The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) in M/s. Sri Sai Datta Mutual Aided Co-operative Credit Society vs ACIT, held that the income cannot be taxed on the activities of the Society when principles of mutuality are applicable to it.
The assessee is a mutually aided co-operative society founded by 15 members. After the registration many became the members of the society. The income returns filed by the Society showed NIL, claiming deduction U/s. 80P of the Income Tax Act, 1961 of Rs. 40 Lacs. The Assessing Officer (A.O) found that there were two categories of Members – Ordinary Members and Nominal Members and the transactions with non-Members being third parties is not entitled for deduction either under Section. 80P or under the concept of mutuality. Accordingly, he denied the benefit and restricted it to an amount of Rs. 40,300/- U/s. 80P (2) of the Act. In addition to the above issue, AO noticed that assessee had paid honorarium to its directors to an extent of Rs. 20.76 Lacs and since TDS was not deducted, the said amount was also disallowed under Section 40(a)(ia) of the Income Tax Act, 1961. On appeal, the Commissioner of Income Tax (Appeals) rejected the contentions of the assessee. Thereafter, appeal was filed before the ITAT.
The Counsel for the assessee argued that there was no distinction between ordinary members and nominal members and all the members were having equal rights. He referred to the definition of ‘Membership’ to submit that the nominal members were admitted to the membership of the society. Therefore, according to him, the concept of Mutuality could not be denied only, because some members were categorized as nominal members. It was further submitted that the nominal members also participated in general body meeting and got dividends from the society along with other members as per the objects of the society. Therefore, he concluded that the distinction drawn by the AO on members and non-members was not maintainable.
The Bench comprising of Vice President D. Manmohan and Accountant Member B. Ramakotaiah said that the principle of mutuality Could not be denied simply because there were two categories of members as per the bye-laws of the society. They explained that the class of contributors and the class of participators were more important than classification of members. It found that the class of contributors and class of participators were identical in the instant case.
“Since all the parameters with regard to principles of mutuality are complied, we are of the opinion that the AO’s distinction or findings that society is transacting with non-members is not correct. There is no distinction between ordinary members and nominal members and just because categorized as nominal members, they cannot be treated as ‘non-members’… nominal member cannot be treated as a non-member and so the transactions of nominal members cannot be treated as transactions of non-members… For the reasons stated above, we are of the opinion that the distinction sought to be made by the AO and CIT(A) is arbitrary and artificial. Therefore, we agree that assessee is covered by the principle of mutuality and its income will be exempt on that concept.” observed the Bench.
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