Cooperative society gets proportionate section 80P deductions for non-member dealings, not complete disallowance

The ITAT Bangalore restored multiple issues to the AO regarding section 80P deductions for a cooperative society. For deduction under section 80P(2)(a)(i), the tribunal held that dealing with non-members should only result in proportionate denial, not complete disallowance, following the SC's Mavilayi Service Co-operative Bank decision. Regarding section 80P(2)(d) deductions on interest income, the AO must examine and allow deductions for interest received from cooperative societies and unlicensed cooperative banks per the SC's Kerala State Co-operative Agricultural Rural Development Bank ruling. Interest on compulsory deposits may qualify as business income under section 80P(2)(a)(i) if mandated by cooperative laws. The AO must also calculate cost of funds deductions under section 57 for interest income taxed under section 56.

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Issues Involved:
1. Eligibility for deduction under section 80P(2)(a)(i) of the Income Tax Act.
2. Deduction under section 80P(2)(d) for interest received from co-operative societies.
3. Deduction under section 80P(2)(d) for interest received from co-operative banks.
4. Deduction under section 80P(2)(a)(i) for interest earned on compulsory deposits with co-operative banks.
5. Deduction under section 57(iii) for cost of funds and proportionate administrative expenses if interest is taxed under "Income from Other Sources".

Detailed Analysis:

Issue 1: Eligibility for Deduction under Section 80P(2)(a)(i)
The assessee, a co-operative society, was denied deduction under section 80P(2)(a)(i) by the AO and CIT(A) on the grounds that it was dealing with nominal/associate members, thus violating the principles of mutuality. The AO relied on the judgment in Citizen Co-operative Society Ltd. vs. ACIT. However, the assessee argued that the Supreme Court's latest judgment in Mavilayi Service Cooperative Bank Ltd. vs. CIT clarified that the term "members" should be interpreted based on the respective Co-operative Societies Act. The Tribunal noted that both the AO and CIT(A) failed to consider this judgment and directed the AO to re-examine the matter, allowing deduction proportionately for dealings with regular members.

Issue 2: Deduction under Section 80P(2)(d) for Interest from Co-operative Societies
The assessee contended that interest received from investments with co-operative societies should be eligible for deduction under section 80P(2)(d). The Tribunal agreed, citing the clear wording of section 80P(2)(d), and directed the AO to re-examine the claim, ensuring the bifurcation of interest receipts and granting deduction for interest from co-operative societies.

Issue 3: Deduction under Section 80P(2)(d) for Interest from Co-operative Banks
The assessee argued that interest received from co-operative banks should also qualify for deduction under section 80P(2)(d). The Tribunal referred to the Supreme Court's judgment in Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. vs. AO, which held that co-operative banks without an RBI banking license are essentially co-operative societies. The Tribunal restored the matter to the AO to determine if the co-operative banks in question lacked an RBI license, thus qualifying for the deduction.

Issue 4: Deduction under Section 80P(2)(a)(i) for Interest on Compulsory Deposits
The assessee claimed that interest earned on compulsory deposits with central co-operative banks, as mandated by the Karnataka Co-operative Societies Act, should be considered "Income from Business/Profession" and eligible for deduction under section 80P(2)(a)(i). The Tribunal cited previous orders supporting this view and directed the AO to verify if the investments were indeed compulsory under the relevant Act and Rules. If so, the interest income should be treated as business income and eligible for the deduction.

Issue 5: Deduction under Section 57(iii) for Cost of Funds and Administrative Expenses
The assessee alternatively argued that if the interest income is taxed under "Income from Other Sources," it should be allowed to deduct the cost of funds and proportionate administrative expenses under section 57(iii). The Tribunal referred to the Karnataka High Court's judgment in Totgars Co-operative Sale Society Ltd. vs. ITO, which supports this claim. The matter was restored to the AO to calculate the cost of funds and allow the deduction accordingly.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, directing the AO to re-examine each issue based on the detailed guidelines and judicial precedents provided. Each ground was restored to the AO for a fresh decision in accordance with the law, ensuring the assessee is afforded a reasonable opportunity of hearing.

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