2024 (6) TMI 1386 - AT - Income Tax

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

M/s. Shree Cheerumba Credit Cooperative Society Ltd. Versus ITO, Ward – 2 (1), Mangaluru.

The ITAT Bangalore restored multiple issues to the AO regarding section 80P deductions for a cooperative society. For deduction under section ... Deduction u/s 80P(2)(a)(i) - claim denied as that assessee was dealing with nominal / associate members who are not regular members of assessee society and has violated the principles of mutuality - HELD THAT:- In respect of associate / nominal members, the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd., & Ors. [2021 (1) TMI 488 - SUPREME COURT] had held that the expression “members” is not defined under the Income Tax Act, 1961. Hence, it is necessary to construe the expression “members” in section 80P(2)(a)(i) of the Act light of the definition of the expression as contained in the concerned Co-operative Societies Act under which the assessee is constituted. Both the AO and the CIT(A) has not considered the latest judgment of Mavilayi Service Co-operative Bank Ltd., & Ors. Vs. CIT (supra) in correct perspective. Even assuming that assessee is dealing with non-members, only to such extent there shall be a denial of deduction u/s 80P(2)(a)(i) of the Act. We deem it appropriate to restore the matter to the AO. AO is directed to examine whether assessee has been dealing with non-members, and if so, only to that extent there shall be denial of deduction under section 80P(2)(a)(i) of the Act. Assessee would be entitled to proportionate deduction in respect of its dealing with members - ground Nos. 2 and 3 are allowed for statistical purposes. Interest received by the Appellant from co-operative banks is not eligible for deduction u/s 80P(2)(d) - The wording of section 80P(2)(d) of the Act is very clear. If the assessee co-operative society is in receipt of interest from investments with another co-operative society, the same is eligible for deduction under section 80P(2)(d) of the Act. It is a claim of the assessee that the entire interest receipts received from scheduled bank, central co-operative bank and co-operative societies has been aggregated by the AO and has denied the benefit the deduction under section 80P - Section 80P(2)(d) of the Act, the issue raised in ground No. 4 needs to be re-examined by the AO. The assessee is directed to furnish the bifurcation of the interest receipts and necessary details before the AO. The AO shall examine the claim of the assessee and shall grant deduction under section 80P(2)(d) of the Act in respect of interest income received from co-operative societies Disallowance of deduction u/s 80P(2)(d) on interest income earned from other co-operative banks, as the definition co-operative society includes co-operative banks as well - The Hon’ble Apex Court in the case of Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. [2023 (9) TMI 761 - SUPREME COURT] had held that although the assessee society in that case is an apex co-operative society within the meaning of State Act, 1985, it is not a cooperative bank within the meaning of section 5(b) r.w.s. 56 of the RBI Act, 1949. It was concluded by the Hon’ble Apex Court that if a co-operative bank does not have a banking licence under the RBI Act, the said co-operative bank would be entitled to deduction under section 80P of the Act - certain categories of co-operative banks which does not have RBI licence to do a banking business would in essence be a co-operative society. Hence, any interest income received from such co-operative banks should also be entitled to deduction under section 80P(2)(d) of the Act. Therefore, with the aforesaid observation, the matter is restored to the files of the AO. Eligibility to claim deduction in respect of interest earned on compulsory deposit with co-operative banks which is a statutory requirement after deduction u/s 80P(2)(d) of the Act is disallowed - As relying on M/S. KACHUR CREDIT CO-OPERATIVE SOCIETY LTD. [2023 (9) TMI 1487 - ITAT BANGALORE] we direct the AO to examine whether the interest income received on investments with central co-operative banks is out of compulsion compulsions under the Karnataka Co-operative Societies Act, 1959, and the relevant Rules. If so, the same may be considered as “business income” and entitled to deduction under section 80P(2)(a)(i) - Therefore, if the investments are out of compulsions under the relevant Rules, necessarily it forms part of assessee’s business which would entail the benefit of deduction under section 80P(2)(a)(i) of the Act. For the aforesaid examination of the matter, the issue raised in ground No. 6 is restored to the files of the AO. Even interest earned on deposits with cooperative banks is taxed u/s 56 of the Act under 'income from other sources', the Appellant must be eligible to claim deduction u/s 57(iii) of the Act in respect of cost of funds and proportionate administrative and other expenses - We find that this contention of the assessee is covered by the Order of M/s. Deepa Credit Co-operative Society Ltd. [2023 (12) TMI 1326 - ITAT BANGALORE] as followed the dictum laid down in the case of Totgars Co-operative Sale Society Ltd., [2015 (4) TMI 829 - KARNATAKA HIGH COURT] wherein restored the matter to the AO. The AO is directed to calculate the cost of funds for earning the interest income which has to be assessed under section 56 of the Act and allow the same as deduction under section 57 - thus we restore the matter to the AO. The AO is directed to follow the dictum laid down in the judicial pronouncement cited supra and take a decision in accordance with law - ground No. 7 is allowed for statistical purposes. 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 SocietiesThe 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 BanksThe 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 DepositsThe 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 ExpensesThe 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.