Fresh look at cooperative society deductions under ss. 80P(2)(a)(i), 80P(2)(d) and s.57 on remand assessment

ITAT Bangalore set aside the assessment and remanded the matter to the AO for de novo adjudication of the assessee-cooperative society's claim for deduction under ss. 80P(2)(a)(i) and 80P(2)(d). Relying on the SC ruling in Mavilayi, the Tribunal directed the AO to examine whether the assessee is a cooperative society providing credit facilities only to its members and, if so, to allow deduction under s. 80P(2)(a)(i) notwithstanding interest from a cooperative bank. For s. 80P(2)(d), the AO was instructed to verify if interest/dividend arises from investments in cooperative societies and allow deduction accordingly. If interest from banks is taxed as "Income from other sources," proportionate relief under s. 57 must be granted.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessee, a co-operative society engaged in providing credit facilities to its members, is entitled to deduction under section 80P(2)(a)(i) in respect of its income, including interest, having regard to the law laid down in the decision on Mavilayi Service Co-operative Bank.

1.2 Whether interest/dividend income earned from investments with co-operative banks / co-operative societies, particularly deposits with a District Central Co-operative Bank, qualifies for deduction under section 80P(2)(d).

1.3 If interest income from bank deposits is assessed under the head "Income from other sources", whether deduction under section 57 is allowable in respect of related expenditure / cost of funds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Deduction under section 80P(2)(a)(i) for a co-operative society providing credit facilities to its members

Legal framework (as discussed)

2.1 The judgment discusses section 80P(1) and 80P(2)(a)(i), and section 80P(4), and the interpretation of "member" and "co-operative bank" as laid down by the Supreme Court in Mavilayi Service Co-operative Bank Ltd. and connected decisions.

2.2 The Court notes that in Mavilayi Service Co-operative Bank Ltd., it was held that:

(a) Section 80P is a benevolent provision and must be construed liberally in favour of the assessee.

(b) Section 80P(4) operates as a proviso, excluding only "co-operative banks" which are co-operative societies engaged in banking business with the public and holding RBI licence.

(c) The expression "member" is not defined in the Income-tax Act and has to be understood with reference to the respective State Co-operative Societies Act.

(d) If nominal/associate members are recognised as members under the State Act, income from providing credit to such members is also eligible for deduction under section 80P(2)(a)(i).

(e) Profits attributable to loans given to non-members (other than persons legally recognised as members under the State Act) are not eligible for deduction.

Interpretation and reasoning

2.3 The Tribunal records that the assessee is registered under the Karnataka Co-operative Societies Act and is engaged in providing credit facilities to members and allied co-operative activities. The CIT(A) had accepted entitlement in principle but restricted deduction based on an alleged non-member component and on the character of interest income.

2.4 The Tribunal relies on its earlier decision in a factually similar case (Ravindra Multipurpose Co-operative Society Ltd.), where, following Mavilayi Service Co-operative Bank Ltd., the matter was remanded to the Assessing Officer to re-examine eligibility under section 80P(2)(a)(i) by correctly applying the Supreme Court's principles regarding "members", "nominal/associate members" and exclusion of income relatable to true non-members.

2.5 Applying the same approach, the Tribunal holds that a fresh factual examination is required in this case to determine:

(a) Whether the persons to whom credit facilities are extended are "members" within the meaning of the Karnataka Co-operative Societies law (including regular, associate and nominal members where legally permissible); and

(b) To what extent, if any, income is attributable to dealings with persons who are not "members" within that framework, which portion would not qualify for deduction.

Conclusions

2.6 The Tribunal restores the entire issue of deduction under section 80P(2)(a)(i) to the file of the Assessing Officer for de novo consideration, with a direction to apply the ratio of Mavilayi Service Co-operative Bank Ltd. and to grant proper opportunity of hearing to the assessee.

Issue 2 - Deduction under section 80P(2)(d) on interest/dividend from investments with co-operative societies / co-operative banks (including District Central Co-operative Bank)

Legal framework (as discussed)

2.7 Section 80P(2)(d) provides deduction in respect of "any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society".

2.8 The Tribunal refers to the Supreme Court decision in Kerala State Co-operative Agricultural and Rural Development Bank Ltd., which explains the distinction between:

(a) A "co-operative society" registered under a State Co-operative Societies Act which does not transact the business of "banking" as defined in section 5(b) read with section 5(c) and section 56 of the Banking Regulation Act, 1949; and

(b) A "co-operative bank" that is in substance a "banking company" engaged in accepting deposits from the public and therefore requires an RBI licence under section 22 of the Banking Regulation Act, 1949.

2.9 That decision clarifies: if a co-operative society is not a "co-operative bank" within section 56 of the Banking Regulation Act read with the NABARD Act, it remains a co-operative society and its income may still be eligible for deduction under section 80P.

Interpretation and reasoning

2.10 The assessee contended that its deposits with the District Central Co-operative Bank (S.C.D.C.C. Bank) are:

(a) Statutorily mandated under the Karnataka Co-operative Societies framework and relevant Registrar's circulars for maintaining "fluid resources" and reserve funds; and

(b) Made with an entity that is a central co-operative bank registered under the Karnataka Co-operative Societies Act and primarily financing other co-operative societies, and hence a "co-operative society" for purposes of section 80P(2)(d).

2.11 The assessee further relied on the Supreme Court's reasoning in Kerala State Co-operative Agricultural and Rural Development Bank Ltd. and on decisions holding that central / district co-operative banks registered under State Co-operative Societies Acts may be treated as co-operative societies (and not as commercial banks governed per se by RBI) for purposes of section 80P(2)(d), subject to factual verification.

2.12 The Tribunal does not finally adjudicate the precise character of S.C.D.C.C. Bank but accepts in principle that where interest/dividend is derived from investments with a "co-operative society", section 80P(2)(d) applies, in line with the Supreme Court's observations cited.

Conclusions

2.13 The Tribunal directs the Assessing Officer to:

(a) Verify whether the payer entities from which the assessee has derived interest/dividend, including the District Central Co-operative Bank, are "co-operative societies" within the meaning of section 80P(2)(d); and

(b) If so, allow deduction under section 80P(2)(d) on such interest/dividend income in accordance with law.

2.14 The issue of deduction under section 80P(2)(d), including in respect of interest from the District Central Co-operative Bank, is thus restored to the Assessing Officer for de novo examination on the above lines.

Issue 3 - Allowability of deduction under section 57 if interest from bank deposits is assessed as "Income from other sources"

Legal framework (as discussed)

2.15 Section 57 allows deduction of expenditure laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head "Income from other sources".

Interpretation and reasoning

2.16 The assessee contended, in the alternative, that if interest from deposits with banks is not treated as business income and is brought to tax under the head "Income from other sources", then the corresponding cost of funds / related expenditure must be allowed as deduction under section 57.

2.17 The Tribunal accepts this alternative proposition in principle, clarifying that any such relief must be granted strictly in accordance with section 57 and on verification of facts.

Conclusions

2.18 The Tribunal explicitly directs that if, upon remand, the Assessing Officer treats the interest earned by the assessee from banks as income assessable under the head "Income from other sources", then the Assessing Officer shall grant appropriate deduction under section 57 to the assessee, in accordance with law, for expenditure incurred for earning such income.

2.19 The matter on this aspect is also restored to the Assessing Officer for fresh consideration consistent with these directions.

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