TaxTMI 
TaxTMI 
2026 (5) TMI 1839
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....appeal relates to levy of interest under section 234B of the Act which is consequential in nature and the same does not require any sperate adjudication. Hence, Ground No. 5 is dismissed as infructuous. 4. The effective issue raised by the assessee through Ground Nos. 2 to 4 are that the learned CIT(A) erred in directing the AO to disallow the deduction under section 80P(2)(a)(i) of the Act in respect of income attributable to 'C' class members. 5. The facts in brief are that the assessee is a primary agricultural society. As per the bye-laws, the assessee society can have 4 categories of members which are detailed as under: - A Class Member: These are permanent/regular members operating in the jurisdictional area of the assessee society. - B class member: Capital by state Government - C Class Member: Nominal Members - D Class Member: Associate Member 5.1 During the year under dispute, the assessee society has A, C and D class members i.e. Regular, Nominal and Associate members. The total members as stood at the end of the year is 5761 which comprises 1687 regular members, 4070 nominal members and 4 associate members. The AO note....
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....erned by the provisions of the Karnataka Co-operative Societies Act, 1959 and the rules framed thereunder. The bye-laws of the society, which are duly approved by the Registrar of Co-operative Societies, specifically permit admission of nominal and associate members. Such admission is not a "carved out" category as alleged in the case of Citizen Co-operative Society Ltd., but is expressly recognized under the statute itself. Section 2(f) read with section 18 of the Karnataka Co-operative Societies Act clearly includes nominal and associate members within the definition and framework of membership. Therefore, the very foundation on which the Hon'ble Supreme Court proceeded in Citizen Co-operative Society Ltd. does not exist in the present case. 5.6 It is further submitted that as per the bye-laws, nominal and associate members do not enjoy full voting rights or rights in profits and assets, but they are nevertheless members of the society for the purpose of availing credit facilities within the regulatory framework. The society operates strictly within its notified area of operation and extends credit facilities only to its members, including nominal and associate members, in....
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....l conditions of section 80P(2)(a)(i) of the Act are fully satisfied. 5.11 In view of the above factual and legal position, it is respectfully submitted that the decision in Citizen Co-operative Society Ltd. is clearly distinguishable and not applicable to the present case. The assessee is entitled to deduction u/s 80P(2)(a)(i) of the Act and the proposed disallowance deserves to be dropped. 5.12 The AO considered the submissions of the assessee, however, found that the same are not acceptable. The AO observed that the assessee society has structured its membership into different categories, namely A class (regular members), and C and D class (nominal and associate members). The regular members alone enjoy full rights such as voting rights, participation in administration and entitlement to dividend. On the other hand, the nominal and associate members are not entitled to voting rights, cannot participate in management, and are not eligible to share in profits of the society. Thus, there is a clear distinction in rights and obligations among members. 5.13 The AO held that the concept of mutuality requires complete identity between contributors and participants. In the prese....
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....uction under section 80P of the Act. The AO observed that the facts of the assessee are similar, as the assessee has admitted a large number of nominal members who are not entitled to full membership rights but are used for accepting deposits and granting loans. 5.18 The AO further noted that the number of nominal members is very high compared to regular members and exceeds the permissible limits of 15% of the regular member as prescribed under the relevant Co-operative Societies Act. This indicates violation of statutory provisions and strengthens the conclusion that the assessee is not functioning as a genuine co-operative society. 5.19 The AO also observed from the details furnished that nominal members cannot subscribe to shares in the same manner as regular members and are not allowed to participate in administration or access full financial information of the society. This clearly establishes that there is no equality among members and hence the principle of mutuality is absent. 5.20 In view of the above discussion, the AO concluded that the assessee society does not satisfy the basic condition of mutuality and is engaged in activities akin to a finance business by d....
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....see also submitted that the AO has failed to consider several recent judicial decisions where it has been held that the decision of the Hon'ble Supreme Court in Citizen Co-operative Society Ltd. is distinguishable in the case of primary credit co-operative societies like the assessee. 7.5 Without prejudice, the assessee argued that even if nominal members are assumed not to be "members", the deduction u/s 80P should have been restricted only to the proportion of transactions relating to such members and not denied in full. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of Quepem Urban Co-operative Credit Society Ltd. in ITA Nos. 22 to 24 of 2015, wherein proportionate disallowance was considered. 7.6 However, the learned CIT(A) rejected the main argument of the assessee but allowed the alternative plea of disallowances of section 80P(2) of the Act to the income proportionate to nominal members only. The relevant finding of the learned CIT(A) reads as follows: 5.3.2. Out of total 5,761 members of the appellant society, the class 'A' members are 1,687 i.e. 29.28% of the total members. There is said to be no member in cl....
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....t up to the notice of the authorities cited, hence the benefit of exemption u/s 80P(2) has to be allowed/disallowed strictly relying on the statute and law of interpretation laid down by the Hon'ble Supreme Court in 'Dilip Kumar' (supra) 5.3.6. The appellant has taken an alternate plea vide the ground no. 8 as follows: "Without prejudice to the above, even if it is accepted, for the sake of argument, that the "nominal members" are not to be treated as "Member", the deduction u/s 80P should have been denied only to the proportionate extent of dealings with such nominal members, as held by the Hon'ble Bombay High Court in the case of M/s Quepem Urban Co Op Credit Credit Society Ltd in ITA No : 22 to 24 of 2015 ; Order dated : 17-04-2015. The learned AO has erred in disallowing the claim of deduction u/s 80P in entirety." 5.3.7. In view of the foregoing discussion from para 5.3.1 to 5.3.5 and the alternate plea taken by the appellant as reproduced in para 5.3.6; the AO is directed to re-compute and restrict the disallowance u/s 80P to the extent of income attributable and received by the appellant from its members in class 'C' during ....
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....with such nominal members disentitle the assessee from claiming deduction u/s 80P(2)(a)(i) of the Act. 11. We have heard the rival contentions of both the parties and perused the materials available on record. The short controversy before us is whether the assessee society is eligible for deduction u/s 80P(2)(a)(i) of the Act on income arising from credit facilities provided to its nominal members (class 'C' members). The AO denied the claim mainly on the ground that the nominal members do not have voting rights, are not entitled to participate in the management of the society and are not entitled to share in the profits. The AO further held that the assessee had violated the provisions of the Karnataka Co-operative Societies Act, 1959 and that the case was covered by the decision of the Hon'ble Supreme Court in the case of Citizen Co-operative Society Ltd. reported in 397 ITR 1. The Ld. CIT(A), while not accepting the main plea of the assessee, directed the AO to restrict the disallowance only to the income attributable to class 'C' members. The relevant facts, including the membership pattern, the AO's reasoning, the assessee's submissions and the f....
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....the society. (3) An associate member may hold shares but shall not be entitled to become an [office bearer] of the society. (4) Save as provided in this section, a nominal or associate member shall have such privileges and rights of a member and be subject to such liabilities of a member, as may be specified in the bye-laws of the society. 11.2 From the perusal of the above, it is transpired that the proviso to section 18, after amendment, places restriction on the number of associate members and provides that the number of associate members shall not exceed 15% of the total regular members. The said restriction is not on nominal members. In the present case, the associate members are only 4 as against 1,687 regular members. Therefore, even on facts, the number of associate members is far below the prescribed statutory ceiling. Once this position is accepted, the very foundation of the AO's allegation that there is violation of the State Co-operative law does not survive. The Ld. CIT(A) has also noticed that class 'D'/associate members are only 4 and constitute only a minuscule portion of the total membership. However, the Ld. CIT(A) proceeded to up....
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....ember into a non-member. The State legislature itself has created different classes of members with different rights and restrictions. A regular member may have full voting rights and management rights. A nominal member may have limited rights. An associate member may also have restricted rights. But the absence of complete rights does not mean that such persons are not members, when the State Act and the bye-laws recognize them as members. The Income-tax authorities cannot sit in judgment over the wisdom of the State legislature or rewrite the definition of membership for the purpose of section 80P of the Act. 11.6 We also find merit in the submission of the assessee that the decision of the Hon'ble Supreme Court in Citizen Co-operative Society Ltd., in our humble understanding, has been wrongly applied by the lower authorities. In Citizen Co-operative Society Ltd., the Hon'ble Supreme Court found that the society was functioning in violation of the concerned co-operative law. The society had carved out a class of nominal members in a manner not contemplated by law and was also dealing with persons who were not genuine members. In that factual background, the deduction ....
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....rpose of deduction under section 80P(2)(a)(i). 47. Further, unlike the facts in Citizen Cooperative Society Ltd. (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows: "59. Restrictions on loans .- (1) A society shall not make a loan to any person or a society other than a member: Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank. Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society. (2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit. (3) Granting of loans to members or to non-members under sub- section (2) and recovery thereof shall be in the manner as may be specified by the Registrar." Thus, the giving of loans by a primary agricultural credit society to non- members is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra). 11.7 In the present case, there is no finding that the assessee has advanced loans to the general public without admitt....
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....se nominal members do not have voting rights or profit- sharing rights. In the context of deduction u/s 80P(2)(a)(i) of the Act, the primary test is whether the assessee is a co-operative society engaged in the business of banking or providing credit facilities to its members. The doctrine of mutuality may be relevant in a given case where the society deals with outsiders or carries on activities contrary to its objects and governing statute. But where the persons with whom the assessee deal are admitted as members under the State Act and the bye-laws, the deduction cannot be denied merely by applying a general test of mutuality detached from the statutory scheme of section 80P of the Act. The Hon'ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. has clarified this position and has held that the Revenue authorities must examine the facts in the light of the State Act and not merely deny deduction on the ground that nominal members have limited rights. 11.11 In view of the above discussion, we hold that the nominal members/class 'C' members of the assessee society cannot be treated as non-members for the purpose of section 80P(2)(a)(i) of the Act merely bec....
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....ission at length. The crux of the argument advance by the assessee is that a major part of deposits or investments made with SCDCC Bank are idle surplus funds but were made in compliance with mandatory SLR requirement of the Karnataka Cooperative Societies Act (KCS Act). The assessee submitted that as per the KCS Act certain mandatory deposits or investments were required to be made which are as follows: - 25% of Total deposit accepted from the members required to be kept as FD with district cooperative bank. - A minimum of 25% of net profit and credited it to reserve fund account every year shall be invested in designated term deposits with district cooperative bank. - 3% of Total deposit accepted from the members as Cash Reserve should be held in saving bank/current bank account with Banks. - In case of Primary Agricultural Society who avail refinance from District cooperative bank for the purpose of relending to the member, required to investment 5% of refinance amount in the equity share of the Bank. 15.3 The assessee further submitted that sometimes it has surplus funds which are not immediately required for lending, they are invested int....
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....purposes is assessable as "income from other sources" u/s 56 of the Act and cannot be treated as profits and gains attributable to the business activity of the society. 15.11 Regarding the contention of the assessee that such deposits were made during normal business operations and that it was required to keep funds in banks as per KCS Act guidelines for SLR requirement, the AO rejected this contention by relying on the decision of the Hon'ble Supreme Court in Southern Technologies Ltd. v. JCIT [2010] 187 Taxman 346 (SC), wherein it was held that RBI directions do not override the provisions of the Income-tax Act, 1961. 15.12 Accordingly, the AO held that the interest income earned by the assessee from deposits with co-operative banks and other financial institutions was not operational income attributable to the activity of providing credit facilities to members. Therefore, the AO treated such interest income as "income from other sources" u/s 56 of the Act and denied deduction u/s 80P(2)(a)(i) of the Act. 15.13 The AO also rejected the alternative plea of the assessee for allowances of deduction of expenditure under section 57 of the Act. The AO held that the assesse....
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.... other short term deposit was made during ordinary course of the business to avoid keeping surplus fund idle when not immediately required for lending. However the AO disallowed the claim of deduction under section 80P of the Act on impugned interest and dividend income. 19.1 The views of the AO are that such interest income from banks or cooperative banks cannot be said to be attributed to the carrying on banking business or providing credit facility as it is not arising from the members. Therefore, such income shall not be eligible for deduction under section 80P(2)(a)(i) of the Act. The views of the Revenue authorities are largely based on the ruling of Hon'ble Supreme Court in the case of Totgars, Co-Operative Sales Society Ltd Vs. ITO in Civil Appeal Nos. 1622 to 1629 of 2010, dated 8th February 2010, reported in 322 ITR 283/ 188 Taxman 282. 19.2 Going through the above stated judgment of Hon'ble Supreme Court, we note the assessee i.e. Totgars, Co-Operative Sales Society Ltd at the relevant time (A.Y. 1991-92 to 1999-2000) was engaged in two activities viz marketing of agricultural produce of its members and providing credit facilities to them. The assessment fo....
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....n was not required immediately for business purposes, it was invested in specified securities. The question, before us, is - whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under section 28 of the Act? In our view, such interest income would come in the category of "Income from other sources", hence, such interest income would be taxable under section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain incomes". The headnote to section 80P indicates that the said section deals with deductions in respect of income of co-operative Societies. Section 80P(1), inter alia, states that where the gross total income of a co-operative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-Society. An income, which is attributable to any of the specified activities in section 80P(2) of the Act, would be eligible for ....
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....a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa ) to section 80HHC, section 80HHD(3) and section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject-matter. For example, section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of section 80HHC is, therefore, different from the scope of section 80P of the Act, which deals with deduction in respect of income of co-operative Societies. Even Explanation (baa) to section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to section 80HHC, therefore, cannot be compared with the words used in section 80P of the Act which grants deduction in respect of "the whole of the amount of profits and gains of business". A number of judgments were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of section 80P of the Act. We find no merit because all the judg....
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....edit Cooperative Ltd (hereafter-TMSCC) was engaged only in the business of providing credit facilities to members unlike the assessee i.e. Totgars Co-operative Sale Society Ltd which was also engaged in marketing of agricultural produce of the members as well as providing credit facilities. For the A.Y. 2009-10, the assessee TMSCC earned interest income on short term deposit with the M/s Allahabad Bank and M/s Axis Bank and the same was included in the profit claimed for the deduction under section 80P(2)(a)(i) of the Act. The learned CIT(A) disallowed the deduction to the extent of aforesaid interest income and coordinate bench of the Tribunal confirmed the disallowances by following the ratio of the Hon'ble Supreme Court in case of Totgars Co-operative Sale Society Ltd. (supra). However, the Hon'ble High Court found that the assessee being cooperative society is only engaged in the business of providing credit facility to the members and other than that it does not engage in any other business. It was observed that the word used in the provision of section 80P of the Act is the profit and gains attributable to the business of providing credit facilities. The Hon'ble H....
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....followed the principle laid down Tumkur Merchants Souharda Credit Cooperative Ltd(supra) in the subsequent judgment dated 19th February 2018 in the case of Lalitamba Pattina Souharda Sahakari Niyamita vs. ITO in ITA No. 100004 of 2018. 19.9 We also find that the identical view was taken by the Hon'ble High Court of Andhra Pradesh in the case of Commissioner of Income-tax-III, Hyderabad vs. Andhra Pradesh State Cooperative Bank Ltd. dated 7th June 2011 reported in 12 taxmann.com 66. This decision of Hon'ble Andhra High Court was passed after considering the ratio of the Hon'ble Supreme Court in Totgars Co-operative Sale Society(supra) and before the ratio of the Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd(supra). The relevant extract stands as under: 11. Does section 80P(2)(a) of the Act make a distinction between income received by a cooperative bank from statutory deposits and the income from non-statutory deposit of surplus funds? The answer must be in the negative. The income earned by the cooperative bank either by deposit of the prescribed percentage of its reserves or by deposit of their surplus funds is exempte....
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....uld cease to form part of its profits and gains attributable to its business of providing credit facilities to its members? In our view that question must be answered in the negative, since we cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount [the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi-State Co-operative Societies Act, or permitted by Section 64 of the said Act. In other words, it dealt with the surplus profit in a manner envisaged under the regulatory Statute that regulated, and thereby legitimized, its business of providing credit facilities to its members. Under those circumstances, if the assessee managed to earn some additional income by way of interest on the deposits made, it could only be seen as an enhancement of the profits and gains....
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.... Souharda Credit Cooperative Ltd. v. ITO [2015] 55 taxmann.com 447/ 230 Taxman 309 (Kar) identical issue was considered and it was held that where Cooperative Society was engaged in the business of providing credit facilities to its members, they deposited excess amount for short term in banks, interest earned was entitled to be deducted under section 80P of the Act. 19.12 At this point, we also find it pertinent to refer the decision of Hon'ble Gujarat High Court in the case of State Bank of India (SBI) vs. CIT reported [2016] 72 taxmann.com 64 wherein ratio of Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd(supra) was distinguished by holding the ratio of the Hon'ble Supreme Court in Totgars Co-operative Sale Society(supra) was properly interpreted. The relevant finding of the Hon'ble Gujarat High Court in this respect reads as under: 13. In the opinion of this court, in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall in any of the categories mentioned under section 80P(2)(a) of the Act. In the case of Totgars Co-operative Sale Soci....
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....ed in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law. 19.13 From the preceding discussion of the ratio laid down by the Hon'ble Supreme Court, High Court of Karnataka, Andhra Pradesh, Kerala, Culutta and Gujarat, we note the dispute of whether the interest income earned from deposit or investment of surplus/idle fund out of profit & gains or capital by the cooperative societies engaged in providing credit facilities to the members is squarely covered in favour of the assessee by the ruling of Jurisdictional High Court in the cases of Tumkur Merchants Souharda Credit Cooperative Ltd(supra), Guttigedarara Credit Co-operative Society Ltd. and Lalitamba Pattina Souharda Sahakari Niyamita vs. ITO as well as by the decision of Hon'ble Kerala High court and Calcutta high court as mentioned in preceding paras. 19.14 It well settled position of the law that the Income-tax Appellate Tribunal, though the final fact-finding authority under the Income-tax Act, functions within the judicial hierarchy established under the Constitution. Under Articles 226 and 227 of the Constit....
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....ld also be conducive to their smooth working: otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer. We, therefor, hold that the law declared by the highest court in the State is binding on authorities or tribunals under its supreintendence, and that they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. If that be so, the notice issued by the authority signifying the launching of proceedings contrary to the law laid down by the High Court would be in. valid and the proceedings themselves would be without jurisdiction. 19.16 Further, the binding nature of Hon'ble Jurisdictional High Court decisions on the Tribunal has been reiterated in CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 by the Hon'ble Bombay High Court, wherein it was held that the Tribunal is bound by the decision of the Hon'ble High Court within whose jurisdiction it functions. The Hon'ble Court also clarified that decisions of other High Courts have only persuasive value. The relevant finding is extracted below: For deciding whose decision is binding on whom, it is n....
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....inate courts, it is implicit in the power of supervision conferred on a superior Tribunal that the Tribunals subject to its supervision would confirm to the law laid down by it. It is in that view of the matter that the Supreme Court in East India Commercial Co, Ltd. v. Collector of Customs, AIR 1962 SC 1893 (at page 1905) declared : "We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it. ... 19.17 In the absence of a decision of the jurisdictional High Court, the Tribunal may rely upon judgments of other Hon'ble High Courts as persuasive precedents. The Hon'ble Bombay High Court in CIT v. Thana Electricity Supply Ltd. (supra) explained that when conflicting decisions of Hon'ble Non-Jurisdictional High Courts exist, the Tribunal may adopt the view it considers more reasonable. 19.18 Thus, under the constitutional scheme and the doctrine of judicial discipline, a decision of the Hon'ble jurisdictional High Court is binding on the Tribunal, while decisions of other Hon'ble High Courts carry persuasive value and may be followed in the abs....
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.... that decided the case of M.P. Co-operative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital. 19.21 Applying the principle culled out from the elaborate discussion of various judicial pronouncements in the preceding paragraphs of this order, we hold that the assessee is eligible for deduction under section 80P(2)(a)(i) of the Act on the above-compulsory deposit, fixed deposit as well as saving bank interest and dividend income. 19.22 At this juncture it is equally important to note that in several earlier decisions, this Tribunal had taken a view that interest income earned by a co-operative society from deposits placed with banks would not qualify for deduction under section 80P(2)(a)(i) of the Act and the same was liable to be taxed under the head "Income from other sources". Accordingly, the claim of deduction under section 80P(2)(a)(i) in respect of such interest income was rejected in those cases. 19.23 However, the legal position now stands clarified by the judg....