Interest on Statutory Deposits Integral to Lending Business, qualifies for Deduction u/s 80P(2)(a)(i): ITAT [Read Order]

Sullia Primary Co-operative Agricultural & Rural Development Bank, the assesse is a registered co-operative society under the Karnataka Co-operative Societies Act. The assessee filed its returns claiming deduction under Section 80P(2)(a)(i) for Assessment Years 2017–18 and 2018–19.

The Assessing Officer denied the deduction, alleging a violation of the principle of mutuality as most of the society’s transactions were with nominal (B-class) members who lacked voting and profit-sharing rights.

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During the year, there were 3159 members of “A Class” and 4920 members of “B Class”, whereas zero members of “C Class”. Further, the AO observed that during the year, A class members have made a deposit/investment of Rs. 4,8297320/- only, whereas B class members have made a deposit/investment of 14,48,91,961/- only.

Both classes of members (to A and B class members) have been paid interest of Rs. 28,71,695/- and Rs. 76,88,048/- respectively by the assessee. Likewise, the assessee during the year received interest of Rs. 24,68,69773/- and Rs. 76,556/- from A and B Class members, respectively.

Relying on Citizen Co-operative Society Ltd. (SC), the AO held that dealings with such members were akin to business with non-members. The deduction was further disallowed on interest income from deposits with scheduled and co-operative banks, and a provision for Golden Jubilee expenses was treated as a contingent liability.

The assessee in reply submitted that the case of the Citizen Cooperative Society is different from the facts of the assessee. The Citizen Cooperative Society Ltd was working as a bank and dealt with members as well as the general public and having presence in multiple states.

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Further, the Citizen Cooperative was registered under different Act of different states in which admission of nominal or associate members was not allowed.

However, the AO dismissed the argument of the assessee. The AO held that the assessee society has three categories of members- A, B, and C. While A-class members are regular members with voting rights and dividend entitlement, the B and C category members, mainly associated or nominal members, have no such rights. These associated/nominal members can make deposits and take loans, but they do not have voting rights and are not entitled to participate in the surplus or receive dividends.

The aggrieved assessee preferred an appeal before the CIT(A).On appeal, the CIT(A) confirmed the disallowances. Being aggrieved by the order of the CIT(A), the assessee filed an appeal before the Tribunal.

The assessee submitted that the AO has wrongly held that the assessee society is not entitled to a deduction under section 80P(2)(a)(i) of the Act. The AO relied on the judgment of the Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. (2017) to say that dealings with nominal members violate the principle of mutuality.

However, the assessee contended that this reliance is misplaced because the later judgment of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) has clearly distinguished and limited the application of the earlier judgment. The Hon’ble Court has categorically held that nominal members are also to be treated as “members” within the meaning of the State Co-operative Societies Act, and therefore, dealing with such nominal members does not make the assessee ineligible for deduction under section 80P(2)(a)(i) of the Act.

The assessee further submitted that as per the provisions of the Karnataka Co-operative Societies Registration Act, 1959, nominal members are recognised as members. They may not enjoy all privileges, such as voting or profit-sharing, but they are still members under the

law. Hence, transactions entered into by the assessee society with such nominal members cannot be treated as transactions with “non- members” or the general public. Therefore, the AO’s observation that the assessee violated the mutuality is not correct.

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The two-member bench of Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member) held that the co-operative society is eligible for deduction under Section 80P(2)(a)(i), as dealings with nominal or associate members do not violate the principle of mutuality.

The Tribunal observed that under the Karnataka Co-operative Societies Act, nominal members are recognised as valid members, even if they lack voting or profit-sharing rights. Relying on the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd. v. CIT, the Tribunal distinguished Citizen Co-operative Society Ltd., noting that the latter was decided in a different statutory context. Accordingly, the deduction under Section 80P(2)(a)(i) was restored to the assessee.

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