Deduction for credit to nominal members under co-operative law upheld for federation income

A co-operative federation is entitled to deduction under Section 80P(2)(a)(i) for interest income from credit facilities extended to nominal members, because the governing co-operative law treats nominal and associate members as members for this purpose. Although individuals are not ordinarily direct members of a federal society, the statutory proviso allowing admission of nominal members brings such persons within the membership base of the federation. Credit given to those nominal members is therefore credit to members, and the deduction applies.

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Issues: Whether a co-operative federation is entitled to deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961 on interest income earned from extending credit facilities to nominal members who are not direct individual members of the federation.

Analysis: Section 80P(2)(a)(i) allows deduction where a co-operative society carries on the business of banking or provides credit facilities to its members. Under the Karnataka Co-operative Societies Act, 1959, a federal society is ordinarily not open to individuals, but the proviso permits admission of individuals as nominal members. The statutory definition of member also includes nominal and associate members. Since nominal members are treated as members for the purpose of the federation, credit facilities extended to such members fall within the scope of the deduction provision.

Conclusion: The federation was entitled to deduction under Section 80P(2)(a)(i) in respect of income earned from credit facilities extended to nominal members.

Ratio Decidendi: Where the governing co-operative law permits individuals to be admitted as nominal members, credit facilities extended to such nominal members by a co-operative federation constitute facilities to its members for the purpose of Section 80P(2)(a)(i) of the Income-tax Act, 1961.

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