Court Allows Deduction for Interest Income from Cooperative Society to Nominal Members

The appeal involved the denial of deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 for interest earned from credit facilities provided to nominal members by a cooperative society. The court held that since the term 'Member' under the relevant State Act included nominal members, the deduction should be allowed. Relying on precedents like Citizen Co-operative Society Ltd. vs. ACIT and Mavilayi Service Co-Operative Bank Ltd. vs. CIT, the court overturned the decision disallowing the deduction and directed it to be allowed. Consequently, the appeal was allowed on 16th November 2022.

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Issues:
Denial of deduction u/s.80P(2)(a)(i) of the Income-tax Act, 1961 in respect of interest earned from credit facilities provided to nominal members.

Analysis:
The appeal pertains to the denial of deduction u/s.80P(2)(a)(i) of the Income-tax Act, 1961 concerning interest earned from credit facilities provided to nominal members. The assessee, a cooperative society engaged in banking and providing credit facilities, claimed a deduction under 80P(2)(a)(i) for interest earned from credit facilities provided to regular and nominal/associate members. The Assessing Officer disallowed the claim stating that credit facilities provided to non-members were not eligible for deduction, a decision upheld by the CIT(A).

Upon review, it was noted that the term 'Member' as defined in the Karnataka Cooperative Society Act includes nominal or associate members. As the assessee made advances to nominal members and earned interest income, it was concluded that the deduction u/s 80P(2)(a)(i) should be allowed. Reference was made to the judgment of the Hon'ble Supreme Court in the case of Citizen Co-operative Society Ltd. vs. ACIT, which highlighted the inclusion of 'Nominal Member' in the definition of 'Member' under the Kerala Act.

Drawing from the Supreme Court's decision in Mavilayi Service Co-Operative Bank Ltd. vs. CIT, it was established that interest on loans given to nominal members under the Kerala Act was eligible for deduction under 80P(2)(a)(i) as the term 'Member' encompassed 'Nominal Members'. Consequently, when loans are extended to nominal members and the relevant State Act recognizes 'Nominal Members' as part of the 'Member' category, the benefit under 80P(2)(a)(i) cannot be denied. Therefore, the impugned order was overturned, and the deduction was directed to be allowed.

In conclusion, the appeal was allowed, and the order was pronounced in the Open Court on 16th November, 2022.

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