2022 (8) TMI 1270 - AT - Income Tax

Cooperative Society Wins Tax Deduction Case: Section 80P Benefits Upheld

The Income Tax Officer, Ward – 2 (2), Belagavi. Versus M/s. Shiva Credit Souharda Sahakari Niyamit

The Tribunal ruled in favor of the assessee, a Cooperative Credit Society, allowing the deduction under Section 80P(2)(a)(i) of the Income Tax Act for ... Deduction u/s 80P(2)(i) - interest income of investment as interest not being earned by way of providing credit facilities to its members - case of the assessee-society was selected for scrutiny and notice under section 143(2) - as per AO the newly inserted provisions of Section 2(24) (viia) by the Finance Act, 2006 with effect from 01.04.2007, includes the profit and gains of any business of banking (including providing credit facilities) carried on by a co-op society with its members and held that deduction under section 80P shall not be available to a Co-operative Bank other than a Primary Agricultural Credit Society or a Primary Co-operative Agricultural and Rural Development Bank, though it is available to Co-operative Societies engaged in the activity of providing credit facility to members HELD THAT:- From the First Appellate Order we have observed that the Ld. CIT(A) has confirmed the disallowance made by the A.O. observing that the income earned from persons other than its regular members would not be eligible for deduction under section 80P(2)(a)(i) and such income earned from business with persons other than the regular members would be taxable as income from business. Similar issue was placed for adjudication before ITAT, Chennai Bench, Chennai in the case of Varathappam Palayam Primary Agricultural Co-op. Credit Society [2022 (7) TMI 113 - ITAT CHENNAI] wherein held that irrespective of the fact that whether the assessee is having “A” class Members or “B” class Members, the assessee is entitled for claiming exemption under section 80P(2)(a)(i). Thus we are compelled to held that the assessee is eligible for exemption under section 80P(2)(a)(i) of the I.T. Act, 1961 from the income earned from its regular members as well as from Associate/Other members. Therefore, the A.O. was not right in making disallowance and the Ld. CIT(A) has also erred in confirming the baseless and unsustainable disallowance. Therefore, grounds of assessee are allowed and A.O. is directed to allow the deduction under section 80P(2)(a)(i) - Appeal of assessee allowed. Issues Involved:1. Eligibility for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961.2. Classification of the assessee as a Cooperative Credit Society or a Cooperative Bank.3. Applicability of Section 80P(4) of the Income Tax Act, 1961.4. Treatment of income earned from members and non-members.Detailed Analysis:1. Eligibility for Deduction under Section 80P(2)(a)(i):The primary issue was whether the assessee, a Cooperative Credit Society registered under the Karnataka Souharda Sahakari Act, 1997, was eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961. The assessee claimed a deduction of Rs. 78,31,020/- under this section, which was initially disallowed by the Assessing Officer (A.O.) on the grounds that the assessee functioned akin to a Cooperative Bank and thus fell under the purview of Section 80P(4), which excludes cooperative banks from the benefits of Section 80P.2. Classification as Cooperative Credit Society or Cooperative Bank:The A.O. classified the assessee as a Cooperative Bank, arguing that it met the conditions of a Cooperative Bank under the Banking Regulation Act, 1949. This classification led to the disallowance of the deduction under Section 80P(2)(a)(i), as Section 80P(4) excludes Cooperative Banks from claiming such deductions. However, the CIT(A) partly allowed the deduction, directing the A.O. to allow the income earned from providing credit facilities to regular members, following the Supreme Court judgments in the cases of The Citizen Co-operative Society Ltd. vs. ACIT and M/s. Totgars' Co-Operative Sale Society Ltd. vs. ITO.3. Applicability of Section 80P(4):The A.O. applied Section 80P(4) to disallow the deduction, arguing that the assessee operated as a Cooperative Bank. The CIT(A) confirmed the disallowance for income earned from non-members but allowed it for income from regular members. The Tribunal, however, found that the assessee was not engaged in banking activities as it did not hold a banking license from the RBI and its transactions were restricted to its members, including associate members. The Tribunal referred to the Supreme Court's judgment in Mavilayi Service Co-operative Bank Limited vs. Commissioner of Income Tax, Calicut, which clarified that Section 80P(4) excludes only those cooperative societies that function as banks and hold an RBI license.4. Treatment of Income Earned from Members and Non-Members:The Tribunal observed that the CIT(A) had correctly disallowed the deduction for income earned from non-members but allowed it for income from regular members. The Tribunal further extended this allowance to income from associate members, following the precedent set by the ITAT Chennai Bench in similar cases. The Tribunal held that the assessee was entitled to the deduction under Section 80P(2)(a)(i) for income earned from both regular and associate members, as the assessee did not operate as a bank and was not subject to Section 80P(4).Conclusion:The Tribunal concluded that the assessee, being a Cooperative Credit Society and not a Cooperative Bank, was eligible for deduction under Section 80P(2)(a)(i) for income earned from its regular and associate members. The A.O.'s disallowance was overturned, and the appeal was allowed in favor of the assessee. The Tribunal directed the A.O. to allow the deduction as per the provisions of Section 80P(2)(a)(i). The judgment emphasized the distinction between cooperative societies and cooperative banks, reinforcing that only those societies functioning as banks with an RBI license are excluded from Section 80P benefits.