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2020 (3) TMI 1112 - AT - Income TaxDenial of deduction u/s 80P(2) - assessee is in the Banking business accepts the deposits from the general public being D Class nominal members and also lend the funds - eligibility of nominal members under Karnataka Co-operative Societies Act, 1959 - HELD THAT - As decided in M/S. KODAVOOR VYAVASAYA SEVA SAHAKARI SANGHA NIYAMITHA 2019 (8) TMI 1269 - ITAT BANGALORE 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 of Hon'ble Supreme Court 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 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 M/S. S-1308 AMMAPET PRIMARY AGRICULTURAL COOPERATIVE 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 and the assessee should be provided adequate opportunity of hearing and co-operate in submitting the information for early disposal of the case and allow the grounds of appeal of the assessee for statistical purposes.
Issues Involved:
1. Legality of the CIT(A)'s order being prejudicial to the interests of the appellant. 2. Confirmation of disallowance of deduction under Section 80P(2)(a)(i) of the Income Tax Act. 3. Denial of deduction under Section 80P(2)(a)(i) due to dealings with nominal and associate members. 4. Eligibility of the assessee as a co-operative society under the Karnataka State Co-operative Societies Act, 1959. 5. Non-allowance of interest income on investments as a deduction under Section 80P(2)(a)(i). 6. Non-allowance of interest income on investments as a deduction under Section 80P(2)(d). Detailed Analysis: 1. Legality of the CIT(A)'s Order: The assessee contended that the order of the CIT(A) was prejudicial and erroneous in law. The Tribunal noted that the CIT(A) concurred with the Assessing Officer's (AO) action, leading to the dismissal of the appeal. The Tribunal emphasized that the primary issue was the denial of deduction under Section 80P(2) of the Act. 2. Confirmation of Disallowance of Deduction under Section 80P(2)(a)(i): The AO disallowed the deduction under Section 80P(2)(a)(i), observing that the assessee society accepted deposits from D Class nominal members who do not have voting rights and are not eligible for dividends. The AO concluded that the concept of mutuality ceased to exist as these nominal members contributed to the surplus but did not share it. 3. Denial of Deduction Due to Dealings with Nominal and Associate Members: The Tribunal examined whether nominal members could be considered as members for the purpose of Section 80P(2). The assessee argued that nominal members are treated as members under the Karnataka Co-operative Societies Act, 1959. The Tribunal referred to judicial precedents, including the decisions of the Ahmedabad Bench of ITAT and the Hon'ble Madras High Court, which supported the view that nominal members are eligible for benefits under Section 80P(2). 4. Eligibility as a Co-operative Society: The Tribunal noted that the assessee is registered as a co-operative society under the Karnataka State Co-operative Societies Act, 1959. The Tribunal found that the CIT(A) did not adequately appreciate this fact when denying the deduction under Section 80P(2)(a)(i). 5. Non-Allowance of Interest Income as Deduction under Section 80P(2)(a)(i): The AO treated the interest income earned from investments in banks as "income from other sources" rather than business income, thereby denying the deduction under Section 80P(2)(a)(i). The Tribunal referred to the decision of the Hon'ble Supreme Court in Totgar’s Co-operative Sales Society Ltd. and the Hon'ble Karnataka High Court in Tumkur Merchants Souharda Credit Co-operative Ltd., which supported the AO's view. 6. Non-Allowance of Interest Income as Deduction under Section 80P(2)(d): The Tribunal observed that the CIT(A) relied on judicial decisions that were distinguishable from the present case. The Tribunal referred to the Hon'ble Karnataka High Court's decision in Tumkur Merchants Souharda Credit Co-operative Ltd., which held that interest earned from investments in co-operative banks is assessable under "income from other sources" and not eligible for deduction under Section 80P(2)(d). Conclusion: The Tribunal restored the entire disputed issues to the file of the AO for fresh examination in light of judicial precedents. The AO was directed to verify the eligibility of nominal members under the Karnataka Co-operative Societies Act, 1959, and provide the assessee with adequate opportunity for hearing. The appeal was allowed for statistical purposes.
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