2025 (11) TMI 1506 - AT - Income Tax

Deduction under Section 80P(2)(a)(i) allowed to Souharda credit society, nominal members also qualify as members

ITAT Bangalore dismissed the Revenue's appeals and upheld the order of CIT(A) allowing deduction under s.80P(2)(a)(i) to the assessee, a credit society ... Deduction u/s 80P(2)(a)(i) - assessee is registered under the Karnataka State Souharda Sahakari Act, 1997 - principle of mutuality between the regular / normal members and nominal members - as noted functioning of the society is mainly based on the principle of mutuality wherein each and every member does not have equal and identical rights and participation in the business of the society - AO has classified members into two categories viz., regular/normal and nominal members HELD THAT:- On going through the above observation of the CIT(A) and relying on the judgment of Swabhimani Souharda Credit Cooperative Ltd., V. Government of India [2020 (1) TMI 831 - KARNATAKA HIGH COURT] in which it has been held that assessee registered under the Karnataka State Souharda Sahakari Act, 1997 shall be equally treated as registered under Karnataka Co-operative Society Act for the income tax purpose. Since assessee satisfied the provision of section 80P(2)(a)(i) of the Act therefore it cannot be deprived for the eligibility of deduction under section 80P(2)(a)(i) of the Act since the assessee is fulfilling the requirement of section. Merely there are two categories of members viz., regular/normal and nominal members. Member has been defined in section 2(r) of the Karnataka State Souharda Sahakari Act, 1997 in which nominal members have also been included. Therefore, the for purpose of income tax, nominal members cannot be treated separately for deduction under section 80P(2)(a)(i) of the Act. Accordingly, we hold that learned CIT(A) has rightly allowed deduction u/s 80P(2)(a)(i) of the Act on the operational income. We do not find any infirmity in the Order of learned CIT(A). Appeals of the Revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a society registered under the Karnataka Souharda Sahakari Act, 1997 and carrying on the business of providing credit facilities to its members is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, notwithstanding section 80P(4). 2. Whether nominal/associate members admitted under the Karnataka Souharda Sahakari Act, 1997 (including where nominal members exist or are alleged to exceed a specified proportion) must be treated as non-members for the purpose of section 80P(2)(a)(i), thereby disallowing deduction in proportion to transactions with such persons. 3. Whether interest income earned from deposits/investments (with banks, co-operative societies or others) constitutes eligible 'profits and gains of business attributable to providing credit facilities to members' under section 80P(2)(a)(i), or is 'other income' not eligible for deduction. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Eligibility of a Souharda-registered society for deduction under section 80P(2)(a)(i) Legal framework: Section 80P(2)(a)(i) allows deduction of the whole of profits and gains of business attributable to carrying on the business of banking or providing credit facilities to members of a co-operative society. Section 80P(4) (inserted by Finance Act, 2006) excludes 'co-operative banks' except primary agricultural credit societies and primary co-operative agricultural and rural development banks, with meanings drawn from Part V of the Banking Regulation Act, 1949. Precedent treatment: The tribunal relied on Karnataka High Court decisions holding entities registered under the Karnataka Souharda Sahakari Act, 1997 fit the definition of 'co-operative society' for Income-tax Act purposes, and on Supreme Court authority (Mavilayi) which held section 80P(2)(a)(i) should be given a liberal reading and entitlement to deduction where activity qualifies and is carried on with members. Interpretation and reasoning: The Court examined the objects and bye-laws showing the society's primary business is providing credit to members. It accepted the High Court rulings that Souharda-registered entities fall within the Income-tax definition of 'co-operative society.' Section 80P(4) excludes only entities that are 'co-operative banks' as per Part V of the Banking Regulation Act; where a society is not such a co-operative bank but provides credit to its members, section 80P(2)(a)(i) applies. Deduction is therefore available for operational profits from providing credit to members. Ratio vs. Obiter: Ratio - a society registered under the Karnataka Souharda Sahakari Act, 1997 and carrying on the business of providing credit to its members (and not falling within the Part V 'co-operative bank' exclusion) is eligible for deduction under section 80P(2)(a)(i). Obiter - observations on the legislative purpose of section 80P being benevolent and read liberally (derived from Mavilayi) serve as contextual support. Conclusion: Deduction under section 80P(2)(a)(i) is available to the assessee for profits attributable to providing credit facilities to its members, since it is a cooperative society under section 2(19) and not a co-operative bank excluded by section 80P(4). ISSUE-WISE DETAILED ANALYSIS - Issue 2: Treatment of nominal/associate members and alleged excess above 15% cap Legal framework: Membership definitions in the Karnataka Souharda Sahakari Act, 1997 include 'nominal members' (sec.2(r) and sec.21A). The Act specifies rights and limitations of nominal members (no share in profits/assets, no voting/management rights, limited duration) and, as argued, does not impose the claimed 15% cap within the state Act's text relied upon by the AO. Precedent treatment: The Supreme Court in Mavilayi held that deduction under section 80P(2)(a)(i) must be allowed irrespective of the technical status of members if members are recognized by the relevant state Act; where loans are given to non-members, profits attributable to such loans cannot be deducted. Karnataka High Court decisions held Souharda societies qualify as co-operative societies for section 80P. Interpretation and reasoning: The Tribunal examined the statutory definition of 'member' under the Karnataka Souharda Sahakari Act and found nominal members are expressly included. The Tribunal accepted the assessee's factual showing that nominal members were 0.52% for AY 2017-18 and nil for AY 2018-19, so no material excess existed. The Court held that where the state Act recognizes nominal members, transactions with such members are transactions with members for section 80P purposes, applying Mavilayi's principle. The AO's contention that excess admission of nominal members (claimed 15% cap) violated the state law and converted transactions into non-member transactions was not substantiated on the record and did not arise from the AO's order as framed. Ratio vs. Obiter: Ratio - nominal members recognized by the relevant state Act are to be treated as members for the purpose of section 80P(2)(a)(i); mere categorization as 'nominal' does not automatically convert transactions into non-member transactions. Obiter - discussion of alleged statutory caps (15%) under local law where not shown in the cited provisions and where factual percentages are minimal. Conclusion: Transactions with nominal members recognized under the Karnataka Souharda Sahakari Act are within the ambit of member transactions for section 80P(2)(a)(i); the assessee's nominal membership proportion did not warrant treating transactions as with non-members and did not disentitle the deduction. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Deductibility of interest/investment income as operational income under section 80P(2)(a)(i) Legal framework: Section 80P(2)(a)(i) permits deduction for profits and gains attributable to eligible activities (providing credit facilities to members). Totgars and related authority treat non-operational receipts (e.g., interest on investments) as 'other income' not eligible for deduction under section 80P(2)(a)(i). Precedent treatment: Both Totgars and the Supreme Court's direction in Mavilayi were considered. Mavilayi permits deduction only in respect of eligible activities carried on with members and excludes profits attributable to loans to non-members; Totgars distinguishes operational business receipts from other income like interest on investments. Interpretation and reasoning: The Court accepted the CIT(A)'s analysis that interest income from deposits/investments held with other cooperative societies, scheduled banks and institutions - where those recipients are not members - is not operational income from providing credit to the assessee's members and thus does not qualify for deduction under section 80P(2)(a)(i). Even if such income derived from surplus funds, that would not automatically render it eligible for deduction: only income attributable to eligible activities carried on with members qualifies. Ratio vs. Obiter: Ratio - interest and investment income earned from non-member entities are 'other income' and not deductible under section 80P(2)(a)(i); analysis follows established precedents (Totgars, Mavilayi). Obiter - alternative reasoning that source of funds being surplus does not convert investment income into eligible business income. Conclusion: Deduction under section 80P(2)(a)(i) is limited to profits attributable to providing credit facilities to members; interest/investment income from non-member institutions is not deductible. OVERALL CONCLUSIONS 1. A co-operative society registered under the Karnataka Souharda Sahakari Act, 1997 and carrying on the business of providing credit facilities to members (and not a co-operative bank excluded by section 80P(4)) qualifies for deduction under section 80P(2)(a)(i) in respect of operational profits attributable to that activity. 2. Nominal members expressly recognized by the state Act are to be treated as members for section 80P purposes; absent material non-compliance or factual excess that converts dealings into non-member transactions, the presence of nominal members does not bar the deduction (and in the present facts nominal members were negligible or nil). 3. Interest/investment income from deposits placed with non-member banks or institutions does not constitute operational income from providing credit facilities to members and is not eligible for deduction under section 80P(2)(a)(i). Result: The Revenue's appeals were dismissed and the CIT(A)'s allowance of deduction on operational income was upheld subject to the limits in law concerning non-member transactions and non-operational income.