2025 (6) TMI 635 - AT - Income Tax

Credit cooperative society entitled to section 80P deduction despite having three member classes with different rights

ITAT Bangalore held that a credit cooperative society operating under Karnataka Cooperative Societies Act (KCSA) was entitled to section 80P deduction ... Allowances of deduction claimed u/s 80P - Assessee submitted that it is a credit co-operative society, and its operations were fully compliant with the provisions of the Karnataka Cooperative Societies Act (KCSA) and the bye-laws of the society - Revenue argued that because the society has three classes of members — regular (Class A), associate (Class B), and nominal (Class C) — and only some have rights to profits or voting, the principle of mutuality (that members collectively benefit) is broken, thus denied the deduction, claiming that business with non-profit-sharing members disqualified the society from the benefit HELD THAT:- We find that this reasoning did not hold here because the present assessee operates under the Karnataka Cooperative Societies Act (KCSA), which explicitly allows the inclusion of nominal and associate members. By law, these members may not vote or share profits, but they are still valid members, and the society’s dealings with them fall under the cooperative framework. We note that the Citizen Cooperative [2017 (8) TMI 536 - SUPREME COURT] case was based on a different state law that did not allow nominal members, making the facts and legal background entirely different. Hon’ble Supreme Court’s ruling in the case of Mavilayi Service Cooperative Bank [2021 (1) TMI 488 - SUPREME COURT] has clarified that the eligibility under section 80P should be assessed in the light of the relevant state cooperative law, and under KCSA, the presence of nominal and associate members is lawful and does not break the mutuality principle. Hence, the ground of appeal of the Revenue is hereby dismissed. Eligibility of the interest income from fixed deposits with a cooperative bank - We also set aside this issue to file of the AO to verify mandatory requirement for making FD as per the provision of KCSA if the deposit is found within the limit of mandatory requirement, then interest earned from such deposit be allowed in view of judgment of CIT Vs. Karnataka State Co-operative Apex Bank [2001 (8) TMI 9 - SUPREME COURT] In case, the excess deposit, than the mandatory requirement, is found then the proportionate interest income be excluded from the eligible income but after allowing the corresponding cost as per section 57 of the Act. Rental income, commissions, and small other income heads - We hold that these incomes are not arising from the business of the assessee as envisaged u/s 80P of the Act. Accordingly, we disallow the same. On the disallowance u/s 40(a)(ia) of the Act relating to tax deduction at source (TDS), we note that the assessee’s explanation regarding timing differences needs to be considered before finalizing any disallowance. In view of the above detailed discussion, the grounds of appeal filed by the revenue are by partly allowed for statistical purposes. Appeal of the revenue is partly allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal were:Whether the assessee cooperative society is eligible to claim deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961, given that it has three classes of members (regular, associate, and nominal) with differing rights regarding voting, profit sharing, and dividends, and whether the presence of non-profit-sharing members breaches the principle of mutuality required for such deduction.The tax treatment of various income heads including interest income earned from fixed deposits with a cooperative bank, commission and other miscellaneous receipts, and rental income, in the context of eligibility for deduction under section 80P.The validity of disallowance under section 40(a)(ia) of the Act relating to expenses incurred without deducting tax at source (TDS), particularly in light of the assessee's explanation about timing differences in TDS deduction and remittance.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Eligibility for deduction under section 80P(2)(a)(i) considering the presence of multiple classes of membersRelevant legal framework and precedents: Section 80P(2)(a)(i) provides deduction to cooperative societies engaged in providing credit facilities to their members. The principle of mutuality is essential, meaning the society must operate for the mutual benefit of its members. The Supreme Court judgment in Citizen Cooperative Society Ltd vs. ACIT was relied upon by the Assessing Officer (AO) to deny deduction on the ground that the presence of members who do not share profits or voting rights breaks mutuality. However, the Supreme Court's ruling in Mavilayi Service Cooperative Bank Ltd vs. CIT clarified that the eligibility under section 80P(2)(a)(i) must be assessed in the context of the relevant State Cooperative Societies Act under which the society is registered.Court's interpretation and reasoning: The Tribunal noted that the assessee operates under the Karnataka Cooperative Societies Act (KCSA), which explicitly recognizes three categories of members: regular (Class A), associate (Class B), and nominal (Class C). The KCSA permits nominal and associate members who do not have voting rights or profit-sharing rights, but are still valid members. The Tribunal distinguished the Citizen Cooperative Society Ltd case, which was decided under the Andhra Pradesh Mutually Aided Cooperative Societies Act (MACSA) that does not recognize nominal members, making the facts and legal framework different.Key evidence and findings: The assessee's by-laws and membership structure comply with the KCSA. The society transacts only with its members and does not engage in business with the general public. Earlier assessment years had accepted the deduction under section 80P(2)(a)(i) on similar facts.Application of law to facts: Since the KCSA permits nominal and associate members, their presence does not violate the principle of mutuality. The society's transactions are confined to its members, preserving the mutuality principle required for deduction under section 80P(2)(a)(i).Treatment of competing arguments: The Revenue's argument that the presence of non-profit-sharing members breaks mutuality was rejected on the basis that the law under which the society operates explicitly allows such members. The Tribunal held that the Supreme Court's ruling in Citizen Cooperative Society Ltd is not applicable to the present facts.Conclusion: The Tribunal concluded that the assessee is eligible for deduction under section 80P(2)(a)(i) as the principle of mutuality is intact under the KCSA framework despite the presence of nominal and associate members.Issue 2: Tax treatment of interest income from fixed deposits with a cooperative bankRelevant legal framework and precedents: Section 80P(2)(a)(i) allows deduction for income from providing credit facilities to members. The Supreme Court in CIT vs. Karnataka State Co-operative Apex Bank held that interest income from fixed deposits with cooperative banks is eligible for deduction if the deposits are within mandatory limits prescribed by the relevant cooperative law.Court's interpretation and reasoning: The Tribunal observed that the interest income earned from fixed deposits is incidental to the assessee's business activity of providing credit facilities to members. The Tribunal directed the AO to verify whether the fixed deposits are within the mandatory limits under KCSA. If within limits, the interest income shall be allowed as eligible income under section 80P(2)(a)(i). If excess deposits are found, the proportionate interest income shall be excluded, but corresponding expenses shall be allowed under section 57.Key evidence and findings: The AO had disallowed the entire interest income from fixed deposits as ineligible. The Tribunal found this approach premature without verifying compliance with KCSA provisions.Application of law to facts: The interest income is closely connected to the business of the cooperative society and thus prima facie eligible for deduction, subject to verification of deposit limits.Treatment of competing arguments: The Revenue's disallowance was set aside for verification. The assessee's contention that the interest income is eligible was accepted subject to conditions.Conclusion: The issue was remitted to the AO for verification of FD limits under KCSA, with directions to allow interest income accordingly.Issue 3: Tax treatment of rental income, commission, e-stamp commission, other miscellaneous receiptsRelevant legal framework: Section 80P applies to income earned from business activities with members. Income from renting properties or miscellaneous commissions may not fall within the scope of business income eligible for deduction under section 80P.Court's interpretation and reasoning: The Tribunal held that rental income and other miscellaneous receipts do not arise from the business of providing credit facilities to members. Therefore, such income is not eligible for deduction under section 80P.Key evidence and findings: The AO had taxed rental income under income from other sources or house property, and disallowed deduction under section 24(a). The CIT(A) had directed the AO to consider the assessee's submissions on these heads.Application of law to facts: The Tribunal disallowed the claim of deduction under section 80P for these income heads and confirmed their taxation under appropriate heads.Treatment of competing arguments: The assessee argued these incomes were integral to its objectives and eligible for deduction; the Tribunal rejected this argument.Conclusion: Rental income, commissions, and other miscellaneous receipts are not eligible for deduction under section 80P and are taxable accordingly.Issue 4: Disallowance under section 40(a)(ia) for expenses without TDSRelevant legal framework: Section 40(a)(ia) mandates disallowance of expenses where tax is not deducted at source as required. However, timing differences in TDS deduction and remittance can affect applicability.Court's interpretation and reasoning: The Tribunal noted the assessee's explanation that the disallowance arose due to timing differences and that the expenses were disallowed in an earlier year and claimed correctly in the relevant year.Key evidence and findings: The AO disallowed Rs. 88,680/-; the assessee claimed this was not justified due to timing issues.Application of law to facts: The Tribunal directed that the assessee's explanations be considered before finalizing any disallowance under section 40(a)(ia).Treatment of competing arguments: The Revenue insisted on disallowance; the Tribunal favored a fair consideration of the assessee's submissions.Conclusion: The disallowance under section 40(a)(ia) is to be reconsidered after considering the assessee's explanation.3. SIGNIFICANT HOLDINGS'The assessee operates under the Karnataka Cooperative Societies Act, 1959, which explicitly provides for the existence of nominal and associate members who do not share profits or voting rights but remain valid members. Therefore, the presence of such members does not violate the principle of mutuality essential for claiming deduction under section 80P(2)(a)(i) of the Income Tax Act.''The Supreme Court's ruling in Citizen Cooperative Society Ltd is distinguishable on facts and law, as it was decided under a different state law which did not recognize nominal members, whereas the present case is governed by KCSA.''Interest income earned from fixed deposits with cooperative banks is eligible for deduction under section 80P(2)(a)(i) if such deposits are within the mandatory limits prescribed by the relevant cooperative law. Excess deposits and corresponding interest income should be excluded proportionately, but corresponding expenses allowed under section 57.''Income such as rental receipts, commissions, and miscellaneous receipts not arising from the business of providing credit facilities to members are not eligible for deduction under section 80P and are taxable under their respective heads.''Disallowance under section 40(a)(ia) for expenses without TDS must be considered in light of the assessee's explanation regarding timing differences in deduction and remittance of tax.'The Tribunal's final determinations were:The Revenue's appeal challenging the deduction under section 80P(2)(a)(i) on grounds of breach of mutuality due to presence of nominal and associate members is dismissed.The issue of interest income from fixed deposits is remitted to the AO for verification and appropriate allowance or disallowance consistent with KCSA and Supreme Court precedent.Rental income, commissions, and other miscellaneous receipts are not eligible for deduction under section 80P and are taxable accordingly.The disallowance under section 40(a)(ia) is to be reconsidered after considering the assessee's submissions.The appeal of the Revenue is partly allowed for statistical purposes.