NARAVI VYAVASAYA SEVA SAHAKARI BANK LIMITED ,DAKSHINA KANNADA vs. INCOME TAX OFFICER, WARD-1, PUTTUR

ITA 2552/BANG/2025Status: DisposedITAT Bangalore19 May 2026AY 2017-1844 pages
AI SummaryAllowed

What were the facts?

The assessee, M/s Naravi Vyavasaya Seva Sahakari Bank Limited, filed appeals for Assessment Years 2017-18 and 2018-19 against orders of the National Faceless Appeal Centre (NFAC). The core dispute concerns the disallowance of deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, in respect of income attributable to 'C' class (nominal) members. The Assessing Officer (AO) disallowed the deduction, citing a violation of the Karnataka Cooperative Societies Act, 1959, regarding the proportion of nominal members, and a breach of the principle of mutuality, relying on the Supreme Court's decision in Citizen Cooperative Society Ltd. The assessee contended that its bye-laws, approved by the Registrar, permit nominal members, and its operations, including extending credit only to members within its area, adhere to cooperative laws and NABARD guidelines, distinguishing its case from the Citizen Cooperative Society Ltd. judgment.

What did the Tribunal hold?

The Tribunal held that the assessee is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, in respect of income attributable to 'C' class (nominal) members. The Tribunal distinguished the present case from the Supreme Court's decision in Citizen Co-operative Society Ltd. by noting that the assessee society is governed by the Karnataka Co-operative Societies Act, 1959, and its approved bye-laws, which explicitly recognize nominal and associate members. The Tribunal found that the assessee strictly adheres to statutory provisions, does not deal with non-members, has no regulatory breaches, and maintains mutuality. The Tribunal also referred to the jurisdictional High Court of Karnataka's decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which held that interest income earned by a cooperative society from temporarily parking surplus funds with banks is attributable to its business and eligible for deduction under Section 80P(2)(a)(i). The Tribunal distinguished the Karnataka High Court's decision in BELVE VYAVASAYA SEVA SAHAKARI SANGHA LTD vs. ITO, which dealt with deduction under Section 80P(2)(d) concerning investments with cooperative banks, from the present case concerning deduction under Section 80P(2)(a)(i) for income from its primary business of providing credit facilities. The AO was directed to delete the addition made. The Tribunal also noted that grounds related to general issues and interest under Section 234B were dismissed as infructuous or general.

What were the issues?

1. Whether the assessee is entitled to deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, in respect of income attributable to 'C' class (nominal) members, considering the provisions of the Karnataka Cooperative Societies Act, 1959, and the principle of mutuality. Assessee's contentions: - The assessee argued that the Hon'ble Supreme Court's decision in Citizen Co-operative Society Ltd. is distinguishable as the present society strictly adheres to the Karnataka Co-operative Societies Act, 1959, and its approved bye-laws, which expressly permit nominal and associate members. Unlike the cited case, there is no violation of cooperative law, no acceptance of deposits from non-members, no dealing with the general public, and no loss of mutuality. The assessee relied on the Bombay High Court's decision in Jalgaon District Central Co-operative Bank Ltd. and the Supreme Court's decision in U.P. Co-operative Cane Union Federation vs. CIT, stating that the definition of 'member' should be gathered from the relevant Co-operative law, which includes nominal members. Revenue's contentions: - The Revenue, through the AO, contended that the assessee violated Section 18 of the Karnataka Cooperative Societies Act, 1959, by having nominal members exceeding 15% of regular members. The AO also argued that nominal members do not contribute to shares, are not entitled to profits, have no role in management, and lack voting rights, thus violating the principle of mutuality. The AO relied on the Supreme Court's decision in Citizen Co-operative Society Ltd.

Which sections of the Income-tax Act were involved?

Section 80P(2)(a)(i),Section 250,Section 18,Section 80P,Section 80P(2)(d),Section 234B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE

Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY

For Appellant: Shri Narendra Sharma, Advocate
For Respondent: Shri Subramanian, JCIT (DR)

PER WASEEM AHMED, ACCOUNTANT MEMBER:

These two appeals filed at the instance of the assessee for the A.Y. 2017-18 and 2018-19 are directed against separate orders of the learned Commissioner of Income Tax Appeal (hereafter- learned CIT-A), at National Faceless Appeal Centre-NFAC, under section 250 of the Income Act, 1961 (hereafter- The Act) and both of them were head together.

First, we take up assessee’s appeal in ITA No. 2552/Bang/2025 for A.Y. 2017-18. ITA No.2552 & 2553/Bang/2025

2.

The assessee in the appeal memo has raised as many as 6 grounds of appeal. However, Ground Nos. 1 & 6 of the assessee’s appeal

The order continues below.

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