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2020 (10) TMI 650 - AT - Income TaxDenial of deduction claimed u/s. 80P(2)(a)(i) - profits earned by the appellant from the business of providing credit facilities to its members - assessee s claim denied of expenses incurred for earning the interest income/dividend income and allowed only an ad hoc deduction of 10% of such income without any basis, as expenses for earning interest income and dividend income - HELD THAT - The assessee is having nominal members and having nominal members in the Co-operative Society does not disentitle the assessee for getting exemption u/s. 80P. The issue is covered by the above orders of the Co-ordinate Bench relied M/S. KODAVOOR VYAVASAYA SEVA SAHAKARI SANGHA NIYAMITHA 2019 (8) TMI 1269 - ITAT BANGALORE and is required to be re-adjudicated by the Assessing Officer after considering the above decisions. Accordingly, remit this issue to the file of the Assessing Officer for fresh consideration on similar directions. Thus, this ground of appeal of the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Denial of deduction claimed under Section 80P(2)(a)(i) of the Income Tax Act. 2. Classification of income earned from investments and deposits. 3. Treatment of nominal members in the cooperative society. 4. Assessment of interest income under the head "Other Sources." 5. Allowance of expenses under Section 57(iii) of the Income Tax Act. 6. Liability under Section 234B of the Income Tax Act. Detailed Analysis: 1. Denial of Deduction Claimed Under Section 80P(2)(a)(i): The assessee, a Primary Agricultural Cooperative Society, claimed a deduction under Section 80P(2)(a)(i) for profits earned from providing credit facilities to its members. The CIT(A) upheld the denial of this deduction, arguing that the business did not comply with the principles of mutuality due to the inclusion of nominal and associate members who could neither vote nor share in the profits. The assessee contended that admitting nominal and associate members was permissible under the Karnataka Cooperative Societies Act, 1959, and did not violate any provisions. The Tribunal remitted the issue back to the Assessing Officer (AO) for reconsideration, directing the AO to examine the nature of income and the principle of mutuality in light of the Supreme Court's judgment in Citizens Cooperative Society. 2. Classification of Income Earned from Investments and Deposits: The AO denied the deduction under Section 80P(2)(d) for income from term deposits and dividends, classifying it under "Other Sources." This classification was upheld by the CIT(A). The assessee argued that the interest income from investments required by the Karnataka Cooperative Societies Act should be considered part of the business income. The Tribunal referred to the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which held that such income should be assessed as business income. The issue was remanded to the AO for fresh consideration. 3. Treatment of Nominal Members: The CIT(A) denied the entire deduction under Section 80P, citing the inclusion of nominal members. The assessee argued that nominal members were allowed under the Karnataka Cooperative Societies Act and should be considered members for the purpose of Section 80P. The Tribunal cited the Ahmedabad ITAT's decision in Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd., which recognized nominal members as eligible for benefits. The issue was remitted to the AO for reconsideration, directing the AO to treat nominal members as eligible for benefits under Section 80P. 4. Assessment of Interest Income Under the Head "Other Sources": The AO assessed the interest income from investments in cooperative banks under "Other Sources," denying the deduction under Section 80P. The Tribunal referred to the Supreme Court's decision in Totgar’s Cooperative Sale Society Ltd., which held that interest income from surplus funds should be assessed under "Other Sources." However, the Tribunal also cited the Karnataka High Court's decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which supported the assessee's claim. The issue was remanded to the AO for fresh examination. 5. Allowance of Expenses Under Section 57(iii): The AO allowed an ad hoc deduction of 10% of the interest income as expenses, denying the actual expenses claimed by the assessee. The CIT(A) upheld this decision. The assessee argued that the actual interest paid on members' deposits should be allowed as expenses under Section 57(iii). The Tribunal remitted the issue to the AO for reconsideration, directing the AO to allow the actual expenses incurred for earning the interest income. 6. Liability Under Section 234B: The assessee denied liability under Section 234B, arguing that the interest charged was unjustified. The Tribunal did not provide a specific ruling on this issue, as it was contingent on the outcome of the remanded issues. Conclusion: The Tribunal remitted the primary issues back to the AO for fresh consideration, directing the AO to re-examine the nature of income, the principle of mutuality, and the classification of interest income. The Tribunal emphasized the need to consider judicial precedents and provide the assessee with an opportunity to present relevant evidence. The appeal was partly allowed for statistical purposes.
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