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

2. These appeals have been filed by co-operative societies who have been registered as ‘primary agricultural credit societies’, together with one ‘multi-State co-operative society’, and raise important questions as to deductions that can be claimed under section 80P(2)(a) (i) of the Income-Tax Act, 1961 (“ IT Act ”); and in particular, whether these assessees are entitled to such deductions after the introduction of section 80P(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 these assessees, who are stated to be providing credit facilities to their members for agricultural and allied purposes, have been classified as primary agricultural credit societies by the Registrar of Co- operative Societies under the Kerala Co-operative Societies Act, 1969 (“ Kerala Act ”), and were claiming a deduction under section 80P(2)(a) (i) of the IT Act, which had been granted to them up to 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 officer denied their claims for deduction, relying upon section 80P(4) of the IT Act, holding that as per the Audited Receipt & 2 Disbursal Statement furnished by the assessees in these cases, agricultural credits that were given by the assessee-societies to its members were found to be negligible – the credits given to such members being for purposes other than agricultural credit. The decisions of the assessing officers were challenged up to the Kerala High Court. Before the High Court, the assessees relied upon a decision of a Division Bench of the Kerala High Court in Chirakkal Service Co-operative Bank Ltd. v. CIT (2016) 384 ITR 490 (Ker.), where in a batch of appeals challenging assessments completed under section 147 read with 143(3)/144 of the IT Act, the High Court, after considering section 80P(4) of the IT Act, various provisions of the Kerala Act, the Banking Regulation Act, 1949, the bye-laws of the Societies, etc., held that once a Co-operative Society is classified by the Registrar of Co-operative Societies under the Kerala Act as being a primary agricultural credit society, the authorities under the IT Act cannot probe into whether agricultural credits were in fact being given by such societies to its members, thereby going behind the certificate so granted. This being the case, the High Court in Chirakkal (supra) held that since all the assessees were registered as primary 3 agricultural credit societies, they would be entitled to the deductions under section 80P(2)(a)(i) read with section 80P(4) of the IT Act. 4. However, the Department contended that the judgment in Chirakkal (supra) was rendered per incuriam by not having noticed the earlier decision of another Division Bench of the Kerala High Court in Perinthalmanna Service Co-operative Bank Ltd. v. ITO and Anr. (2014) 363 ITR 268 (Ker.), where, in an appeal challenging orders under section 263 of the IT Act, it was held that the revisional authority was justified in saying that an inquiry has to be conducted into the factual situation as to whether a co-operative bank is in fact conducting business as a co-operative bank and not as a primary agricultural credit society, and depending upon whether this was so for the relevant assessment year, the assessing officer would then allow or disallow deductions claimed under section 80P of the IT Act, notwithstanding that mere nomenclature or registration certificates issued under the Kerala Act would show that the assessees are primary agricultural credit societies. These divergent decisions led to a reference order dated 09.07.2018 to a Full Bench of the Kerala High Court. 4 5. The Full Bench of the Kerala High Court, by the impugned judgment dated 19.03.2019, referred to section 80P of the IT Act, various provisions of the Banking Regulation Act and the Kerala Act and held that the main object of a primary agricultural credit society which exists at the time of its registration, must continue at all times including for the assessment year in question. Notwithstanding the fact that the primary agricultural credit society is registered as such under the Kerala Act, yet, the assessing officer must be satisfied that in the particular assessment year its main object is, in fact, being carried out. If it is found that as a matter of fact agricultural credits amount to a negligible amount, then it would be open for the assessing officer, applying the provisions of section 80P(4) of the IT Act, to state that as the co-operative society in question – though registered as a primary agricultural credit society – is not, in fact, functioning as such, the deduction claimed under section 80P(2)(a)(i) of the IT Act must be refused. This conclusion was reached after referring to several judgments, but relying heavily upon the judgment of this Court in Citizen Cooperative Society Ltd. v. Asst. CIT, Hyderabad (2017) 9 SCC 364. Thus, the conclusion of the Full Bench was as follows: 5

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7 Appellant assessees are concerned. He read to us in copious detail the provisions of section 80P, various provisions contained in the Banking Regulation Act, 1949 and the various provisions of the Kerala Act and rules made thereunder, together with the bye-laws of some of the assessees before us. His main argument, based upon the language of section 80P(1) and (2), is that section 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, becomes deductible from its gross total income. According to him, the moment a co-operative society that is registered as such is engaged in providing credit facilities to its members, the inquiry of an assessing officer stops there. He argued that the Full Bench was wholly incorrect in adding credit facilities related to agriculture, as no such thing is contained in section 80P(2)(a)(i), as contrasted with sections 80P(2)(a)(iii) to (v) of the IT Act. He therefore argued that the moment a co-operative society is registered under the said Act, whatever be its classification, so long as it provides credit facilities to its members – which need not be credit facilities related to agriculture – it is entitled to a deduction contained in section 80P(2)(a) 8

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 primary agricultural credit society so as to be outside section 80P(4) should not, in any manner, cut down the beneficial provision contained in section 80P(1) and (2), as section 80P(4) is in the nature of a proviso which cannot cut down the main enacting part. In any case, he argued that once a registration certificate stating that the assessee is a primary agricultural credit society is given by the Registrar under the Kerala Act, then short of such certificate being cancelled under the Kerala Act and rules thereunder, the assessing officer, who is an authority for purposes of collection of revenue, cannot possibly go into whether, in substance, the society continues to be a primary agricultural credit society. He relied upon various judgments of this Court to buttress his submissions. He also relied upon a circular, being Circular 14/2006 dated 28.12.2006 containing explanatory notes to the Finance Act, 2006, and the letter of the Central Board of Direct Taxation (“ CBDT ”) dated 09.05.2008, both of which made it clear that if a co-operative society cannot be said to 10 be a co-operative bank, then the provisions of section 80P(4) would have no application. 8. Shri Diwan’s second broad submission was that the Full Bench of the Kerala High Court completely misread this Court’s judgment in Citizen Cooperative Society Ltd. (supra). He contended that if the judgment is seen closely, all the assessees’ contentions in law were answered in their favour. However, on facts, it was held that since the co-operative society in that case carried on business illegally i.e. by giving loans to nominal members who had no place under the statute under which it was registered, and was also giving loans to the members of the general public, it could not be said to be a co-operative society at all, as a result of which the findings of fact of all the authorities below were not interfered with by the Supreme Court. There was no argument, neither was there any finding by the Court in that case, that the assessing officer is entitled to go behind a certificate given under a particular statute. Indeed, he pointed out that both under the Banking Regulation Act, 1949 and the Kerala Act, if any dispute arose as to classification of a society as being a primary agricultural credit society versus being a co-operative bank, it is the RBI alone 11 who is to decide such dispute under the Banking Regulation Act, 1949, and the Registrar, Co-operative Societies, who is to decide on classification under Rule 15 of the Kerala Co-operative Societies Rules 1969. Thus, according to him, the judgment in Citizen Cooperative Society Ltd. (supra) is directly in his client’s favour on the applicability of section 80P(4), which has been completely missed by the Full Bench. 9. Shri Arvind Datar, learned Senior Advocate appearing on behalf of some of the assessees, supported the submissions of Shri Divan, and argued that all co-operative societies, once they are registered under a State Act, are entitled to deductions under section 80P. The extent of the deduction would depend upon attributability and not eligibility for deduction. Once it is found, having regard to letters issued by the RBI in the present case stating that the Appellants cannot be classified as co-operative banks, and once it is found that licences have not been given to function as co-operative banks, all these societies qualify under section 80P(2)(a)(i) for deductions to be granted, section 80P(4) having no application as they are not and cannot be stated to be co-operative banks. 12 10. Shri Balbir Singh, learned Additional Solicitor General appearing on behalf of the Revenue, refuted all the arguments made by the learned Senior Advocates for the assessees. According to him, the Full Bench was wholly correct in stating that a mere certificate of registration as a primary agricultural credit society would not avail. For the assessment year in question, the assessing officer has to be satisfied that the assessee is “engaged in” activities as a primary agricultural credit society i.e. in giving loans for agricultural and allied purposes to its members. He read from some of the assessing officers’ orders the fact that loans given for agricultural purposes by the aforesaid societies were negligible, the main business being that of banking, as such loans were given for purposes other than agricultural credit. He also read copiously from the various Acts, rules and bye- laws to buttress his submission that in actual fact, since the Appellants were no longer doing business as primary agricultural credit societies, they would be disentitled to any deduction under Section 80P after the advent of Section 80P(4). According to him, the classification of a co- operative society under the State Act, which is expressly referred to in Section 2(19) of the IT Act, is of primary importance, and once 13 classified as a primary agricultural credit society, it is only if activities relatable to agriculture are carried out that eligibility for deduction would arise in the first place under section 80P(1) and (2). The whole object of section 80P would be defeated if the Division Bench in Chirakkal (supra) was held to be correct in law, as then, despite being engaged in activities other than agricultural credit, a society undeserving of any deduction would still get such deduction contrary to what was sought to be achieved by section 80P(4) of the IT Act. According to him, the Supreme Court judgment in Citizen Cooperative Society Ltd. (supra) was correctly read by the Full Bench, as permitting an assessing officer to get to the real facts of a case in order to conclude as to whether activities of a primary agricultural credit society were, in fact, being carried out in the assessment year in question. For this purpose, he referred to several provisions of the IT Act, which give very vast powers of investigation into the facts of any given case and, in particular, relied upon section 133(6) of the IT Act. He also relied upon several judgments of this Court which would show that mere registration as a primary agricultural credit society is not enough, the expression “engaged in” meaning that there must be a continuing obligation on 14 such society to carry out its main objects from year to year, and if does not do so, it would be disentitled to any deduction under Section 80P(4). He further argued, relying upon judgments of this Court, that the burden is on the assessee to establish by facts, in every assessment year, that it is entitled to the deduction under Section 80P; and if it cannot adduce facts to show that it is in fact carrying on its business as a primary agricultural credit society in the assessment year in question, it would not discharge such burden, and would, therefore, be unable to avail of any deduction under Section 80P. He also relied upon certain RBI Press releases of the year 2017 cautioning the public not to deal with such societies who, though unlicenced, are in fact carrying on banking business. 11. Having heard learned counsel for the assessees as well as for the Revenue, it is first important to set out sections 2(19) and 80P of the Income Tax Act, which read as follows: “ 2. In this Act, unless the context otherwise requires,- xxx xxx xxx (19). “co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any law for the time being in force in any State for the registration of co-operative societies.” 15 “ 80P. Deduction in respect of income of co-operative societies.— (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:— (a) in the case of a co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce 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 the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities: Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting 16 rights to the following classes of its members, namely: — (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the co-operative credit societies which provide financial assistance to the society; (3) the State Government; (b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to— (i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or (ii) the Government or a local authority; or (iii) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established 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 the public), the whole of the amount of profits and gains of such business; (c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,— 17 (i) where such co-operative society is a consumers’ co-operative 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; (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income; (e) in respect of any income derived by the co-operative society from the letting of go downs or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income; (f) in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22. Explanation. —For the purposes of this section, an “urban consumers’ co-operative society” means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. 18 (3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section HHA, section 80HHB, section HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section 80JJ. (4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation. —For the purposes of this sub-section,— (a) “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.” 12. The relevant provisions of the Banking Regulation Act, 1949, insofar as it has bearing on the facts of these cases are also set out as follows: “ 3. Act to apply to co-operative societies in certain cases. —Nothing in this Act shall apply to— 19 (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 to the extent specified in Part V.” “ 56. Act to apply to co-operative societies subject to modifications. —The provisions of this Act, as in force for the time being, shall apply to, or in relation to, co-operative societies as they apply to, or in relation to, banking companies subject to the 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 a co-operative bank, (ii) references to “commencement of this Act” shall be construed as references to commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 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 inserted namely:— (cci) “co-operative bank” means a state co- operative bank, a central co-operative bank and a primary co-operative bank; 20 (ccii) “co-operative credit society” means a co- operative society, the primary object of which is to provide financial accommodation to its members and includes a co-operative land mortgage bank; (cciia) “co-operative society” means a society registered or deemed to have been registered under any Central Act for the time being in force relating to the multi-State co-operative societies, or any other Central or State law relating to co- operative societies for the time being in force; (cciii) “director”, in relation to a co-operative society, includes a member of any committee or body for the time being vested with the management of the affairs of that society; (cciiia) “multi-State co-operative bank” means a multi-State co-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 any Central Act for the time being in force relating to the multi State co-operative societies but does not include a national co-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 is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops); and 21 (2) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such co- operative society out of funds provided by the State Government for the purpose; (ccv) “primary co-operative bank” means a co- operative society, other than a primary agricultural credit society,— (1) the primary object or principal business of which is the transaction of banking business; (2) the paid-up share capital and reserves of which are not less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such co- operative society out of funds provided by the State Government for the purpose; (ccvi) “primary credit society” means a co-operative society, other than a primary agricultural credit society,— (1) the primary object or principal business of which is the transaction of banking business; 22 (2) the paid-up share capital and reserves of which are less than one lakh of rupees; and (3) the bye-laws of which do not permit admission of any other co-operative society as a member: Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such co- operative society out of funds provided by the State Government for the purpose. Explanation. —If any dispute arises as to the primary object or principal business of any co- operative society referred to in clauses (cciv), (ccv) and (ccvi), a determination thereof by the Reserve Bank shall be final; (ccvii) “central co-operative bank”, “primary rural credit society” and “state co-operative bank” shall have the meanings respectively assigned to them in the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981);” 13. So far as the Kerala Act and the rules framed thereunder are concerned, the following provisions are relevant: Act “2. In this Act, unless the context otherwise requires,- (f) “ Co-operative Society ” or “ society ” means a Co- operative society registered or deemed to be registered under this Act; 23 xxx xxx xxx (l) “ member ” means a person joining in the application for the registration of a Co-operative society or a person admitted to membership after such registration in accordance with this Act, the rules and the bye-laws and includes a nominal or associate member; xxx xxx xxx (m) “ nominal or associate member ” means a member who possess only such privilege and rights of a member who is subject only to such liabilities of a member as may be specified in the bye-laws; xxx xxx xxx (oaa) “ Primacy Agricultural Credit Society ” means a Service Co-operative Society, a Service Co-operative Bank, a Farmers Service Co-operative Bank and a Rural Bank, the principal object of which is to undertake agricultural credit activities and to provide loans and advances for agricultural purposes, the rate of interest on such loans and advances shall be the rate fixed by the Registrar and having its area of operation confined to a Village, Panchayat or a Municipality; Provided that the restriction regarding the area of operation shall not apply to Societies or Banks in existence at the commencement of the Kerala Co-operative Societies (Amendment) Act, 1999 (1 of 2000). Provided further that if the above principal object is not fulfilled, such societies shall lose all characteristics of a Primary Agricultural Credit Society as specified in the Act, Rules and Bye-laws except the existing staff strength. xxx xxx xxx 24 (ob) “ Primary Credit Society ” means a society other than an apex or central society which has as its principal object the raising of funds to be lent to its members; (oc) “ Primary Co-operative Agricultural and Rural Development Bank ” means a society having its area of operation confined to a Taluk and the principal object of which is to provide for long term credit for agricultural and rural development activities; Provided that no Primary Co-operative Agricultural and Rural Development Bank shall be registered without the bifurcation of assets and liabilities of the existing societies having the area of operation in more than one Taluk and the societies shall restrict their operation in the area of the respective society on such bifurcation.” “ 3. Registrar. - (1)The Government may appoint a person to be the Registrar of Co-operative Societies for the State. (2)The Government may by general or special order confer on any person all or any of the powers of the Registrar under this Act. 4. Societies which may be registered. - Subject to the provisions of this Act, a co-operative society which has as its object the promotion of the economic interests of its members or of the interests of the public in accordance with co-operative principles, or a society established with the object of facilitating the operations of such a society, may be registered under this Act: Provided that no co-operative society shall be registered if it is likely to be economically unsound, or the registration of which have an adverse effect on development of co- operative movement. xxx xxx xxx 25 7. Registration. - (1)If the Registrar is satisfied within a period of ninety days from the date of the application — (a)that the application complies with the provisions of this Act and the rules; (b)that the objects of the proposed society are in accordance with section 4; (c)that the area of operation of the proposed society and the area of operation of another society of similar type do not overlap; (d)that the proposed bye-laws are not contrary to the provisions of this Act and the rules; and (e)that the proposed society complies with the requirements of sound business, he may register the society and its bye-laws within a period of ninety days from the date of receipt of the application. (2) Where the Registrar refuses to register a society, he shall communicate the order of refusal together with the reasons therefore within seven days of such order to such of the applicants as may be prescribed. (3) An application for registration of a society shall be disposed of by the Registrar within ninety days from the date of receipt of the application. (4) Where an application for registration of a society is not disposed of within the time specified in sub-section (3), the applicant may make a representation,-- 26 (a)before the Registrar, if the application for registration is made to a person on whom the powers of the Registrar is conferred under subsection (2) of section 3; or (b)before the Government, if the application for registration is 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 appropriate decision on the application for registration and the authority concerned shall comply with such directions. 8.Registration certificate.- (1)Where a co-operative society is registered under this Act, the Registrar shall issue a certificate of registration signed and sealed by him, which shall be conclusive evidence that the said society is duly registered under this Act. (2)Notwithstanding anything contained in subsection (1), where the Registrar is satisfied that the original registration certificate is irrecoverably lost and the duplicate certificate could not be issued as the files or records regarding the registration of the co-operative society was lost, after registration, the Registrar shall issue a certificate stating the registration number and date of registration of a co- operative society, on the basis of the details available in the audit certificate and the records available with the Registrar, signed and sealed by him, which shall be conclusive proof that the said society is duly registered and it shall be treated as a certificate of registration.” Rules “ 15. Classification of societies according to types. - After the registration of a society the Registrar shall classify the 27

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paddy and other agricultural produce. Section 81 is set out in paragraph 6 of the judgment as follows: “81. Income of cooperative societies. — Income tax shall not be payable by a cooperative society — ( i ) in respect of the profits and gains of business carried on by it, if it is — ( a ) a society engaged in carrying on the business of banking or 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 agricultural produce of its members; or ( d ) a society engaged in the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members; or ( e ) a society engaged in the processing without the aid of power of the agricultural produce of its members; or ( f ) a primary society engaged in supplying milk raised by its members to a federal milk cooperative society: Provided that, in the case of a cooperative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees;” 34

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attributable to any one or more activities mentioned in sub- section (2) of section 80P must be given by way of deduction; (III) That this Court in Kerala State Cooperative Marketing Federation Ltd. and Ors. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied; (IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so – which is not the case with section 80P(2)(a)(i); (V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1) and (2). This proviso specifically excludes only co-operative banks, which are co- operative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that 45 case was not so licenced, the assessee would not fall within the mischief of section 80P(4). 22. However, considering that the learned Senior Advocate appearing for the Revenue argued that the concurrent findings of fact in that case were that most of the business of the assessee was conducted illegally with nominal members, who could not be members of such society under the Andhra Pradesh Act, and considering also that, as the assessee engaged in granting loans to the general public, it could not be treated as a co-operative society meant only for its members and providing credit facilities to its members, the appeal by the assessee would fail. It is important to note that no argument was made by the counsel for the assessee in Citizen Cooperative Society Ltd. (supra) that the assessing officer and other authorities under the IT Act could not go behind the registration of the co-operative society in order to discover as to 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 judgment that is binding as a precedent. Thus, in B. Shama Rao v. Union Territory, Pondicherry (1967) 2 SCR 650, the majority judgment of Shelat J., speaking for himself and other two learned Judges held: 46

47 of general application, not refuted by the majority, it is worth setting out this part of the judgment as follows: “With greatest respect, the majority decision in Rajendra Prasad case does not lay down any legal principle of general applicability. A decision on a question of sentence depending upon the facts and circumstances of a particular case, can never be regarded as a binding precedent, much less “law declared” within the meaning of Article 141 of the Constitution so as to bind all courts within the territory of India. According to the well-settled theory of precedents every decision contains three basic ingredients: “( i ) findings of material facts, direct and inferential. An inferential finding of facts is the inference which the Judge draws from the direct or perceptible facts; ( ii ) statements of the principles of law applicable to the legal problems disclosed by the facts; and ( 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 it determines finally their rights and liabilities in relation to the subject-matter of the action. It is the judgment that estops the parties from reopening the dispute. However, for the purpose of the doctrine of precedents, ingredient ( ii ) is the vital element in the decision. 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 giving judgment that constitutes a precedent. The only thing in a judge's decision binding a party is the principle upon which the case is decided and for this reason it is important to analyse a decision and isolate from it the ratio decidendi. In the 48 leading case of Qualcast (Wolverhampton) Ltd . v. Haynes [LR 1959 AC 743] it was laid down that the ratio decidendi may be defined as a statement of law applied to the legal problems raised by the facts as found, upon which the decision is based. The other two elements in the decision are not precedents. The judgment is not binding (except directly on the parties themselves), nor are the findings of facts. This means that even where the direct facts of an earlier 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 the earlier case.” (at pages 1073-1074) 26. Applying the aforesaid decisions, it is clear that the ratio decidendi in Citizen Cooperative Society Ltd. (supra) would not depend upon the conclusion arrived at on facts in that case, the case being an authority for what it actually decides in law and not for what may seem to logically follow from it. Thus, the statement of the principles of law applicable to the legal problems disclosed by the facts alone is the binding ratio of the case, which as has been stated hereinabove, is contained in paragraphs 18 to 23 of the judgment. Paragraphs 24 to 26, being the judgment based on the combined effect of the statements of the principle of law applicable to the material facts of the case cannot be described as the ratio decidendi of the judgment. Nor can it be said that it would logically follow from the finding on facts that the assessing officer can go behind the registration of a society 49

defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law 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 State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y. 29. Thirdly , the gross total income must include income that is referred to in sub-section (2). 30. Fourthly , sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being “engaged in” carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co-operative society must be “engaged in” the providing credit facilities to its members. As has been rightly pointed out by the learned Additional Solicitor General, the expression “engaged in”, as has been held in Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Ltd. (2008) 9 SCC 337, would necessarily entail an examination of all the facts of the case. This Court in Ponni Sugars and Chemicals Ltd. (supra) held: 51

52 Act, 1949, and the Registrar alone under the Kerala Act who can look into questions as to whether a primary agricultural credit society is, or is not, a co-operative bank, and whether a society’s classification as primary agricultural credit society ought to continue or be re-classified as a co-operative bank. Neither argument applies to the facts of these cases, given that the statutory provision involved does not require the Appellants to be primary agricultural credit societies to claim a deduction under section 80P(2)(a)(i) in the first place. 32. Fifthly , as has been held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT (2009) 8 SCC 393 at paragraph 23, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P. Therefore, the assessing officer under the IT Act cannot be said to be going behind any registration certificate when he engages in a fact-finding enquiry as to whether the co-operative society concerned is in fact providing credit facilities to its members. Such fact finding enquiry (see section 133(6) of the IT Act) would entail examining all relevant facts of the co-operative society in question to find out whether it is, as a matter of fact, providing credit facilities to its members, whatever be its nomenclature. Once this task is fulfilled by the assessee, by placing reliance on such facts as would 53 show that it is engaged in providing credit facilities to its members, the assessing officer must then scrutinize the same, and arrive at a conclusion as to whether this is, in fact, so. 33. Sixthly, what is important to note is that, as has been held in Kerala State Cooperative Marketing Federation Ltd. and Ors. (supra) the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone. Section 80P being a beneficial provision must be construed with the object of furthering the co-operative movement generally, and section 80P(2)(a)(i) must be contrasted with section 80P(2)(a)(iii) to (v), which expressly speaks of agriculture. It must also further be contrasted with sub-clause (b), which speaks only of a “primary” society engaged in supplying milk etc. thereby defining which kind of society is entitled to deduction, unlike the provisions contained 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 of society which can avail of the deductions contained in those two sub-clauses, unlike any such restrictive language in Section 80P(2)(a)(i). Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society 54

58 provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities. 40. As a matter of fact, some primary agricultural credit societies applied for a banking licence to the RBI, as their bye-laws also contain as one of the objects of the Society the carrying on of the business of banking. This was turned down by the RBI in a letter dated 25.10.2013 as follows: “ Application for license Please refer to your application dated April 10, 2013 requesting for a banking license. On a scrutiny of the application, we observe that 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 in terms 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 Bank of India. RCS will issue the necessary guidelines in this regard.” 41. A number of judgments have held that a proviso cannot be used to cut down the language of the main enactment where such language is clear, or to exclude by implication what the main enactment clearly states. Thus, in CIT, Mysore v. Indo Mercantile Bank 1959 Supp. (2) SCR 256, this Court held: 59 “The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. “It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as a proviso”. Therefore it is to be construed harmoniously with the main enactment. (Per Das, C.J.) in Abdul Jabar Butt v. State of Jammu & Kashmir [(1957) SCR 51, 59] . Bhagwati, J., in Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax [(1955) 2 SCR 483, 493] said: “It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other.” Lord Macmillan in Madras & Southern Maharatta Railway Co. v. Bezwada Municipality [(1944) LR 71 IA 113, 122] laid down the sphere of a proviso as follows: “The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where, as in the present case, the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude from it by implication what clearly falls within its express terms.” The territory of a proviso therefore is to carve out an exception to the main enactment and exclude something which otherwise would have been within the section. It has 60

43. Another two-Judge Bench in J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers (1996) 6 SCC 665 then declared: “ 33. A proviso to a provision in a statute has several functions and while interpreting a provision of the statute, the court is required to carefully scrutinise and find out the real object of the proviso appended to that provision. It is not a proper rule of interpretation of a proviso that the enacting part or the main part of the section be construed first without reference to the proviso and if the same is found to be ambiguous only then recourse may be had to examine the proviso as has been canvassed before us. On the other hand an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially. 34. A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be a part of the main provision. A proviso must, therefore, be considered in relation to the principal matter to which it stands as a proviso. A proviso should not be read as if providing something by way of addition to the main provision which is foreign to the main provision itself. 35. Indeed, in some cases, a proviso, may be an exception to the main provision though it cannot be inconsistent with what is expressed in the main provision and if it is so, it would be ultra vires of the main provision and struck down. As a general rule in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justify its necessity. 62 36. While dealing with proper function of a proviso, this Court in CIT v. Indo Mercantile Bank Ltd. [AIR 1959 SC 713: (1959) 36 ITR 1] opined: “The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to 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 beyond the provision to which it is a proviso. Therefore, the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction. This is laid down in Dwarka Prasad 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 uses of provisos in statutes: CIT v. Indo- Mercantile Bank Ltd. [AIR 1959 SC 713]; Ram Narain Sons Ltd. v. CST [AIR 1955 SC 765]; Thompson v. Dibdin [1912 AC 533], AC p. 541; R. v. Dibdin [1910 P 57 (CA)], and Tahsildar Singh v. State of U.P. [AIR 1959 SC 1012]. The law is trite. A proviso must be limited to the subject- matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and 63 considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. ‘Words are dependent on the principal enacting words to which they are tacked as a proviso. They cannot be read as divorced from their context’ ( Thompson v. Dibdin [1912 AC 533]). If the rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause, the stand we have taken is sound. To expand the enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction.” 45. To sum up, therefore, the ratio decidendi of Citizen Cooperative Society Ltd. (supra) , must be given effect to. Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word “agriculture” into Section 80P(2)(a)(i) when it is not there. Further, section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co- 64 operative societies engaged in banking business i.e. engaged in lending money to members of the public, which have a licence in this behalf from the RBI. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in its reading of Citizen Cooperative Society Ltd. (supra). Clearly, therefore, once section 80P(4) is out of harm’s way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(a)(i), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted. 46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 referred to section 80P of the IT Act and then held: “ 8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)( a )( i ) must, therefore, be construed in the context of the 65 provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)( a )( i ) of the Act in the light of the definition of that expression as contained in Section 2( n ) of the Cooperative Societies Act. The said provision reads as under: “2. ( n ) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;”” Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i). 47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows: “ 59. Restrictions on loans. - (1) A society shall not make a loan to any person or a society other than a member: Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank. Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society. 66 (2) Notwithstanding anything contained in sub-section (1), a society may 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 be specified by the Registrar.” Thus, the giving of loans by a primary agricultural credit society to non- members is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra). 48. Resultantly, the impugned Full Bench judgment is set aside. The appeals and all pending applications are disposed of accordingly. These appeals are directed to be placed before appropriate benches of the Kerala High Court for disposal on merits in the light of this judgment. …………………..………………J. (R. F. Nariman) ……………..……………………J. (Navin Sinha) ……………..……………………J. (K.M. Joseph) New Delhi. January 12, 2021. 67