2018 (8) TMI 273 - AT - Income Tax

Denial of exemption under section 80P - credit facilities extended to nominal members far exceeds regular members, and therefore, principle of mutuality has been broken - Held that - In the present case, the nominal members are members as provided in the Act and that deposits received and loan advanced to the nominal cannot be treated as from non-members or from public and in the nature of banking business. That being so, then, an assessee engaged in primary agriculture activities and providing credit facilities and agriculture facilities to the farmer-members of a particular region, claim of deduction under section 80P(2) cannot be denied. It is not denied by the Revenue that the activities of the assessee society are of primary agriculture activities. Competent authority has also recognized the assessee as primary agriculture credit society. In the earlier assessment year also, Revenue has accepted this fact and allowed the claim of the assessee - We allow the claim of the assessee and direct the ld.AO to re-compute income of the assessee by allowing claim under section 80P(2)(4) - Decided in favour of assessee

Summary

Issues:
- Denial of exemption under section 80P of the Income Tax Act based on the principle of mutuality.
- Interpretation of the term "member" in the context of credit societies.
- Applicability of sub-section (4) of section 80P to primary agricultural credit societies.
- Distinction between regular and nominal members for claiming deductions under section 80P.

Analysis:
The appeal was against the denial of exemption under section 80P of the Income Tax Act, primarily due to the alleged breach of the principle of mutuality. The Assessing Officer (AO) contended that the credit facilities provided to nominal members exceeded those provided to regular members, indicating a profit motive and a breakdown of mutuality. The AO relied on a judgment of the Hon'ble Supreme Court in a different case to disallow the claim. The appellant, a primary agricultural credit society, argued that it was entitled to the exemption under sub-section (4) of section 80P. The appellant highlighted that the Income Tax Act did not define "member" and emphasized the broader interpretation of the term as per the State Act. The appellant also distinguished its case from the Supreme Court judgment cited by the AO, emphasizing the nature of its society and the recognition it had received as a primary agriculture credit society.

The Commissioner of Income Tax (Appeals) considered the submissions of both parties. It was established that the appellant was indeed a primary agricultural credit society registered under the Gujarat Cooperative Societies Act, engaged in providing credit facilities to farmers. The CIT(A) noted the absence of a specific definition of "member" in the Income Tax Act and acknowledged the broader interpretation provided in the State Act. The CIT(A) found in favor of the appellant, emphasizing the appellant's activities in primary agriculture and the recognition received as a primary agriculture credit society. The CIT(A) concluded that the denial of the claim under section 80P(2) was not justified, directing the AO to re-compute the income by allowing the claim under section 80P(2)(4) of the Act.

In the final judgment, the Tribunal allowed the appeal of the appellant, highlighting the entitlement of the appellant to the deduction under section 80P(2)(4) as a primary agricultural credit society. The Tribunal emphasized the lack of distinction between regular and nominal members in the Income Tax Act and the recognition of nominal members as part of the society as per the State Act. The Tribunal found the reasoning of the Revenue authorities unconvincing and directed the AO to re-compute the income by allowing the claim under section 80P(2)(4) of the Act.