Section 80P deduction on Income from Loan to nominal / associate member: ITAT Remands case to CIT(A)

Hunnur Souhard Credit Sahakari Vs ITO (ITAT Bangalore)

Section 80P deduction on Income from Loan to nominal / associate member: ITAT Remands Decision to CIT(A) for Fresh Review

The Income Tax Appellate Tribunal (ITAT) in Bangalore has decided to remand the case of Hunnur Souhard Credit Sahakari vs. Income Tax Officer (ITO) concerning the applicability of Section 80P of the Income Tax Act, 1961. This case pertains to the assessment year 2017-18, where the National Faceless Assessment Centre (NFAC) had previously rejected the assessee’s claim for a deduction under Section 80P(2)(a)(i).

Background of the Case

The appeal was directed against an order issued by the NFAC on May 16, 2024, which was made under Section 250 of the Income Tax Act. The central issue was the rejection of the claim by Hunnur Souhard Credit Sahakari for a deduction related to income earned from providing loans to nominal and associate members. The assessee contested this decision, arguing that it was unfair and lacked merit.

Dismissal by CIT(A)

Upon review, the Commissioner of Income Tax (Appeals) [CIT(A)] dismissed the appeal filed by Hunnur Souhard Credit Sahakari for non-prosecution, without addressing the substantive issues raised by the assessee. This dismissal was a critical point of contention in the appeal to ITAT, as it prevented a proper examination of the merits of the case.

ITAT’s Review and Findings

In its deliberations, the ITAT carefully considered the arguments presented by both parties. The tribunal noted that the dismissal of the case by CIT(A) lacked a substantive decision on the merits. To ensure a fair hearing, the ITAT deemed it necessary to remand the issue back to the CIT(A) for a thorough review.

Citing previous case law, particularly the decision from the Supreme Court in Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr., the ITAT emphasized that the term “member” is not defined within the Income Tax Act. As such, the definition provided by the respective State Co-operative Societies Acts should be considered. The apex court had previously held that co-operative societies offering credit facilities to their members are entitled to deductions under Section 80P(2)(a)(i).

The tribunal highlighted that if the State Co-operative Societies Act permits nominal or associate members, the income generated from lending to these members would also qualify for the deduction.

Similar Cases Considered

The ITAT referred to its earlier decision in M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO (ITA No.1262/Bang/2019), where a similar issue was addressed. In that case, the tribunal had remanded the issue to the Assessing Officer for a de novo consideration, instructing adherence to the principles set forth by the Supreme Court.

The ITAT noted that the issues in the present case closely mirrored those in the Ravindra case. Therefore, it restored the issue regarding the claim of deduction under Section 80P(2)(a)(i) back to the Assessing Officer for a fresh review.

Implications for Cooperative Societies

This ruling holds significant implications for cooperative societies that provide loans to nominal and associate members. The ITAT’s emphasis on reviewing the definition of “member” in light of state legislation suggests that many cooperative societies may still be eligible for tax deductions under Section 80P, provided they meet the requirements laid out by their respective state laws.

Conclusion

The ITAT’s decision to remand the case of Hunnur Souhard Credit Sahakari provides an opportunity for a proper evaluation of the assessee’s claims regarding Section 80P deductions. The tribunal’s ruling underscores the necessity for a detailed examination of the facts surrounding the classification of members and the corresponding eligibility for tax benefits.

In summary, the appeal has been partly allowed for statistical purposes, and the matter is now set for fresh consideration by the CIT(A), ensuring that the assessee is afforded a fair opportunity to present its case. This development highlights the importance of adhering to due process in tax adjudication, especially for cooperative societies operating under unique regulatory frameworks.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal by assessee is directed against order of NFAC dated 16.05.2024 for the assessment yar 2017-18 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act).

2. The assessee came in appeal before us with regard to rejecting the claim of assessee u/s 80P(2)(a)(i) of the Act by ex-parte order of NFAC.

3. We have heard the rival submissions and perused the materials available on record. The ld. CIT(A) dismissed the appeal of the assessee for non-prosecution without deciding the issues on merit. In our opinion, in the interest of justice, it is appropriate to remit the issue to the file of ld. CIT(A) to decide the issue on merit after taking into note of the order of the decision of this Tribunal in the case of Kotekar Vyavasaya Seva Sahakara Sangha Niyamitha in ITA Nos.452 to 454/Bang/2024 dated 1.5.2024, where in the Tribunal held as under:

“4. We have heard the rival submissions and perused the materials available on record. The Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (123 taxman.com 161) had held that the co­operative societies providing credit facilities to its members is entitled to deduction u/s 80P(2)(a)(i) of the Act. The Hon’ble Apex Court after considering the judicial pronouncements on the subject, had stated the term “member” has not been defined under the Income-tax Act. It was, therefore, stated by the Hon’ble Apex Court that the term “member” in the respective State Co-operative Societies Acts under which the societies are registered have to be taken into consideration. The Hon’ble Apex Court held that if nominal / associate member is not prohibited under the said Act, for being taken as a member, the income earned on account of providing credit facilities to such member also qualify for deduction u/s 80P(2)(a)(i) of the Act. It was further held by the Hon’ble Apex Court that section 80P(4) of the I.T. Act is to be read as a proviso. It was stated by the Hon’ble Apex Court that section 80P(4) of the Act now specifically excludes only co-operative banks which are co-operative societies engaged in the business of banking i.e. engaged in lending money to members of the public, which have a license in this behalf from the RBI. The Hon’ble Apex Court had enunciated various principles in regard to deduction u/s 80P of the Act. On identical factual situation, the Bangalore Bench of the Tribunal in the case of M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO in ITA No.1262/Bang/2019 (order dated 31.08.2021) had remanded the issue to the files of the A.O. for de novo consideration. The Tribunal directed the A.O. to follow the dictum laid down by the Hon’ble Apex Court in the case of Mavilayi Service Co-operative Bank Ltd. & Ors. v. CIT & Anr. (supra). The relevant finding of the Co-ordinate Bench of the Tribunal in the case of M/s. Ravindra Multipurpose Cooperative Society Ltd. v. ITO (supra), reads as follows:-

“6. Grounds 2-4 & additional Ground No.1:

In respect of associate / nominal members, Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT (2021) 123 taxmann.com 161 (SC) has held that the expression “Members” is not defined in the Income-tax Act. Hence, it is necessary to construe the expression “Members” in section 80P(2)(a)(i) of the Act in the light of definition of that expression as contained in the concerned co-operative societies Act. In view of this, the facts are to be examined in the light of principles laid down by the Hon’ble Supreme Court in Mavilayi Service Cooperative Bank Ltd. (surpa).

Accordingly, we remit this issue of deduction u/s 80P(2)(a)(i) of the Act to the files of Ld.AO to examine the same de novo in the light of the above judgment. Needless to say that proper opportunity of being heard is to be granted to assess in accordance with law.”

4.1 In view of the order of the ITAT, which is identical to the facts of the case, we restore the issue of claim of deduction u/s 80P(2)(a)(i) of the Act to the file of the A.O. for de novo consideration.”

3.1 Accordingly, the grounds raised by the assessee are remitted to the file of ld. CIT(A)/NFAC for fresh consideration for giving an opportunity of hearing to the assessee.

4. In the result, appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 21^st Aug, 2024