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Facts
The assessee, a cooperative society, claimed deduction under Section 80P(2)(a)(i) for its business income which included interest from FDRs, rental income, and commissions. The AO disallowed these deductions, arguing the principle of mutuality was broken due to different member classes, and that some income was not from eligible business.
Held
The Tribunal held that the assessee, operating under the Karnataka Cooperative Societies Act, is eligible for Section 80P deduction. The presence of nominal and associate members, permitted by law and not breaching mutuality, does not disqualify the deduction. Interest income from FDRs needs verification regarding mandatory requirements.
Key Issues
Whether the presence of different classes of members (including non-profit sharing) in a cooperative society breaks the principle of mutuality, affecting eligibility for deduction under Section 80P, and whether certain incomes are attributable to the eligible business.
Sections Cited
80P, 80P(2)(a)(i), 80P(2)(c), 80P(2)(d), 40(a)(i), 40(a)(ia), 22, 24(a)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the Revenue against the order passed by the NFAC, Delhi dated 28/02/2024 in DIN No. ITBA/NFAC/S/ 250/2023-24/1061657647(1) for the assessment year 2017-18.
The issue raised by the Revenue in its grounds appeal are interconnected and pertains to allowances of deduction claimed under section 80P of the Act.
The relevant facts are that the assessee is a cooperative society carrying out banking business and providing credit facilities to the members. The assessee society has 8606 members which are categories into 3 different classes of members. The numbers of members of each class and their rights are detailed as under: Particular Class ‘A’ regular Class ‘B’ Calss ‘C’ member associate nominal member member Total number of 2197 2522 3663 members Right to Vote Yes No No Right in share profit Yes Yes No Dividend Right Yes Yes No Right to participate in Yes Yes Yes activity
The assessee for the year under consideration declared gross total income of Rs. 1,76,24,174/- which consist of business income of Rs. 1,75,65,121/- and income from house property of Rs. 59,053/- only. The entire gross total income of Rs. 1,76,24,174/- claimed as deduction under section 80P(2)(a)(i) of the Act.
In the assessment proceeding, the AO found that the assessee is catering to the different classes of members having different rights with regard to participate in the share profit and dividend. Therefore, the essential feature, i.e. the concept of mutuality, is missing in the case of the assessee, hence the assessee is not eligible to claim the benefit of the provision of section 80P(2)(a)(i) of the Act. The AO in this regard referred to and placed heavy reliance on the judgment of Hon’ble .
Supreme Court in the case of Citizen Cooperative Society Ltd vs. ACIT, circle- 9(1), reported 84 taxmann.com 114.
Besides the above, the AO found that the business income declared by the assessee includes the following receipts: (i) E-Stamp Commission Rs. 35,000/- (ii) Other income Rs. 50,236/- (iii) Commission Rs. 620/- (iv) Pickmy Commission Rs. 65,439/- Total Rs. 1,51,295/-
The AO held that these receipts are not attributable to the eligible business, therefore the same are not eligible for deduction under section 80P(2)(a)(i) of the Act and accordingly held that these are taxable as income from other sources.
The AO further found that the business income includes interest income of Rs. 79,28,908/- earned from FD with the Cooperative Bank. The AO held that the income earned from the FD with cooperative bank is neither eligible for deduction under section 80P(2)(a)(i) of the Act nor eligible under section 80P(2)(d) of the Act. Thus, the same is taxable as income from other sources.
Likewise, the AO found that the Auditor in the Form 3CD reported expenses amounting to Rs. 2,58,825/- incurred/paid without deducting eligible tax at source (TDS). Therefore, in accordance with the provision of section 40(a)(i) of the Act, an amount of Rs. 77,648/- (30%) was required to be disallowed. However, the assessee instead of disallowing impugned amount has reduced gross total income by Rs. 11,032/- . only.
Hence, the AO made the disallowances of Rs. 88,680/- (77648 + 11,032) only.
Furthermore, the AO found that the assessee has received rent amounting to Rs. 1.1 Lakh and computed income on the same as per the provision applicable to the income from house property. The AO held that the assessee cannot be allowed to compute income as per section 22 of the Act. As such the AO held the receipt covered under section 80P(2)(c) of the Act and accordingly after providing deduction of Rs. 50000/- brought balance amount of Rs. 60,000/- to tax. Accordingly, the AO in view of the above, worked out the total income of the assessee at Rs. 1,77,12,854/- only.
The aggrieved assessee preferred an appeal before the learned CIT(A).
The assessee before the learned CIT(A) submitted that it is a credit co-operative society, and its operations were fully compliant with the provisions of the Karnataka Cooperative Societies Act (KCSA) and the bye-laws of the society. The assessee emphasized that membership, as per the Act (KCSA), includes nominal and associate members, and thus, the restriction on voting rights does not affect their participation in the society’s activities. The assessee contended that there was no violation of the KCSA or any deviations from the bye-laws.
Regarding judgment of Hon’ble Supreme Court in the case of M/s. Citizen Co-operative Society Ltd.(supra), the assessee clarified that the ruling is not applicable on given facts, as that case pertained to a society . formed under a different state Act and involved transactions with the general public, thereby violating the principles of mutuality. In contrast, the assessee society strictly follows the principle of mutuality and engages only with its members. It was also highlighted that the Income Tax Act has not been amended to reflect any change in the treatment of such co-operative societies, indicating the government's intent not to penalize compliant societies.
Further, the assessee pointed out that the issue of deduction under section 80P(2)(a)(i) had already been settled in its favor for earlier assessment years (AYs 2009-10 and 2010-11) by the ld. CIT (Appeals), with a clear order dated 11.09.2013. It stressed that there has been no change in the legal provisions since then, and therefore, the disallowance of such a deduction by the AO was unwarranted.
On the rental income, the assessee argued that the receipts from renting out two premises, totaling Rs. 1,10,000, were correctly classified under 'income from house property', and a deduction under section 24(a) of the Act for repairs and maintenance had been appropriately claimed. The AO's denial of this deduction and failure to provide the assessee an opportunity to explain its claim was unjustified.
Moreover, the assessee contended that all its income, including e- stamp commission and other miscellaneous receipts, fall within the scope of section 80P(2)(a)(i) of the Act, being integral to its stated objectives.
Lastly, the assessee challenged the addition under section 40(a)(ia) of the Act for Rs. 88,680/-, arguing that the discrepancy arose due to timing differences in deduction and remittance of tax, and that the concerned expenses were disallowed in the financial year 2015-16 and claimed correctly in the financial year 2016-17. Therefore, the deduction claimed in the assessment year 2017-18 was valid.
The learned CIT(A) after considering the AO’s finding and submission of the assessee found that the assessee is in the business of providing credit facilities to the members which is carried well within the law and permitted by its byelaws approved by registrar of cooperative societies. The assessee has not entered into business transaction other than with the members. Therefore, the assessee in the light of judgment of Hon’ble Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd & Ors vs. CIT, reported in 123 taxmann.com 161 is eligible for deduction under section 80(2)(a)(i) of the Act.
Regarding the interest income earned from FD, the learned CIT(A) held that impugned income is incidental to the business activity of the assessee i.e. providing credit facilities to members and having close nexus. Further the assessee did not carry any other business other than providing credit facility. Therefore, interest income is eligible for deduction u/s 80P(2)(a)(i) of the Act.
The learned CIT(A) regarding the dispute with respect to rental receipt, commission, E-stamp commission, other income and section 40(a)(i) disallowances directed the AO to allow the assessee’s claim after considering assessee submission.
Being aggrieved by the order of the learned CIT(A) the Revenue is in appeal before us
The learned DR before us relied on the order of this tribunal in the case of Primary Agricultural Credit Society Ltd vs. ITO in dated 3rd July 2024. As per the learned DR the principles of mutuality in the given facts and circumstances were missing. Accordingly, the learned DR contended that the assessee is not eligible for deduction under section 80 P of the Act.
On the other hand, the learned AR before us submitted that the presence of Category ‘C’ members i.e. nominal or associate members, who do not participate in the profits of the respondent assessee, does not impact or breach the principle of mutuality. It is submitted that as per section 18 of the Karnataka Cooperative Societies Act, 1959 (KCSA), a cooperative society is legally allowed to admit nominal and associate members. The law itself clearly lays out the distinctions that nominal members cannot hold shares or participate in the profits or assets of the society and cannot become office bearers, while associate members may hold shares but are still not entitled to become office bearers. This categorization between A, B, and C members is not an artificial creation by the assessee but is established by law, and hence, their presence does not affect the mutuality principle under which the society operates. The learned AR further argued that the provisions of section 80P of the Act, specifically allows deductions on income earned by the cooperative societies from their members, particularly in respect of banking or providing credit facilities. Since, the KCSA provides for these different member categories, and the law explicitly recognizes nominal and . associate members, the assessee is entitled to claim deductions on the income earned from transactions with all these members, including Category ‘C’ members. Importantly, the learned AR highlighted that the Hon’ble Supreme Court’s ruling in the Citizen Cooperative Society Ltd (supra) does not apply in the present case because that judgment was based on the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995 (MACSA), which has no provision for nominal members. In contrast, the assessee in this case operates under the KCSA, which does provide for such members, making the facts and legal framework distinctly different.
Moreover, the learned AR referred to the Supreme Court’s judgment in the case of Mavilayi Service Cooperative Bank (supra), which clarified that the term ‘members’ under section 80P(2)(a)(i) must be understood in the context of the provisions of the respective State Cooperative Societies Act under which the society is formed. As per the KCSA, nominal and associate members are validly recognized, and any income or loans provided to such members would qualify for deduction under section 80P of the Act. Therefore, the ld. AR strongly submitted that the deduction claimed by the respondent assessee under section 80P(2)(a)(i) is fully justified and must be allowed, as the activities of the assessee align with the legal framework and the principle of mutuality remains intact despite the presence of non-profit-sharing members.
Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. The core issue is whether the . society is entitled to claim a deduction under section 80P(2)(a)(i) of the Act, which gives tax relief to cooperative societies engaged in providing credit facilities to their members. The Revenue argued that because the society has three classes of members — regular (Class A), associate (Class B), and nominal (Class C) — and only some have rights to profits or voting, the principle of mutuality (that members collectively benefit) is broken. The AO had relied on an earlier ruling of Hon’ble Supreme Court in the case of Citizen Cooperative Society(supra) to deny the deduction, claiming that business with non-profit-sharing members disqualified the society from the benefit.
26.1 However, we find that this reasoning did not hold here because the present assessee operates under the Karnataka Cooperative Societies Act (KCSA), which explicitly allows the inclusion of nominal and associate members. By law, these members may not vote or share profits, but they are still valid members, and the society’s dealings with them fall under the cooperative framework. We note that the Citizen Cooperative (supra) case was based on a different state law that did not allow nominal members, making the facts and legal background entirely different. Furthermore, the Hon’ble Supreme Court’s ruling in the case of Mavilayi Service Cooperative Bank (supra) has clarified that the eligibility under section 80P should be assessed in the light of the relevant state cooperative law, and under KCSA, the presence of nominal and associate members is lawful and does not break the mutuality principle. Hence, the ground of appeal of the Revenue is hereby dismissed.
26.2 Moving ahead to the issue of eligibility of the interest income from fixed deposits with a cooperative bank, we also set aside this issue to file . of the AO to verify mandatory requirement for making FD as per the provision of KCSA if the deposit is found within the limit of mandatory requirement, then interest earned from such deposit be allowed in view of judgment of Hon’ble Supreme Court in the case of CIT Vs. Karnataka State Co-operative Apex Bank reported in 251 ITR 194. In case, the excess deposit, than the mandatory requirement, is found then the proportionate interest income be excluded from the eligible income but after allowing the corresponding cost as per section 57 of the Act.
26.3 As for the rental income, commissions, and small other income heads, we hold that these incomes are not arising from the business of the assessee as envisaged under section 80P of the Act. Accordingly, we disallow the same. On the disallowance under section 40(a)(ia) of the Act relating to tax deduction at source (TDS), we note that the assessee’s explanation regarding timing differences needs to be considered before finalizing any disallowance. In view of the above detailed discussion, the grounds of appeal filed by the revenue are by partly allowed for statistical purposes.
In the result, the appeal of the revenue is partly allowed for statistical purposes.
Order pronounced in court on 29th day of May, 2025