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Income Tax Appellate Tribunal, B BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU
Per George George K, Vice President :
This appeal at the instance of the assessee is directed against the order of CIT(A), passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2020-21.
The solitary issue that is raised is whether CIT(A) is justified in confirming the Assessment Order wherein the claim of deduction under section 80P(2)(a)(i) of the Act, amounting to Rs.2,05,53,500/- was denied.
Brief facts of the case are as follows:
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Assessee is a credit co-operative society. It is engaged in the business of providing credit facilities to its members. For Assessment Year 2020-21, the return of income was filed declaring total income of Rs.36,210/- after claiming deduction under section 80P(2)(a)(i) of the Act, amounting to Rs.2,05,17,291/-. The assessment was completed under section 143(3) r.w.s. 144B of the Act, vide order dated 12.09.2022. In the said Assessment Order, the claim of deduction under section 80P(2)(a)(i) of the Act, was denied for the reason that assessee was dealing with nominal / associate members who are non-members and hence lost the concept of mutuality. In holding so, the AO relied on the judgment of Hon’ble Apex Court in the case of Citizen Co-operative Society Ltd., Vs. ACIT reported in (2017) 397 ITR 1.
Aggrieved by the Order of the AO denying the claim of deduction under section 80P(2)(a)(i) of the Act, assessee preferred appeal before the First Appellate Authority (FAA). The CIT(A) confirmed the view taken by the AO. The relevant finding of the CIT(A) reads as follows:
“5.2 The addition made by the Assessing Officer and submissions of the appellant has been perused. It is seen from the byelaws of the appellant society that as per provisions of Section 20 of the Co-operative Societies Act voting right is conferred only on an active member of a society. It is also specified that a nominal or associate member shall not have the right to vote and as per provisions of Section 18(2) of the Karnataka Co- operative Societies Act, the nominal member shall not be entitled to any share in any form whatsoever in the assets or profits of the society and a nominal member who is an individual shall not also be entitled to become an office bearer of the society. It is to note that the nominal members who are making deposits with the appellant for the purpose of obtaining loans and in fact, they are not members in real sense. In reality, such activity of the appellant is that of finance business and cannot be termed as co- operative society. As held by the Assessing Officer that these nominal members are solely contributors to earning surpluses and no participators in the surpluses and hence the concept of mutuality of the said entity ceases to exist. Since there is no principle of mutuality in appellant's activity and
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the activities are purely that of a private finance business, the appellant Co-operative Society is not eligible for deduction u/s.80P of the Act. It is also to note that as per the provisions of Section 18 of the Karnataka Co- operative Societies Act 1959 as amended w.e.f. 06.09.2014, the associate members should be within 15% of regular members. In the instant case, the details of members, nominal/associate members are not available. The case law relied upon by the Assessing Officer squarely applies to the facts of the appellant's case. In view of the above, the action of the Assessing Officer is upheld and grounds raised in this regard are dismissed.”
Aggrieved by the above order of the CIT(A), assessee has filed the present appeal before the Tribunal. The learned AR submitted that section 18 of the Karnataka Co-operative Societies Act, 1959, permits the assessee to have nominal / associate members upto 15% of regular members. It was submitted by the assessee that associate / nominal members are within 15% of the total members for the relevant Assessment Year. In this context, the learned AR had referred to the audit report detailing the total number of members and the associate / nominal members. The learned AR, relying on the judgment of the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT reported in 431 ITR 1, submitted that even assuming that associate / nominal members exceeded 15% of the total membership, assessee ought to be provided with proportionate deduction under section 80P(2)(a)(i) of the Act, for its dealing with its regular members.
The learned DR supported the orders of the Income Tax authorities.
We have heard the rival submissions and perused the material on record. The Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT (supra) had held that expression of the word “members”, since it is not defined under the Income Tax Act, 1961, must be considered in the context of the law enacted by the state legislature under which the Co-operative Society claiming exemption under section 80P of the Act has been instituted. Therefore,
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it is necessary to consider the expression “member” in light of the definition as contained in section 18 of the Karnataka Co-operative Societies Act, 1959. The aforesaid section permits the Co-operative Societies registered under the Karnataka Co-operative Societies Act, 1959 to have nominal / associate members upto 15% of the total regular membership (subsequent to the amendment to section 18 w.e.f. 06.09.2014). Moreover, the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT (supra) had categorically held that assessee is entitled to proportionate deduction under section 80P of the Act, in respect of the profits it has derived from the regular members. The dictum laid down by the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT (supra) has not been considered by the AO nor the CIT(A). Therefore, in the interest of justice and equity, we are of the view that the matter needs to be restored to the files of the AO. The AO is directed to grant deduction under section 80P(2)(a)(i) of the Act, in respect of profits derived by the assessee on the dealings it had with regular members. It is ordered accordingly.
In the result, appeal filed by the assessee is allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- Sd/- (LAXMI PRASAD SAHU) (GEORGE GEORGE K) Accountant Member Vice President Bangalore. Dated: 17.04.2024. /NS/*
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Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order
Assistant Registrar, ITAT, Bangalore.