VIJAY SAHAKARI PAT SANSTHA LIMITED,ICHALKARANJI vs. ITO WARD-2, ICHALKARANJI, ICHALKARANJI

3. Briefly stated, the facts of the case are that the assessee is Co- operative Society. It filed its return of income on 20.02.2018 declaring total income at Rs. Nil after claiming deduction u/s 80P of the Income Tax Act, 1961 (the “Act”) of Rs.25,62,137/-. The return was processed u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny under CASS. Accordingly, notice(s) u/s 143(2) and 142(1) were of the Act were issued and served upon the assessee calling for certain details. During the assessment proceedings, the Ld. Assessing Officer (“AO”) observed that assessee has given loans to nominal members / B class members and earned interest thereon of Rs. 22,34,529/- and asked the assessee as to why the deduction under section 80P should not be disallowed in respect of the said interest income in view of the decision of the Hon‟ble Supreme Court in the case of Citizen Cooperative Society Ltd. Vs. ACIT. The assessee filed its written submission and in support of its contention, placed reliance on the favorable decision of the jurisdictional Pune ITAT in the case of Sai Prerna Gramin Bigar Sheti Pata Sanstha Vs. ITO (ITA No. 143/PMA/2018 for AY 2015-16, however, the Ld. AO did not consider the same for the reason that said decision is not yet finally accepted by the Department and the issue of further appeal against the said decision is yet to be finalized as on the date. The Ld. AO, therefore, denied the deduction of net interest income of Rs.8,81,745/- u/s 80P(2)(a)(i) of the Act and assessing such net interest income as “income from other sources” under section 56 of the Act on the ground that the interest derived by the assessee society from Nominal members/ B class members is not qualified for deduction under section 80P(2)(a).

4. Aggrieved, the assessee filed appeal before the Ld. Addl./JCIT(A) who confirmed the order of the Ld. AO by observing as under: “7.3 In the present appeal, all grounds relate to the disallowance of the deduction under Section 80P(2)(a)(i) of the Act, amounting to Rs. 8,81,745/-. The AO noted that the appellant's income was derived from providing loan facilities to not only its members but also to non-members (nominal members), who do not qualify under the principle of mutuality. The AO relied on the decision of the CIT(A), Kolhapur, in the case of Manamandir Nagari Shekari Pata Sanstha, Sangli (Appeal No. Sli/10311/2018-19 for A.Y. 2016- 17).

7.4 During the appellate proceedings, the appellant submitted that it is a registered Co-operative Society under the Maharashtra Co-operative Societies Act, 1960. The appellant accepts deposits from members and provides credit facilities (i.e., loans) to its members. The society emphasized that there is no distinction made between regular members, nominal members, associate members, and sympathizer members. The appellant further cited judgments from the ITAT, Pune, and other higher judicial authorities to support its claim. The appellant argued that the decision by the Apex Court in Citizen Co-Op Credit Society, Hyderabad is not applicable to societies registered under the Maharashtra Co-operative Societies Act, 1960. According to the appellant, members should include "nominal members, associate members, and sympathizer members." 7.5 The contentions of the appellant have been carefully considered. The appellant's argument that, according to the Maharashtra Co-operative Societies Act, 1960, members should include "nominal members is noted. However, it is important to clarify that while a co-operative society may have various categories of members as per the relevant state laws, it must also comply with the requirements under the Income Tax Act, particularly under Section 80P, to claim deductions. Section 80P(2)(a)(i) allows a deduction for the income derived by a co-operative society from carrying on the business of providing credit facilities to its members. However, the fundamental principle of mutuality underpins the eligibility for such deductions. A member who is not involved in the economic and administrative affairs of the society and is merely a nominal member would not fulfill the concept of mutuality. Such a member is, in effect, considered part of the general public, and therefore, the income generated from them would not qualify for deductions under Section 80P. Co-operative societies, being voluntary associations of persons united to meet their common economic, social, and cultural needs, must ensure that their activities are centered on members who actively participate in the cooperative's affairs. Non-participating or nominal members do not contribute to this mutual relationship, and income derived from them cannot be considered eligible for deduction under Section 80P. 7.6 The AO, after considering the submissions, concluded that the appellant's income was derived from providing credit facilities to both regular and nominal members. Nominal members, being akin to the general public, do not fulfill the mutuality requirement. Since the appellant society was engaged in providing loans to the general public (i.e., nominal members), it could not be classified as a co-operative society dedicated solely to its eligible members. As such, the appellant is not entitled to the deduction under Section 80P. 7.7 The appellant has failed to substantiate its claim that the facts and circumstances of its case are distinct from those in the case of Citizen Co- operative Society Ltd. v. Assistant Commissioner of Income-tax, Circle-9(1), Hyderabad, where similar issues were adjudicated in favor of the Revenue.

8. In light of the above considerations, I find no merit in the appellant's contentions. The AO's decision to disallow the appellant's claim for a deduction of Rs. 8,81,745/- under Section 80P(2)(a)(i) of the Income Tax Act is in accordance with the provisions of the Act. Therefore, the appeal of the appellant is hereby dismissed.”

“45. To sum up, therefore, the ratio decidendi of Citizen Co-operative Society Ltd. (supra), must be given effect to Section 80P of the IT Act, being a benevolent provision enacted by Parliament to encourage and promote the credit of the co-operative sector in general must be read liberally and reasonably, and if there is ambiguity, in favour of the assessee. A deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication, as is sought to be done by the Revenue in the present case by adding the word "agriculture" into section 80P(2)(4)(1) when it is not there. Further, section 80P(4) s to be read as a proviso, which proviso now specifically excludes co-operative banks which are co-operative societies engaged in banking business in engaged in lending money to members of the public, which have a licence in this behalf from the RBL. Judged by this touchstone, it is clear that the impugned Full Bench judgment is wholly incorrect in is reading of Citizen Cooperative Society Ltd. (napra) Clearly, therefore, once section COPY 4) is out of harm's way, all the assessees in the present case are entitled to the benefit of the deduction contained in section 80P(2)(3)(), notwithstanding that they may also be giving loans to their members which are not related to agriculture. Also, in case it is found that there are instances of loans being given to non-members, profits attributable to such loans obviously cannot be deducted.

“3. Briefly stated, the facts of the case are that the assessee is a co-operative credit society providing credit facilities to its members. A return was filed declaring Nil income after claiming deduction of Rs.45,71,701/- u/s.80P of the Act. The Assessing Officer (AO) observed that the assessee was accepting deposits from its regular members and also nominal members. Considering the fact that there was a difference between the rights and obligations of the regular and nominal members, the AO held that the nominal members could not be considered as „members‟ for the purpose of deduction u/s.80P. He also noted that the assessee earned interest income on deposits made with the banks, which was not eligible for deduction u/s.80P of the Act. In the ultimate analysis, he denied the benefit of deduction u/s.80P, which got echoed in the first appeal.

4. I have heard both the sides and gone through the relevant material on record. The assessee Co-operative society is admittedly engaged in carrying on the business of banking and providing credit facilities. Section 80P(2)(a)(i) provides that in the case of co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to such activities shall be deductible in the computation of total income. The claim of assessee for deduction has been negated by the authorities below, inter alia, on the ground that it admitted certain Members, described as „Nominal Members‟, who were neither entitled to dividend nor voting rights. It is relevant to note that the term „Member‟ has been defined u/s 2(19) in the Maharashtra Act to mean: “a person joining in an application for the registration of a Co- operative society which is subsequently registered, or a person duly admitted to membership of a society after registration and includes a nominal, associate or sympathizer member”. On going through the above definition of „Member‟, it becomes overt that the term „Member‟ also includes a Nominal Member. Once it is accepted that the assessee, governed by the Maharashtra Act, made advances to certain Nominal Members from whom interest income was earned, there can be no doubt whatsoever that the deduction u/s 80P(2)(a)(i) has to be allowed. The Department has heavily relied on the judgment of Hon'ble Supreme Court in the case of Citizen Co- operative Society Ltd. vs. ACIT (supra). That was a case in which Andhra Pradesh Mutually Aided Co-operative Society Act, 1995 was under consideration, which did not admit `Nominal Member‟ within the ambit of the term „Member‟. Recently, the Hon'ble Supreme Court in Mavilayi Service CoOperative Bank Ltd. vs. CIT (2021) 123 taxmann.com 161 (SC) considered its earlier judgment in Citizen Co-operative Society Ltd. vs. ACIT (supra) vide para 46 of its order. Taking note of the fact case in which Andhra Pradesh Mutually Aided Co-operative Society Act, 1995 was under consideration, which did not admit `Nominal Member‟ within the ambit of the term „Member‟. Recently, the Hon'ble Supreme Court in Mavilayi Service CoOperative Bank Ltd. vs. CIT (2021) 123 taxmann.com 161 (SC) considered its earlier judgment in Citizen Co-operative Society Ltd. vs. ACIT (supra) vide para 46 of its order. Taking note of the fact member. In view of the above discussion, I overturn the impugned order on this score.”

“3. Briefly stated, the facts of the case are that the assessee is a co-operative credit society providing credit facilities to its members. A return was filed declaring Nil income after claiming deduction of Rs.45,71,701/- u/s.80P of the Act. The Assessing Officer (AO) observed that the assessee was accepting deposits from its regular members and also nominal members. Considering the fact that there was a difference between the rights and obligations of the regular and nominal members, the AO held that the nominal members could not be considered as „members‟ for the purpose of deduction u/s.80P. He also noted that the assessee earned interest income on deposits made with the banks, which was not eligible for deduction u/s.80P of the Act. In the ultimate analysis, he denied the benefit of deduction u/s.80P, which got echoed in the first appeal.