The Supreme Court held that loans given by co-op credit societies to nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i) of the Income Tax Act.
The 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.
Particularly, whether these assessees are entitled to such deductions after the introduction of section 80P(4) of the Income Tax Act by section 19 of the Finance Act, 2006 with effect from April 1, 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 , and were claiming a deduction under section 80P(2)(a)(i), which had been granted to them up to Assessment Year 2007-08.
The Full Bench of the Kerala High Court, by the impugned judgment referred to section 80P, 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 objective 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), 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) must be refused.
Shri Shyam Divan, Senior Advocate leading the charge on behalf of the assessees, has 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.
The three-judge bench of Justices R. F. Nariman, Navin Sinha and K.M. Joseph held that the giving of loans by a primary agricultural credit society to non-members is not illegal.
However, the court held that 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.
The Apex Court while setting aside the order of Kerala High Court held that 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.
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