The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) allowed the claim of deduction in respect of interest earned from credit facilities extended to members, including nominal and associate members.
The Assessee M/s. Chokkadi Vyavasaya Seva Sahakari Bank was a primary agricultural credit co-operative society engaged in the business of providing credit facilities to its members and distribution of ration articles. Assessee had filed its return of income for A.Y. 2017-18 on 20.10.2017 and for A.Y. 2020-21 on 08.01.2021. Assessee had claimed deduction under Section 80P for the years under consideration amounting to Rs.1, 09, 49,775/- for A.Y. 2017-18 and Rs.5, 02, 74,275/- for A.Y. 2020-21. The case was selected for scrutiny to verify the claim of deduction under Section 80P by the assessee.
Show cause notice was issued to the assessee for A.Y. 2017-18 for which assessee filed various details as called for. For A.Y. 2020-21, assessee did not respond to the various notices issued even for the notice issued on 29.08.2022 reply was not filed. The AO thereafter completed the assessment under Section 144B of the act by making the disallowance of deduction claimed by the assessee under Section 80P for A.Y. 2020-21. For A.Y. 2017-18, the assessment order under Section 143(3) was passed by the Ld.AO by disallowing the claim under Section 80P of the Income Tax Act in the hands of the assessee.
The assessee submitted that assessee was eligible for under Section 80P (2)(a)(i) deduction in respect of the interest earned on credit facilities provided / extended to the members. It also submitted that the assessee was eligible for deduction under Section 80P (2)(d) on the interest / dividend earned from investments made in other co-operative societies / co-operative banks.
Mr. Sreehari Kutsa representing the assessee submitted that assessee being a primary agricultural credit co-operative society was engaged in the business of providing credit facilities to its member’s agriculturists. The assessee also distributes ration articles as per State Government guidelines.
Further submitted that assessee was a co-operative society registered under Karnataka Co-operative Societies Act whereas Citizen Cooperative Society has been observed to be a mutually aided cooperative society and was functioning as a bank that had a RBI approval. He thus submitted that the ratio laid down therein is not applicable to assessee as assessee does not have a RBI approval to function like a bank.
Mr. Muthu Shankar, representing revenue vehemently opposed the arguments of the assessee by submitting that principle of mutuality is not satisfied as assessee extends credit facilities to nominal / associate members who do not have any right in the assessee society. In respect of Section 80P (2)(d) deduction, further submitted that interest / dividend income earned by assessee by making investments which has been simply accrued falls out the ambit of 80P and therefore the AO has rightly treated the entire interest as income from other sources. He thus vehemently supported the orders passed by the authorities below on both these accounts for the years under consideration.
The bench noted that, Karnataka Co-operative Societies Act, 1959 defines Members to include nominal / associate members under Section 2(f). Considering the definition of “Member” under the Karnataka Cooperative Societies Act, the present assessee qualifies for deduction under Section 80P (2)(a)(i) of the Income Tax Act.
The two member bench of the tribunal comprising Waseem Ahemed ( Accountant member) and Beena Pillai ( Judicial member) allowed the claim of the assessee under Section 80P(2)(a)(i) of the Income Tax Act in respect of the interest earned by the assessee from credit facilities extended to members that includes nominal / associate members.
ITAT directed the AO to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society, as observed by the Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. Cited (supra), the same was entitled to deduction under Section 80P(2)(d) of the Income Tax Act. Accordingly, the appeals filed by the assessee partly allowed for statistical purposes.
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