Income Tax Deduction Under Section 80P: Co-operative Society vs. Co-operative Bank

The case revolves around the denial of income tax deductions under Section 80P of the Income Tax Act, 1961, to The Citizen Co-operative Society Limited, Hyderabad. The primary issue in the case was whether the appellant, a co-operative society, could claim exemption under Section 80P(2)(a)(i), which applies to co-operative societies engaged in the business of banking or providing credit facilities to its members. The Assessing Officer, Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal (ITAT), and the High Court of Andhra Pradesh ruled against the appellant, leading to this appeal before the Supreme Court.

Background of the Case

The Citizen Co-operative Society was established in 1997 as a Mutually Aided Co-operative Credit Society under the Andhra Pradesh Mutually Aided Co-operative Societies Act, 1995. Over time, it expanded its operations beyond Andhra Pradesh into Maharashtra and Karnataka, registering under the Multi-State Co-operative Societies Act, 2002.

The Society filed a tax return for the Assessment Year 2009-10, claiming a deduction of Rs. 4,26,37,817 under Section 80P of the Act. The Assessing Officer, however, disallowed the deduction, stating that the Society functioned as a co-operative bank rather than a co-operative society and thus fell under the restrictions imposed by Section 80P(4), which was introduced by the Finance Act, 2006. This section bars co-operative banks from claiming deductions under Section 80P, except for primary agricultural credit societies or primary co-operative agricultural and rural development banks.

Arguments by the Petitioner

The counsel for the appellant, Mr. V. Shekhar, contended that the appellant was a co-operative society engaged in providing credit facilities to its members and not a co-operative bank. He argued:

That the legislative intent behind Section 80P was to encourage and promote the growth of co-operative societies, which should be interpreted liberally.
That the appellant’s primary objective was to promote the economic and social betterment of its members through self-help and mutual aid.
That it did not accept deposits from the public but only from its members, differentiating it from a co-operative bank as per the Banking Regulation Act, 1949.
That the Reserve Bank of India (RBI) did not recognize it as a co-operative bank, and it did not possess a banking license.
That the Central Board of Direct Taxes (CBDT) had clarified in a circular that Section 80P(4) applies only to co-operative banks and not to credit co-operative societies.
That it operated on the principle of mutuality, where profits were distributed among members.

Arguments by the Respondent

The counsel for the Income Tax Department, Mr. Radhakrishnan, argued that the appellant functioned like a co-operative bank and had violated the provisions of the Andhra Pradesh Mutually Aided Co-operative Societies Act, 1995. He pointed out:

That the appellant catered to two categories of members—resident (ordinary) members and nominal members—who deposited funds and availed loans.
That a significant portion of the deposits came from nominal members, who were not true members under the Act.
That these deposits were used to earn interest from fixed deposits with banks and for advancing loans, which constituted financial business rather than co-operative banking.
That the appellant was engaged in general financial activities, violating the principles of co-operative societies.
That the principle of mutuality was absent since there was no identity between contributors and beneficiaries.

Supreme Court Judgment

The Supreme Court, while upholding the decisions of the lower authorities, ruled that the appellant was not entitled to deductions under Section 80P. The Court emphasized the following findings:

The appellant’s activities went beyond providing credit facilities to its members and included banking-like operations with the general public.
The principle of mutuality was missing, as nominal members (non-members) significantly contributed to the Society’s funds.
There was a clear distinction between depositors and borrowers, which negated the essence of co-operative banking under Section 80P.
Though the appellant was not classified as a co-operative bank under RBI regulations, its operations effectively made it one in substance.
The introduction of Section 80P(4) aimed to exclude co-operative banks from availing deductions, and the appellant’s nature of business fell within this exclusion.

The Court concluded that the appellant’s financial transactions and acceptance of deposits from non-members disqualified it from claiming benefits under Section 80P. Consequently, the appeal was dismissed.

Conclusion

This judgment reaffirms the restrictive interpretation of Section 80P(4) concerning co-operative societies that function like banks. The ruling underscores that co-operative societies must strictly adhere to their co-operative principles and limit financial activities to their members to qualify for tax benefits under Section 80P. The case serves as a precedent for other co-operative societies involved in financial transactions, highlighting the importance of compliance with co-operative laws and taxation regulations.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: The Citizen Co-opera vs Assistant Commission Supreme Court of India Judgment Dated 08-08-2017.pdf

Direct Downlaod Judgment: Direct downlaod this Judgment

See all petitions in Income Tax Disputes
See all petitions in Tax Evasion Cases
See all petitions in Banking Regulations
See all petitions in Judgment by A.K. Sikri
See all petitions in Judgment by Ashok Bhushan
See all petitions in dismissed
See all petitions in supreme court of India judgments August 2017
See all petitions in 2017 judgments

See all posts in Taxation and Financial Cases Category
See all allowed petitions in Taxation and Financial Cases Category
See all Dismissed petitions in Taxation and Financial Cases Category
See all partially allowed petitions in Taxation and Financial Cases Category