In the recent ruling, the Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that co-operative societies offering credit facilities to their members can claim deductions under section 80P(2)(a)(i) of the Income Tax Act,1961.
Nava Karnataka Souhard Credit Cooperative Limited, the appellant-assessee, e-filed its return for AY 2018-19 on October 1, 2018, declaring nil income after claiming a deduction of Rs. 36,02,052 under section 80P. The return was processed under section 143(1), followed by a notice under section 143(2) issued on September 22, 2019, and subsequent notices under section 142(1) for further verification.
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The Assessing Officer (AO), relying on the Supreme Court’s decision in Citizen Co-operative Society Ltd., determined that the assessee could not claim the deduction, as it failed to meet the necessary conditions and also noted that the society was not licensed to deal with the public and concluded that deductions were applicable only to societies providing credit facilities to their members.
The AO found that associated members could not participate in profits and only contributed share capital, violating the principle of mutuality, which required a connection between contributors and participators. Nominal and associated members lacked voting rights, preventing influence over the society’s affairs. Therefore, these members were seen as mere contributors, leading to the conclusion that mutuality did not exist.
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The AO determined that the assessee could not be classified as a mutual concern, and transactions with associate and nominal members only benefited regular members. As a result, the AO disallowed the entire deduction claimed under section 80P(2) of the Act.
During the assessment, the AO found that the assessee claimed a deduction of Rs.2,92,14,754 under section 80P(2)(a)(i) for interest income. The AO determined that only interest from investments with other cooperative societies is eligible for deduction, while the assessee had invested idle funds in cooperative and scheduled banks.
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Referencing a Karnataka High Court ruling, the AO concluded that this interest should be treated as “income from other sources” under section 56. As a result, the AO disallowed the deduction and added the interest income to the assessee’s total income, initiating penalty proceedings for underreporting. The assessee subsequently appealed to the CIT(A).
The Commissioner of Income Tax (Appeals)/National Faceless Assessment Centre [CIT(A)/NFAC] addressed the appeal regarding the disallowance of interest income as “income from other sources” and the denial of section 80P(2) deduction. He cited the Supreme Court’s ruling in Citizens Cooperative Society, highlighting that differential voting rights indicated it was not a cooperative society. The CIT(A) referenced RBI guidelines stating that entities with equity over Rs.1 lakh qualify as cooperative banks, which are not eligible for section 80P(4) exemptions.
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The CIT(A) concluded that the interest income of Rs.2,92,14,754 from loans and investments in cooperative and scheduled banks was not eligible for deduction. Thus, this amount was added to the assessee’s income as “Income from Other Sources,” upholding the AO’s assessment.
The tribunal noted the Supreme Court’s ruling in Mavilayi Service Co-operative Bank Ltd. v. CIT, which confirmed that cooperative societies offering credit to members can claim deductions under section 80P(2)(a)(i). The court specified that “member” definitions should follow state cooperative acts and that income from nominal or associate members is deductible if not prohibited by these acts. It also clarified that section 80P(4) only excludes cooperative banks with RBI licenses.
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The two member bench comprising Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member) restored the issue of the assessee’s claim for deduction under section 80P(2)(a)(i) to the AO for fresh consideration, instructed the AO to verify if interest or dividends came from investments in cooperative societies qualifying for deduction under section 80P(2)(d), and noted that if interest from banks was treated as “Income from Other Sources,” the AO should grant relief under section 57, resulting in a partly allowed appeal.
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