2020 (9) TMI 567 - AT - Income Tax

Denial of deduction u/s 80P - assessee is a co-operative society registered under Karnataka co-operative societies act 1959 and is engaged in the business of providing credit facilities to its members and distribution of ration card - HELD THAT - First part of Sec.80P(2)(a)(i) allows deduction in respect of income derived by a co-operative society from business of banking. Even claim of the assessee for deduction requires to be examined under first part of Sec.80P(2)(a)(i) - Hon'ble Supreme Court in case of Citizen Co- operative Society Ltd. 2017 (8) TMI 536 - SUPREME COURT has held that, it is also important to ascertain as to what is the nature of income which is claimed as exempt, and as to how principle of mutuality is not violated in respect of such income. An examination of (i) memorandum of association, articles of association, (ii) byelaws and other documents explaining rules and regulations of the society is necessary, so as to clearly understand the purpose and the nature of business done by it. An examination of different categories of members of a society and what are the conditions attached to their being admitted as members and their rights as contributors of funds to the society and participants in surplus and the byelaws of the society is necessary. Deduction u/s.80P2(a)(i) is allowed only in respect of income arising out of transactions with members. The relevant law governing co-operative Society of State providing status of different categories of members, in so far as affairs of co- operative Society are concerned, is also required to be examined. It is only income which arises from dealing with members and which is either in the nature of banking or providing credit facilities to members that would be allowed as deduction. All these aspects requires examination. Ld.AO will allow opportunity of being heard to the Assessee and filing appropriate evidence, if desired, by the Assessee to substantiate its case, before deciding the issue. - Assessee appeal stands allowed for statistical purposes.

Summary

Issues:
1. Denial of deduction under section 80P of the Income Tax Act.

Analysis:
The appeal was filed by the assessee against the order passed by the Ld.CIT (A), Bangalore for the assessment years 2015-16, specifically challenging the denial of deduction under section 80P of the Act. The assessee, a cooperative society providing credit facilities to its members and distributing ration cards, claimed a deduction of &8377; 84,67,703 under section 80P but was denied by the Ld.AO based on the violation of principles of mutuality. The Ld.AO disallowed the deduction citing relevant court decisions and observations. The assessee then appealed before the Ld.CIT(A) who upheld the Ld.AO's decision, leading to the current appeal before the ITAT Bangalore.

The Ld.AR representing the assessee argued that the society did not violate any provisions of the Karnataka co-operative societies act and included nominal and associate members. It was highlighted that only jewel loans were given to nominal members, mainly farmers with agricultural land, which constituted a small portion of the total advances. The Ld.AR contended that the facts of the present case were more aligned with a different court case and requested a reexamination of the issue.

The ITAT Bangalore, after considering the submissions from both parties and examining the records, decided to address the grievance of the assessee regarding the test of mutuality. The ITAT set aside the issue of deduction under section 80P(2)(a)(i) for fresh consideration by the Ld.AO. The ITAT directed the assessee to provide a certificate from the RBI confirming the absence of a banking license and to clarify that the business conducted was not similar to that of a co-operative bank. The ITAT emphasized the need to scrutinize the society's documents, membership categories, bylaws, and nature of business to determine the eligibility for deduction under section 80P. The Ld.AO was instructed to allow the assessee an opportunity to present evidence and substantiate its case before making a decision on the deduction issue.

Ultimately, the ITAT allowed the grounds raised by the assessee for statistical purposes, and the appeal was deemed allowed on those grounds. The judgment was pronounced on 1st September 2020.