2025 (5) TMI 1162 - AT - Income Tax

Denial of deduction u/s. 80P(2)(d) - interest income earned from the scheduled banks and co-operative banks - concept of mutuality ceases to exists when the nominal members are present and not entitled to share the profits or losses and also barred from holding voting rights - HELD THAT - The assessee society is entitled for deduction u/s. 80P(2)(a)(i) of the Act even though the society is having nominal members. Since we are granting the relief in respect of the interest income claimed u/s. 80P(2)(a)(i) of the Act the order of the Ld.CIT(A) remanding the matter to the AO for bifurcating the interest income obtained from the members as well as from the co-operative banks is not required. We set aside the findings of the Ld.CIT(A) insofar as the claim made u/s. 80P(2)(a)(i) is concerned and allow the appeal filed by the assessee. In view of this order the assessee is entitled for deduction both under Section 80P(2)(a)(i) as well as under Section 80P(2)(d) of the Act. The above said finding given in respect of the A.Y. 2015-16 shall apply mutatis mutandis to the other appeals in respect of A.Ys. 2016-17 to 2018-19. Appeals filed by the assessee are allowed.

Summary

The core legal questions considered in this matter revolve around the entitlement of a co-operative society to claim deduction under Section 80P(2)(a)(i) and Section 80P(2)(d) of the Income Tax Act, particularly focusing on the applicability of the mutuality principle in the presence of nominal or "C" class members within the society. The issues can be summarized as follows:

1. Whether the presence of nominal ("C" class) members, who do not have voting rights or rights to share profits or losses, violates the principle of mutuality, thereby disentitling the co-operative society from claiming deduction under Section 80P(2)(a)(i) of the Act.

2. Whether the assessee is entitled to claim deduction under Section 80P(2)(d) on interest income earned from scheduled banks and co-operative banks.

3. The correctness of the lower authorities' treatment of nominal members as non-members or general public for the purpose of denying the deduction.

Issue-wise Detailed Analysis

Issue 1: Applicability of Mutuality Principle and Deduction under Section 80P(2)(a)(i) in the presence of Nominal Members

Relevant Legal Framework and Precedents:
Section 80P(2)(a)(i) provides deduction to co-operative societies on income earned from transactions with their members. The mutuality principle, traditionally, requires that the society's transactions be exclusively with its members to claim such deduction. The definition of "member" is crucial and is governed by the relevant State Co-operative Societies Act. The Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. v. CIT (431 ITR 1) is a pivotal precedent that clarified the scope of "members" under the respective State Act and its impact on the mutuality principle. Additionally, the U.P. Cooperative Cane Unions' Federation Ltd. v. CIT (1997) 11 SCC 287 was referenced for interpreting the term "member" in the context of Section 80P.

Court's Interpretation and Reasoning:
The Tribunal noted that the lower authorities (AO and CIT(A)) had disallowed the deduction on the ground that the presence of "C" class nominal members, who lack voting rights and rights to share profits or losses, violates the mutuality principle. The authorities treated these nominal members as non-members or general public, thereby denying the deduction under Section 80P(2)(a)(i).However, the Tribunal relied heavily on the Supreme Court's ruling in Mavilayi Service Co-operative Bank Ltd., which held that the definition of "member" must be understood in the context of the State Co-operative Societies Act under which the society is registered. The Kerala Act's definition of "member" includes nominal members, and loans given to such members qualify for deduction under Section 80P(2)(a)(i). The Court emphasized that the mere presence of nominal members does not extinguish the mutuality principle or the society's entitlement to deduction.

Key Evidence and Findings:
The assessee society had two classes of members: "A" class (regular members) and "C" class (nominal members). The nominal members were admitted as members under the State Act and were not treated as outsiders. There were no transactions with non-members. The assessee's claim was supported by the Supreme Court's authoritative interpretation, which was overlooked by the lower authorities.

Application of Law to Facts:
Applying the Supreme Court's interpretation, the Tribunal held that the nominal members are indeed "members" as per the relevant State law. Consequently, the mutuality principle is not violated by their presence. The society's transactions with these nominal members qualify for deduction under Section 80P(2)(a)(i). The Tribunal also found no justification for remanding the matter to the AO for bifurcation of income between members and co-operative banks since the mutuality principle stood satisfied.

Treatment of Competing Arguments:
The Revenue contended that nominal members should be treated as non-members, thus disallowing the deduction. The Tribunal rejected this view, emphasizing the binding nature of the Supreme Court's ruling and the statutory definition of "member" under the State Act. The assessee's reliance on the Supreme Court judgment and a favorable ITAT decision in a similar matter were accepted as authoritative.

Conclusions:
The Tribunal concluded that the presence of nominal members does not violate the mutuality principle and the assessee is entitled to claim deduction under Section 80P(2)(a)(i) of the Income Tax Act.

Issue 2: Deduction under Section 80P(2)(d) on Interest Income from Scheduled Banks and Co-operative Banks

Relevant Legal Framework and Precedents:
Section 80P(2)(d) allows deduction on interest income earned from scheduled banks and co-operative banks. The AO initially denied this deduction, relying on the Supreme Court's judgment in Citizen Cooperative Bank Ltd. case, which had implications on the eligibility of such deductions.

Court's Interpretation and Reasoning:
The CIT(A) allowed the deduction under Section 80P(2)(d) following the jurisdictional High Court's decision in PCIT vs. Totagars Sales Co-operative Society (2017) 78 taxmann.com 169. The Tribunal agreed with this approach, holding that the assessee is entitled to claim deduction under Section 80P(2)(d) as well.

Key Evidence and Findings:
The assessee's interest income from scheduled and co-operative banks was duly reported and claimed as deduction. The lower authorities' disallowance was considered inconsistent with the prevailing judicial precedents.

Application of Law to Facts:
The Tribunal applied the legal principles established by the High Court and accepted the assessee's claim for deduction under Section 80P(2)(d).

Treatment of Competing Arguments:
The Revenue's reliance on the Citizen Cooperative Bank judgment was distinguished on facts and subsequent judicial interpretations. The Tribunal favored the assessee's position in line with the High Court ruling.

Conclusions:
The assessee is entitled to deduction under Section 80P(2)(d) on interest income earned from scheduled and co-operative banks.

Significant Holdings

"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., Lucknow v. Commissioner of Income Tax, Lucknow-I (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 80P(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 80P(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)."

The Tribunal's final determination is that the assessee society is entitled to deduction under both Section 80P(2)(a)(i) and Section 80P(2)(d) of the Income Tax Act despite the presence of nominal members. The earlier orders of the AO and CIT(A) denying deduction under Section 80P(2)(a)(i) on the ground of violation of mutuality principle are set aside. The appeals for the assessment years 2015-16 to 2018-19 are allowed accordingly.