2020 (5) TMI 163 - AT - Income Tax

Deduction u/s 80P(2) - assessee is a co-operative society registered under Karnataka Co-operative Societies Act, 1959 - denial of deduction u/s 80P(2) as the assessee is in the Banking business accepts the deposits from the general public being C Class nominal members and also lend the funds - whether nominal members are the contributors for earning surplus and does not participate share the sulplus of the society, hence the concept of mutuality cease to exists? - HELD THAT - As decided in M/S. KODAVOOR VYAVASAYA SEVA SAHAKARI SANGHA NIYAMITHA 2019 (8) TMI 1269 - ITAT BANGALORE referring decision rendered by the co-ordinate Bench and the jurisdictional High Court in respect of Members definition and chargeability of interest income under 'income from other sources' . We follow the judicial precedence and restore the entire disputed issue to the file of Assessing Officer to adjudicate afresh in the light of the decision of chargeability of interest income under the head 'income from other sources' and the observations 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. Accordingly, we are of the substantive opinion that the 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 - Assessee's appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Denial of deduction under Section 80P(2) of the Income Tax Act, 1961.
2. Treatment of interest income from deposits.
3. Levy of interest under Section 234B of the Act.
4. Eligibility of nominal members for benefits under Section 80P(2).

Detailed Analysis:

1. Denial of Deduction under Section 80P(2) of the Income Tax Act, 1961:
The assessee, a Primary Agricultural Co-operative Society, claimed deductions under Section 80P(2) of the Act. The Assessing Officer (AO) disallowed the claim, arguing that the society was engaged in banking activities, accepting deposits from nominal members who do not have voting rights or share in the surplus. The AO relied on the Supreme Court's decision in Citizen Co-operative Society Ltd. vs. ACIT. The CIT(A) upheld the AO's decision. However, the Tribunal found that the authorities failed to appreciate that nominal members are considered members under the Karnataka Co-operative Societies Act, 1959, and thus eligible for benefits under Section 80P(2).

2. Treatment of Interest Income from Deposits:
The AO categorized the interest income earned from deposits in Co-operative Banks and other banks as "income from other sources" rather than business income, thus denying the deduction under Section 80P(2). The Tribunal referenced the co-ordinate bench decision in The Jayanagar Co-operative Society Vs. ITO, which held that interest income from investments of surplus funds should be assessed as business income, not income from other sources. The Tribunal directed the AO to re-examine the facts in light of the decisions of the Supreme Court and Karnataka High Court.

3. Levy of Interest under Section 234B of the Act:
The appellant contested the levy of interest under Section 234B, arguing that the computation of interest was not provided regarding the rate, period, and method of calculation. The Tribunal did not provide a detailed analysis on this issue but restored the matter to the AO for reconsideration.

4. Eligibility of Nominal Members for Benefits under Section 80P(2):
The Tribunal emphasized that the definition of "member" under the Karnataka Co-operative Societies Act includes nominal members. It cited decisions from various judicial forums, including the Ahmedabad Bench of ITAT and the Madras High Court, which supported the view that nominal members are eligible for benefits under Section 80P(2). The Tribunal concluded that nominal members should be considered for the benefits of the credit society, restoring the issue to the AO for verification and re-examination.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the eligibility of nominal members and the treatment of interest income in light of judicial precedents. The assessee was also directed to be provided with an adequate opportunity for hearing and to cooperate in submitting the necessary information.