2024 (9) TMI 582 - AT - Income Tax

Denial of deduction u/s 80P2(a)(i) - assessee society has invested its idle funds which are immediately not required for lending to its members in Co-op Banks and Scheduled Banks and earned interest out of such investment - AO held that society cannot be termed as a mutual concern and the principles of mutuality cannot be applied. The transactions with associate/nominal members result in certain income/advantages, which are used by the society or rather applied to the benefit of the regular members HELD THAT - The Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. 2021 (1) TMI 488 - SUPREME COURT had held that the co-operative societies providing credit facilities to its members is entitled to deduction u/s 80P(2)(a)(i) of the Act. The Hon ble Apex Court after considering the judicial pronouncements on the subject, had stated that the term member has not been defined under the Income-tax Act. Also section 80P(4) of the I.T. Act is to be read as a proviso. It was stated by the Hon ble Apex Court that section 80P(4) of the Act now specifically excludes only co-operative banks which are co-operative societies engaged in the business of banking i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. The Hon ble Apex Court had enunciated various principles in regard to deduction u/s 80P of the Act. On identical factual situation, the Bangalore Bench of the Tribunal in the case of M/s. Ravindra Multipurpose Cooperative Society Ltd 2021 (9) TMI 342 - ITAT BANGALORE had remanded the issue to the files of the A.O. for de novo consideration. The Tribunal directed the A.O. to follow the dictum laid down by the Hon ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. Ors. v. CIT Anr. (supra). Thus, we restore the issue of claim of deduction u/s 80P(2)(a)(i) of the Act to the file of the A.O. for de novo consideration. Claim of deduction u/s 80P(2)(d) - We direct the AO to verify whether interest / dividend is received by the assessee out of investments made with Cooperative Societies. If the assessee earns interest / dividend income out of investments with co-operative society, as observed by Hon ble Supreme Court in the case of Kerala State Co-operative Agricultural and Rural Development Bank Ltd. 2023 (9) TMI 761 - SUPREME COURT the same is entitled to deduction u/s 80P(2)(d) of the I.T. Act. Addition u/s 57 - We make it clear that if the interest earned by assessee from the banks is considered under the head Income from other sources , relief to be granted to the assessee u/s 57 in accordance with law. Accordingly, the issue is restored to the file of ld. AO for de-novo consideration with the above observations. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues:
1. Disallowance of deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Disallowance of interest income as income from other sources and denial of deduction u/s 80P(2) of the Act.

Analysis:
1. The appeal was against the order of CIT(A)/NFAC for the AY 2018-19 disallowing the deduction u/s 80P(2)(a)(i) of the Act. The AO held that the society did not qualify for the deduction as it failed to meet the conditions under section 80P. The AO found that the society lacked the necessary mutuality principle as nominal and associated members were not entitled to participate in profits or voting rights. Consequently, the AO disallowed the entire deduction claimed by the society u/s 80P(2) of the Act. The AO also disallowed interest income of Rs. 2,92,14,754/-, earned from investments with Co-op Banks and Scheduled Banks, as it did not qualify for deduction u/s 80P(2)(d) of the Act. Penalty proceedings u/s 270A were initiated due to underreporting of income.

2. The CIT(A)/NFAC upheld the disallowance of interest income as income from other sources and denial of deduction u/s 80P(2)(a)(i) of the Act. The CIT(A) relied on the Supreme Court's decision in Citizens Cooperative society and RBI guidelines to support the disallowance. The CIT(A) concluded that the interest income derived from investments in banks was not eligible for deduction under section 80P(2)(a)(i) and should be added to the income of the society as "Income from Other Sources" under section 56 of the Income Tax Act, 1961.

3. The ITAT, Bangalore, referred to the decision of the Hon'ble Apex Court in Mavilayi Service Co-operative Bank Ltd. v. CIT & Anr. and the Tribunal's decision in M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO. The ITAT noted that the issue of deduction u/s 80P(2)(a)(i) was remanded for de novo consideration in a similar case. Therefore, the ITAT restored the issue of claim of deduction u/s 80P(2)(a)(i) to the AO for fresh examination. Additionally, the ITAT directed the AO to verify if interest/dividend income was received from investments made with Cooperative Societies for consideration under section 80P(2)(d) of the Act.

4. The ITAT partly allowed the appeal for statistical purposes, restoring the issues of deduction u/s 80P(2)(a)(i) and interest income to the AO for reevaluation. The order was pronounced in the open court on 10th Sept, 2024.