviso to section 2(oaa) of the Kerala Act, and argued that given thefact that the principal object in most, if not all, of the Appellants beforeus has not been fulfilled, these Appellants have lost all characteristics ofbeing primary agricultural credit societies. In answer to this submission,learned counsel for the Appellants cited the following judgments, namely,Assistant Commissioner of Income Tax v. A.K. Menon and Ors.(1995) 5 SCC 200 (paragraph 4); Titan Medical Systems (P) Ltd. v.Collector of Customs, New Delhi (2003) 9 SCC 133 (paragraph 12);and Vadilal Chemicals Ltd. v. State of A.P. and Ors. (2005) 6 SCC292 (paragraphs 20 to 23), for the proposition that it is the RBI aloneunder the Banking Regulation Act, 1949, and the Registrar alone underthe Kerala Act who can look into questions as to whether a primaryagricultural credit society is, or is not, a co-operative bank, and whethera society’s classification as primary agricultural credit society ought tocontinue or be re-classified as a co-operative bank. Neither argumentapplies to the facts of these cases, given that the statutory provisioninvolved does not require the Appellants to be primary agricultural creditsocieties to claim a deduction under section 80P(2)(a)(i) in the first place.

32. Fifthly, as has been held in Udaipur Sahkari UpbhoktaThok Bhandar Ltd. v. CIT (2009) 8 SCC 393 at paragraph 23, theburden is on the assessee to show, by adducing facts, that it is entitled toclaim the deduction under Section 80P.Therefore, the assessing officerunder the IT Act cannot be said to be going behind any registrationcertificate when he engages in a fact-finding enquiry as to whether theco-operative society concerned is in fact providing credit facilities to itsmembers. Such fact finding enquiry (see section 133(6) of the IT Act)would entail examining all relevant facts of the co-operative society inquestion to find out whether it is, as a matter of fact, providing creditfacilities to its members, whatever be its nomenclature. Once this task isfulfilled by the assessee, by placing reliance on such facts as wouldshow that it is engaged in providing credit facilities to its members, theassessing officer must then scrutinize the same, and arrive at a conclusionas to whether this is, in fact, so.

33. Sixthly, what is important to note is that, as has been held inKerala State Cooperative Marketing Federation Ltd. and Ors.(supra) the expression “providing credit facilities to its members” doesnot necessarily mean agricultural credit alone. Section 80P being a AB

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Abeneficial provision must be construed with the object of furthering theco-operative movement generally, and section 80P(2)(a)(i) must becontrasted with section 80P(2)(a)(iii) to (v), which expressly speaks ofagriculture.It must also further be contrasted with sub-clause (b), whichspeaks only of a “primary” society engaged in supplying milk etc. therebydefining which kind of society is entitled to deduction, unlike the provisionsBcontained in section 80P(2)(a)(i). Also, the proviso to section 80P(2),when it speaks of sub-clauses (vi) and (vii), further restricts the type ofsociety which can avail of the deductions contained in those two sub-clauses, unlike any such restrictive language in Section 80P(2)(a)(i).Onceit is clear that the co-operative society in question is providing creditCfacilities to its members, the fact that it is providing credit facilities tonon-members does not disentitle the society in question from availing ofthe deduction. The distinction between eligibility for deductionandattributability of amount of profits and gains to an activity is a real one.Since profits and gains from credit facilities given to non-members cannotbe said to be attributable to the activity of providing credit facilities to itsDmembers, such amount cannot be deducted.

34. Seventhly, section 80P(1)(c) also makes it clear that section80P is concerned with the co-operative movement generally and,therefore, the moment a co-operative society is registered under the1912 Act, or a State Act, and is engaged in activities which may beEtermed as residuary activities i.e. activities not covered by sub-clauses(a) and (b), either independently of or in addition to those activities, thenprofits and gains attributable to such activity are also liable to be deducted,but subject to the cap specified in sub-clause (c). The reach of sub-clause (c) is extremely wide, and would include co-operative societiesFengaged in any activity, completely independent of the activities mentionedin sub-clauses (a) and (b), subject to the cap of INR 50,000/- to be foundin sub-clause (c)(ii). This puts paid to any argument that in order to availof a benefit under Section 80P, a co-operative society once classified asa particular type of society, must continue to fulfil those objects alone. Ifsuch objects are only partially carried out, and the society conducts anyGother legitimate type of activity, such co-operative society would only beentitled to a maximum deduction of Rs.50,000/- under sub-clause (c).

35. Eighthly, sub-clause (d) also points in the same direction, inthat interest or dividend income derived by a co-operative society frominvestments with other co-operative societies, are also entitled to deductH

the whole of such income, the object of the provision being furtheranceof the co-operative movement as a whole.

36. Coming to the provisions of section 80P(4), it is important toadvert to speech of the Finance Minister dated 28.02.2006, which reflectsthe need for introducing section 80P(4). Shri P. Chidambaram specificallystated:

“166. Cooperative Banks, like any other bank, are lendinginstitutions and should pay tax on their profits. Primary AgriculturalCredit Societies (PACS) and Primary Cooperative Agriculturaland Rural Development Banks (PCARDB) stand on a specialfooting and will continue to be exempt from tax under section 80Pof the Income Tax Act. However, I propose to exclude all othercooperative banks from the scope of that section.”

37. Likewise, a Circular dated 28.12.2006, containing explanatorynotes on provisions contained in the Finance Act, 2006, is also important,and reads as follows:

“Withdrawal of tax benefits available to certain cooperative banks xxx xxx xxx 22.2. The cooperative banks are functioning at par with othercommercial banks, which do not enjoy any tax benefit. Thereforesection 80P has been amended and a new sub-section (4) hasbeen inserted to provide that the provisions of the said sectionshall not apply in relation to any co-operative bank other than aprimary agricultural credit society or a primary co-operativeagricultural and rural development bank. The expressions ‘co-operative bank’, ‘primary agricultural credit society’ and ‘primaryco-operative agricultural and rural development bank’ have alsobeen defined to lend clarity to them.”

38. A clarification by the CBDT,in a letter dated 09.05.2008, isalso important, and states as follows:

“Subject: Clarification regarding admissibility of deduction undersection 80P of the Income Tax Act, 1961.

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

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Anot be allowable to any co-operative bank other than a primaryagricultural credit society or a primary co-operative agriculturaland rural development bank. For the purpose of the said sub-section, co-operative bank shall have the meaning assigned to it inpart V of the Banking Regulation Act, 1949.

B3. In part V of the Banking Regulation Act, “Co-operative Bank”means a State Co-operative bank, a Central Co-operative Bankand a primary Co-operative bank.

4. Thus, if the Delhi Co-op Urban T & C Society Ltd. does notfall within the meaning of “Co-operative Bank” as defined in partCV of the Banking Regulation Act, 1949, subsection(4) of section80P will not apply in this case.

5. Issued with the approval of Chairman, Central Board of DirectTaxes.”

39. The above material would clearly indicate that the limited objectDof section 80P(4) is to exclude co-operative banks that function at parwith other commercial banks i.e. which lend money to members of thepublic. Thus, if the Banking Regulation Act, 1949 is now to be seen,what is clear from section 3 read with section 56 is that a primary co-operative bank cannot be a primary agricultural credit society, as suchEco-operative bank must be engaged in the business of banking as definedby section 5(b) of the Banking Regulation Act, 1949, which means theaccepting, for the purpose of lending or investment, of deposits of moneyfrom the public. Likewise, under section 22(1)(b) of the BankingRegulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is aFco-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-operativesociety, the primary object of which is to provide financial accommodationto its members for agricultural purposes or for purposes connected withagricultural activities.G40. As a matter of fact, some primary agricultural credit societiesapplied for a banking licence to the RBI, as their bye-laws also containas one of the objects of the Society the carrying on of the business ofbanking. This was turned down by the RBI in a letter dated 25.10.2013as follows:

“Application for license

Please refer to your application dated April 10, 2013 requestingfor a banking license. On a scrutiny of the application, we observethat you are registered as a Primary Agricultural Credit Society(PACS).

In this connection, we have advised RCS vide letter dated UBD(T) No. 401/10.00/16A/2013-14 dated October 18, 2013 that interms of Section 3 of the Banking Regulation Act, 1949 (AACS),PACS are not entitled for obtaining a banking license. Hence,your society does not come under the purview of Reserve Bankof India. RCS will issue the necessary guidelines in this regard.”

41. A number of judgments have held that a proviso cannot beused to cut down the language of the main enactment where suchlanguage is clear, or to exclude by implication what the main enactmentclearly states. Thus, in CIT, Mysore v. Indo Mercantile Bank 1959Supp. (2) SCR 256, this Court held:

“The proper function of a proviso is that it qualifies the generalityof the main enactment by providing an exception and taking outas it were, from the main enactment, a portion which, but for theproviso would fall within the main enactment. Ordinarily it is foreignto the proper function of a proviso to read it as providing somethingby way of an addendum or dealing with a subject which is foreignto the main enactment. “It is a fundamental rule of constructionthat a proviso must be considered with relation to the principalmatter to which it stands as a proviso”. Therefore it is to beconstrued harmoniously with the main enactment. (Per Das, C.J.)in Abdul Jabar Butt v. State of Jammu & Kashmir [(1957) SCR51, 59] . Bhagwati, J., in Ram Narain Sons Ltd. v. AssistantCommissioner of Sales Tax [(1955) 2 SCR 483, 493] said:

“It is a cardinal rule of interpretation that a proviso to a particularprovision of a statute only embraces the field which is covered bythe main provision. It carves out an exception to the main provisionto which it has been enacted as a proviso and to no other.”

Lord Macmillan in Madras & Southern Maharatta RailwayCo. v. Bezwada Municipality [(1944) LR 71 IA 113, 122] laiddown the sphere of a proviso as follows:

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“The proper function of a proviso is to except and deal with acase which would otherwise fall within the general language ofthe main enactment, and its effect is confined to that case. Where,as in the present case, the language of the main enactment isclear and unambiguous, a proviso can have no repercussion onthe interpretation of the main enactment, so as to exclude from itby implication what clearly falls within its express terms.”

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The territory of a proviso therefore is to carve out an exception tothe main enactment and exclude something which otherwise wouldhave been within the section. It has to operate in the same fieldand if the language of the main enactment is clear it cannot beCused for the purpose of interpreting the main enactment or toexclude by implication what the enactment clearly says unlessthe words of the proviso are such that that is its necessary effect.(Vide also Corporation of City of Toronto v. Attorney-Generalfor Canada [(1946) AC 32, 37].”

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42. To similar effect, a two-Judge Bench of this Court inTribhovandas Haribhai Tamboli v. Gujarat Revenue Tribunal(1991) 3 SCC 442 held:

E“6. It is a cardinal rule of interpretation that a proviso to a particularprovision of a statute only embraces the field, which is coveredby the main provision. It carves out an exception to the mainprovision to which it has been enacted by the proviso and to noother. The proper function of a proviso is to except and deal witha case which would otherwise fall within the general language ofFthe main enactment, and its effect is to confine to that case. Wherethe language of the main enactment is explicit and unambiguous,the proviso can have no repercussion on the interpretation of themain enactment, so as to exclude from it, by implication whatclearly falls within its express terms. The scope of the proviso,Gtherefore, is to carve out an exception to the main enactment andit excludes something which otherwise would have been withinthe rule. It has to operate in the same field and if the language ofthe main enactment is clear, the proviso cannot be torn apart fromthe main enactment nor can it be used to nullify by implicationwhat the enactment clearly says nor set at naught the real object H

of the main enactment, unless the words of the proviso are suchthat it is its necessary effect.”

43. Another two-Judge Bench in J.K. Industries Ltd. v. ChiefInspector of Factories and Boilers (1996) 6 SCC 665 then declared:

“33. A proviso to a provision in a statute has several functionsand while interpreting a provision of the statute, the court is requiredto carefully scrutinise and find out the real object of the provisoappended to that provision. It is not a proper rule of interpretationof a proviso that the enacting part or the main part of the sectionbe construed first without reference to the proviso and if the sameis found to be ambiguous only then recourse may be had to examinethe proviso as has been canvassed before us. On the other handan accepted rule of interpretation is that a section and the provisothereto must be construed as a whole, each portion throwing light,if need be, on the rest. A proviso is normally used to removespecial cases from the general enactment and provide for themspecially.

34. A proviso qualifies the generality of the main enactment byproviding an exception and taking out from the main provision, aportion, which, but for the proviso would be a part of the mainprovision. A proviso must, therefore, be considered in relation tothe principal matter to which it stands as a proviso. A provisoshould not be read as if providing something by way of addition tothe main provision which is foreign to the main provision itself.

35. Indeed, in some cases, a proviso, may be an exception to themain provision though it cannot be inconsistent with what isexpressed in the main provision and if it is so, it would be ultravires of the main provision and struck down. As a general rule inconstruing an enactment containing a proviso, it is proper to construethe provisions together without making either of them redundantor otiose. Even where the enacting part is clear, it is desirable tomake an effort to give meaning to the proviso with a view tojustify its necessity.

36. While dealing with proper function of a proviso, this Courtin CIT v. Indo Mercantile Bank Ltd. [AIR 1959 SC 713: (1959)36 ITR 1] opined:

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“The proper function of a proviso is that it qualifies the generalityof the main enactment by providing an exception and taking outas it were, from the main enactment, a portion which, but for theproviso would fall within the main enactment. Ordinarily it is foreignto the proper function of a proviso to read it as providing somethingby way of an addendum or dealing with a subject which is foreignto the main enactment.”

This view has held the field till date.”

44. More recently, in Union of India v. Dileep Kumar Singh(2015) 4 SCC 421, this Court held as follows:

“20. Equally, it is settled law that a proviso does not travel beyondthe provision to which it is a proviso. Therefore, the golden rule isto read the whole section, inclusive of the proviso, in such mannerthat they mutually throw light on each other and result in aharmonious construction. This is laid down in DwarkaPrasad v. Dwarka Das Saraf [(1976) 1 SCC 128], as follows:

“18. We may mention in fairness to counsel that the following,among other decisions, were cited at the Bar bearing on the usesof provisos in statutes: CIT v. Indo-Mercantile Bank Ltd. [AIR1959 SC 713]; Ram Narain Sons Ltd. v. CST [AIR 1955 SC765]; Thompson v. Dibdin [1912 AC 533], AC p.541; R. v. Dibdin [1910 P 57 (CA)], and Tahsildar Singh v. Stateof U.P. [AIR 1959 SC 1012]. The law is trite. A proviso must belimited to the subject-matter of the enacting clause. It is a settledrule of construction that a proviso must prima facie be read andconsidered in relation to the principal matter to which it is a proviso.It is not a separate or independent enactment. ‘Words aredependent on the principal enacting words to which they are tackedas a proviso. They cannot be read as divorced from their context’(Thompson v. Dibdin [1912 AC 533]). If the rule of constructionis that prima facie a proviso should be limited in its operation tothe subject-matter of the enacting clause, the stand we have takenis sound. To expand the enacting clause, inflated by the proviso,sins against the fundamental rule of construction that a provisomust be considered in relation to the principal matter to which itstands as a proviso. A proviso ordinarily is but a proviso, althoughthe golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other andresult in a harmonious construction.”

45. To sum up, therefore, the ratio decidendi of CitizenCooperative Society Ltd. (supra), must be given effect to. Section80P of the IT Act, being a benevolent provision enacted by Parliamentto encourage and promote the credit of the co-operative sector in generalmust be read liberally and reasonably, and if there is ambiguity, in favourof the assessee. A deduction that is given without any reference to anyrestriction or limitation cannot be restricted or limited by implication, asis sought to be done by the Revenue in the present case by adding theword “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 specificallyexcludes co-operative banks which are co-operative societies engagedin banking business i.e. engaged in lending money to members of thepublic, which have a licence in this behalf from the RBI. Judged by thistouchstone, it is clear that the impugned Full Bench judgment is whollyincorrect in its reading of Citizen Cooperative Society Ltd.(supra).Clearly, therefore, once section 80P(4) is out of harm’s way, allthe assessees in the present case are entitled to the benefit of the deductioncontained in section 80P(2)(a)(i), notwithstanding that they may also begiving loans to their members which are not related to agriculture. Also,in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.

46. It must also be mentioned here that unlike the Andhra Act thatCitizen Cooperative Society Ltd. (supra) considered, ‘nominalmembers’ are ‘members’ as defined under the Kerala Act. This Courtin U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v.Commissioner of Income Tax, Lucknow-I(1997) 11 SCC 287referred to section 80P of the IT Act and then held:

“8. The expression “members” is not defined in the Act. Since acooperative society has to be established under the provisions ofthe law made by the State Legislature in that regard, the expression“members” in Section 80-P(2)(a)(i) must, therefore, be construedin the context of the provisions of the law enacted by the StateLegislature under which the cooperative society claimingexemption has been formed. It is, therefore, necessary to construethe expression “members” in Section 80-P(2)(a)(i) of the Act in AB

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Athe light of the definition of that expression as contained in Section2(n) of the Cooperative Societies Act. The said provision readsas under:

“2. (n) ‘Member’ means a person who joined in the applicationfor registration of a society or a person admitted to membershipBafter such registration in accordance with the provisions of thisAct, the rules and the bye-laws for the time being in force but areference to ‘members’ anywhere in this Act in connection withthe possession or exercise of any right or power or the existenceor discharge of any liability or duty shall not include reference toany class of members who by reason of the provisions of this ActCdo not possess such right or power or have no such liability orduty;””

Considering the definition of ‘member’ under the Kerala Act, loansgiven to such nominal members would qualify for the purpose of deductionunder section 80P(2)(a)(i).D

47. Further, unlike the facts in Citizen Cooperative SocietyLtd. (supra), the Kerala Act expressly permits loans to non-membersunder section 59(2) and (3), which reads as follows:

“59. Restrictions on loans.- (1) A society shall not make a loanEto any person or a society other than a member:Provided that the above restriction shall not be applicable to theKerala State Co-operative Bank.

Provided further that, with the general or special sanction of theRegistrar, a society may make loans to another society.F(2) Notwithstanding anything contained in sub-section (1), a societymay make a loan to a depositor on the security of his deposit.

(3) Granting of loans to members or to non-members under sub-section (2) and recovery thereof shall be in the manner as may bespecified by the Registrar.”G

Thus, the giving of loans by a primary agricultural credit societyto non-members is not illegal, unlike the facts inCitizen CooperativeSociety Ltd. (supra).

48. Resultantly, the impugned Full Bench judgment is set aside.Theappeals and all pending applications are disposed of accordingly. Theseappeals are directed to be placed before appropriate benches of theKerala High Court for disposal on merits in the light of this judgment.

Devika Gujral

Appeals dispoed of.

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