2025 (5) TMI 2184 - AT - Income Tax

Two-tier society membership qualifies loans to associate members as 'members' under section 80P(2)(a)(i), allowing deduction

AA533 Umareddiyur Primary Agricultural Cooperative Credit Society Ltd Versus The Income Tax Officer, Ward 2 (1), Erode

ITAT CHENNAI (AT) allowed the assessee's appeal and directed the AO to grant deduction under section 80P(2)(a)(i). The tribunal held that the society's ... Denial of deduction u/s. 80P(2)(a)(i) - assessee was having both members as well as non-members - HELD THAT:- The members of assessee co-operative society are admitted as per section 2(16) of the TNCS Act. The TNCS Act allows admission of two class Members A Class (Primary) and B Class (Associate) Members. As decided in case of The Mavilayi Service Cooperative Bank Ltd. & Ors [2021 (1) TMI 488 - SUPREME COURT] considering the definition of 'member' under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2) (a)(i). ITAT Chennai in the Case of AA531 Kesarimangalam Primary Agrl. Co-op. Credit Society Ltd [2025 (3) TMI 520 - ITAT CHENNAI] allowed the deduction under sec. 80P by accepting submission made by the assessee on the issue of admission of two classes of member. We direct the AO to allow the claim of deduction u/s. 80P(2)(a)(i). Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the delay in filing the appeal (32 days) is sufficiently explained to warrant condonation. 2. Whether a primary agricultural credit co-operative society registered under the Tamil Nadu Co-operative Societies Act (TNCS Act) is entitled to deduction under section 80P(2)(a)(i) of the Income Tax Act for income from providing credit facilities where the society admits two classes of members (A class and B/associate class). 3. Whether the existence of nominal/associate members (B class) within the society defeats the principle of mutuality and precludes the section 80P(2)(a)(i) deduction, in light of conflicting precedents and statutory definitions of 'member.' ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of delay in filing the appeal Legal framework: Procedural rules permit condonation of delay on demonstration of sufficient cause and absence of laches. Precedent treatment: Standard administrative practice and judicial approach require assessment of reasons for delay and consideration of prejudice to the opposite party. Interpretation and reasoning: The Tribunal examined the reasons advanced in the condonation petition and found them to constitute sufficient cause; no laches or prejudice to the Revenue was identified. Ratio vs. Obiter: Ratio - the Tribunal's condonation order is a dispositive finding that the delay is excused for the purposes of adjudicating the appeal on merits. Conclusion: Delay of 32 days is condoned and the appeal is admitted for hearing on merits. Issue 2 - Entitlement to deduction under section 80P(2)(a)(i) where society admits two classes of members under the TNCS Act Legal framework: Section 80P(2)(a)(i) allows deduction for income of co-operative societies from providing credit facilities to members. The term 'members' is not defined in the Income Tax Act and must be read in light of the statute under which the co-operative society is registered; TNCS Act provides for admission of associate (B class) members and defines 'member' to include associate members. Precedent treatment: The Tribunal relied on a binding interpretation from the Apex Court in the Mavilayi line of authority which holds that where the State co-operative statute defines and permits admission of nominal/associate members, loans to such members qualify for the 80P deduction. The earlier Citizen Co-operative Society decision (involving multi-state societies or different statutory regimes) was treated as distinguishable insofar as it addressed societies under a different legislative scheme where 'nominal members' were not members in the statutory sense applicable there. Interpretation and reasoning: The Tribunal analysed the statutory definition of 'member' under the TNCS Act (which expressly includes associate members) and concluded that B class/associate members admitted under that Act are statutory members. Applying the Mavilayi reasoning, the Tribunal held that loans or credit facilities extended to such associate members do not vitiate the mutual character required for section 80P(2)(a)(i). The Tribunal also relied on a recent coordinate ITAT decision (Kesarimangalam Primary Agricultural Co-op. Credit Society) that applied the same principle under the TNCS Act and allowed the 80P deduction where B class members were present. Ratio vs. Obiter: Ratio - where a co-operative society is registered under a State co-operative statute that defines 'member' to include associate/nominal members, transactions with such statutory associate members satisfy the 'members' requirement of section 80P(2)(a)(i), and do not negate mutuality for the purpose of the deduction. Distinguishing principle - multi-state or other statutory regimes where 'nominal members' are not statutory members fall outside this ratio. Conclusion: The Tribunal directed allowance of the section 80P(2)(a)(i) deduction for the claimed sum (Rs. 6,28,728) on the ground that the TNCS Act's definition of member includes B class (associate) members and thus loans to such members qualify; the presence of two classes of members under the TNCS Act does not defeat mutuality for section 80P. Issue 3 - Effect of presence of nominal/associate members on the principle of mutuality and applicability of Citizen Co-operative Society precedent Legal framework: Deduction under section 80P(2)(a)(i) requires that the receipts be from activities conducted with members in a mutual manner. Whether a category of members is 'real' members is judged by reference to the statutory framework governing membership rights and liabilities. Precedent treatment: The Apex Court's decision in the Citizen Co-operative Society matter (involving a multi-state society or different statutory context) was applied by the Assessing Officer and CIT(A) to deny deduction, on the basis that presence of nominal members destroyed mutuality. The Tribunal distinguished that decision on its facts/statutory background and followed Mavilayi which treats statutory associate members as bona fide 'members' for section 80P purposes. Interpretation and reasoning: The Tribunal emphasised that the critical inquiry is whether the impugned class of members is a statutory 'member' under the relevant co-operative law and whether, in substance, the society is dealing only with members. Where the State Act (TNCS Act) permits two classes and defines 'member' to include associate members, those associate members are 'members' in law and lending to them does not, per se, undermine mutuality. The Tribunal rejected the AO/CIT(A)'s application of Citizen Co-operative Society precedent to the TNCS Act facts because that precedent turned on a different statutory construct where nominal members were not recognized as members for the parent Act's purposes. Ratio vs. Obiter: Ratio - the functional test of mutuality must be applied in the context of the society's constitutive statute; statutory recognition of associate/nominal members sustains mutuality for section 80P. Obiter - the observation that multi-state societies or societies under different Acts may attract a different result is ancillary and fact-specific. Conclusion: The presence of B class/associate members under the TNCS Act does not destroy mutuality; the Citizen Co-operative Society precedent is distinguishable on statutory grounds, and the Tribunal followed Mavilayi and the recent coordinate ITAT decision to allow the deduction. Cross-references See Issue 2 for the primary statutory and precedential basis for allowing deduction where the State Act defines 'member' to include associate/nominal members; see Issue 3 for the treatment and distinction of Citizen Co-operative Society authority and the mutuality analysis.