State Declaration on KSCARDB as Cooperative Bank was Struck Down: Supreme Court directs RBI to Revoke Banking License [Read Order]

The Supreme Court directed the Reserve Bank India(RBI)to revoke the banking license and struck down the State declaration on Kerala State Co-Operative Agricultural And Rural Development Bank Ltd(KSCARDB) as a Cooperative Bank. The appellant/assessee is a state-level Agricultural and Rural Development Bank governed as a cooperative society under the Kerala Co-operative Societies Act, 1969 (“State Act, 1969”) and is engaged in providing credit facilities to its members who are cooperative societies only. Initially, in 1951, the appellant/assessee was registered under Section 10 of the Travancore Cochin Co-operative Societies Act, 1951 (“State Act, 1951”). The appellant/assessee filed its Return of Income for the Assessment Year 2007-08 of Rs. 27,18,052 claiming deduction under Section 80P (2)(a)(i) of the Act. Upon scrutiny, on 22.12.2009 an Assessment Order under Section 143(3) of the Act, was passed by the Assessing Officer for the Assessment Year 2007-08, disallowing the deduction of Rs. 36,39,87,058 under Section 80P(2)(a)(i) holding that the appellant/assessee is neither a primary agricultural credit society nor a primary co-operative agricultural and rural development bank. The Assessing Officer declared the appellant/assessee to be neither a primary agricultural credit society nor a primary cooperative agricultural and rural development bank, thus, the appellant/assessee’s claim was hit by Section 80P (4) of the Act. The total income was assessed at Rs. 36,69,47,233. The CIT(A) viewed that the appellant/assessee is actively playing the role of a development bank in the State and is no longer a land mortgage bank but a development bank. The held that the appellant/assessee is a co-operative bank and is not a primary agricultural credit society or a primary co-operative agricultural and rural development bank and is consequently hit by the provision of Section 80P (4), thus, the deduction claimed was rightly denied. However, the ITAT also clarified to the extent that the appellant/assessee is acting as a State Land Development Bank which falls within the purview of the National Bank for Agriculture and Rural Development Act, 1981 (“NABARD Act, 1981”) It was contended that the appellant bank is not a banking company within the meaning of Section 5(c) of the BR Act, 1949 which defines a “banking company” to be any company which transacts the business of banking in India and Section 5(b) defines “banking” to mean the accepting, for lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. That the appellant is a co-operative society and not a co-operative bank. It was ultimately observed that the Reserve Bank of India could not have granted the licence to the appellants in the said case unless they were first declared a state cooperative bank under the NABARD Act, 1981. Since such a declaration was struck down, the Reserve Bank of India could not have issued a licence to carry on banking business. Therefore, the Reserve Bank of India would have to cancel the licence granted by it to the appellant therein. Hence, a direction was issued to the Reserve Bank of India to revoke the banking licence granted to the appellants therein. Section 56 of the BR Act, 1949 begins with a non-obstante clause which states that notwithstanding anything contained in any other law for the time being in force, the provisions of the said Act, shall apply to, or about, co-operative societies as they apply to, or about, banking companies subject to certain modifications. The object of Section 56 is to provide a deeming fiction by equating a cooperative society to a banking company if it is a cooperative bank within the meaning of the said provision. This is because Chapter V of the BR Act, 1949, deals with the application of the Chapter to co-operative societies which are co-operative banks within the meaning of the said chapter. For these cases, what is relevant is that throughout the In Citizen Co-operative Society Ltd., the Court held that the appellant therein had both members as well as nominal members who were depositing and availing loan facilities from the appellant therein and therefore, the appellant therein was not entitled to the benefit of Section 80P of the Act as it was functioning as a cooperative bank. But, the appellant herein is not a cooperative bank and neither has it been so declared under the provisions of the NABARD Act, 1981 or the State Act. On the other hand, under the provisions of the State Act, 1969, the Kerala State Co-operative Bank has been declared by the Government of Kerala as a co-operative bank. Further, under the provisions of the State Act, 1984, ‘agricultural and rural development bank’ means the Kerala Cooperative Central Land Mortgage Bank Limited, registered under Section 10 of the Travancore-Cochin Co-operative Societies Act, 1951, which shall be known as Kerala State Co-operative Agricultural and Rural Development Bank Limited i.e. the appellant herein. A two-judge bench comprising Justice Nagarathna and Justice Ujjal Bhuyan observed that “Although the appellant society is an apex cooperative society within the meaning of the State Act, 1984, it is not a co-operative bank within the meaning of Section 5(b) read with Section 56 of the BR Act, 1949.” The Court set aside the order of the Kerala High Court and allowed the appeal. Support our journalism by subscribing to Taxscan premium. 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