Nominal Members Do Not Defeat Section 80P Deduction- Bang ITAT Grants Relief to Co-operative Society

Lokapavani Credit Co-operative Society Ltd. Vs ITO (ITAT Bangalore)

The Bangalore ITAT held that the mere presence of associate or nominal members does not disentitle a co-operative society from claiming deduction u/s 80P(2)(a)(i). In the case of Lokapavani Credit Co-operative Society Ltd., the Assessing Officer had denied section 80P deduction by relying on the Supreme Court ruling in Citizen Co-operative Society Ltd., alleging that the society had nominal members and therefore ceased to qualify for deduction. The Tribunal, however, relied on the later Supreme Court ruling in Mavilayi Service Co-operative Bank Ltd. and observed that the Karnataka Co-operative Societies Act itself permits admission of associate/nominal members. Accordingly, the ITAT held that denial of deduction merely on this ground was unsustainable and directed allowance of deduction u/s 80P(2)(a)(i).

On the issue of demonetisation cash deposits treated as unexplained cash credits u/s 68, the Tribunal restored the matter back to the AO for fresh examination. The assessee contended that the deposits represented monies received from members and had also filed additional evidences before the CIT(A). However, the CIT(A) refused to admit those evidences solely because they were not produced during assessment proceedings. The ITAT held that such an approach violated principles of natural justice and observed that once the assessee attempted to substantiate the source of deposits, the appellate authority ought to have examined the documents after obtaining remand report. The Tribunal therefore remanded the section 68 issue to the AO with direction to consider all evidences and grant personal hearing to the assessee.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal is filed by the assessee challenging the order of the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(A)] dated 14.11.2024 in respect of AY 2017-18.

2. The appeal has been filed with a delay of 17 days and assessee also enclosed an application to condone the said delay. We have considered the reasons given in the said application and also by considering that the delay is minimal, we are inclined to condone the said delay.

3. The brief facts of the case are that assessee is a credit co-operative society registered under the provisions of the Karnataka State Co-operative Societies Act and filed its return of income on 07.11.2017. The assessee claimed the entire income as eligible for deduction under Chapter VIA. Subsequently the case was selected for limited scrutiny through CASS and notice u/s. 143(2) was issued on 20.9.2018. Thereafter another notice u/s 143(2) was issued on 25.9.2018 in which another reason of cash deposits during the demonetisation was added in the said notice. Thereafter assessment proceedings had commenced and the AO had disallowed the deduction claimed by the assessee under Chapter VIA of the Act for the reason that the assessee is also having associate/nominal members and therefore they are not entitled for deduction u/s. 80P(2)(a)(i) of the Act. The AO had relied on the judgment of Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. The AO had also based on the details from the Banks treated the cash deposits during the demonetisation period as unexplained cash credits u/s. 68 of the Act.

4. As against the above said order, the assessee filed an appeal before the CIT(A). The assessee had also raised a legal plea that the notice issued u/s. 143(2) of the Act is without getting any approval from the higher authorities since the first notice does not contain the cash deposits made during the demonetisation period. Insofar as the disallowance made u/s. 80P(2)(a)(i) of the Act and the cash deposits during the demonetisation period, the ld. CIT(A) had confirmed the additions made by the AO. The present appeal has been filed by the assessee challenging the said order of the ld. CIT(A).

5. At the time of hearing, the ld. AR submitted that the ld. AO had issued 143(2) notice on 20.9.2018 for limited scrutiny on 3 items, subsequently another notice was issued on 25.9.20218 in which the cash deposits made during the demonetisation period was also added and submitted that the said notice without getting any prior approval from the higher authorities is bad in law.

6. The ld. AR also submitted on the merits that the disallowance made by the AO on the sole ground that assessee is also having associate / nominal members are not in accordance with the judgment of the Hon’ble Supreme Court reported in Mavilayi Service Co-operative Bank Ltd. reported in 431 ITR 1 and therefore the order of the lower authorities are liable to be set aside. Insofar as the cash deposits made during the demonetisation period, the ld. AR submitted that the amounts are received from the members and the said cash deposits were made during the demonetisation period and in fact the assessee had produced the various evidences before the ld. CIT(A), but the ld. CIT(A) has not accepted the said evidences since the assessee had not furnished the said details before the AO and on that score, the ld. CIT(A) had confirmed the addition which is not correct.

7. The ld. AR also filed a paperbook enclosing the various documents including the application seeking the permission of the ld. CIT(A) for admitting the additional evidences. The ld. AR has also filed a compilation of case laws in support of his contentions.

8. The ld. DR relied on the orders of the lower authorities and also relied on the judgment of the Hon’ble Delhi High Court in the case of Devendra Kumar Singh v. ACIT reported in [2020] 425 ITR 222 (Del) and submitted that the legal ground raised by the assessee is not maintainable.

9. We have heard the rival contentions and perused the material on record. In the present appeal, the assessee has raised a legal plea to the effect that the 2nd notice issued u/s. 143(2) is not valid since the same was issued without getting any prior approval from the higher authorities. In this connection, we refer to section 143(2) proviso which prescribes that the notice has to be issued within a period of six months from the end of financial year in which the return of income was filed. Admittedly in the present case return of income was filed on 07.11.2017 and therefore the financial year ends on 31.3.2018. The AO has 6 months’ time from the said date and the last date for issuing the notice under the above proviso is 30.9.2018. The AO had rightly issued the notice on 20.9.2018 by giving 3 reasons for scrutiny, whereas subsequently on 25.9.2018 another 143(2) notice was issued by the AO in which an additional item was added for scrutiny. Therefore both the notices are issued by the AO within the period of limitation prescribed under the proviso to section 143(2) of the Act. In such circumstances, we do not think that there is any need for the AO to get the prior approval of the higher authorities for issuing these notices. The judgment relied on by the ld. DR in the case of Devendra Kumar Singh (supra) also supports the view taken by us. In the said judgment the Hon’ble High Court had held that “The proviso to subsection (2) of Section 143, as it stands today provides that no notice shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished. We are informed that the return in the present case was filed on 12.09.2018. Accordingly, the six months envisaged under the proviso to Section 143 (2) of the Act would expire on 30.09.2019 and thus the notice was necessarily required to be issued under the said provision prior to the said date. In the present case, a notice under Section 143 (2) had already been issued prior to the filing of the present petition, and if another notice has been issued, we do not see any reason to stay the same. No law has been shown which restricts the issuance of more than one notice. The issuance of the notice under Section 143 (2) is essential for the Assessing Officer to embark upon scrutiny assessment, however it does not mean that once a notice has been issued, another notice could not be issued thereafter. Certainly, after 30.09.2019, the Respondents cannot issue a fresh notice.” In such circumstances, the legal plea raised by the assessee could not be entertained and therefore the said plea is rejected by us.

10. Insofar as the addition made by disallowing the deduction claimed u/s. 80P(2)(a)(i) of the Act, the presence of associate/nominal members would not disentitle the assessee from claiming deduction u/s. 80P(2)(a)(i) of the Act as held by the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. reported in 431 ITR 1. The Karnataka Co-operative Societies Act also permits the assessee society to have the associate/nominal members and therefore the denial of deduction u/s. 80P(2)(a)(i) of the Act by both the authorities are not in accordance with the principles laid down by the Hon’ble Supreme Court. We therefore allow the claim made by the assessee.

11. Insofar as the addition made u/s. 68 of the Act is concerned, we have considered the assessment order as well as the ld. CIT(A)’s order and also the application filed by the assessee before the ld. CIT(A) in which the assessee had sought for permission to admit the additional evidences in respect of cash deposits made during the demonetisation period. We have also considered the contention of the assessee that these are monies deposited by the Members of the society and therefore the said amounts could not be treated as unexplained cash credit u/s. 68 of the Act. The assessee also tried to prove the said facts by filing additional evidences before the ld. CIT(A). But unfortunately the ld. CIT(A) had not accepted such additional evidences only for the reason that the assessee had not submitted the said details before the AO at the time of assessment. We do not think that the said approach by the ld. CIT(A) is correct. When the assessee is able to demonstrate that the cash deposits during the demonetisation period are from the sources, the appellate authority ought to have considered the said documents and after obtaining a remand report he could have decided the issue by one way or the other. In respect of deciding the issue the ld. CIT(A) had not accepted the additional evidences which is against the natural justice and also against the provisions of the Act. We therefore deem it fit that this issue has to be decided by the AO based on the evidence produced before the ld. CIT(A) and also based on the other evidences available with the assessee. We therefore set aside the order of the lower authorities insofar as addition made u/s. 68 of the Act is concerned and remit this issue to the file of the AO for fresh consideration. We also permit the assessee to file the evidences in support of the said deposits and the AO is also directed to grant personal hearing before concluding the proceedings.

12. In the result, the appeal by the assessee is partly allowed.

Pronounced in the open court on this 18^th day of May, 2026.