2021 (9) TMI 342 - AT - Income Tax

Deduction u/s. 80P(2)(a)(i) - Denial of deduction as appellant deals with nominal and associate members - HELD THAT - In respect of associate/nominal members, Hon ble Supreme Court in the case of Mavilayi Service Cooperative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT has held that the expression Members is not defined in the Income-tax Act. Hence, it is necessary to construe the expression Members in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. The facts are to be examined in the light of principles laid down by the Hon ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. (supra). Accordingly, we remit this issue of deduction u/s.80P(2)(a)(i) of the Act to the file of Ld.AO to examine the same de novo in the light of the above judgment. Needless to say that proper opportunity of being heard is to be granted to assessee in accordance with law Accordingly grounds 2-4 and Additional Ground No.1 stands allowed for statistical purposes. Interest from investment in Co-operative banks, nationalised banks - HELD THAT - This issue has been decided by coordinate bench of this Tribunal in case of Potters Cottage Industrial Co-Operative Society Ltd., for assessment years 2015-16 2021 (9) TMI 137 - ITAT BANGALORE . Thus as relying on it we direct the Ld.AO to verify the interest earned on investment earned from co-operative societies and to consider the claim of assessee in accordance with law under section 80P(2)(d). Grounds raised by assessee stands allowed for statistical purposes.

Summary

Issues Involved:
1. Denial of deduction under section 80P(2)(a)(i) of the Income Tax Act.
2. Eligibility of interest income for deduction under section 80P(2)(d) of the Income Tax Act.

Detailed Analysis:

1. Denial of Deduction under Section 80P(2)(a)(i):
The primary issue was whether the authorities were justified in denying the assessee's claim for deduction under section 80P(2)(a)(i) of the Income Tax Act. The assessee, a co-operative society providing credit facilities to its members, claimed this deduction. The Assessing Officer (AO) observed that the society earned income not only from regular members but also from nominal/associate members, which violated the principle of mutuality. The AO relied on the Supreme Court decision in Citizen Co-op Society Ltd., Hyderabad v. ACIT, which held that providing credit facilities to non-members disqualifies the society from claiming the deduction under section 80P. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the society had admitted more nominal/associate members than allowed under the Karnataka Co-operative Society Act, 1959, thereby violating the principle of mutuality.

The Tribunal, however, referred to the Supreme Court decision in Mavilayi Service Cooperative Bank Ltd. v. CIT, which stated that the term "members" in section 80P(2)(a)(i) should be construed based on the definition in the relevant co-operative societies Act. Therefore, the Tribunal remitted the issue back to the AO to re-examine the facts in light of the Supreme Court's principles in Mavilayi Service Cooperative Bank Ltd., ensuring a proper opportunity for the assessee to be heard.

2. Eligibility of Interest Income for Deduction under Section 80P(2)(d):
The second issue was whether the interest income earned by the assessee from investments in co-operative banks and nationalized banks was eligible for deduction under section 80P(2)(d). The AO had denied this deduction, categorizing the interest income as "income from other sources," based on the Supreme Court's decision in Totgars Co-operative Sale Society Ltd. v. ITO. The Tribunal noted that the Karnataka High Court, in Tumkur Merchants Souharda Credit Cooperative Ltd. v. ITO, had distinguished the Totgars case, holding that interest income from deposits in nationalized banks used for providing credit facilities to members is attributable to the business of the society and thus deductible under section 80P(2)(a)(i).

However, the Tribunal also acknowledged conflicting decisions by the Karnataka High Court and the Gujarat High Court regarding the applicability of section 80P(2)(d) to interest income from investments in co-operative societies. The Tribunal directed the AO to verify the interest earned from investments in co-operative societies and consider the deduction under section 80P(2)(d) accordingly.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, remanding the issues back to the AO for re-examination in light of relevant judicial precedents and proper verification of facts. The AO must re-assess the eligibility of deductions under sections 80P(2)(a)(i) and 80P(2)(d), granting the assessee a fair opportunity to present its case.