2014 (6) TMI 1057 - HC - Income Tax

Deduction u/s 80P(2)(a)(i) - Assessee is a Cooperative Society - HELD THAT - It is not in dispute that the assessee-The Karnataka State Co-Operative Housing Federation Limited is a co-operative society registered under the Act. It is a federal society the membership of which is open to a co-operative society registered under the Act and not to individuals. However the proviso makes it clear that if an individual is to be admitted as a member of a Federal Society it could be done as a nominal member. The definition of a Member contained under Section 2(f) includes a nominal and an associated member. In order to attract the benefit of deduction in respect of income of a co-operative society what is required is that the assessee claiming benefit should be carrying on the business of banking or providing credit facilities to its members. As an individual could be a nominal member both of a federal society and a co-operative society and if a federal society extends credit facilities to such nominal members the income derived from such business falls within Sub-Section (2)(a)(i) of Section 80P of the Act. Therefore the assessee would be entitled to the benefit of deduction. Therefore the finding recorded by the Tribunal that the assessee is entitled to the said benefit is strictly in accordance with law and it cannot be found fault with. In that view of the matter we do not see any merit in this appeal. Therefore the substantial question of law is answered in favour of the assessee and against the revenue.

Summary

Issues:
- Eligibility of a Cooperative Society for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961
- Interpretation of the term "member" in the context of a Cooperative Society
- Applicability of the proviso to the definition of a Federal Society regarding membership
- Whether a Federal Society can extend credit facilities to individuals who are not direct members of the federation

Analysis:
1. Eligibility for Deduction under Section 80P(2)(a)(i): The Tribunal initially allowed the deduction claimed by the assessee Society under Section 80P(2)(a)(i) of the Income Tax Act. The assessing authority had disallowed the deduction, citing that it is permissible only if the Cooperative Society is engaged in the business of banking or providing credit facility to its members. However, the Tribunal's decision was based on subsequent judgments that overruled previous decisions, leading to the restoration of the deduction claimed by the assessee.

2. Interpretation of "Member" in a Cooperative Society: The revenue contended that the assessee, being a federal society, does not have individual members, as membership is limited to cooperative societies. The definition of a federal society under the Karnataka Co-Operative Societies Act, 1959, restricts membership to cooperative societies, with a provision allowing individuals to be admitted as nominal members. The Tribunal justified its decision based on the inclusion of nominal members in the definition of a member, thereby allowing the assessee to claim the deduction.

3. Applicability of the Proviso to the Definition of a Federal Society: The proviso to the definition of a Federal Society clarifies that nominal members can be treated as members of the Federal Society. This exception allows for individuals to be considered members, albeit not full-fledged ones. The Tribunal's decision was supported by this proviso, enabling the assessee to extend credit facilities to nominal members and claim the deduction under Section 80P(2)(a)(i).

4. Extension of Credit Facilities to Non-Direct Members: The key question raised in the appeal was whether the Tribunal was correct in allowing the deduction to the assessee federation for interest income earned from extending credit facilities to individuals who are not direct members of the federation. The Tribunal's decision was upheld, emphasizing that as per the provisions of the Act and the definition of a member, individuals admitted as nominal members could still be considered members for the purpose of extending credit facilities and claiming the deduction.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision to allow the deduction claimed by the Cooperative Society under Section 80P(2)(a)(i) of the Income Tax Act, based on a comprehensive analysis of the relevant legal provisions and definitions pertaining to membership in a Federal Society.