2018 (3) TMI 1807 - AT - Income Tax

Eligibility for deduction u/s. 80P(2)(a)(i) - principles of mutuality - DR submitted that an assessee would be eligible for relief only if it falls within two categories of co-operative banks i.e., 'primary agricultural cooperative society' and 'primary co- operative agricultural and rural development bank' - HELD THAT - AO examined the books of accounts and found that the society had advanced loans to non-voting/non-profit sharing members and earned profit from them. However, the profit was shared only with the voting members/shareholding members and hence, principles of mutuality did not exist among all the classes of members and accordingly held that the assessee is not eligible for deduction u/s. 80P(2)(a)(i) and completed the assessment. These findings have not been disputed. Thus, when the profits of the assessee are not shared with Associate Members as is done with the Members, it is clear that these assessee s case fail on the principles of mutuality. Referring to case of THE CITIZEN CO-OPERATIVE SOCIETY LIMITED, THROUGH ITS MANAGING DIRECTOR, HYDERABAD VERSUS ASSISTANT COMMISSIONER OF INCOME TAX 2017 (8) TMI 536 - SUPREME COURT it is clear that the Hon ble Supreme Court rejected the above assessee s claim holding that the principles of mutuality was missing in that case. Although, both the Members to the transactions of this assessee are the contributors towards surplus, however, the Associate Members are not entitled to the benefits of surplus of the assessee and hence, the principles of mutuality is missing in this case. The assessee cannot be treated as a Co-operative Society meant only for its Members and providing credit facility to its Members and hence they are not entitled to the benefit of section 80P(2)(a)(i) of the Act. The Revenue s above appeal is allowed.

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act.
2. Definition and rights of 'members' vs. 'associate members' in the context of a co-operative society.
3. Applicability of the principles of mutuality.
4. Compliance with the provisions of the State Co-operative Societies Act.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P(2)(a)(i):
The primary issue revolves around whether the assessee, a Primary Agricultural Co-operative Credit Society, is eligible for deduction under Section 80P(2)(a)(i). The Assessing Officer (AO) denied the deduction, arguing that the society engaged in commercial banking activities rather than agricultural activities, thus failing to meet the criteria specified in Section 80P(4). The society earned interest income comparable to commercial banks and charged higher interest rates for loans, which indicated a profit motive rather than an agricultural purpose.

2. Definition and Rights of 'Members' vs. 'Associate Members':
The AO found that the society had advanced loans to 'associate members' (non-voting, non-profit sharing members) and earned profits from them, which were shared only with 'voting members' (shareholding members). The AO argued that 'associate members' do not qualify as 'members' under Section 80P(2)(a)(i) because they lack voting rights, the right to receive dividends, and the right to participate in the general administration of the society. This distinction was supported by the bye-laws of the society and the State Co-operative Societies Act, which define 'associate members' as possessing limited rights and privileges.

3. Applicability of the Principles of Mutuality:
The principle of mutuality requires that the contributors to the surplus are also the participants in the surplus. The AO concluded that since 'associate members' were not entitled to share in the profits, the principle of mutuality did not apply. This was further supported by the Supreme Court's decision in The Citizen Co-operative Society Limited vs. ACIT, which held that the absence of mutuality disqualified the society from claiming deductions under Section 80P(2)(a)(i).

4. Compliance with the Provisions of the State Co-operative Societies Act:
The AO analyzed the provisions of the State Co-operative Societies Act and found that the activities of the society were not in line with the intended purpose of helping agriculturists. The society's activities were deemed commercial, and the distinction between 'members' and 'associate members' was crucial in determining eligibility for deductions. The AO's findings were not disputed, and it was clear that the society's operations did not align with the principles of mutuality as required by the Act.

Conclusion:
The Tribunal upheld the AO's decision, concluding that the society did not qualify for the deduction under Section 80P(2)(a)(i) due to the absence of mutuality and the commercial nature of its activities. The appeal by the Revenue was allowed, and the society was denied the claimed deduction. The judgment emphasized the importance of mutuality and compliance with the specific provisions of the State Co-operative Societies Act in determining eligibility for tax deductions.

Order Pronouncement:
The order was pronounced on Tuesday, the 27th day of March, 2018 at Chennai, allowing the Revenue's appeal.