Nominal Members No Bar to Section 80P Deduction; ITAT Sends Cooperative Society’s Claim Back for Fresh Examination

Adarsha Multipurpose Cooperative Society Ltd. Vs ACIT (ITAT Bangalore)

Nominal Members No Bar to Section 80P Deduction; ITAT Sends Cooperative Society’s Claim Back for Fresh Examination

The Bangalore ITAT held that the presence of nominal members cannot by itself be a ground to deny deduction under Section 80P(2)(a)(i) to a cooperative society. Relying on the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd., the Tribunal observed that the view adopted by the lower authorities treating nominal members as non-members for denying deduction is no longer sustainable in law.

The assessee, Adarsha Multipurpose Cooperative Society Ltd., Puttur, had claimed deduction under Section 80P on interest income earned from deposits and also challenged the disallowance of provision for bad and doubtful debts. The CIT(A) had denied the deduction on multiple grounds, including that the society dealt with nominal members, was not a Primary Agricultural Credit Society, and that interest income from deposits was not eligible for deduction.

The Tribunal observed that if deposits with cooperative banks were made pursuant to a statutory requirement under the Karnataka Cooperative Societies Act, the resulting interest income could be regarded as income attributable to the business of the society and eligible for deduction under Section 80P(2)(a)(i). It further held that deduction under Section 80P(2)(d) may also be available where interest is earned from deposits with another cooperative society such as MASS Ltd., subject to verification.

The Tribunal also rejected the reasoning that deduction under Section 80P(2)(a)(i) is available only to Primary Agricultural Credit Societies, noting that no such restriction exists in the statute. Since several factual aspects required verification, including whether the deposits were statutory in nature and the treatment adopted in earlier years, the matter was restored to the Assessing Officer for fresh adjudication in accordance with law.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These are the appeals filed by the assessee challenging the separate orders of the NFAC, Delhi all dated 28/10/2025 in respect of the A.Ys. 2016-17 to 2018-19 and 2020-21. The appeal related to the assessment year 2016-17 is taken as a lead case since the issues are common in all the four years and therefore the facts of the assessment year 2016-17 is given as follows. The decision arrived in appeal ITA No.2996/Bang/2025 would mutatis mutandis apply to the other assessment years.

2. The brief facts of the case are that the assessee is a co-operative society registered under the provisions of the Karnataka Co-operative Societies Act. During the assessment years, they have filed their return of income and claimed deduction u/s. 80P of the Act. The return was processed u/s. 143(1) of the Act. Thereafter the cases were selected for scrutiny under CASS and notices u/s. 143(2) as well as 142(1) were issued. The assessee also responded to the notices. The AO considered the various claims and proposed to disallow the expenditure claimed as provision for bad and doubtful debts and staff gratuity. Similarly the AO had proposed to deny the claim made u/s. 80P on the interest income earned from FDs made with other than co-operative societies. The AO had estimated the interest income at Rs. 12,69,844/-. The assessee submitted their response but the AO had not accepted the same and treated the interest income as income from other sources and after granting deduction u/s. 57, had determined the income from other sources at Rs. 12,69,844/-. Similarly, the AO had confirmed the provision for disallowance of bad debts and doubtful debts.

3. As against the said order, the assessee preferred an appeal before the Ld.CIT(A). The assessee contended that disallowance of the claim of interest u/s. 80P(2)(a)(i) against the statutory requirement of investment is not taxable and eligible for deduction u/s. 80P(2)(a)(i) of the Act. The assessee also contended that earning of interest is attributable to the business of the assessee and eligible for deduction u/s. 80P(2)(a)(i) of the Act. The assessee also disputed the addition by disallowing the provision for bad and doubtful debts. The Ld.CIT(A) had confirmed the addition of the provision for bad and doubtful debts. The Ld.CIT(A) not accepted the plea that the interest earned by the assessee from the co-operative banks are not eligible for deduction u/s. 80P(2)(d) of the Act. The Ld.CIT(A) further observed that the interest received and claimed deduction u/s. 80P(2)(a)(i) is not allowable since the assessee is dealing with the nominal / non-members. The Ld.CIT(A) further held that the assessee is not a primary agricultural credit society and therefore not eligible for deduction u/s. 80P(2)(a)(i) of the Act. However the Ld.CIT(A) had directed the AO to verify the portion of profits relatable to lending to members and non-members and grant the deduction to the extent of income earned from members.

4. As against the said order, the present appeal has been filed by the assessee before this Tribunal.

5. At the time of hearing, the Ld.AR pointed out so many infirmities in the orders of the lower authorities. The Ld.AR submitted that the claim u/s. 80P(2)(a)(i) is an admissible one as per the judgment of the Hon’ble High Court in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. The Ld.AR further submitted that the deposits are statutory deposits and therefore the interest income earned is attributable to the business of the assessee and hence eligible for deduction u/s. 80P(2)(a)(i) of the Act. The Ld.AR further submitted the presence of nominal members are permitted under the Karnataka Co-operative Societies Act and therefore the disallowance on that basis is against the judgment of the Hon’ble Supreme Court reported in 431 ITR 1 in the case of Mavilayi Service Co-operative Bank Ltd. The Ld.AR submitted that the Ld.CIT(A) had not considered the specific ground and therefore liable to be set aside. The Ld.AR further submitted that the assessee had earned interest income from the deposits with MASS Ltd. which is a co-operative society and therefore eligible for deduction u/s. 80P(2)(d) of the Act.

6. The Ld.DR relied on the judgment reported in 395 ITR 611 (Karnataka) in the case of Totgars Co-operative Sales Society wherein the deduction u/s. 80P(2)(d) is not available to the deposits made with co­operative banks.

7. We have heard the arguments of both sides and perused the materials available on record.

8. In this appeal, the assessee submits that the interest income earned from the deposits made with co-operative banks are statutory deposits and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. No doubt, if the deposits are made out of statutory compulsion, the interest income earned is attributable to the business income of the assessee and eligible for deduction u/s. 80P(2)(a)(i) of the Act. This fact has to be verified. Further, as seen from the order of the Ld.CIT(A), the claim of deduction u/s. 80P(2)(a)(i) is not allowable, since the assessee is having nominal members who are treated to be non-members. This view is no longer good, in view of the judgment of the Hon’ble Supreme Court reported in 431 ITR 1 in the case of Mavilayi Service Co-operative Bank Ltd. Therefore we are not satisfied with the said finding and therefore the assessee is entitled for deduction u/s. 80P(2)(a)(i) of the Act, even if there is nominal members available.

9. Further, the Ld.CIT(A) had also held that the assessee is not a Primary Agricultural Credit Society but a multipurpose co-operative society engaged in general credit activities and therefore the deduction u/s. 80P(2)(a)(i) of the Act is not available. This finding is also not correct in view of the provision 80P(2) of the Act. Nowhere such restriction has been placed by the Statue and therefore on that basis, deduction u/s. 80P(2)(a)(i) could not be denied.

10. When we considered the above settled principle of law, we are of the view that the order of the lower authorities need to be revisited since the issues are not clear. If the assessee had deposited the funds in a co­operative bank out of compulsion of the Karnataka Co-operative Societies Act, then they are eligible for deduction u/s. 80P(2)(a)(i) of the Act. Further, if the deposits are made with MASS Ltd., a co-operative society, then the interest earned could be granted deduction u/s. 80P(2)(d) of the Act. In the former case, the interest income could be treated as income attributable to the business and therefore eligible for deduction u/s. 80P(2)(a)(i) of the Act. Otherwise only the income could be treated as income from other sources.

11. It is also the case of the assessee that in respect of the earlier years, similar deduction was allowed by the AO and no further proceedings were initiated against such proceedings. We are not aware about the earlier year proceedings and if the said contention is correct on verification, the AO could not take a different view for the current year in dispute.

12. Therefore, in the interest of justice, we are inclined to set aside the orders of the lower authorities and remit these issues to the JAO for passing appropriate orders pursuant to the findings given by us in the preceding paragraphs of the order. We also direct the JAO to consider the earlier assessment years orders before coming to a conclusion in the present year. We also made it clear that if the assessee was able to demonstrate that the interest income earned could be attributable to the business income and the interest income was earned from a co-operative society irrespective of the fact that the assessee is having nominal members, deduction should be granted u/s. 80P(2)(a)(i). With the above direction, we remit this issue to the JAO for denovo consideration, after granting an opportunity to the assessee.

13. In the result, all the appeals filed by the assessee are allowed for statistical purposes.

Order pronounced in the open court on 08th June, 2026.