KANAK PATTIN SAHAKARI SANGH NIYAMIT ,BAGALKOT vs. INCOME TAX OFFICER WARD-1, BAGALKOT

According to the AO, the assessee has claimed to be a Co- operative credit society registered under Karnataka State Co- operative Societies Act, 1959 and is engaged in the business of accepting deposits and providing credit facilities to its members, besides making investments. The assessee has claimed deduction u/s 80P of the Act and accordingly declared NIL income.

During the course of assessment proceedings, the AO noticed that the assessee was having different categories of members, viz., Regular Members, Associate members and Nominal members. He noticed that the nominal members are also mentioned as Associate Members, i.e, both categories were treated alike. The assessee was having 2038 nominal members/Associate members and 3831 regular members. Thus the percentage of nominal members worked out to 53.20%, which was in violation of provisions of sec.16 of the Karnataka Co-operative Societies Act, which has prescribed a limit of 15%. Accordingly, the AO took the view that the assessee is dealing with general public by admitting them as nominal members. Accordingly, by placing reliance on the decision rendered by Hon'ble Supreme Court in the case of Citizen Co-op Society Ltd (Civil Appeal No.10245 of 2017), the AO held that the assessee is not entitled for deduction u/s 80P of the Act, since it is dealing with general public/ Nominal members. The assessee had derived interest income from deposits made with various banks. The AO, by following the decision rendered by Hon'ble Jurisdictional Karnataka High Court in the case of CIT vs. The Totagars Co-op Sale Society (ITA No.100066/2016 dated 16.06.2017), held that the assessee is not entitled for deduction u/s 80P of the Act for the interest income. Accordingly the AO rejected the claim for deduction u/s 80P of the Act in toto. The CIT(A) also confirmed the same.

The next issue relates to the rejection of claim for deduction u/s 80P of the Act in respect of its business income. Before me, the Ld A.R placed his reliance on the decision rendered by the division bench of Bangalore ITAT in the case of M/s Bapooji Pattin Souharda Sahakari Niyamit vs. ITO (ITA No.544/Bang/2019 dated 04-09-2019) and submitted that the matters may be restored to the file of the AO for examining the facts as held in the above said case.

The Ld D.R, on the contrary, submitted that the AO had rejected the claim for deduction u/s 80P for the reason that the assessee has carried on business with nominal/associate members, who cannot be called as ‘members’ within the meaning of sec.80P(2)(a)(i). He submitted that under the provisions of sec.80P(2)(a)(i) of the Act, the income earned by a co-operative society on credit facilities provided to its “members” alone is deductible. He submitted that the assessee has got huge number of nominal members, who do not participate in the dividend. Hence as per the decision rendered by Hon’ble Supreme Court in the case of Citizen Co-operative Bank (349 ITR 1), they cannot be called as “Members”, within the meaning of sec.80P(2)(a)(i) of the Act. Hence the tax authorities have held that the assessee is, in effect, dealing with general public. Accordingly he submitted that the decision rendered by Hon'ble Supreme Court in the case of Citizen Co- operative Co-operative bank (supra) would be applicable to the assessee and the assessee is not eligible for deduction u/s 80P of the Act.

He further submitted that the SMC bench of ITAT, Bangalore has examined an identical issue in the case of M/s Athmashakthi Multipurpose co-operative society Ltd (ITA Nos. 1220 & 1221/Bang/2019 dated 18-10-2019) and confirmed the rejection of deduction u/s 80P of the Act, when the number of associate members exceeded 15% limit prescribed under Karnataka Co- operative Bank Ltd.

In the rejoinder, the Ld A.R submitted that the limit of 15% would apply only to Associate members and not nominal members. He submitted that the assessee has got both associate members and nominal members.

The principle of Mutuality shall apply when there is parity of contributors and participators, i.e., the contributors as a class should be eligible to participate in profits also. In the case of Citizen Co-operative Society Ltd (397 ITR 1), the AO had brought out the facts that the contributors were all categories of persons, viz., regular members, nominal members and general public. However, it was not proved by the assessee that the very same contributors were also “participators” in profits. Further, majority of income was derived by the above said assessee from nominal members and general public. These findings remained unshaken till the stage of Hon'ble Supreme Court. Under these set of facts, the Hon'ble Supreme Court held that the above said assessee cannot be categorized as a co-operative society eligible for deduction u/s 80P(2)(a)(i), since the said section exempts income earned from credit facilities given to its “members” only. In the instant case, it is not clear as to whether Nominal members or Associate members are also entitled to participate in profits, so that can also be called as “members” mentioned in sec. 80P(2)(a)(i) of the Act. This issue also requires examination.

In the case of Atmashakthi Multipurpose Co-operative Society Ltd, the co-ordinate bench considered section 18 of the Karnataka Cooperative Societies Act, 1959, which prescribed a limit of 15% for admitting Associate members. Accordingly it was held that when the number of associate members does not exceed 15%, the provisions of Karnataka Co-operative Societies Act were not violated. In AY 2015-16, the number of associate members did not exceed 15%. Since the AO had denied deduction u/s 80P of the Act in AY 2015-16 in the case of above said assessee without pointing out any other reason, the matter was restored to the file of the AO.

I notice that the “Principle of Mutuality” emphasized by Hon'ble Supreme Court in the case of Citizen Co-operative Society Ltd (supra) was not discussed in the above said decision. As stated earlier, the question whether “nominal members” and “associate members” would also quality as “members” within the meaning of sec.80P(2)(i) also requires examination in the light of provisions of Karnataka Co-operative Societies Act and/or Bye Laws of Society. In the instant case, the Ld A.R is also contending that there is difference between nominal members and associate members.

In the case of Citizen co-operative Society (supra), the majority of income was derived from nominal members and general public and hence the Hon'ble Supreme Court held that the business of the assessee is in the nature of a financial institution and not in the nature of providing credit facilities to its members. Hence the component of income derived from members (who are eligible to participate in profits) and other persons may also require examination and may influence the decision to be taken with regard to the eligibility of the assessee to claim deduction u/s 80P of the Act. If majority of income was derived from members (who are entitled to participate in profits), then the question that would arise is, whether the assessee would be eligible for deduction u/s 80P of the Act fully or proportionately in proportion to the income derived from members, who qualify as participators in profits. This question also requires examination.

The foregoing discussions would show that the entire issue requires fresh examination at the end of the assessing officer. Accordingly I set aside the order passed by Ld CIT(A) and restore all the issues to the file of the AO for examining it afresh. After affording adequate opportunity of being heard, the AO may take appropriate decision in accordance with law.

In the result, the appeal of the assessee is treated as allowed for statistical purposes.