2019 (8) TMI 1269 - AT - Income Tax

Denial of deduction of claim u/s 80P(2) - AO has dealt on the interest income from investment / deposits in Banks whereas the assessee society is engaged in business of carrying on banking and providing credit facilities - HELD THAT - Restore the entire disputed issue to the file of AO to adjudicate afresh in the light of the decision of chargeability of interest income under the head income from other sources and the observations of Hon ble Supreme Court in the case of Totgar s Co-operative Sales Society Ltd. Vs. ITO 2010 (2) TMI 3 - SUPREME COURT and Tumkur Merchants Souharda Credit Co-operative Ltd. 2015 (2) TMI 995 - KARNATAKA HIGH COURT . Whereas in respect of the claim of Nominal Members included in the definition of Member we find support on our view rely on the decision of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT 2018 (8) TMI 273 - ITAT AHMEDABAD and Prin. CIT Vs. S-1308 Ammapet Primary Agricultural Co-operative Bank Ltd. 2019 (1) TMI 116 - MADRAS HIGH COURT which is covered in favour of the assessee Nominal members are also eligible for the Benefits of credit society. Accordingly we restore entire disputed issue to the file of Assessing Officer to grant the benefit to the nominal members and the assessee should be provided adequate opportunity of hearing and co-operate in submitting the information for early disposal of the case and allow the grounds of appeal of the assessee for statistical purposes.

Summary

Issues Involved:
1. Denial of deduction under Section 80P(2) of the Income Tax Act.
2. Classification of interest income from deposits with banks.
3. Definition and eligibility of nominal members for benefits under Section 80P(2).

Detailed Analysis:

Issue 1: Denial of Deduction under Section 80P(2)
The primary issue in the appeals was the denial of the deduction under Section 80P(2)(a)(i) of the Income Tax Act. The assessee, a Primary Agriculture Credit Co-operative Society, claimed this deduction for income earned from providing credit facilities to its members. The Assessing Officer (AO) denied the claim, arguing that the interest income should be assessed under "income from other sources" rather than "business income." The CIT (Appeals) upheld this decision, leading to the appeal to the Tribunal.

Issue 2: Classification of Interest Income
The AO contended that the interest income earned from fixed deposits with Karnataka DCC Bank should be classified as "income from other sources," not "business income." This classification was critical because it determined the applicability of the deduction under Section 80P(2). The Tribunal referred to the decision in the case of The Jayanagar Co-operative Society Vs. ITO, where it was held that interest income from surplus funds invested in short-term deposits should be assessed as "income from other sources." The Tribunal decided to restore this issue to the AO for a fresh decision, considering the judgments of the Hon'ble Supreme Court in The Totgar’s Co-operative Sales Society Ltd. Vs. ITO and the Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd.

Issue 3: Definition and Eligibility of Nominal Members
The Tribunal also addressed whether nominal members of the co-operative society are eligible for benefits under Section 80P(2). The AO had questioned the eligibility of nominal members, suggesting that the society's dealings with them violated the principle of mutuality. The Tribunal referred to the Ahmedabad Bench of ITAT in the case of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT, which held that nominal members are indeed considered members under the co-operative society's bye-laws. The Tribunal also cited the Hon'ble Madras High Court's decision in The Prin. Commissioner of Income Tax Vs. S-1308 Ammapet Primary Agricultural Cooperative Bank Ltd., which supported the inclusion of nominal members for benefits under Section 80P(2).

Conclusion:
The Tribunal restored the entire disputed issue to the AO for fresh adjudication, considering the judicial precedents on the classification of interest income and the eligibility of nominal members. The appeals were allowed for statistical purposes, directing the AO to re-examine the facts and provide the assessee with an opportunity for a fair hearing.

Separate Judgments:
No separate judgments were delivered by different judges; the decision was consolidated and jointly delivered.

Final Order:
The appeals in ITA Nos. 707, 762, 765, 942, 1190 & 1191/Bang/2019 were treated as allowed for statistical purposes. The order was pronounced in the open court on 26th Aug., 2019.