3 Pr. Commissioner of Income-tax vs. Petrofils Co-operative Limited (2021) 431 ITR 501 (SC)
Depreciation – Unabsorbed depreciation – Effect of amendment of section 32(2) by Finance Act, 2001 – Any unabsorbed depreciation available to an assessee on 1st April, 2002 (assessment year 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001
Prior to the Finance (No. 2) Act of 1996, the unabsorbed depreciation for any year was allowed to be carried forward indefinitely and by a deeming fiction became an allowance of the immediately succeeding year. The Finance (No. 2) Act of 1996 restricted the carrying forward of unabsorbed depreciation and set-off to a limit of eight years from the assessment year 1997-98. Thus, the brought-forward depreciation for A.Y. 1997-98 was eligible to be carried forward and set off against income till A.Y. 2005-06. Section 32(2) of the Act was amended by the Finance Act, 2001 to provide that the depreciation allowance or the part of the allowance to which effect has not been given shall be added to the amount of depreciation for the following previous year and deemed to be part of the allowance of that previous year and so on from the succeeding year.
A question arose before the Gujarat High Court in an appeal filed by the Revenue as to whether the ITAT was right in law in directing the Assessing Officer (A.O.) to allow carry-forward of depreciation which had been allowed to the assessee because unabsorbed depreciation up to 1997-98 would become depreciation of the current year and to be treated in accordance with law.
The High Court dismissed the appeal following its judgment in the case of General Motors India P. Ltd. vs. Deputy Commissioner of Income-tax reported in (2013) 354 ITR 244 (Guj) wherein it was held that any unabsorbed depreciation available to an assessee on the 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001.
On an SLP, the Supreme Court held that in view of the judgments on the interpretation of section 32(2) delivered by the Delhi, Gujarat, Madras and Bombay High Courts, which were upheld by it by special leave petitions being dismissed, no question of law arose for determination in these special leave petitions.
4. The Mavilayi Service Co-operative Bank Ltd. vs. CIT (2021) 431 ITR 1 (SC)
Co-operative society – Special deduction – A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication by adding the word ‘agriculture’ into section 80P(2)(a)(i) when it is not there – Section 80P(4) is to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-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
The appeals were filed before the Supreme Court by co-operative societies who had been registered as ‘primary agricultural credit societies’, together with one ‘multi-State co-operative society’, and raised questions as to deductions that could be claimed u/s 80P(2)(a)(i) and, in particular, whether these assessees were entitled to such deductions after the introduction of section 80P(4) by section 19 of the Finance Act, 2006.
All these assessees, who were stated to be providing credit facilities to their members for agricultural and allied purposes, had 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 u/s 80P(2)(a)(i) which had been granted to them up to A.Y. 2007-08.
However, with the introduction of section 80P(4), the scenario changed. In respect of these assessees, the A.O. denied their claims for deduction, relying upon section 80P(4) holding that as per the Audited Receipt and Disbursal Statement furnished by the assessees in these cases, agricultural credits that were given by the assessee-societies to their members were found to be negligible – the credits given to such members being for purposes other than agricultural credit.
The decisions of the A.O.s were challenged up to the Kerala High Court. Before the High Court, the assessees relied upon a decision of a Division Bench of the same Court in Chirakkal Service Co-operative Bank Ltd. vs. CIT (2016) 384 ITR 490 (Ker). The High Court, after considering section 80P(4), 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 their 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 agricultural credit societies, they would be entitled to the deductions u/s 80P(2)(a)(i) read with section 80P(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. vs. ITO and Anr. (2014) 363 ITR 268 (Ker) where, in an appeal challenging orders u/s 263, 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 A.O. would then allow or disallow deductions claimed u/s 80P, 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 9th July, 2018 to a Full Bench of the Kerala High Court.
The Full Bench, by the impugned judgment dated 19th March, 2019, 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 A.O. 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 A.O., applying the provisions of section 80P(4), to state that as the co-operative society in question (although registered as a primary agricultural credit society) is not, in fact, functioning as such, the deduction claimed u/s 80P(2)(a)(i) must be refused. This conclusion was reached after referring to several judgments but relying heavily upon the judgment of the Supreme Court in Citizen Co-operative Society Ltd. vs. Asst. CIT, Hyderabad (2017) 9 SCC 364.
Being aggrieved by the Full Bench judgment, the appellant assessees were before the Supreme Court.
The Supreme Court noted the relevant provisions of various applicable Acts and also the bye-laws of some of the appellants that were available on record and noted that though the main object of the primary agricultural society in question was to provide financial assistance in the form of loans to its members for agricultural and related purposes, yet, some of the objects went well beyond, and included performing of banking operations ‘as per Rules prevailing from time to time’, opening of medical stores, running of showrooms and providing loans to members for purposes other than agriculture.
The Supreme Court made the following observations for the proper interpretation of section 80P:
First, the marginal note to section 80P which reads ‘Deduction in respect of income of co-operative societies’ is important, in that it indicates the general ‘drift’ of the provision.
Second, for purposes of eligibility for deduction, the assessee must be a ‘co-operative society’. A co-operative society is defined in section 2(19) 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.
Third, the gross total income must include income that is referred to in sub-section (2).
Fourth, sub-clause (2)(a)(i) 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’ providing credit facilities to its members.
Fifth, as has been held in Udaipur Sahkari Upbhokta Thok Bhandar Ltd. vs. 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 u/s 80P. Therefore, the A.O. under the IT Act cannot be said to be going behind any registration certificate when he engages in a fact-finding inquiry as to whether the co-operative society concerned is in fact providing credit facilities to its members. Such fact-finding inquiry [see section 133(6)] 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 show that it is engaged in providing credit facilities to its members, the A.O. must then scrutinise the same and arrive at a conclusion as to whether this is, in fact, so.
Sixth, in Kerala State Co-operative Marketing Federation Ltd. and Ors. (Supra) it has been held that 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. Further, it must also 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). Further, 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 also does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of the amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.
Seventh, section 80P(1)(c) also makes it clear that section 80P is concerned with the co-operative movement generally and, therefore, the moment a co-operative society is registered under the 1912 Act, or a State Act, and is engaged in activities which may be termed as residuary activities, i.e., activities not covered by sub-clauses (a) and (b), either independently or in addition to those activities, then profits 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 societies engaged in any activity, completely independent of the activities mentioned in sub-clauses (a) and (b), subject to the cap of Rs. 50,000 to be found in sub-clause (c)(ii). This puts an end to any argument that in order to avail of a benefit u/s 80P a co-operative society once classified as a particular type of society must continue to fulfil those objects alone. If such objects are only partially carried out and the society conducts any other legitimate type of activity, such co-operative society would only be entitled to a maximum deduction of Rs. 50,000 under sub-clause (c).
Eighth, sub-clause (d) also points in the same direction, in that interest or dividend income derived by a co-operative society from investments with other co-operative societies are also entitled to deduct the whole of such income, the object of the provision being furtherance of the co-operative movement as a whole.
Coming to the provisions of section 80P(4), the Supreme Court referred to the speech of the Finance Minister on 28th February, 2006, the Circular dated 28th December, 2006 containing explanatory notes on provisions contained in the Finance Act, 2006 and a clarification by the CBDT, in a letter dated 9th May, 2008, and observed that the limited object of section 80P(4) was to exclude co-operative banks that function at par with other commercial banks, i.e., which lend money to members of the public. Thus, from section 3 read with section 56 of the Banking Regulation Act, 1949, it would be clear that a primary co-operative bank cannot be a primary agricultural credit society, as a co-operative bank must be engaged in the business of banking as defined by section 5(b) of the Banking Regulation Act, 1949, which means the accepting, for the purpose of lending or investment, of deposits of money from the public. Likewise, u/s 22(1)(b) of the Banking Regulation Act, 1949 as applicable to co-operative societies, no co-operative society shall carry on banking business in India, unless it is a co-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-operative society, the primary object of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities.
The Supreme Court, therefore, concluded that the ratio decidendi of Citizen Co-operative Society Ltd. (Supra), must be given effect to. Section 80P, being a benevolent provision enacted by Parliament to encourage and promote 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 was 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-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.
According to the Supreme Court, judged by this touchstone, it was clear that the impugned Full Bench judgment was wholly incorrect in its reading of Citizen Co-operative Society Ltd. (Supra). Clearly, therefore, once section 80P(4) was out of harm’s way, all the assessees in the present case were 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. Further, in case it is found that there were instances of loans being given to non-members, profits attributable to such loans obviously could not be deducted.
