DCIT Vs Adarsh Credit Co-Operative Society Ltd. (ITAT Jodhpur)
Section 80P Cannot Be Denied by Naming Ghost Members—Unidentified Allegations &; a Remand Fishing Trip Fail to Sink ₹165-Crore Deduction
Summary:
The ₹165-Crore Controversy
The Assessee, a registered co-operative society subsequently registered as a Multi-State Co-operative Society, accepted deposits from members & provided credit facilities to them. It also carried on money-transfer agency, insurance agency & certain trading activities.
For AY 2014-15, it declared income of ₹7.28 crore after claiming deduction of ₹165.50 crore u/s 80P.
The AO alleged that the Society had not properly verified borrowers’ creditworthiness or end use of loans, accepted deposits from nominal, non-existent or non-members, failed to obtain adequate security & committed irregularities in complying with its bye-laws. He also referred to salary & incentives of ₹24.55 crore allegedly paid to the Managing Director.
According to the AO, these circumstances ruptured the principle of mutuality. He denied the entire deduction u/s 80P & assessed income at ₹172.88 crore.
CIT(A) Restores the Deduction
The Assessee contended that it was not a co-operative bank, did not transact with the public & held no banking licence from the RBI. Therefore, the exclusion contained in section 80P(4) was inapplicable.
It was also submitted that the AO had not identified any non-member, nominal member or fictitious person relevant to the year. Nor had he quantified income arising from any such transaction.
The CIT(A) found that the AO had confused the statutory deduction u/s 80P with the general doctrine of mutuality. He further observed that the expression in section 80P(2)(a)(i) is carrying on banking business “or” providing credit facilities to members. The AO could not read “or” as “&” & insist that both activities must coexist.
The CIT(A) substantially allowed the deduction, while making a protective lump-sum disallowance stated to be ₹20 lakh for unidentified nominal members, if any. The Assessee did not challenge the amount sustained.
A Co-operative Society Is Not Automatically a Co-operative Bank
The ITAT referred to Mavilayi Service Co-operative Bank Ltd. v. CIT, 431 ITR 1 (SC), which explains the distinction between eligibility for deduction & attributability of profits to an eligible activity.
Section 80P(4) excludes co-operative banks functioning substantially like commercial banks. Merely accepting deposits from members & providing credit facilities to them does not transform every co-operative society into a co-operative bank.
The AO had neither found that the Assessee possessed an RBI banking licence nor examined the cumulative statutory requirements under Part V of the Banking Regulation Act, 1949. In fact, the assessment order itself described the Assessee as a co-operative society, not a co-operative bank.
Therefore, the CIT(A)’s conclusion that section 80P(4) was inapplicable required no interference.
Mutuality Cannot Replace the Statutory Conditions
The AO proceeded on the premise that any breach of mutuality automatically destroyed the entire deduction. The Tribunal rejected this sweeping proposition.
Deduction u/s 80P is a statutory benefit whose eligibility must be tested against the ingredients of section 80P(2)(a)(i). The general doctrine of mutuality cannot be substituted for Parliament’s specific statutory conditions.
The AO referred to nominal members, non-members, dummy members & eight allegedly fictitious persons. However, he did not identify even one such person in the assessment order. No membership application, deposit, loan, transaction or attributable income was specified. The allegations were largely borrowed from earlier years without incorporating year-specific evidence for AY 2014-15.
Citizen Co-operative Society Distinguished
The Revenue relied upon Citizen Co-operative Society Ltd. v. ACIT, 397 ITR 1 (SC). The ITAT held that the decision was factually distinguishable.
In Citizen Co-operative Society, there were categorical findings that the society dealt with two distinct classes, conducted substantial business with persons who were not genuine members & advanced loans to the general public in violation of the applicable co-operative law.
No comparable findings existed here. Even the DR acknowledged that the AO had not listed or quantified transactions with non-members, nominal members or dummy persons, income from other activities or allegedly unexplained deposits.
A precedent founded upon established facts cannot be applied to another case resting upon unparticularised allegations.
Large Remuneration Is Not Automatic Diversion
The reference to ₹24.55 crore paid to the Managing Director also failed. The AO had not found that the payment was bogus, that services were not rendered, that the bye-laws prohibited it or that any provision independently required disallowance.
The mere size of managerial remuneration, without a legally sustainable finding regarding deductibility, could not justify denial of the Society’s entire deduction u/s 80P.
No Second Innings for an Incomplete Assessment
The Revenue requested remand for comprehensive factual verification. The Tribunal declined.
The AO had issued detailed questionnaires, examined voluminous records & personally appeared before the CIT(A) with written submissions. Remand could not be granted merely to permit a fresh or roving inquiry aimed at discovering the factual foundation missing from the assessment order.
The protective disallowance did not establish rupture of mutuality because the CIT(A) expressly found that no nominal member had been proved. The Tribunal also noticed an arithmetical inconsistency: the figures suggested a ₹10-lakh difference, while the stated disallowance was ₹20 lakh. Since the Assessee filed no appeal or cross-objection, the existing relief remained undisturbed.
The Revenue’s appeal was consequently dismissed.
Section 80P cannot be demolished by repeatedly saying “nominal members” without naming one. An assessment needs identified facts—not unidentified members, unquantified income & a request to investigate properly in the second innings.
Cases Discussed
- Mavilayi Service Co-operative Bank Ltd. v. CIT, 431 ITR 1 (SC)
- Citizen Co-operative Society Ltd. v. ACIT, 397 ITR 1 (SC)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, JODHPUR BENCH
This appeal by the Revenue is directed against the order dated 12.03.2018 passed by the learned Commissioner of Income-tax (Appeals)-2, Udaipur[hereinafter referred to as “the CIT(A)”], for the assessment year 2014-15, arising from the assessment order dated 30.12.2016 passed under section 143(3) of the Income-tax Act, 1961[hereinafter referred to as “the Act”].
2. The Revenue has raised the following grounds of appeal:
On the facts and circumstances of the case Ld. C.I.T. (A) has erred in:
1. Whether on the facts and in the circumstances of the case CIT(A) was right in allowing deduction u/s 80P claimed by the assessee despite the fact that there was no „concept of mutuality‟ exists in the society.
2. Whether on the facts and in the circumstances of the case CIT(A), was right in observing that the decision of Hon‟ble Supreme Court in the case of Citizen Cooperative Society was distinguishable.
3. Whether on the facts and in the circumstances of the case CIT(A) was right in holding that the assessee Co-operative Society is eligible to claim deduction u/s 80P despite the assessee society violating the principle of mutuality by diverting its funds for the benefit of selected members associated with the management of society in the form of huge salaries, incentives, commission etc.
4. Whether on the facts and in the circumstances of the case, the CIT(A) was right in allowing the claim of deduction u/s 80P to the assessee society despite disallowing a sum of Rs.20 lakhs on account of income related to the Nominal members thereby himself holding rupture in mutuality
The Appellant crave, leave or reserving the right to amend modify, alter add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
Facts of the case
3. The assessee is a co-operative society. It filed its return of income for the assessment year under consideration on 10.11.2014 declaring total income of Rs.7,28,28,186/-. The assessee was engaged, inter alia, in accepting deposits from its members and providing credit facilities to its members. It also carried on money-transfer agency and insurance-agency activities. In the return of income, the assessee claimed deduction of Rs.1,65,50,31,148/- under section 80P of the Act.
4. The case was selected for complete scrutiny under CASS. The first notice under section 143(2), dated 04.09.2015, was served upon the assessee on 09.09.2015. Further notices and questionnaires were issued during the assessment proceedings. In response thereto, the assessee furnished its replies and supporting material.The Assessing Officer examined the claim under section 80P and referred to certain observations made in the assessments for the earlier years. He observed that the assessee had not adequately verified the creditworthiness of the borrowers and the end use of the loans. He also referred to an alleged absence of collateral security, non-availability of certain share certificates, deposits allegedly accepted from non-members, nominal members and non-existent persons, notices returned unserved, and alleged non-compliance with the bye-laws.
5. The Assessing Officer further observed that the assessee was engaged in insurance-agency business, money-transfer agency business and trading in shares, securities and bullion. He also referred to salary and incentives aggregating to Rs.24,55,00,000/- allegedly paid to the Managing Director and concluded that the funds were diverted for the benefit of selected persons associated with the management.
6. On the basis of the aforesaid observations, the Assessing Officer held that the principle of mutuality had broken down and that the assessee was not entitled to deduction under section 80P. He accordingly disallowed the entire deduction of Rs.1,65,50,31,148/- and assessed the total income at Rs.1,72,88,59,330/-. Penalty proceedings under section 271(1)(c) were also initiated.
7. Before the learned CIT(A), the assessee submitted that it was duly registered under the Rajasthan Co-operative Societies Act, 1965 and had subsequently been registered as a Multi-State Co-operative Society under the Multi-State Co-operative Societies Act, 2002. It was contended that the assessee was providing credit facilities to its members in accordance with its objects and registered bye-laws.
8. The assessee further submitted that it was not a co-operative bank and was not carrying on banking business with the public. It had no banking licence from the Reserve Bank of India. Therefore, section 80P(4) was not applicable. It was also contended that the Assessing Officer had not identified any non-member, nominal member or fictitious member pertaining to the assessment year under consideration and had not quantified any income arising from transactions with such persons.
9. During the appellate proceedings, the Assessing Officer was afforded an opportunity of hearing. The learned CIT(A) recorded that, after certain adjournments, the Assessing Officer personally appeared on 12.02.2018 and filed written submissions vide letter No. Dy. CIT/Cent. Circle-1/Jodhpur/2017-18/1502 dated 09.02.2018. The assessee filed a rejoinder on 28.02.2018.
10. The learned CIT(A), while considering the findings recorded in the assessee’s case for A.Y. 2010-11 and applying the same to the assessment year under consideration, reproduced and adopted, inter alia, the following findings:
“17.4.6 In view of reasons stated in preceding paras, the view of the Ld. AO that the appellant is a cooperative bank within the meaning of section 80P(4) of the Act can not be accepted as appellant is not carrying out any banking activities. There is no dispute to this fact as the AO in assessment order as categorically stated the status of the appellant society as cooperative society and not cooperative bank.”
“17.4.8 From the explanation given by the appellant before the AO and further illustrated those explanations with additional evidences during the appellate proceeding in para 17.01 to 17.76 of appellant‟s submission which has been reproduced in Para 17.2 above it is clear that the lack of meticulous observation of the procedure by the appellant resulting in to discrepancies and irregularities is not strong enough to vitiate against their claim as co-operative society carrying eligible business as regulators controlling their activities have not taken any adverse stand notwithstanding the intimation of the same by the Department. It is emphasized here that the same issues were raised before the Hon‟ble Settlement Commission, Delhi with the same material for disqualifying the appellant from the benefits u/s 80P. However, no adverse view has been taken in the order of Hon‟ble Settlement Commission dated 23.07.2015 in Settlement Application No. RJ/JP-51/13-14/20-IT for such the lack of meticulous observation of the procedure by the appellant resulting in to discrepancies and irregularities.”
“17.4.9 It is noticed from reading para 10.40 of the assessment order that the AO confused the deduction u/s 80P with the principle of mutuality. Similarly, it is also found from reading para 16.39 & 16.43 of the assessment order that the AO impliedly interpreted the word “or” in the provision of sec. 80P(2)(a)(i) “carrying on the business of banking or providing credit facilities to its members” as “and” and according wrongly inferred that appellant‟s activities are not strictly for it members. However, such confusion and misinterpretation cannot be supported.”
11. Thereafter, the learned CIT(A) recorded his findings for the assessment year under consideration in paragraphs 4.4 to 4.6 as follows:
“4.4 It is seen that facts and issue involved in this appeal is similar to appeal for A.Y. 2010-11, therefore, I follow the said decision as there is no change in the facts and circumstances of the case as compared to earlier. Notably, no case specific case or quantum of deduction if any relevant to any alleged non-member has been led before me by the AO through in the impugned assessment order as well as in the remand report there is just a passing reference. Similarly, the issue of receipt of share application money/deposits from some members which were treated as unexplained in earlier years stands decided in favour of the Appellant in ITA No. 939/11-12, 938/11-12 & Others for earlier years, therefore, I find no valid reasons to interfere with findings made in earlier years. As no specific case of nominal members has been pointed out which was the case in Citizen Cooperative Society (supra), therefore, I am of the considered view of the A/R that facts of this case are distinguished from the facts of the case of Citizen Cooperative Society (supra) which was before the Hon‟ble Apex Court. Notably, Hon‟ble Apex Court has allowed deduction to cooperative society u/s 80P even after insertion of sub-section (4) to 80P, which applies to cooperative bank only. Therefore, in view of the decision made earlier by the undersigned and my findings as above, I allow the deduction of Rs. 1,65,40,31,148/- to the appellant on the similar lines as above.”
“4.5 However, to avoid any uncertainty and as a matter of protecting the interest revenue and considering the situation that if any specific members are held to be nominal members at any stage, though no such case has been proved before me by the AO, a lumpsum disallowance of Rs. 20 Lakh is made as far as the claim of deduction u/s 80P of the Act is concerned in respect of those unidentified nominal members, if any.”
4.6 Thus the issue remains principally decided in favour of the assessee on merits and on legality and the deduction u/s 80P of the Act is allowed to the extent of Rs. 1,65,40,31,148/- except an amount of Rs. 20 Lakh as discussed above. In result, this ground is partly allowed.
12. The learned CIT(A) thus allowed the deduction to the extent stated in the impugned order and sustained a lump-sum disallowance stated to be Rs.20,00,000/-. The assessee has not challenged the disallowance sustained by the learned CIT(A).
13. The learned Departmental Representative (DR) relied upon the assessment order and placed on records a written submissions dated 03.03.2025. He submitted that the Assessing Officer had raised serious doubts concerning the creditworthiness of the borrowers, collateral security, genuineness of share-application money, deposits accepted from nominal or non-existent members and diversion of funds through salaries, incentives and commission.
14. The learned DR, however, fairly acknowledged in the written submissions that the AO had not quantified the allegedly non-genuine share-application money; the income from insurance agency, money-transfer agency, trading in shares and trading in bullion had not been separately quantified; the AO had neither listed nor quantified the transactions of the alleged dummy or non-existent persons; the deposits allegedly accepted from non-members or nominal members were not quantified; the AO had not brought on record the quantum of deposits which could allegedly be treated as unexplained; except for the payment of Rs.24,55,00,000/- to the Managing Director, other alleged instances of diversion through salaries, incentives or commission were not identified and the complete factual particulars were not brought on record by the AO.
15. On the above basis, the learned DR submitted that the learned CIT(A) ought to have called for a comprehensive remand report and undertaken further factual verification. He contended that the Tribunal, being the final fact-finding authority, should restore the matter to the AO for bringing the complete facts on record. In support thereof, he relied upon Vijay Kumar Talwar v. CIT (2011) 330 ITR 1 (SC), Kanubhai N. Amin v. Asstt. CIT (1989) 35 TTJ (Ahd.) 306 and Anusayaben A. Doshi v. Joint Commissioner of Income-tax.
16. Per contra, the learned Authorised Representative (AR) relied upon the order of the learned CIT(A). He submitted that the Assessing Officer had been afforded sufficient opportunity during the assessment as well as the appellate proceedings, but had failed to identify any specific nominal member, non-member or fictitious member or to quantify the income arising from any such transaction. The learned AR accordingly submitted that no further opportunity could be granted to the Revenue to improve upon the assessment order and that the appeal deserved to be dismissed.
17. We have considered the rival submissions and perused the material available on record. The principal controversy is whether the learned CIT(A) was justified in allowing the assessee’s claim under section 80P(2)(a)(i), despite the allegations of the AO concerning absence of mutuality, dealings with nominal or non-existent members, alleged diversion of funds and irregularities in the functioning of the assessee.
18. Section 80P(2)(a)(i), insofar as relevant, grants deduction in respect of the profits and gains of business attributable to carrying on the business of banking or providing credit facilities to members. Section 80P(4), on the other hand, excludes a co-operative bank, other than the institutions specifically excepted therein, from the benefit of section 80P.
19. It is an admitted position that the assessee is registered as a co-operative society and was subsequently registered as a Multi-State Co-operative Society. The Assessing Officer has not recorded that the assessee held a licence issued by the Reserve Bank of India to carry on banking business. Nor has he examined and established the cumulative statutory conditions necessary to treat the assessee as a co-operative bank under Part V of the Banking Regulation Act, 1949.
20. The law has since been authoritatively explained by the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 431 ITR 1 (SC). The Hon’ble Supreme Court held:
“The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one.” (para 33)
21. The Hon’ble Supreme Court further explained that section 80P(4) operates to exclude co-operative banks functioning at par with commercial banks. Therefore, the mere fact that a co-operative society accepts deposits from its members and provides credit facilities to them does not, without more, bring it within the exclusion contained in section 80P(4).
22. In the present case, the learned CIT(A) recorded a categorical finding that the assessee was not carrying on banking activities and that even the assessment order described its status as a co-operative society and not as a co-operative bank. The Revenue has not brought before us any material demonstrating that the said finding is factually incorrect. We, therefore, find no infirmity in the conclusion of the learned CIT(A) that section 80P(4) was not attracted.
23. The Assessing Officer has substantially proceeded on the premise that any alleged failure of mutuality would automatically disentitle the assessee to the entire deduction under section 80P. We are unable to subscribe to such a broad proposition. The claim under section 80P is a statutory deduction and its admissibility must be examined with reference to the ingredients of the relevant clause. The general doctrine of mutuality cannot be substituted for the specific statutory conditions enacted in section 80P(2)(a)(i).
24. The AO referred to non-members, nominal members, dummy members and eight allegedly fictitious persons. However, despite a detailed scrutiny assessment, he did not identify any such person in the assessment order. He did not set out the relevant membership application, nature of membership, deposit, loan, transaction or the income attributable thereto. The allegations were substantially drawn from enquiries or findings relating to earlier years. No year-specific material was incorporated in the assessment order to establish that the assessee, during A.Y. 2014-15, was carrying on the business of providing credit facilities to the general public.
25. The distinction drawn by the learned CIT(A) between the present case and Citizen Co-operative Society Ltd. v. ACIT (2017) 397 ITR 1 (SC) is, therefore, justified. In that case, there were categorical findings that the society was dealing with two distinct classes, that the depositors and borrowers were distinct, that substantial business was conducted with persons who were not members in the real sense and that loans were granted to the general public in violation of the governing co-operative law. The Hon’ble Supreme Court expressly observed:
“These are the findings of fact which have remained unshaken till the stage of the High Court.” (para 27)
26. No comparable finding, supported by identified persons and transactions, is available in the present assessment order. The learned DR has also expressly acknowledged that the AO neither listed nor quantified the alleged transactions with non-members, nominal members or dummy persons. The decision in Citizen Co-operative Society Ltd. rests upon its own established facts and cannot be applied merely on the basis of unparticularised allegations.
27. We also find no merit in Ground No. 3 relating to the payment of salaries, incentives and commission. The assessment order refers to payment of salary and incentives aggregating to Rs.24,55,00,000/- to the Managing Director. However, no finding has been recorded that the payment was bogus, that no services were rendered, that it was prohibited by the registered bye-laws or that it was otherwise disallowable under any particular provision of the Act. No independent disallowance was made in respect thereof. The mere quantum of managerial remuneration, without a legally sustainable finding concerning its deductibility, cannot result in denial of the entire deduction under section 80P.The learned DR’s written submissions themselves demonstrate that the AO did not quantify the disputed share-application money, the alleged deposits from non-members, the transactions with dummy persons, the income from other activities or the alleged diversion of funds, except for the solitary reference to the remuneration of the Managing Director. The deficiencies acknowledged by the learned DR are deficiencies in the foundation of the assessment order. They do not constitute fresh evidence disproving the findings recorded by the learned CIT(A).
28. We are also not persuaded by the request of the learned DR to restore the entire matter to the AO. The assessee had furnished voluminous material during the assessment proceedings. The AO had issued detailed questionnaires and was afforded full opportunity to examine the material. During the appellate proceedings also, the AO personally appeared before the learned CIT(A) and filed a written submission dated 09.02.2018. The assessee’s rejoinder was thereafter obtained. Thus, irrespective of whether the communication filed by the AO was formally described as a remand report, the AO had an effective opportunity to place his factual objections before the learned CIT(A).
29. The decisions cited by the learned DR concerning the Tribunal’s position as the final fact-finding authority do not lay down that the Tribunal must invariably restore a matter whenever the assessment order lacks particulars. The Tribunal’s duty to appreciate the facts cannot be converted into a duty to enable the AO to make a fresh or roving enquiry to discover the factual foundation of an addition already made. No specific document, member, transaction or material has been produced before us to demonstrate an error in the factual findings recorded by the learned CIT(A). We, therefore, decline the request for remand.
30. Ground No. 4 proceeds on the basis that the disallowance of Rs.20,00,000/- by the learned CIT(A) amounts to a finding that there was a rupture in mutuality. This reading is not borne out from paragraph 4.5 of the impugned order. The learned CIT(A) expressly recorded that no specific nominal member had been proved by the AO. The disallowance was made merely to protect the interest of the Revenue against an uncertain and unidentified possibility. Such a protective disallowance cannot be elevated into an affirmative finding that dealings with nominal members had been established.
31. We notice that, while paragraph 4.5 of the impugned order refers to a disallowance of Rs.20,00,000/-, paragraphs 4.4 and 4.6 state that deduction of Rs.1,65,40,31,148/- was allowed against the original claim of Rs.1,65,50,31,148/-. There is thus an apparent arithmetical inconsistency in the impugned order. However, the assessee has neither filed an appeal nor a cross-objection against the amount sustained by the learned CIT(A). We, therefore, do not enlarge the relief granted to the assessee and leave the operative relief under the impugned order undisturbed. The Revenue cannot derive any further adverse inference against the assessee from a disallowance already sustained in favour of the Revenue.
32. In view of the foregoing discussion, we find that the Revenue has failed to bring any material on record warranting interference with the conclusion reached by the learned CIT(A). The learned CIT(A) examined the registration of the assessee, its registered bye-laws, the nature of its activities, the assessment order, the response filed by the AO and the assessee’s rejoinder. His finding that no specific case of a nominal member, non-member or fictitious member was established for the assessment year under consideration remains uncontroverted.
33. Accordingly, Ground Nos. 1 to 4 raised by the Revenue are dismissed.
34. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on 01.09.2026.
