Co-operative society deduction fails when loans are routed mainly to excess nominal and associate members.

Deduction under section 80P(2)(a)(i) was denied where a co-operative society accepted deposits and advanced loans mainly to nominal and associate members in excess of the 15% limit under amended section 18 of the Karnataka Co-operative Societies Act, 1959. The text treats such dealings as governed by the State co-operative law and notes that, because the excess nominal and associate membership finding was not rebutted, transactions with persons effectively outside the permitted membership structure could not sustain the claimed tax benefit. The disallowance of the deduction was accordingly upheld.

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Issues: Whether the assessee was entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, where it had accepted deposits and advanced loans primarily to nominal or associate members in excess of the limit permitted under section 18 of the Karnataka Co-operative Societies Act, 1959.

Analysis: The assessee was found to have accepted deposits and granted credit facilities mainly to nominal and associate members. Under the Karnataka Co-operative Societies Act, 1959, nominal and associate membership is recognised, but the amended section 18 restricts such membership to fifteen per cent of total membership. The finding that nominal and associate members substantially exceeded that limit was not rebutted. In that situation, the State co-operative law governed the activity and the claim could not be sustained. The authorities relied on the principle that transactions with persons who are effectively non-members, in breach of the State Act, disentitle the society to the benefit claimed under section 80P.

Conclusion: The disallowance of deduction under section 80P(2)(a)(i) was upheld.

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