AO's Incomplete Consideration of Member Categories Invalidates Disallowance: ITAT Remands Matter [Read Order]

The Visakhapatnam Bench of the Income Tax Appellate Tribunal (ITAT) remanded the matter to the Assessing Officer (AO) stating that the AO had failed to consider the different categories of members of the society.

The Eluru Cooperative House Mortgage Society Limited (assessee), a cooperative society, filed appeals against the orders of the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee had claimed a deduction of Rs. 28,81,720 under Section 80P(2)(a)(i) of the Income Tax Act.

The AO disallowed the deduction, finding that the assessee had been collecting deposits and granting loans to non-members and staff members, thus violating the principles of mutuality.

The CIT(A) upheld this disallowance, noting that "many such instances" were discussed in the AO's order and that the assessee had failed to follow the principles of mutuality, in part because depositors were not eligible to share in the surplus while some borrowers were.

The counsel for the assessee submitted that the society has two categories of members "A" Class Members and "B" Class Members.

The counsel submitted that "A" Class Members pay Rs. 100 in share capital, are eligible for mortgage loans, are entitled to receive dividends, and have voting rights. "B" Class Members pay a nominal membership fee of Rs. 10, are eligible to place fixed deposits and avail loans against those deposits, but are not entitled to receive dividends and have no voting rights.

The counsel argued that both categories are members in conformity with the Andhra Pradesh Cooperative Societies Act. The counsel contended that the lower authorities considered only partial information, which led to the incorrect conclusion that the society had transacted with non-members.

The two-member bench comprising S. Balakrishnan (Accountant Member) and Sandeep Singh Karhail (Judicial Member), noted that the lower authorities had not considered the entire details furnished by the assessee, particularly the columns showing Temporary Membership Number and Temporary Membership Date.

The Tribunal found that there was no examination of the fact that the assessee has two types of members and that the classification was in conformity with the Andhra Pradesh Cooperative Societies Act.

The Tribunal restored the issue to the AO for fresh adjudication after considering all details, the society's bylaws, and the Andhra Pradesh Cooperative Societies Act. The appeal was partly allowed for statistical purposes.

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