Tribunal interprets 'Members' under Section 80P(2)(a)(i) based on cooperative societies Act

The Tribunal referred to the Supreme Court decision in Mavilayi Service Cooperative Bank Ltd. v. CIT, emphasizing interpreting the term "Members" in Section 80P(2)(a)(i) based on the relevant cooperative societies Act. The Tribunal remanded the issue to the AO for a fresh examination of the deduction claim in line with this ruling. As a result, the appeal was allowed for statistical purposes, with the judgment issued on August 24, 2021.

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Issues Involved:
1. Rejection of deduction claim under Section 80P(2)(a)(i) of the Income Tax Act.
2. Applicability of the Supreme Court judgment in the case of Citizen Cooperative Society, Hyderabad.
3. Status of the appellant as a cooperative society under the Karnataka Souharda Sahakari Act, 1997.
4. Consideration of jurisdictional High Court judgments.
5. Principle of mutuality and its application in the case.

Issue-wise Detailed Analysis:

1. Rejection of Deduction Claim under Section 80P(2)(a)(i):
The primary issue is whether the revenue authorities were justified in denying the assessee's claim for deduction under Section 80P(2)(a)(i) of the Income Tax Act. The assessee argued that the CIT(Appeals) erred in rejecting their genuine claim of Rs. 86,60,540. The Tribunal had previously remanded the matter back to the AO, directing them to apply the principles laid down by the Supreme Court in the case of Citizen Cooperative Society Ltd. During the remand proceedings, the AO concluded that the assessee admitted nominal members and provided credit facilities to them, thus failing the principle of mutuality. Consequently, the AO disallowed the deduction claim, which was upheld by the CIT(Appeals).

2. Applicability of the Supreme Court Judgment in Citizen Cooperative Society Case:
The assessee contended that the CIT(Appeals) wrongly applied the Supreme Court's judgment in the case of Citizen Cooperative Society, Hyderabad, as the facts were different. The assessee highlighted several distinctions, such as the registration under different cooperative acts and the nature of members and deposits. The AO, however, found that the assessee society had provided credit facilities to nominal members, similar to the Citizen Cooperative Society case, and thus disallowed the deduction.

3. Status of the Appellant as a Cooperative Society under Karnataka Souharda Sahakari Act, 1997:
The CIT(Appeals) noted that the assessee was registered under the Karnataka Souharda Sahakari Act, 1997, and not under the Karnataka Cooperative Societies Act, 1959. The CIT(A) argued that deduction under Section 80P is allowed only to cooperative societies registered under the Cooperative Societies Act. The assessee had not obtained a certification of registration as a cooperative society, nor had it converted into one as per the Amending Act 13/2004.

4. Consideration of Jurisdictional High Court Judgments:
The assessee argued that the CIT(Appeals) failed to follow the Karnataka High Court judgments in the cases of Tumkur Merchants Souharda Credit Cooperative Ltd and Guttugedarara Credit Cooperative Society Ltd. The High Court had ruled in favor of allowing deductions for societies making short-term deposits out of idle funds. The CIT(A), however, relied on the Tribunal's order in the case of M/s. Udaya Souharda Credit Cooperative Society Limited, which held that deductions can only be allowed to societies registered under the Cooperative Societies Act.

5. Principle of Mutuality:
The CIT(Appeals) held that the principle of mutuality had failed in the assessee's case as substantial business was conducted with the general public or nominal members. The AO had observed that the assessee's income primarily came from nominal/associate members and investments with non-members, violating the cooperative society's bye-laws. The CIT(A) concluded that the assessee was not eligible for deduction under Section 80P due to the failure of mutuality principles and the nature of its registration.

Conclusion:
The Tribunal, after hearing both parties and reviewing the material on record, referred to the Supreme Court's decision in Mavilayi Service Cooperative Bank Ltd. v. CIT, which emphasized construing the term "Members" in Section 80P(2)(a)(i) based on the concerned cooperative societies Act. The Tribunal remitted the issue back to the AO to re-examine the deduction claim afresh in light of this judgment. Consequently, the appeal was allowed for statistical purposes. The judgment was pronounced on August 24, 2021.

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