2020 (7) TMI 192 - AT - Income Tax

Exemption u/s 80P(2)(d) - society has interest income on fixed deposits with Co-operative Banks and Karnataka State Co-operative Apex Bank Ltd. - as per AO interest earned on surplus funds are taxable and not eligible for deduction under Section 80P(2)(d) - society has invested/deposited funds which are not required for business being surplus funds and interest on deposits cannot be considered as income from other sources and observed that the interest income is not covered under Section 80P(2)(d) - HELD THAT - As relying on M/S. THE JAYANAGAR CO-OPERATIVE SOCIETY LTD. 2019 (7) TMI 1219 - ITAT BANGALORE we restore the disputed issue to the file of the CIT (Appeals) to consider the submissions of the assessee for fresh adjudication in light of the judicial decisions of Hon ble Supreme Court in the case of Totgars Co-operative Sale Society 2010 (2) TMI 3 - SUPREME COURT and Tumkur Merchants C-operative Society 2015 (2) TMI 995 - KARNATAKA HIGH COURT and the assessee should be provided adequate opportunity of hearing and shall co-operate in submitting the documents and allow grounds of appeal of the assessee for statistical purposes. Deduction u/s 80P(2)(a)(i) denied as the assessee society accept the deposits from general public being Nama Matra Sadasyaru/Nominal Members and the identity was not established in respect of ordinary members and nominal members in the assessment proceedings - We find nominal members are part of the society for earning surplus/income to the society. Accordingly, we set aside the order of the CIT (Appeals) on this issue and restore this disputed issue to the file of CIT(A) for fresh adjudication on the four categories of members and eligibility of nominal members under Karnataka State Co-operative Societies Act, 1959 and pass a speaking order. Further the assessee should be provided adequate opportunity of hearing and shall co-operate in submitting the information and allow the grounds of appeal of the assessee for statistical purposes.

Issues Involved:
1. Delay in filing the appeal.
2. Eligibility for deduction under Section 80P(2)(a)(i) and Section 80P(2)(d) of the Income Tax Act.
3. Classification and treatment of interest income.
4. Definition and eligibility of nominal members in the co-operative society.

Detailed Analysis:

1. Delay in Filing the Appeal:
The assessee filed an appeal against the order of the Commissioner of Income Tax (Appeals)-6, Bangalore, with a delay of 42 days. The assessee submitted a condonation petition with an affidavit explaining the delay. Upon examination, the tribunal found a reasonable cause for the delay, and since the Department Representative had no serious objections, the delay was condoned, and the appeal was admitted and heard.

2. Eligibility for Deduction under Section 80P(2)(a)(i) and Section 80P(2)(d) of the Income Tax Act:
The assessee, a co-operative society, claimed deductions under Section 80P(2)(a)(i) and Section 80P(2)(d) for the assessment year 2016-17. The Assessing Officer (AO) disallowed the claim, stating that the interest income on fixed deposits with co-operative banks and Karnataka State Co-operative Apex Bank Ltd. was not eligible for deduction as it was considered income from other sources. The AO relied on judicial decisions, including the Hon'ble Supreme Court's decision in the case of Citizen Cooperative Society Ltd. vs. ACIT, which emphasized the test of mutuality and the ineligibility of nominal members for such deductions.

3. Classification and Treatment of Interest Income:
The tribunal examined whether the interest income earned from investments in co-operative banks could be classified under business income or income from other sources. The tribunal referred to the decision in The Jayanagar Co-operative Society Ltd. case, where it was held that interest earned on surplus funds invested in short-term deposits and securities is income from other sources, not business income. The tribunal restored the issue to the file of the CIT (Appeals) for fresh adjudication, considering the judicial decisions of the Hon'ble Supreme Court in the case of Totgar’s Co-operative Sale Society Ltd. and the Hon'ble Karnataka High Court in the case of Tumkur Merchants Souharda Co-operative Ltd.

4. Definition and Eligibility of Nominal Members in the Co-operative Society:
The AO denied the deduction under Section 80P(2)(a)(i) based on the participation of nominal members who do not share in the profits and have no voting rights. The tribunal referred to the co-ordinate bench's decision in M/s. Kodavoor Vyavasaya Seva Sahakari Sangha Niyamitha & Others vs. ITO, which dealt with the criteria of nominal members. The tribunal also considered the Ahmedabad Bench of ITAT and the Hon'ble Madras High Court's decisions, which recognized nominal members as part of the society under the respective state co-operative societies acts. The tribunal restored this issue to the CIT (Appeals) for fresh adjudication, considering the eligibility of nominal members under the Karnataka State Co-operative Societies Act, 1959.

Conclusion:
The tribunal allowed the appeal for statistical purposes, restoring the disputed issues to the CIT (Appeals) for fresh adjudication, ensuring the assessee is provided adequate opportunity for hearing and submission of documents. The decision emphasized the need for a detailed examination of the classification of interest income and the eligibility of nominal members for deductions under the Income Tax Act.

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