2022 (11) TMI 587 - AT - Income Tax

Disallowing deduction u/s 80P(2)(a)(i) - income earned from Associate members/ Nominal members - Whether nominal members are treated on par with the members is to be decided with reference to the provisions of State Legislation under which this appellant society was formed and the bye-laws governing the appellant society? - HELD THAT - Lower authorities had failed to decide the issue with reference to the provisions of the Statute under which the appellant society was formed and the bye-laws of the appellant society. Therefore,we remit the matter to the file of the AO to decide the issue whether a nominal member also falls under the category of a member as provided in the Karnataka Co-operative Societies Act, 1959 and bye-laws of the society, if so, allow the exemption u/s 80P(2)(a)(i) as held by the Hon ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd 2021 (1) TMI 488 - SUPREME COURT . Thus, the matter stands remanded to the file of the Assessing Officer for fresh adjudication in accordance with law. Hence, the grounds of appeal raised by the appellant stand partly allowed for statistical purposes.

Summary

Issues:
- Disallowance of deduction u/s 80P(2)(a)(i) for income earned from Associate members/Nominal members.
- Taxability of interest from deposits with banks as income from other sources.

Analysis:

Issue 1: Disallowance of deduction u/s 80P(2)(a)(i) for income earned from Associate members/Nominal members:
The appellant challenged the disallowance of deduction u/s 80P(2)(a)(i) for income earned from Associate members/Nominal members. The CIT(A) disallowed the deduction, contending that the appellant society is not a cooperative bank but a society providing credit facilities to members. The appellant argued that nominal members are recognized as valid members under the Karnataka Co-op Societies Act 1959 and the society's bylaws. The Tribunal observed that the lower authorities failed to consider the statutory provisions and bylaws governing the society. The matter was remitted to the Assessing Officer to determine if nominal members qualify as "members" under the Act and bylaws, citing the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd. vs. CIT. The appeal was partly allowed for statistical purposes.

Issue 2: Taxability of interest from deposits with banks as income from other sources:
The CIT(A) held that interest from deposits with banks is taxable as income from other sources, contrary to the appellant's claim that it is attributable to providing credit facilities to members. The Tribunal noted the appellant's business nature and directed the Assessing Officer to reevaluate the interest income issue. The appellant's appeal was partly allowed for statistical purposes, emphasizing the need for fresh adjudication in accordance with the law.

In conclusion, the Tribunal's judgment addressed the issues of deduction disallowance for income from Associate/Nominal members and the taxability of interest from bank deposits. The decision highlighted the importance of statutory provisions and bylaws in determining membership status and income attribution, ensuring a fair and legal assessment process.