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Facts
The assessee, a co-operative credit society, claimed a deduction under section 80P(2)(a)(i) of the Act. The AO disallowed this deduction, stating that the society transacted with nominal members, who were considered general public and not members. Additions were also made for provisions for gratuity fund and legal fees.
Held
The Tribunal held that nominal members are indeed members of the society as per the Karnataka Co-operative Societies Act and the society's byelaws. Following the Supreme Court's judgment, the interest earned from loans given to nominal members qualifies for deduction under section 80P(2)(a)(i). The issue regarding disallowances for gratuity and legal fees was remitted to the AO for fresh consideration in light of CBDT Circular No. 37/2016.
Key Issues
Whether nominal members of a co-operative society are considered members for the purpose of deduction under section 80P(2)(a)(i), and the admissibility of deductions on enhanced profits following disallowances.
Sections Cited
80P(2)(a)(i), 2(f), 60, 18, 56, 57(iii), 40A(7)(b), 40(a)(ia), 32, 40A(3), 43B, 80-IB
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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI SOUNDARARAJAN K.
ORDER
PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 19/06/2024 in respect of the A.Y. 2017-18 on the following grounds of appeal:
1. Whether on the facts and in the circumstances of the case, the appellate authority was justified in denying the benefit of deduction u/s. 80P(2)(a)(i) of the Act to the appellant holding the 'concept of mutuality' was dislodged in appellant society.
2. Whether or not the appellant is entitled for deduction in respect of its Business profits of Rs. 64,36,986/- u/s. 80P(2)(a)(i) of the Act considering Sec. 2(f) and Sec. 60 of Karnataka Co-operative Societies Act, 1959 vis-à-vis the judgement of Hon'ble Apex Court in The Mavilayi Service Co-op. Bank Ltd. & Ors. vs. C.I.T. Calicut & anr. [Civil Appeal No. 7343-7350/2019.] 3. Without prejudice, the appellant is entitled for deduction in respect of the income from Business that arose to it from its Associate Members to the extent of permissible cap specified under Sec. 18 of Karnataka Co-operative Societies Act, 1959 and only the excess income beyond the permissible cap is chargeable u/s. 56 of the Act subject to deduction against it for administrative expenses u/s. 57(iii) of the Act.
4. Whether the appellate authority was justified in sustaining the addition made by the Respondent in the impugned order disallowing the Provision for Employees Gratuity Fund Rs. 8,22,430/- and Legal fees of Rs. 42,750/- aggregating to Rs. 8,65,180/- even when CBDT Circular No. 37/2016 dated 02-11-2016 gives the relief in respect of any disallowance of business expenditure by way of deduction under Chapter — VI A of the Act to the extent profits so enhanced by such disallowance.
5. Both the authorities below passed the impugned Orders contrary to established principles laid down by the Hon'ble Supreme Court and jurisdictional High Court.”
2. The assessee is a co operative credit society registered under the provisions of the Karnataka Co-operative Societies Act and providing credit facilities to its members. During the A.Y., the assessee filed their return of income declaring a total income of Rs. 31,090,/- and claimed a deduction of Rs. 99,02,248/- under the provisions of section 80P(2)(a)(i) of the Act. In the assessment, the AO disallowed the deduction claimed by the assessee u/s. 80P(2)(a)(i) of the Act on the ground that the assessee had also transacted with nominal members who are all general public. Further, the AO had 3. As against the said order, the assessee filed an appeal before the Ld.CIT(A) and contended that the deduction claimed u/s. 80P is in order since the nominal members are also classified as members in the byelaws as well as under the provisions of the Karnataka Co-operative Societies Act. Insofar as the addition made u/s. 40A(7)(b) of the Act, the assessee contended that it is against the above said provision and insofar as the addition made by disallowing 30% of the legal fees for not deducting the TDS, the assessee submitted that even after the addition made to the total income, the same again qualified for deduction under section 80P of the Act and therefore no tax effect would be there by adding this 30% to the total income. The Ld.CIT(A) considered the grounds and dismissed the appeal by stating that the assessee had given loans to general public who are all nominal members. Insofar as the addition made on the provision for employees gratuity fund, the Ld.CIT(A) had relied on the provision and confirmed the addition. Similarly, in respect of the 30% deduction made u/s. 40(a)(ia) of the Act, the Ld.CIT(A) had observed that the disallowance made by the AO is in accordance with the provision. As against the said order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
At the time of hearing, the Ld.AR filed the judgment of the Hon’ble Supreme Court reported in 431 ITR 1 (SC) in the case of Mavilayi Co- operative Bank Ltd. and also filed a copy of the judgement of the Hon’ble Jurisdictional High Court made in ITA 211/2019 dated 29/09/2021 in the case of Sri Laxmi Venkatesh Credit Co-op. Society Ltd. vs. PCIT and Anr. and prayed to allow the appeal insofar as the disallowance of deduction claimed u/s. 80P(2)(a)(i) of the Act. In respect of the other additions, the Ld.AR relied on the grounds of appeal.
We have heard the arguments of both sides and perused the materials available on record.
On going through the assessment order, we found that the AO had denied the deduction claimed u/s. 80P(2)(a)(i) of the Act for the simple reason that the assessee had dealt with the ‘C’ class members who are all nominal members and therefore the AO treated the said nominal members as non-members and on that basis, the AO denied the said deduction. The Ld.CIT(A) without considering the merits of the case had confirmed the order of the AO. It is a fact that the Karnataka Co-operative Societies Act had several types of members one such type is the nominal members. The assessee society also in its byelaws had clearly spelt about the nominal members as members of the society. When the assessee as well as the Co- Operative Societies Act recognises the nominal members as the member of the society, we fail to understand why the authorities below had treated the said members as non-members i.e. public. It is seen from the orders, the authorities had come to the wrong conclusion that nominal members are non-members when the statute as well as the byelaws treating them as members. Further, this issue was also considered by the Hon’ble Supreme Court in the above said judgment cited (supra) and held that the nominal members are all members of the society and therefore the interest earned through the loans given to such nominal members would qualify for the deduction u/s. 80P(2)(a)(i) of the Act. Even though, the judgment was rendered by the Hon’ble Supreme Court on 12/01/2021, the Ld.CIT(A) who has passed the order on 19/06/2024 had not considered the judgement which in our view is not correct.
In view of the above said facts and circumstances, we are inclined to allow the claim of the assessee insofar as the deduction claimed u/s. 80P(2)(a)(i) of the Act for the reason that the nominal members are also Hon’ble Supreme Court in the judgment cited (supra). Insofar as the other grounds i.e., the section 40A(7)(b) of the Act and 40(a)(ia) of the Act is concerned, we rely on the Circular No. 37/2016 dated 02/11/2016 which reads as follows:
In view of the above said circular, we are remitting this issue to the file of AO to pass orders afresh by considering the above said circular.
Order pronounced in the open court on 09th January, 2025.