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Facts
The assessee, a co-operative society, claimed deduction under section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer disallowed the deduction citing that a large number of members were nominal or associate members who did not have voting rights or participate in management, violating the principle of mutuality and the Karnataka Co-operative Societies Act's limits on associated members. This was upheld by the CIT(A).
Held
The Tribunal noted that the eligibility for deduction under section 80P(2)(a)(i) depends on various facts, including the type of members, their rights, and whether the society operates on mutuality principles. Citing previous Tribunal orders and Supreme Court judgments, the Tribunal restored the issue to the Assessing Officer for fresh examination.
Key Issues
Whether the co-operative society is eligible for deduction under section 80P(2)(a)(i) when a significant portion of its members are nominal or associate members, potentially violating the principle of mutuality.
Sections Cited
80P(2)(a)(i), 57
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 26/12/2024 in DIN No. ITBA/NFAC/S/ 250/2024-25/1071568785(1) for the assessment year 2017-18.
The issue raised by the assessee is that the learned CIT(A) was wrong in denying deduction under section 80P(2)(a)(i) of the Income Tax Act. The deduction was denied because of the presence of associate and nominal members who do not have voting rights and do not take part in the management of the society.
Briefly stated facts are that the assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959. During assessment, the Assessing Officer noted that the total number of members as on 31.03.2017 was 10,320. Out of this, only 4,112 were A Class members. The remaining 6,208 were nominal and associated members. These members did not hold A Class shares, did not contribute to share capital, had no voting rights, and were not entitled to profits of the society.
The AO noted that as per the bye-laws and amended Karnataka Co-operative Societies Act, associated members should not exceed 15% of total membership. But in this case, they were about 60%, violating the legal limit.
The AO also noted that the society did not follow the principle of mutuality. Since many members were not active and had no rights, it was not a mutual concern. The AO relied on the Supreme Court judgment in the case of Citizen Co-operative Society Ltd. (2017) 397 ITR 1 (SC). He held that the society carried out commercial activity and was not eligible for deduction under section 80P(2)(a)(i) of the Act. So, the entire deduction was disallowed and added to total income of the assessee. The learned CIT(A) agreed with the AO and upheld the disallowance made by him.
Being aggrieved by the order of learned CIT-A, the assessee is in appeal before us.
The learned AR before us submitted that in the case of Sri Anathapadmanabha Credit Co-operative Society Ltd. Vs. ITO in to 2195/Bang/2024, this Tribunal vide order dated 29.05.2025 had set aside the matter to the AO for fresh examination. As per the learned AR, the facts of the case on hand are identical to the facts of the case cited above and therefore, he requested similar direction in this case.
The learned AR also said that the issue on hand can also be examined in the light of the judgment of Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd.
On the other hand, the learned DR had no objection if the issue is set aside to the file of the AO for deciding the dispute in the light of the arguments advanced by the learned AR for the assessee.
We have carefully considered the assessment order, the order of the learned CIT(A), and the submissions made by both sides. It is a fact that the assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959. The deduction under section 80P(2)(a)(i) was denied by the Assessing Officer mainly because a large number of members were nominal or associate members who did not have voting rights, did not hold A class shares, and did not participate in the management of the society. Hence, the Assessing Officer held that the society violated the principles of mutuality and relied on the Supreme Court judgment in the case of Citizen Co-operative Society Ltd. . to deny the deduction. This finding was confirmed by the learned CIT(A).
10.1 During the hearing before us, the learned AR submitted that the Tribunal, in the case of Sri Anathapadmanabha Credit Co-operative Society Ltd. Vs. ITO in to 2195/Bang/2024, has already considered a similar issue and restored the matter to the Assessing Officer for fresh examination. The learned AR also relied on the Supreme Court judgment in the case of Mavilayi Service Co-operative Bank Ltd., where the Hon’ble Court clarified the scope of deduction under section 80P of the Act in similar facts and circumstances. We find merit in the submissions of the learned AR. The question whether the assessee is eligible for deduction under section 80P(2)(a)(i) depends on facts, such as the type of members, their rights and duties, and whether the society is truly working for the benefit of its members on mutuality principles. These facts need to be properly examined by the Assessing Officer in light of the law laid down by the Hon’ble Supreme Court in the cases of Citizen Co-operative Society Ltd. and Mavilayi Service Co-operative Bank Ltd. 10.2 The Tribunal in the case cited by the learned AR (Sri Anantha Grameena) has already restored the matter to the AO under similar facts. In the interest of justice and fair play, we are of the view that the issue in the present case should also be sent back to the Assessing Officer for fresh decision.
10.3 Without prejudice to the above, it is also clarified that in the event any disallowance of deduction to be made of the interest income earned . by the assessee, the corresponding cost of interest and other direct expenses should be allowed as deduction in the manner provided under section 57 of the Act. In this regard, we draw support and guidance from the order of this Tribunal in the case of SSK Pattina Sahakara Sangh Niyamit Vs. ITO in vide order dated 23- 05-2025. Therefore, we set aside the order of the learned CIT(A) and restore the issue to the file of the AO. The AO is directed to examine the claim of deduction under section 80P(2)(a)(i) of the Act afresh, after verifying the facts and applying the law as explained in the above judgments. The assessee must be given a proper opportunity to present its case and file all relevant documents. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.
10.4 There were other grounds of appeal raised by the assessee in the memo of appeal but at the time of hearing, the learned AR did not advance any argument with respect to such grounds of appeal. Accordingly, such grounds of appeal are dismissed as infructuous.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in court on 2nd day of July, 2025