New Delhi: The Supreme Court has clarified that cooperative societies do not fall within the purview of income tax and that they are eligible for exemption from the tax.

After considering the previous orders of the Supreme Court and the High Court, the definition given under the Banking Regulation Act, and the circular issued by the Central Board of Direct Taxes (CBDT), the Bench consisting of Justice M R Shah and Justice C T Ravikumar, made it clear that cooperative societies would be eligible for income tax exemption under all circumstances.

The clarification, which will come as a relief to cooperative societies, including those in Kerala, was made in the course of considering the case of Mumbai Income Tax Commissioner versus Anna Saheb Patil Mathadi Kamgar Sahakari Patpedhi Limited.

In the order, the court quoted at length the issues examined in detail in the verdict of the case between the Mavilayi Service Cooperative Bank in Kerala and Income Tax Commissioner, Kozhikode, in 2021.

There is a huge difference between cooperative institutions that grant loans to their members and banks that extend loans and other facilities to the public, the court said.

The cooperative institutions should not be considered as banks only on the ground that they give loans to their members.

The Supreme Court pointed out that the Income Tax Appellate Tribunal, Commissioner of Income Tax (Appeals), and the High Court were of the opinion that cooperative institutions were eligible for income tax exemption.

The Mavilayi verdict
In the Mavilayi case, the Supreme Court passed the order by quashing the verdict of a Full Bench of the Kerala High Court that cooperative institutions were liable to pay income tax on the income earned from loans given out for non-agricultural purposes.

According to the Kerala Cooperative Societies Act, 1967, the income derived from loans extended to members is eligible for tax exemption. There is also a provision in the law for granting loans to non-members. The Supreme Court, however, ruled that income from such loans would not be eligible for income tax exemption.