2018 (3) TMI 1793 - AT - Income Tax

Co-op Credit Societies Denied Tax Deduction Due to Lack of Mutuality

The Tribunal held that the Primary Agricultural Co-operative Credit Societies did not qualify for deduction under Section 80P(2)(a)(i) of the Income Tax ... Deduction u/s 80P(2)(a)(i) - assessee would be eligible for relief only if it falls within two categories of co-operative banks i.e., 'primary agricultural cooperative society' and 'primary co- operative aqricultural and rural development bank' - AO examined the books of accounts and found that the society had advanced loans to non-voting/non-profit sharing members and earned profit from them, however, the profit was shared only with the voting members/shareholding members and hence, principles of mutuality did not exist among all the classes of members - HELD THAT:- When the profits of the assessees are not shared with Associate Members as is done with the Members, it is clear that these assessees cases fail on the principles of mutuality. In THE CITIZEN CO-OPERATIVE SOCIETY LIMITED, THROUGH ITS MANAGING DIRECTOR, HYDERABAD [2017 (8) TMI 536 - SUPREME COURT] Hon’ble Supreme Court rejected the above assessees claim holding that the principles of mutuality was missing in that case. Although, both the Members to the transactions of these assessees are the contributors towards surplus, however, the Associate Members are not entitled to the benefits of surplus of these assessees and hence, the principles of mutuality is missing in these cases. These assessee’s cannot be treated as a Co-operative Society meant only for its Members and providing credit facility to its Members and hence they are not entitled to the benefit of section 80P(2)(a)(i) - Decided in favour of revenue Issues Involved:1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act.2. Examination of principles of mutuality among members of the society.3. Classification and rights of 'members' and 'associate members' under the Tamil Nadu Co-operative Societies Act, 1983.4. Applicability of the Supreme Court decision in the case of The Citizen Co-operative Society Limited vs ACIT.Issue-wise Detailed Analysis:1. Eligibility for Deduction under Section 80P(2)(a)(i):The primary issue in this case is whether the assessees, being Primary Agricultural Co-operative Credit Societies, qualify for deduction under Section 80P(2)(a)(i) of the Income Tax Act. The Assessing Officer (AO) found that the societies had advanced loans to non-voting/non-profit sharing members and earned profit from them. Since the profit was shared only with the voting members/shareholding members, the AO concluded that the principles of mutuality did not exist among all classes of members, thereby disqualifying the societies from the deduction.2. Examination of Principles of Mutuality:The AO's analysis revealed that 'associate members' were not entitled to dividends, voting rights, or participation in general administration, unlike 'shareholding members.' The AO argued that since profits were not shared with associate members, the principles of mutuality were not upheld. The CIT(A) had allowed the appeals of the societies, but the Revenue contested this, leading to the present appeals.3. Classification and Rights of 'Members' and 'Associate Members':The AO and the Revenue argued that 'associate members' cannot be regarded as full members of the society. According to the Tamil Nadu Co-operative Societies Act, 1983, 'associate members' have limited rights and privileges compared to 'shareholding members.' The AO provided a detailed comparison table highlighting the differences in rights and privileges between the two categories. The Revenue contended that the societies' activities were primarily commercial and not aimed at agricultural purposes, further disqualifying them from the deduction.4. Applicability of the Supreme Court Decision:The Revenue relied on the Supreme Court's decision in the case of The Citizen Co-operative Society Limited vs ACIT, which held that the principles of mutuality were missing in that case. The Supreme Court had noted that the society was engaged in commercial activities and that the principle of mutuality was absent because the profits were not shared with all members. The Tribunal found this decision applicable to the present case, as the societies also failed to share profits with associate members.Conclusion:The Tribunal upheld the AO's findings that the societies did not qualify for deduction under Section 80P(2)(a)(i) due to the absence of mutuality principles. The appeals filed by the Revenue were allowed, and the Cross Objection filed by the assessee was dismissed. The Tribunal concluded that the societies could not be treated as Co-operative Societies meant only for their members and providing credit facilities to their members, thereby disqualifying them from the benefits of Section 80P(2)(a)(i).Order Pronounced:The Revenue’s appeals in ITA Nos. 2327, 2331 & 2332/Chny/2017 were allowed, and the Cross Objection filed by the assessee in 180/Chny/2017 was dismissed. The order was pronounced on Tuesday, the 27th day of March, 2018, at Chennai.