Supreme Court, presided over by Justices B.V. Nagarathna and Ujjal Bhuyan, has provided much-needed clarity on income tax deductions for cooperative societies under Section 80P of the Income Tax Act. This ruling has significant implications for cooperative societies primarily focused on providing credit services to their members.

The crux of the Supreme Court's ruling revolves around distinguishing between cooperative societies engaged in banking activities and those exclusively dedicated to extending credit services. The verdict firmly establishes that cooperative societies abstaining from banking operations, as defined in Section 5(b) of the Banking Regulation Act, 1949, cannot be categorized as cooperative banks. Consequently, these entities become eligible for Section 80P deductions under the Income Tax Act.

The case in question involves the Kerala Co-operative Agricultural and Rural Development Bank, registered under the Kerala Co-operative Societies Act of 1969. The Assessing Officer had challenged the bank's claim for a Section 80P deduction, classifying it as a "cooperative bank" subject to Section 80P(4) provisions.

To bolster its stance, the Supreme Court referred to its previous ruling in the Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd. vs. Maharashtra State Cooperative Bank Ltd. This precedent clarified that Section 56 of the Banking Regulation Act defines specific cooperative bank categories, including state co-operative banks, central co-operative banks, and primary co-operative banks. These banks require a license from the Reserve Bank of India (RBI) to engage in banking operations.

The Court reiterated that any institution not aligning with these specified categories, regardless of nomenclature or organizational structure, would not qualify as a cooperative bank under Section 56 of the Banking Regulation Act. It emphasized that the designation of a state cooperative bank necessitates action by the State Government, as per Section 2(u) of the National Bank for Agriculture and Rural Development Act, 1981.

As the Kerala Co-operative Agricultural and Rural Development Bank had not obtained the designation of a state cooperative bank under the NABARD Act or the Kerala Co-operative Societies Act, the Court concluded that it did not require an RBI license for banking operations. Thus, the bank met the criteria for Section 80P deductions.

In summary, the Supreme Court's ruling removes any ambiguity regarding the tax treatment of cooperative societies primarily offering credit facilities to their members, rather than engaging in full-scale banking activities. This decision holds paramount importance and may influence similar cases in the future.

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