Regional Rural Banks are deemed co-operative societies.

Regional Rural Banks are deemed co-operative societies under RRB Act and eligible for Section 80P deduction.

Issue

Whether a Regional Rural Bank (RRB) is entitled to claim deduction under Section 80P of the Income-tax Act, 1961, despite the insertion of Section 80P(4) which restricts deductions for co-operative banks.

Facts

The assessee, a Regional Rural Bank (RRB), claimed statutory deduction under Section 80P of the Income-tax Act for Assessment Years 2007-08 to 2011-12.
The Assessing Officer initially allowed the deduction under Section 80P in the assessment proceedings.
The Commissioner of Income Tax invoked Section 263, holding that post 01.04.2007, Section 80P(4) denied Section 80P benefits to co-operative banks, making the assessee ineligible.
The status of the assessee as a Regional Rural Bank was never questioned by the Revenue, and the Assessing Officer reiterated in consequential proceedings that the assessee was an RRB governed by the Regional Rural Banks Act, 1976.
Section 22 of the Regional Rural Banks Act, 1976 creates a legal fiction whereby a Regional Rural Bank is deemed to be a co-operative society for the purposes of the Income-tax Act, 1961.

Decision

The legal fiction created under Section 22 of the Regional Rural Banks Act, 1976 explicitly deems an RRB to be a co-operative society for the purposes of the Income-tax Act.
The restriction under Section 80P(4) does not disentitle a Regional Rural Bank from claiming deduction under Section 80P.
The assessment orders allowing the deduction under Section 80P were restored, and the Section 263 revision proceedings were set aside in favor of the assessee.

Key Takeaways

Overriding Effect of Legal Fiction: Section 22 of the Regional Rural Banks Act, 1976 deems RRBs as co-operative societies for tax purposes, preserving their entitlement to Section 80P benefits.
Inapplicability of Section 80P(4) Bar to RRBs: The insertion of Section 80P(4) restricting co-operative banks does not strip away the specific statutory classification and tax benefits accorded to Regional Rural Banks under their governing enactment.

HIGH COURT OF MADRAS

Commissioner of Income-tax

Pandyan Grama Bank

Dr. Anita Sumanth and S. Raveekumar, JJ.

TCA Nos. 1447 of 2010, 154, 155 & 156 of 2013, 90 & 91 of 2015 and 588 of 2016^†

SEPTEMBER 8, 2026

V. Mahalingam, Senior Standing Counsel for the Appellant. A.S. Sriraman, R. Vijayaraghavan and Subbaraya Aiyar Padmanabhan for the Respondent.

JUDGMENT

Dr. Anita Sumanth, J.- This batch of seven appeals relate to the Pandyan Grama Bank (Bank) for assessment years (AY) 2007 – 08 (two appeals), 2008 – 09, (two appeals), 2009 – 10, 2010 – 11 and 2011 – 12.

2. The assessee / respondent is a Regional Rural Bank (RRB) governed by the provisions of the Regional Rural Banks Act, 1976 (in short ‘RRB Act’). The status of the assessee as being a RRB is not in dispute and the Department also has proceeded on the basis that it is an RRB both pre and post the proceedings under Section 263 of the Income-Tax Act, 1961 (in short, ‘IT Act’) for AY 2007 – 08, that was the genesis by which the issues under consideration arose.

3. We have heard Mr.Mahalingam, learned Senior Standing Counsel for the appellant / Department and Mr.A.S.Sriraman and Mr.R.Vijayaraghavan learned counsel for the Bank.

4. The assessee had been claiming deduction under Section 80P of the IT Act read with Section 22 of the RRB Act, which entitled it to claim the status of cooperative society by way of a deeming fiction.

5. While so, Section 80P was amended vide Finance Act 2006 by insertion of sub-section (4), with effect from 01.04.2007. Sub-section (4) provided that the benefit under Section 80P shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agriculture and rural development bank. The terms ‘co-operative bank’ and ‘primary co-operative agricultural and rural development bank’ are defined in the Explanation to Section 80P(4), and sub-section (4) and the Explanation read as follows:-

(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 cooperative 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.

6. The assessment for AY 2007 – 08 was completed originally on 19.03.2009, the assessing officer accepting the case of the assessee in relation to the deduction sought.

7. While so, the Commissioner of Income-Tax (in short ‘CIT’), being of the view that the assessment was both erroneous and prejudicial to the interests of the Revenue, exercised powers of revision under Section 263 and directed the assessing officer to re-look into the deduction sought. The order under Section 263 was the subject matter of challenge before the Tribunal, which quashed the same.

8. An order consequential to the Section 263 order came to be passed by the assessing officer on 20.04.2010, even when the appeal was pending before the Tribunal wherein, invoking Section 80P(4), the assessing authority proceeded to withdraw the deduction originally granted. It is relevant to note that even while doing so, the officer reiterates the status of the assessee as a Regional Rural Bank established under the RRB Act.

9. We first take up TC 1447 of 2010 as that relates to the challenge to order of the Tribunal setting aside the Section 263 of the order passed by the CIT. The Tribunal had allowed the appeal both on the question of jurisdiction of the officer as well on the merits of the matter.

10. As far as jurisdiction is concerned, the Tribunal proceeds on the basis that the view taken by the assessing officer at the first instance was a probable view and hence assumption of jurisdiction under Section 263 was itself bad in law.

11. That apart, and on the merits of the matter, the Tribunal noted the deeming fiction under Section 22 of the RRB Act by virtue of which, a Regional Rural Bank is to be deemed to be a co-operative society and hence concluded that the assessee which still continue to be entitled to the benefit of

12. The substantial questions of law in TCA No. 1447 of 2010 admitted on 21.02.2011 are:

“1.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in quashing the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act?

2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in quashing the order passed by the Commissioner of Income Tax under Section 264, even though the deduction under Section 80P(2)(a)(i) to the Co-operative Banks has been withdrawn by an amendment to insertion to sub-section (4) in Section 80P with effect from 1.4.2007 (Assessment year 2007-08) onwards is valid?”

13. The substantial question admitted in the other appeals relating to the claim of deduction under Section 80P is common across appeals, and reads as follows:-

“Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that in view of Sections 22 and 23 of the RRB Act, the assessee should be treated as co-operative society on the ground that the said Sections having not been overridden, when sub section 4 of Section 80P introduced by Finance Act of 2006 clearly takes a Co-operative Bank out of the purview of the deduction available under Section 80P(2) (a)(i)?”

14. Mr.Mahalingam would rely almost substantially on sub-section (4) of Section 80P inserted with effect from 1.4.2007. According to him, the activities of the assessee are akin to that of a Bank and hence, with the insertion of subsection 4 to Section 80P, the benefit of the deeming fiction under Section 22 of the RRB Act would cease. Drawing our attention to Section 56 of the Banking Regulation Act, he would submit that the assessee must be classified as a primary co-operative bank or a primary credit society, both of which have been denuded of the deduction under Section 80P on account of the insertion of subsection (4).

15. Per contra, learned counsel for the assessee would submit that the entitlement to the deduction would continue even after insertion of sub-section (4) as the status of the assessee continues to be a Regional Rural Bank and the benefit of Section 22 would hence continue to be available. Assessee relies on a slew of decisions as follows:-

(i) Pr. CIT v. Baroda Uttar Pradesh Gramin Bank 447 ITR 218 (Allahabad)

(ii) Pr. CIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. [Income Tax Appeal No. 2 of 2019, dated13-8-2019]

(iii) CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. 362 ITR 331 (Gujarat)

(iv) Baroda Uttar Pradesh Gramin Bank v. Dy. CIT 169 ITD 656 (Allahabad – Trib.)

(v) Asstt. CIT v. Bhilwara Zila Dugdh Utpadak Sahakari Sangh Ltd. [IT Appeal No. 163 (Jodh.) of 2019, dated 11-9-2023]

(vi) Vidarbha Konkan Gramin Bank v. ITO [IT Appeal No. 7 (Nag.) of 2019, dated 28-11-2024]

(vii) Karnataka Vikas Grameena Bank v. Asstt. CIT [IT Appeal No. 611 (Bang) of 2020, dated 5-11-2022]

(viii) CIT v. Savera Industries Ltd. TCA No. 839 of 2016, dated 11-1-2017]

16. We have heard both learned counsel and also perused the material papers and the case law cited.

17. To reiterate, the status of the assessee as a Regional Rural Bank has never been questioned by the Revenue. In fact, in order of assessment under Section 143(3) for AY 2007 – 08, the assessing authority has granted the deduction under Section 80P recording categorically that the assessee is a Regional Rural Bank entitled to the benefit of Section 22 of the RRB Act.

18. Even post the order passed under Section 263 by the CIT, the assessing authority, in the consequential order passed under Section 143(3) read with Section 263 on 20.4.2010, reiterates the position that the assessee was a Regional Rural Bank governed by the RRB Act. Hence there is absolutely no merit whatsoever in the learned Standing Counsel putting forth an altogether different case now, particularly, one that is at variance with the facts on record and the stand of the revenue in the entire proceedings.

19. Part V of the Banking Regulation Act, to which our attention has been drawn by Mr.Mahalingam, in our considered view, does not have any application to this case. References has been made to the definitions of primary co-operative bank and primary credit society under Section 56(ccv) and (ccvi) as below:-

(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 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;

(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:

20. In our considered view, these references are not material to this matter as it has never been the case of the Revenue that the assessee falls within the description of either a primary co-operative Bank or primary credit society. We thus reject the argument that the assessee bank falls under the categories of entities referred to in Section 80P(4) of the Act.

21. The functioning of Regional Rural Banks is governed by the Regional Rural Bank Act that defines an RRB, under Section 3 of the RRB Act as a body corporate with perpetual succession and a common seal with power. It may subject to the provisions of this Act, engage in the following activities: acquire, hold and dispose of property and contract and sue and be sued in its name, subscribe to the share capital of such Regional Rural Bank, train personnel of such Regional Rural Bank, and provide managerial and financial assistance to such Regional Rural Bank, as may be mutually agreed upon between the Sponsor Bank and the Regional Rural Bank.

22. The RRB Act goes on to deal in extenso with the method of incorporation, activities and other aspects germane to the functioning of an RRB and is hence a self-contained enactment governing all aspects of the functioning of an RRB. Section 22 of the RRB Act contains a fiction by virtue of which an RRB is deemed to be a co-operative society for the purposes of the Income-Tax Act, 1961. Section 22 reads as follows:-

“Regional Rural bank to be deemed to be a co-operative society for purpose of the Income-tax Act, 1961. – For the purpose of the Income-tax Act, 1961 (43 of 1961), or any other enactment for the time being in force relating to any tax on income, profits, or gains, a Regional Rural Bank shall be deemed to be a co-operative society.”

23. Section 80P(1) grants deduction to a cooperative society in respect of the incomes as enumerated under sub-section (2) thereof, and the deeming fiction under Section 22 of the RRB Act, which is specific to the provisions of the IT Act, has not been overridden in any manner till date.

24. We also concur with the findings of the Tribunal in relation to the assumption of jurisdiction under Section 263 as, in our considered view, the officer in the order of assessment passed at the first instance, had rightly granted the deduction under Section 80P in view of Section 22 of the RRB Act.

25. In light of this discussion, the substantial questions are answered in favour of the assessee, and these appeals are dismissed. No costs.