Loading judgment…
Facts
The assessee, a cooperative society, claimed deduction under Section 80P(2)(a)(i) of the Income Tax Act on its business income. The AO disallowed the deduction, holding that the principle of mutuality was absent due to different classes of members and that interest income from FDs was taxable as income from other sources. The AO also disallowed a provision for bad debts.
Held
The Tribunal held that the AO has the right to examine factual details like the number and category of members to determine eligibility for deduction under Section 80P, as it impacts the principle of mutuality. The Tribunal directed the AO to re-examine the issue of member classification and the eligibility of interest income from FDs, particularly statutory deposits.
Key Issues
Whether the assessee cooperative society is eligible for deduction under Section 80P(2)(a)(i) despite having different classes of members, and whether interest income from FDs is eligible for deduction.
Sections Cited
80P, 80P(2)(a)(i), 80P(2)(d)
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:
These are the appeals filed by the assessee against the orders passed by the NFAC, Delhi dated 20-09-2024 for the different assessment years 2016-17 to 2018-19.
ITA No. 2194/Bang/2024 for the AY 2017-18 - 2195/Bang/2024 Page 2 of 10
The issue raised by the assessee in its grounds of appeal are interconnected and pertains to allowances of deduction 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 3826 members which are categorized into 3 different classes of members. The numbers of members of each class and their rights are detailed as under:
Particular Class ‘A’ Class ‘B’ Calss ‘C’ regular associate nominal member member member Total number of members 609 14 3202 Right to Vote Yes No No Right in share profit Yes - No Right to obtain books of Yes No No account Right to participate in Yes No No administration Deposit and loan Yes = Yes
The assessee for the year under consideration declared gross total income of Rs. 69,77,720/- and the same was claimed as deduction under section 80P(2)(a)(i) of the Act.
In the assessment proceeding, the AO found that the assessee catered to the different classes of members having different rights with regard to participate in the sharing profit and dividend and administration. Therefore, the essential feature, i.e. the concept of .
- 2195/Bang/2024 Page 3 of 10 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 interest income of Rs. 6,14,000/- earned from FD with cooperative bank. The AO held that interest on FD is not attributable to the eligible business, therefore the same is not eligible for deduction under section 80P(2)(a)(i) of the Act and accordingly, the same is taxable as income from other sources. 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.
Furthermore, the AO found that the assessee has debited profit and loss account by sum of Rs. 5 lakh being RBDD provision. The AO found that the impugned provision created are not an expenditure nor an ascertained liability, hence the same is not allowable as deduction. Accordingly, the AO disallowed the same and added to the total income of the assessee. Hence the AO in view of the above, assessed the total income of the assessee at Rs. 74,77,720/- (Rs. 6977720 + Rs. 5,00,000).
- 2195/Bang/2024 Page 4 of 10
The aggrieved assessee preferred an appeal before the learned CIT(A).
The learned CIT(A) after considering the facts in totality found that the assessee being a cooperative society registered under The Karnataka Cooperative Societies Act 1959 (KCSA) eligible for deduction under section 80P of the Act irrespective of the type of members it catered. The learned CIT(A) in this regard referred to the judgment of Hon’ble Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd vs. CIT reported in 123 taxmann.com 161. However, the learned CIT(A) noted that provision of section 18 of KCSA was amended restricting the associate member to the extent of 15% of the total membership. Hence, the ld. CIT-A directed the AO to examine the status of member in the context of section 18 of the KCSA and decide the issue in the light of ruling of Hon’ble Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd(supra).
Regarding the issue of interest income from FD with cooperative bank the learned CIT(A) held that same will be taxable as income from the other sources and the benefit of section 80P(2)(a)(i) of the Act shall not be extended to such income of the assessee.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us argued that the deduction claimed by the assessee under section 80P(2)(a)(i) of the Act should be allowed, as the appellant was a duly registered co-operative society under the .
- 2195/Bang/2024 Page 5 of 10 Karnataka Co-operative Societies Act, 1959 (KCS Act). The AR emphasized that the learned AO erred by questioning the eligibility of the appellant on the grounds of the inclusion of nominal and associate members, relying on the Hon’ble Supreme Court ruling in Citizen Co- Operative Society Ltd (supra) which was governed under the MACS Act, 1995, where nominal membership is not permitted. However, under the KCS Act, nominal and associate memberships are explicitly allowed, as outlined in section 2(f) and section 18 of such Act. The learned CIT(A), after considering the Hon’ble Supreme Court judgment in Mavilayi Service Co-Operative Bank Ltd. vs. CIT, directed the AO to verify whether the nominal and associate members were within the prescribed limits, i.e., not exceeding 15% of total membership, and accordingly allowed the deduction.
The learned AR in this regard contended that the AO had no jurisdiction to examine compliance with the KCS Act, as this falls solely within the purview of the Registrar of Co-Operative Societies Act , and the AO’s role is confined to verifying whether the appellant is a registered society under the Act. Additionally, the learned AR argued that even if the Hon’ble Bench were to consider the merits, the restriction under section 18 of the KCS Act applies only to associate members, not nominal members, and this distinction was supported by the language of the statute as well as the Statement of Objects and Reasons of the amendment. Therefore, the ld. AR respectfully urged us to direct the AO to accept the registration certificate without questioning the validity or compliance under the KCS Act and to allow the deduction claimed under section 80P(2)(a)(i) on the declared business income.
- 2195/Bang/2024 Page 6 of 10
Regarding the eligibility of interest income from FD with cooperative bank the learned AR argued that AO and the learned CIT(A) misunderstood the judgment of the Hon’ble Supreme Court in the Mavilayi Service Cooperative Bank (supra). According to the learned AR, the Hon’ble Supreme Court judgment only limits the deduction under section 80P(2)(a)(i) of the Act for income from loans given to non- members, but it does not apply to income earned from investments made as part of the society’s normal business activities, which are required by law. The ld. AR emphasized that section 80P should be read in a liberal way to support and promote cooperative societies, as intended by Parliament.
On the other hand, the learned DR vehemently supported the finding of the lower authorities.
We have heard the rival contentions of both the parties and perused the materials available on record. The main issue before us is whether the assessee, a cooperative society registered under the Karnataka Cooperative Societies Act (KCS Act), is eligible for deduction under section 80P(2)(a)(i) of the Act, despite having different classes of members, particularly associate and nominal members. In this regard, we note that section 18 of the KCS Act places a restriction only on associate members, limiting them not more than 15% of the total membership. The learned AR argued that the society has only 14 associate members, which is well within the permitted limit. However, we observe that the AO has not verified this fact, and for the sake of justice and fair play, we find it appropriate to set aside this issue to the AO. We direct the AO to examine the status and number of members in .
- 2195/Bang/2024 Page 7 of 10 light of section 18 of the KCS Act and to verify whether the society’s associate members comply with the prescribed limit. The AO further directed that if any member not found in conformity of the section 18 of the KCS Act, then only the proportionate income earned from those associate member be excluded from for deduction under section 80P(2)(a)(i) of the Act. Accordingly, whereas income pertaining to regular member and nominal member continue to be allowable as deduction.
16.1 Regarding the second issue of interest income earned from fixed deposits (FDs) with cooperative banks, we understand the assessee’s argument that such deposits are part of the statutory requirements under the KCS Act and should therefore be considered eligible for deduction. The AO had treated the interest income from FDs as taxable under “income from other sources,” disallowing the deduction. We direct the AO to specifically examine the statutory obligations under the KCS Act for making such FDs. If it is found that the deposits were indeed statutory and mandatory, the AO shall allow the deduction to the extent of the interest income earned from these statutory deposits. In case any excess deposit than statutory obligation then proportionate interest income shall be excluded from deduction provided that the corresponding cost shall be allowed.
16.2 Before parting, we also consider the learned AR’s argument that the AO does not have the jurisdiction or authority to examine whether the assessee society complies with the provisions of KCS Act, as this responsibility lies solely with the Registrar of Cooperative Societies. While we acknowledge that the primary authority to monitor and .
- 2195/Bang/2024 Page 8 of 10 regulate cooperative societies under the KCS Act is indeed of the Registrar, but we are also mindful that for the purpose of granting tax benefits under section 80P of the Act, the AO has the duty to verify whether the assessee meets the eligibility conditions prescribed under the Income Tax Act. This includes examining facts such as the composition of membership, the nature of activities, and whether the entity satisfies the specific statutory limits or restrictions referred under state cooperative laws, if they directly impact the eligibility for income of tax deductions.
16.3 In this case, section 18 of the KCS Act imposes a restriction on the proportion of associate members. This restriction is relevant to determining whether the principle of mutuality and the statutory framework are maintained for the purposes of section 80P deductions. Therefore, we hold that the AO is within his rights to examine factual details such as the number and category of members, especially when these details are critical to deciding the eligibility for tax deductions.
16.4 In view of the above, we set aside the relevant issues to the AO for fresh examination after verifying the factual and statutory positions. The AO is instructed to give the assessee a proper opportunity to present evidence and make submissions before passing the fresh order. Hence the ground of appeal of the assessee is allowed for statistical purposes.
In the result appeal of the assessee is allowed for statistical purposes.
- 2195/Bang/2024 Page 9 of 10 & 2195/Bang/2024 for A.Y. 2016-17 & 2018-19
At the outset, we note that the issues raised by the assessee in captioned appeals for the AYs 2016-17 & 2018-19 are identical to the issues raised by the assessee in for the assessment year 2017-18. Therefore, the findings given in shall also be applicable for the assessment years 2016- 17 & 2018-19. The appeal of the assessee for the A.Y. 2017-18 has been decided by us vide paragraph No. 16 of this order in favour of the assessee for statistical purposes. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2017-18 shall also be applied for the assessment years 2016-17 & 2018-19. Hence, the grounds of appeal filed by the assessee for A.Ys. 2016-17 & 2018-19 are hereby allowed for statistical purposes.
In the result, the appeals of the assessee for A.Ys. 2016-17 and 2018-19 are allowed for statistical purposes.
In the combined result, all three appeals of the assessee are allowed for statistical purposes. Order pronounced in court on 29th day of May, 2025