2021 (9) TMI 343 - AT - Income Tax

Assessee's Appeal Allowed for Re-examination of Deductions

Shree Venkatrammana Credit Co-operative Society Ltd. Versus The Income-Tax Officer, Ward-1, Puttur.

Shree Venkatrammana Credit Co-operative Society Ltd. Versus The Income-Tax Officer, Ward-1, Puttur. - TMI Issues Involved:1. Denial of deduction under section 80P(2)(a)(i) of the Income Tax Act.2. Eligibility of interest income for deduction under section 80P(2)(d) of the Income Tax Act.Detailed Analysis:1. Denial of Deduction under Section 80P(2)(a)(i):The primary issue was whether the authorities were justified in denying the claim of the assessee for deduction under section 80P(2)(a)(i) of the Act. The assessee, a co-operative society providing credit facilities to its members, filed its return of income claiming this deduction. However, the Assessing Officer (AO) observed that the society earned income from nominal/associate members, which constituted a majority of its income. Citing the Supreme Court's decision in Citizen Co-op Society Ltd., the AO denied the deduction, asserting that the assessee provided credit facilities to three categories of members (regular, associate, and nominal), thereby violating the principle of mutuality. The CIT(A) upheld this view, noting that the society had admitted excess nominal/associate members, violating the Karnataka Co-operative Society Act, 1959. Consequently, the CIT(A) concluded that the assessee was not entitled to the deduction under section 80P(2)(a)(i).Upon appeal, the Tribunal referred to the Supreme Court's decision in Mavilayi Service Cooperative Bank Ltd. v. CIT, which held that the term 'Members' in section 80P(2)(a)(i) should be construed in light of the definition in the relevant co-operative societies Act. The Tribunal remitted the issue back to the AO for re-examination in light of this judgment, allowing the grounds for statistical purposes.2. Eligibility of Interest Income for Deduction under Section 80P(2)(d):The second issue was whether the interest income earned by the assessee was eligible for deduction under section 80P(2)(d) of the Act. The AO had denied this deduction, treating the interest income received from deposits in banks as 'income from other sources.' The CIT(A) upheld this view, relying on the Karnataka High Court's decision in Totgars Co-operative Sale Society Ltd.The Tribunal referenced a coordinate bench's decision in Potters Cottage Industrial Co-Operative Society Ltd., which had dealt with a similar issue. The Tribunal noted that the Supreme Court in Totgars Co-operative Sale Society Ltd. had held that income from surplus funds invested in banks was taxable under 'income from other sources' and not eligible for deduction under section 80P. However, the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. distinguished this by stating that interest income from deposits made in nationalized banks, used for providing credit facilities to members, was attributable to the business of the society and thus eligible for deduction under section 80P(2)(a)(i).The Tribunal also noted a subsequent Karnataka High Court decision in Pr.CIT vs. Totagars Co-Operative Sale Society, which held that interest income from investments in banks, not being a co-operative society, was not deductible under section 80P(2)(d). However, interest earned from investments in co-operative societies was eligible for deduction under section 80P(2)(d). The Tribunal remanded the issue back to the AO to verify the interest earned from investments in co-operative societies and consider the claim for deduction accordingly.Conclusion:The Tribunal allowed the appeal of the assessee for statistical purposes, directing the AO to re-examine the issues concerning the deduction under section 80P(2)(a)(i) and the eligibility of interest income for deduction under section 80P(2)(d) in light of the relevant judicial precedents. The order was pronounced in the open court on 31st August 2021.