Panchagangavali Souharda Credit Cooperative Pvt. Ltd. Vs ITO (ITAT Bangalore)
The Income Tax Appellate Tribunal (ITAT), Bangalore, allowed the assessee’s appeals for Assessment Years 2017-18 and 2018-19, holding that deduction under Section 80P(2)(a)(i) of the Income-tax Act cannot be denied merely because a co-operative society has different classes of members with varying rights, where such members are recognized under the applicable State law. The Tribunal also held that enhanced business income arising from disallowance of expenditure remains eligible for deduction under Section 80P if it relates to the society’s eligible business.
For Assessment Year 2017-18, the Assessing Officer (AO) denied deduction under Section 80P(2)(a)(i) on the ground that the assessee, registered under the Karnataka Souharda Sahakari Act, 1997, had A-Class, C-Class and D-Class members. According to the AO, C-Class and D-Class members lacked voting rights, profit-sharing rights and participation in management, resulting in violation of the principle of mutuality. The AO relied on the Supreme Court’s decision in Citizen Co-operative Society Ltd. and held that the assessee was substantially dealing with non-members. The Commissioner of Income Tax (Appeals) affirmed the disallowance.
The Tribunal observed that Section 80P does not define the expression “members” and that, in view of the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd., the meaning of “members” must be determined with reference to the State co-operative law. Since the Karnataka Souharda Sahakari Act recognizes nominal and associate members, the Tribunal held that transactions with such members cannot automatically be treated as dealings with non-members merely because they enjoy restricted rights. It further held that the decision in Citizen Co-operative Society Ltd. cannot be mechanically applied to every case involving nominal members and that the lower authorities had failed to examine whether there was any actual violation of the State law relating to admission of associate members. The Tribunal also noted that the assessee had contended that associate members constituted only 230 out of 2,071 total members and were within the permissible limit under the State law. Accordingly, it directed the AO to allow the deduction under Section 80P(2)(a)(i).
