SULLIA PRIMARY CO-OPERATIVE AGRICULTURAL & RURAL DEVELOPMENT BANK,SULLIA vs. INCOME TAX OFFICER, WARD-1, PUTTUR

The relevant facts are that the assessee is primary agricultural cooperative society registered under Karnataka Cooperative Societies Act. For the year under consideration the assessee society declared total income at Rs. 2,54,500/- after claiming deduction of Rs. 1,27,17,965/- under the provision of section 80P of the Act.

The AO during the assessment proceeding found that as per the bylaws of the assessee, there were three types of members viz (i) A Class Members, (ii) B Class Members and (iii) C Class Members. “A Class Member” represent regular members who has subscribed shares of Rs. 500 each. The regular members have all the rights being voting rights, share in profit, participate in administration and right to access the audited financial statements. “B Class Member” represent nominal or associate members who become member by subscribing shares of Rs. 20/- each. These members do not have any rights as enjoyed by the regular members. They can only make deposit and receive loan. “C Class Member” member represents shares subscribed by the State Government for Rs. 1000/ each share.

1 During the year, there were 3159 members of “A Class” and 4920 members of “B Class” whereas zero member of “C Class”. Further, the AO observed that during the year A class members have made deposit/investment of Rs. 4,8297320/- only whereas B class members

2 Based on above the AO alleged that the assessee society done majority of its business with nominal/associate members who are not participating the in the share of profit and voting rights. These are not the members in true sense but only contributing to the revenue generated by the assessee society without participating in the profit. Hence the essence of mutuality is missing on which premises the cooperative society work. The AO alleged that the facts involved in present assessee is covered by the decision of Hon’ble Supreme Court in the case of Citizen Cooperative Society Ltd in civil appeal No. 10245 of 2017. 6. The assessee in reply submitted that the case of the Citizen Cooperative Society is different from the facts of the assessee. The Citizen Cooperative Society Ltd was working as bank and dealt with members as well as general public and having presence in multiple state. Further, the Citizen Cooperative was registered under different Act of different states in which admission of nominal or associate member was not allowed.

However, the AO dismissed the argument of the assessee. The AO held that the assessee society has three categories of members – A, B, and C. While A-class members are regular members with voting rights

1 ITR 241 and Citizen Co-operative Society Ltd.(supra), the AO emphasized that for claiming exemption under section 80P of the Act, there must be a complete identity between members contributing and members enjoying the benefits. In this case, nominal/associated members only contributed funds but were deprived of participation in profits, administration, other rights, which breaks the concept of mutuality.

2 The AO further highlighted that the denial of voting rights and sharing of profits to certain categories of members shows discrimination among members, and such a structure cannot be regarded as a true co- operative society functioning on mutual principles. Since the assessee society was found to be conducting transactions with nominal members akin to finance business rather than mutual activity, the AO concluded that the deduction under section 80P(2) of the Act is not allowable. Accordingly, the entire claim of deduction was disallowed.

Before the Learned CIT(A), the assessee submitted that the main object is to provide credit facilities to its members. The income earned by way of banking business of providing credit facility to the members are eligible for deduction under section 80P of the Act.

It is submitted that section 80P is a benevolent provision intended by Parliament to promote the growth of the co-operative sector. The Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 123 taxmann.com 161 (SC) has clearly held that the deduction under section 80P must be read liberally and in favour of the assessee. The Hon’ble Court further observed that even if loans are given to nominal members, it does not affect the eligibility to claim deduction. However, the learned CIT(A) confirmed the finding of the AO by observing as under: 5. I have considered the facts of the case, assessment order and submission made by the appellant. The appellant has raised 8 grounds in the present appeal. Ground no.1, 2, 4, 5 & 6 are related grounds where appellant has challenged disallowance of deduction u/s.80P(2)(a)(i) of the IT Act of Rs.1,27,17,965/-. The said deduction includes interest income from its investments in scheduled banks and co-operative banks other than co- operative societies at Rs.23,26,564/- which AO has considered same under the head “Income from Other Sources” and denied deduction U/s. 80P. This action of the AO was challenged by appellant by his ground of appeal no. 3. The ground no.8 of the appeal is general in nature. Since ground nos.1, 2, 4 to 6 are related grounds and concerned with disallowance of deduction U/s.80P, same are adjudicated as below: 5.1 The AO in the assessment order observed that principle object of the society as stipulated in by-law as approved by