Section 80P(4) IT Act Does Not Deny Deduction To Regional Rural Banks As They Retain The 'Deemed Co-operative Society' Status Under Section 22 RRB Act: Madras High Court

"For the purpose of the Income-tax Act, 1961... a Regional Rural Bank shall be deemed to be a co-operative society." Madras High Court, in a batch of appeals, has ruled that Regional Rural Banks (RRBs) continue to be eligible for income tax deductions under Section 80P of the Income Tax Act, 1961.

A division bench comprising Dr. Justice Anita Sumanth and Mr. Justice S. Raveekumar held that the insertion of sub-section (4) to Section 80P via the Finance Act 2006, which excludes certain co-operative banks from the benefit, does not override the specific deeming fiction created by Section 22 of the Regional Rural Banks Act, 1976.

Statutory Status of Regional Rural Banks

The dispute arose after the Revenue sought to deny tax deductions to the respondent, M/s. Pandyan Grama Bank, for various assessment years between 2007-08 and 2011-12. The Department contended that since RRBs perform banking functions, they fall within the scope of "co-operative banks" excluded by the amendment to Section 80P(4) of the IT Act. The assessee maintained that its status as a "deemed co-operative society" under the RRB Act remained intact and was not impacted by the restrictive amendment.

The primary question before the court was whether the introduction of Section 80P(4) of the IT Act effectively nullified the benefit granted to RRBs under Section 22 of the RRB Act. Additionally, the court examined whether the Commissioner of Income Tax had validly invoked revisionary powers under Section 263 of the IT Act to withdraw deductions that were originally granted in accordance with the RRB Act's specific provisions.

Court Explains Interaction Between RRB Act and IT Act

The court underscored that the Regional Rural Banks Act is a self-contained enactment. It categorically noted that Section 22 of the RRB Act explicitly creates a legal fiction whereby an RRB is treated as a co-operative society for the purposes of the Income-Tax Act. The bench observed that this provision remains operative and has not been superseded by subsequent amendments to the tax laws.

"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 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."

Rejection of Revenue's Classification Argument

The Revenue had attempted to classify the assessee as a "primary co-operative bank" or "primary credit society" under the Banking Regulation Act to bring them under the exclusion criteria of Section 80P(4). The court rejected this contention, noting that the Revenue had consistently recognized the respondent as an RRB in its own assessment records.

"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."

Invalidity of Section 263 Proceedings

Regarding the jurisdictional challenge, the bench upheld the Tribunal's decision to quash the Commissioner’s order under Section 263. The court held that since the initial assessment correctly granted the deduction based on the existing legal framework of the RRB Act, the view taken by the Assessing Officer was not "erroneous or prejudicial" to the interests of the Revenue, thereby failing to meet the threshold for revisionary intervention.

The court concluded by dismissing the Revenue’s appeals, confirming that Regional Rural Banks are entitled to the tax benefits provided to co-operative societies, as the specific legislative intent behind the RRB Act's deeming provision continues to hold force over the general exclusions found in the Income Tax Act.

Date of Decision: 08 September 2026