2019 (12) TMI 33 - AT - Income Tax

Claim for deduction u/s 80P - AO had rejected the claim for deduction u/s 80P for the reason that the assessee has carried on business with nominal/associate members, who cannot be called as members within the meaning of sec.80P(2)(a)(i) - Whether nominal members and associate members would also quality as members within the meaning of sec.80P(2)(i) also requires examination in the light of provisions of Karnataka Co-operative Societies Act and/or Bye Laws of Society - In the instant case, the Ld A.R is also contending that there is difference between nominal members and associate members. HELD THAT - In the case of Citizen co-operative Society 2017 (8) TMI 536 - SUPREME COURT the majority of income was derived from nominal members and general public and hence the Hon'ble Supreme Court held that the business of the assessee is in the nature of a financial institution and not in the nature of providing credit facilities to its members. Hence the component of income derived from members (who are eligible to participate in profits) and other persons may also require examination and may influence the decision to be taken with regard to the eligibility of the assessee to claim deduction u/s 80P of the Act. If majority of income was derived from members (who are entitled to participate in profits), then the question that would arise is, whether the assessee would be eligible for deduction u/s 80P of the Act fully or proportionately in proportion to the income derived from members, who qualify as participators in profits. This question also requires examination. The foregoing discussions would show that the entire issue requires fresh examination at the end of the assessing officer. Accordingly set aside the order passed by Ld CIT(A) and restore all the issues to the file of the AO for examining it afresh. After affording adequate opportunity of being heard, the AO may take appropriate decision in accordance with law. Assessee is treated as allowed for statistical purposes.

Summary

Issues:
1. Rejection of deduction claimed under section 80P of the Income Tax Act.
2. Interpretation of the term "members" under section 80P(2)(a)(i) of the Act.
3. Application of the Principle of Mutuality in determining eligibility for deduction.
4. Examination of whether nominal members and associate members qualify as "members" under section 80P(2)(a)(i).
5. Compliance with the Karnataka Co-operative Societies Act in relation to the number of associate members.

Analysis:
1. The appeal challenges the rejection of the deduction claimed under section 80P of the Income Tax Act for the assessment year 2016-17. The Assessing Officer (AO) disallowed the deduction, citing a violation of the Karnataka Co-operative Societies Act due to the high percentage of nominal members compared to regular members.

2. The AO and the CIT(A) held that the assessee, a cooperative credit society, did not qualify for the deduction under section 80P as it dealt with nominal members who were not considered "members" under the Act. The decision relied on the Hon'ble Supreme Court's judgment in a similar case.

3. The Principle of Mutuality was discussed to determine if the contributors were also participators in profits. The Supreme Court's decision highlighted the importance of contributors being eligible to participate in profits for an entity to qualify for the deduction under section 80P(2)(a)(i).

4. The distinction between nominal members and associate members was crucial in assessing the eligibility for the deduction. The AO was directed to clarify whether both categories qualified as "members" under section 80P(2)(a)(i) and whether they were entitled to participate in profits.

5. The compliance with the Karnataka Co-operative Societies Act, specifically the limit on associate members, was emphasized. The assessment required a fresh examination by the AO to determine the eligibility of the assessee for the deduction under section 80P of the Act.

In conclusion, the order passed by the CIT(A) was set aside, and all issues were restored to the AO for reevaluation. The decision highlighted the need for a detailed examination of the membership structure, compliance with relevant laws, and the application of the Principle of Mutuality to determine the eligibility for the deduction under section 80P of the Income Tax Act.