2022 (11) TMI 826 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) in respect of interest earned from credit facilities provided to nominal members - Claim disallowed as credit facilities provided to non-members were not eligible for deduction - HELD THAT - The assessee Co-operative society is admittedly engaged in carrying on the business of banking and providing credit facilities. Section 80P(2)(a)(i) provides that in the case of co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to such activities shall be deductible in the computation of total income. The claim of assessee for deduction has been negated by the authorities below, inter alia, on the ground that it admitted certain Members, described as Nominal Members , who were neither entitled to dividend nor voting rights. On going through the above definition of Member , it becomes overt that the term Member also includes a Nominal Member. Once it is accepted that the assessee, governed by the Karnataka Act, made advances to certain Nominal Members from whom interest income was earned, there can be no doubt whatsoever that the deduction u/s 80P(2)(a)(i) has to be allowed. Taking note of the fact that the Citizen Co-operative Society Ltd. vs. ACIT 2017 (8) TMI 536 - SUPREME COURT judgment dealt with the Andhra Act wherein the term Member did not include Nominal Member, the Hon'ble Supreme Court in Mavilayi Service 2021 (1) TMI 488 - SUPREME COURT held that the interest on loans given to Nominal Members under the Kerala Act was eligible u/s 80P(2)(a)(i) of the Act as the term Member under the Kerala Act included Nominal Members . As evident that when the loans are given to Nominal Members and the relevant State Act includes, Nominal Member within the purview of Member , there can be no question of denial of benefit u/s 80P(2)(a)(i). We overturn the impugned order on this score and direct to allow the deduction. Appeal of assesee allowed

Summary

Issues:
Denial of deduction u/s.80P(2)(a)(i) of the Income-tax Act, 1961 in respect of interest earned from credit facilities provided to nominal members.

Analysis:
The appeal pertains to the denial of deduction u/s.80P(2)(a)(i) of the Income-tax Act, 1961 concerning interest earned from credit facilities provided to nominal members. The assessee, a cooperative society engaged in banking and providing credit facilities, claimed a deduction under 80P(2)(a)(i) for interest earned from credit facilities provided to regular and nominal/associate members. The Assessing Officer disallowed the claim stating that credit facilities provided to non-members were not eligible for deduction, a decision upheld by the CIT(A).

Upon review, it was noted that the term 'Member' as defined in the Karnataka Cooperative Society Act includes nominal or associate members. As the assessee made advances to nominal members and earned interest income, it was concluded that the deduction u/s 80P(2)(a)(i) should be allowed. Reference was made to the judgment of the Hon'ble Supreme Court in the case of Citizen Co-operative Society Ltd. vs. ACIT, which highlighted the inclusion of 'Nominal Member' in the definition of 'Member' under the Kerala Act.

Drawing from the Supreme Court's decision in Mavilayi Service Co-Operative Bank Ltd. vs. CIT, it was established that interest on loans given to nominal members under the Kerala Act was eligible for deduction under 80P(2)(a)(i) as the term 'Member' encompassed 'Nominal Members'. Consequently, when loans are extended to nominal members and the relevant State Act recognizes 'Nominal Members' as part of the 'Member' category, the benefit under 80P(2)(a)(i) cannot be denied. Therefore, the impugned order was overturned, and the deduction was directed to be allowed.

In conclusion, the appeal was allowed, and the order was pronounced in the Open Court on 16th November, 2022.