SC Grants Permission to Give Deduction Benefits to KSCARDB U/S 80P

The Supreme Court bench, comprised of Justice B.V. Nagarathna and Justice Ujjal Bhuyan, in the landmark ruling, has allotted the Kerala State Cooperative Agricultural and Rural Development Bank (KSCARDB) the 80P deduction benefit under the Income Tax Act, 1961.

The taxpayer/petitioner, in brief, stated that Kerala State Cooperative Agricultural and Rural Devt Bank is a State-level Agricultural and Rural Development Bank regulated via the Kerala Co-operative Societies Act, 1969, and mainly engaged in furnishing the credit utilities to its members, who are themselves cooperative societies.

The pivotal issue revolved around whether the appellant, operating as a cooperative society, was eligible to claim a deduction for its profits and gains stemming from banking or offering credit facilities to its fellow cooperative society members under Section 80P of the Income Tax Act.

In the state of Kerala, the cooperative society regulations were consolidated under the Kerala Co-operative Societies Act, 1969, and the appellant was duly registered and regulated under this legislation.

Moreover, the appellant was subject to the provisions of the Kerala State Cooperative Agricultural Development Banks Act, 1984, which aimed to enhance the efficiency of cooperative agricultural and rural development banks in Kerala.

For the Assessment Year 2007-08, the appellant submitted its income tax return, seeking a deduction under Section 80P(2)(a)(i) of the Income Tax Act. However, the Assessing Officer denied this deduction, categorizing the appellant as a cooperative bank under the amended Section 80P(4), rendering them ineligible for the benefit.

The case progressed through various authorities, including the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, with divergent viewpoints on the appellant’s classification. Ultimately, the Kerala High Court dismissed the appellant’s appeal, prompting them to file a Special Leave Petition (SLP) in the Supreme Court.

The senior counsel representing the appellant argued that Section 80P(4) constituted an exception and did not apply to their situation, as they functioned as a cooperative society providing credit facilities to cooperative societies, rather than being a cooperative bank.

According to section 22 of the BR Act 1949, the appellant does not secure any license also the same license is not needed for the appellant to operate its business since the appellant does not function the banking business within the BR Act, 1949. Under the provisions of Chapter V of the BR Act, 1949 the appellant bank is not counted.

The appellant is not counted beneath the extent of the provisions of the RBI Act, this is been shown from the reports of the RBI and the categorical answer of RTI, the court witnessed.

After a thorough examination of the relevant statutory provisions, the bench made the following observations: “The appellant, operating as a cooperative credit society under Section 80P(2)(a)(i) of the Act, primarily exists to provide financial assistance to its members, all of whom are other cooperative societies and not members of the general public.”

The highest court in the land declared: “In this particular case, despite the appellant society holding the status of an apex cooperative society as defined in the State Act of 1984, it does not meet the criteria of a cooperative bank as per Section 5(b) in conjunction with Section 56 of the BR Act of 1949.

Consequently, the appeals put forth by the appellant are granted, and the orders issued by the Kerala High Court and other authorities to the contrary are annulled. As a result, we affirm that the appellant is entitled to the deduction benefits outlined in Section 80P of the Act.”

Furthermore, the Supreme Court issued a directive for the Reserve Bank of India to revoke the banking license previously granted to the appellants, given that they do not engage in banking activities, and the state’s classification of the appellant as a Cooperative Bank had already been invalidated.