Sangameshwar Co-operative Credit Society Vs ITO (ITAT Bangalore)
Nominal Member Is Also a Member, but the 15% Ceiling Matters: Entire Section 80P Deduction Cannot Be Denied Without Verification
The Bangalore Bench of the ITAT has held that a co-operative credit society cannot be denied its entire deduction u/s 80P(2)(a)(i) merely because it accepts deposits from or advances loans to nominal/associate members. Under the Karnataka Co-operative Societies Act, 1959, the term “member” includes a nominal member.
However, since section 18 of the Karnataka Act restricts associate membership to 15% of the total membership, the society must establish that its dealings were with eligible nominal/associate members within the statutory limit. The Tribunal restored the matter to the AO to segregate income attributable to regular members, eligible nominal members & genuine non-members.
Entire Deduction of ₹42.97 Lakh Disallowed
Shri Sangameshwar Co-operative Credit Society was registered under the Karnataka Co-operative Societies Act, 1959 and engaged in providing credit facilities to its members. Its membership included regular as well as nominal/associate members.
For AY 2018-19, the society filed a revised return declaring gross total income of ₹44,01,998 and claimed deduction of ₹42,97,998 under Chapter VI-A, resulting in taxable income of ₹1,04,000.
During scrutiny, the AO called upon the society to furnish the names & addresses of regular, nominal and other members; details of interest received from each category; particulars of fixed deposits and their source; interest earned on bank investments; and a detailed working of the deduction claimed u/s 80P.
The society did not furnish the required information.
The AO concluded that the society was providing credit facilities not only to regular members but also to associate members and non-members from the general public. Relying upon Citizen Co-operative Society Ltd. v. ACIT [2017] 397 ITR 1 (SC), he held that the principle of mutuality stood violated and disallowed the entire deduction of ₹42.97 lakh.
The AO also denied deduction on bank interest on the ground that the banks were not members of the society. The assessed income was determined at ₹44.02 lakh.
Appeal Before CIT(A) Also Went Unrepresented
The society filed an appeal before the CIT(A), NFAC. Hearing notices were issued on four occasions between June 2022 & March 2026. The society failed to comply with every notice.
The CIT(A) therefore proceeded ex parte and confirmed the assessment. Before the ITAT, the society argued that nominal and associate members were legally recognised as members under Karnataka law and that the ruling in Citizen Co-operative Society had been incorrectly applied.
Meaning of “Member” Must Come From the State Act
The Tribunal observed that the Income-tax Act does not independently define “member” for section 80P(2)(a)(i). The expression must therefore be understood with reference to the State co-operative law under which the society was constituted.
Section 2(f) of the Karnataka Co-operative Societies Act includes a nominal member within the definition of “member”. Section 18 also expressly permits a co-operative society to admit an individual as a nominal or associate member.
Accordingly, the mere fact that the society dealt with nominal members could not, by itself, justify denial of the entire deduction u/s 80P(2)(a)(i).
Citizen Co-operative Society Distinguished
In Citizen Co-operative Society, the assessee had advanced loans to the general public and dealt with nominal members in violation of the governing Andhra Pradesh legislation. Its activities had effectively travelled beyond the permissible boundaries of a co-operative society.
The present society was governed by the Karnataka Act, which expressly permits admission of nominal members. Therefore, the factual and statutory foundation of the Supreme Court’s ruling in Citizen Co-operative Society was materially different.
The Tribunal instead followed Mavilayi Service Co-operative Bank Ltd. v. CIT [2021] 431 ITR 1 (SC). In that case, the Supreme Court held that where the relevant State legislation includes nominal members within the statutory definition of members, loans to such nominal members may qualify for deduction u/s 80P(2)(a)(i).
Thus, Citizen does not impose a universal prohibition against transactions with nominal members. The answer depends upon the law under which the particular society is registered and whether its activities conform to that law.
Karnataka Law Imposes a 15% Membership Ceiling
The ruling was not an unconditional victory for the society. The proviso to section 18 of the Karnataka Co-operative Societies Act restricts the number of associate members to 15% of the society’s total membership.
The AO and CIT(A) did not have the necessary breakup of regular members, nominal/associate members and non-members because the society had failed to furnish the information specifically called for during assessment.
The Tribunal explained that eligibility for deduction and quantification of deductible income are separate questions. A society does not lose its entire eligibility merely because it has some dealings with non-members. However, profits attributable to credit facilities provided to actual non-members cannot qualify u/s 80P(2)(a)(i).
Therefore, the outright disallowance of the entire ₹42.97 lakh deduction, without determining the membership categories and the income attributable to each, was unsustainable.
Matter Restored for Proportionate Computation
The ITAT restored the matter to the AO for de novo adjudication. The AO was directed to identify:
- income attributable to regular members;
- income attributable to eligible nominal/associate members within the 15% ceiling; and
- income attributable to non-members.
Deduction u/s 80P(2)(a)(i) must be allowed on profits attributable to dealings with regular members and eligible nominal/associate members. Income arising from transactions with non-members would remain outside the deduction.
The society was specifically directed to furnish all information previously called for. If it again failed to cooperate, the AO was permitted to decide the matter on the basis of the available record. The appeal was allowed for statistical purposes.
Author’s Comments
The decision clarifies that nominal membership is not a tax concept floating independently of co-operative law. Its meaning and validity must be tested under the applicable State statute.
For Karnataka societies, Mavilayi provides protection because the Karnataka Act recognises nominal members. But that protection operates only where admission is genuine, recorded in the membership register, supported by applications & resolutions and remains within the statutory 15% ceiling.
The society’s repeated non-compliance weakened an otherwise arguable case. On remand, it must produce category-wise membership records, loan ledgers, deposit accounts and income attribution. Section 80P cannot be denied wholesale—but it also cannot be claimed wholesale without proving who the members actually are.
Cases Discussed
- Citizen Co-operative Society Ltd. v. ACIT [2017] 397 ITR 1 (SC)
- Mavilayi Service Co-operative Bank Ltd. v. CIT, Calicut [2021] 431 ITR 1 (SC)
- U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT [1997] 11 SCC 287
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE
The assessee has filed the present appeal against the impugned order dated 26/03/2026, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2018-19.
2. In this appeal, the assessee has raised the following grounds of appeal:
1. The order of the learned Commissioner of Income Tax (Appeals) is opposed to law, facts and circumstances of the case.
2. The learned CIT(A) erred in dismissing the appeal ex-parte without properly appreciating the facts and materials available on record.
3. The learned CIT(A) erred in confirming the disallowance of deduction of ₹42,97,998 claimed under Section 80P(2)(a)(i) of the Income-tax Act, 1961.
4. The learned CIT(A) failed to appreciate that the appellant is a Co-operative Credit Society registered under the Karnataka Co-operative Societies Act and engaged in providing credit facilities to its members.
5. The learned CIT(A) failed to appreciate that nominal/associate members are also members under the Karnataka Co-operative Societies Act and therefore deduction under Section 80P(2)(a)(i) cannot be denied.
6. The learned CIT(A) erred in applying the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. without appreciating the distinguishing facts of the appellant’s case.
7. The learned CIT(A) failed to consider the binding decisions of the Hon’ble Karnataka High Court and various decisions of the Hon’ble ITAT allowing deduction under Section 80P to Co-operative Credit Societies.
8. The learned CIT(A) erred in sustaining levy of interest under Sections 234A and 234B.
9. The appellant craves leave to add, alter, amend or delete any of the above grounds at the time of hearing the appeal.
3. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a co-operative credit society registered under the Karnataka State Co-operative Societies Act, 1959 and is engaged in providing credit facilities to its members. The assessee society has both regular and nominal/associate members. For the year under consideration, the assessee filed its original return of income electronically on 10/09/2018, declaring gross total income of Rs.42,47,998/- and, after claiming deduction under Chapter VI-A, declared total income at Rs. Nil. The assessee subsequently filed a revised return of income electronically on 31/10/2018, declaring gross total income of Rs.44,01,998/- and claiming a deduction of Rs.42,97,998/- under Chapter VI-A, thereby declaring total income of Rs.1,04,000/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. After perusal of the details and documents filed, the assessee was specifically called upon to furnish: (i) a list of complete name and address of the regular members and nominal members/co-members/non-members, along with supporting evidence; (ii) details of interest/receipts from the regular members and nominal members/co-members/non-members; (iii) details of funds invested in fixed deposits, the source of such funds, i.e., whether from regular members or nominal members/co-members/non-members, and the interest earned thereon; and (iv) the calculation of the amount of deduction along with an explanatory note on the eligibility of deduction under section 80P of the Act. However, no submission, details or documents were furnished by the assessee in response to the aforesaid queries.
4. The Assessing Officer (“AO”), vide order dated 26/03/2021 passed under section 143(3) read with sections 143(3A) and 143(3B) of the Act, held that the assessee, apart from earning income from its regular members, is also providing credit facilities to associate members/non-members and deriving profit from the said category of members. The AO, placing reliance on the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. vs. ACIT, reported in [2017] 397 ITR 1 (SC), held that since the assessee was earning income not only from its members but also from nominal/non-members who are the general public, the concept of mutuality stood violated, and accordingly deduction under section 80P(2)(a)(i) of the Act is not available. The AO further held that the assessee has made investments in banks and earned interest, which is also not eligible for deduction, since these banks are not the members of the society. Accordingly, the AO disallowed the entire deduction of Rs.42,97,998/- claimed under section 80P(2)(a)(i) of the Act and added the same to the total income of the assessee, computing the assessed income at Rs.44,02,000/-.
5. Being aggrieved, the assessee preferred an appeal before the learned CIT(A). During the appellate proceedings, notices under section 250 of the Act were issued to the assessee on four occasions, fixing hearings on 06/06/2022, 26/03/2025, 26/11/2025 and 12/03/2026, respectively. On each occasion, the assessee failed to comply. Accordingly, the learned CIT(A), vide the impugned order, proceeded to dispose of the appeal ex parte and dismissed the appeal filed by the assessee. Being aggrieved, the assessee is in appeal before us.
6. We have considered the submissions and perused the material available on record. In the present case, the assessee is a co-operative credit society registered under the Karnataka State Co-operative Societies Act, 1959. During the year under consideration, the assessee claimed deduction of Rs.42,97,998/- under section 80P(2)(a)(i) of the Act. As per the assessee, since it is in the business of providing credit facilities to its members, its income from the said business is allowable as a deduction under section 80P(2)(a)(i) of the Act. However, the AO rejected the claim of the assessee in its entirety on the basis that the assessee was also dealing with nominal/associate members. In support of its conclusion, the AO relied upon the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. (supra).
7. Before proceeding further, it is relevant to note the provisions of section 80P of the Act, under which the assessee has claimed the deduction in the present case. As per the provisions of section 80P(1) of the Act, the income referred to in sub-section (2) to section 80P shall be allowed as a deduction to an assessee being a co-operative society. The provisions of section 80P(2)(a)(i) of the Act, under which the deduction is claimed by the assessee, are reproduced as follows: –
“(2) The sums referred to in sub-section (1) shall be the following, namely:—
(a) in the case of a co-operative society engaged in—
(i) carrying on the business of banking or providing credit facilities to its members, or
………….
………….
the whole of the amount of profits and gains of business attributable to any one or more of such activities”
8. In the present case, the assessee is a co-operative credit society having both regular and nominal members. It is pertinent to note that as per section 2(f) of the Karnataka Co-Operative Societies Act, 1959, the term “member” includes a nominal member. Therefore, we are of the considered view that nominal members are also members for the purpose of the Karnataka Co-Operative Societies Act, 1959, and merely dealing with nominal members, by itself, cannot be the sole basis to deny the entire deduction claimed under section 80P(2)(a)(i) of the Act.
9. From a careful perusal of the decision in Citizen Co-operative Society Ltd. (supra), relied upon by the AO, we find that the Hon’ble Supreme Court held that Citizen Co-operative Society Ltd. is not entitled to claim the deduction under section 80P(2)(a)(i) of the Act as the society had granted loans to the general public, and the society had catered to ordinary members as well as its nominal members, without any approval from the Registrar of the Societies. Thus, the activities of the society were found to be in violation of the provisions of the Mutually Aided Co-operative Societies Act, 1995, under which it was formed.
10. However, as per section 18 of the Karnataka Co-Operative Societies Act, 1959, the co-operative society can admit, inter alia, any individual as a nominal member. Thus, the Karnataka Co-Operative Societies Act, 1959, under which the assessee is formed, does not bar admission of a nominal member in the co-operative society.
11. We find that in a subsequent decision in Mavilayi Service Co-operative Bank Ltd. vs. CIT, Calicut, reported in [2021] 431 ITR 1 (SC), the Hon’ble Supreme Court, after considering the definition of the term “members” in the Kerala Co-operative Societies Act, 1969, held that unlike the Andhra Pradesh Act, which was considered in the case of Citizen Co-operative Society Ltd. (supra), “nominal members” are members as defined under the Kerala Act, and therefore, the loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i) of the Act. The relevant findings of the Hon’ble Supreme Court, in the aforesaid decision, are reproduced as follows: –
“46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd. v. CIT [1997] 11 SCC 287 referred to section 80P of the IT Act and then held:
“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the Cooperative Societies Act. The said provision reads as under:
“2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;””
Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i)(a).”
12. Therefore, we are of the considered view that the reliance placed by the Revenue authorities on the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. (supra) is completely misplaced, as the said decision was rendered on its own facts, which are different from the present case. On the other hand, we find that the facts of the present case are closer to those in Mavilayi Service Co-operative Bank Ltd. (supra), as under both the Kerala Co-operative Societies Act, 1969 and the Karnataka Co-Operative Societies Act, 1959, “members” are defined to include nominal members. Therefore, we are of the considered view that merely because the assessee was receiving deposits from and advancing loans to the nominal members, the same does not, by itself, disentitle the assessee from claiming the deduction under section 80P(2)(a)(i) of the Act.
13. From the perusal of the provisions of section 18 of the Karnataka Co-Operative Societies Act, 1959, we find that the proviso to the said section imposes a restriction on the number of nominal members in the co-operative society. The said proviso to section 18 of the Karnataka Co-Operative Societies Act, 1959, reads as follows: –
“Provided that the number of associate members under clause (a) in any Co-operative Society shall not exceed fifteen percent of the total membership of the society. However, in case of Co-operative Societies already having more than fifteen percent of their total membership as associate members, the excess associate members shall be either made as member, if eligible under the section 16 or shall be removed from the associate membership within six months from the date of commencement of the Karnataka Co-operative Societies (Amendment) Act, 2014.”
14. In the present case, we find that neither the AO nor the learned CIT(A) has had the benefit of the requisite factual details of the break-up of regular and nominal members, since the assessee, despite being specifically called upon vide notice dated 12/03/2021 issued under section 142(1), failed to furnish any such details either before the AO or before the learned CIT(A). At this stage, it is pertinent to note the following observations of the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. (supra), rendered in the context of deduction under section 80P of the Act: –
“33. ……Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.”
15. Therefore, respectfully following the decision of the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. (supra), we are of the considered view that the outright denial of the entire deduction claimed under section 80P(2)(a)(i) of the Act, without any factual verification of the break-up of regular members and nominal/associate members (subject to the ceiling of 15% of the regular member under section 18 of the Karnataka Co-Operative Societies Act, 1959), and without quantifying the profits and gains attributable to each such category, cannot be sustained.
16. In view of the above, we deem it fit and proper to set aside the impugned order of the learned CIT(A) and restore the issue of deduction under section 80P(2)(a)(i) of the Act to the file of the AO for de novo adjudication after affording reasonable opportunity of hearing to the assessee. We direct that the AO shall determine the extent of deduction admissible under section 80P(2)(a)(i) of the Act in terms of the principles laid down by the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. (supra), i.e., after ascertaining the break-up of income attributable to regular members, nominal/associate members (within the permissible limit under section 18 of the Karnataka Co-Operative Societies Act, 1959) and non-members, and after allowing deduction only to the extent attributable to dealings with regular and eligible nominal/associate members. The assessee is directed to appear before the AO and furnish the complete details called for, including those sought vide notice dated 12/03/2021, failing which the AO shall be at liberty to decide the issue on the basis of material available on record, in accordance with law.
17. With the above directions, the grounds raised by the assessee are allowed for statistical purposes.
18. In the result, the appeal by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 15-Sept-2026.
