2025 (6) TMI 635

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.... Class 'A' regular member Class 'B' associate member Class 'C' nominal member Total number of members 2197 2522 3663 Right to Vote Yes No No Right in share profit Yes Yes No Dividend Right Yes Yes No Right to participate in activity Yes Yes Yes 4. The assessee for the year under consideration declared gross total income of Rs. 1,76,24,174/- which consist of business income of Rs. 1,75,65,121/- and income from house property of Rs. 59,053/- only. The entire gross total income of Rs. 1,76,24,174/- claimed as deduction under section 80P(2)(a)(i) of the Act. 5. In the assessment proceeding, the AO found that the assessee is catering to the different classes of members having different rights with regard to participate in the share profit and dividend. Therefore, the essential feature, i.e. the concept of mutuality, is missing in the case of the assessee, hence the assessee is not eligible to claim the benefit of the provision of section 80P(2)(a)(i) of the Act. The AO in this regard referred to and placed heavy reliance on the judgment of Hon'ble Supreme Court in the case of Citizen Cooperative Society Ltd vs. ACI....

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..... The assessee emphasized that membership, as per the Act (KCSA), includes nominal and associate members, and thus, the restriction on voting rights does not affect their participation in the society's activities. The assessee contended that there was no violation of the KCSA or any deviations from the bye-laws. 13. Regarding judgment of Hon'ble Supreme Court in the case of M/s. Citizen Co-operative Society Ltd.(supra), the assessee clarified that the ruling is not applicable on given facts, as that case pertained to a society formed under a different state Act and involved transactions with the general public, thereby violating the principles of mutuality. In contrast, the assessee society strictly follows the principle of mutuality and engages only with its members. It was also highlighted that the Income Tax Act has not been amended to reflect any change in the treatment of such co-operative societies, indicating the government's intent not to penalize compliant societies. 14. Further, the assessee pointed out that the issue of deduction under section 80P(2)(a)(i) had already been settled in its favor for earlier assessment years (AYs 2009-10 and 2010-11) by the ld. CI....

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.... and section 40(a)(i) disallowances directed the AO to allow the assessee's claim after considering assessee submission. 21. Being aggrieved by the order of the learned CIT(A) the Revenue is in appeal before us 22. The learned DR before us relied on the order of this tribunal in the case of Primary Agricultural Credit Society Ltd vs. ITO in ITA No. 947/Bang/2024 dated 3rd July 2024. As per the learned DR the principles of mutuality in the given facts and circumstances were missing. Accordingly, the learned DR contended that the assessee is not eligible for deduction under section 80 P of the Act. 23. On the other hand, the learned AR before us submitted that the presence of Category 'C' members i.e. nominal or associate members, who do not participate in the profits of the respondent assessee, does not impact or breach the principle of mutuality. It is submitted that as per section 18 of the Karnataka Cooperative Societies Act, 1959 (KCSA), a cooperative society is legally allowed to admit nominal and associate members. The law itself clearly lays out the distinctions that nominal members cannot hold shares or participate in the profits or assets of the society and cannot ....

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....e core issue is whether the society is entitled to claim a deduction under section 80P(2)(a)(i) of the Act, which gives tax relief to cooperative societies engaged in providing credit facilities to their members. The 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. The AO had relied on an earlier ruling of Hon'ble Supreme Court in the case of Citizen Cooperative Society(supra) to deny the deduction, claiming that business with non-profit-sharing members disqualified the society from the benefit. 26.1 However, 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 (supra) case was based on a different state law that did not allo....