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2025 (6) TMI 487 - AT - Income TaxDeduction u/s 80P(2)(a)(i) - assessee a cooperative society registered under the Karnataka Cooperative Societies Act (KCS Act) despite having different classes of members particularly associate and nominal members - HELD THAT - We note that section 18 of the KCS Act places a restriction only on associate members limiting them not more than 15% of the total membership. AR argued that the society has only 14 associate members which is well within the permitted limit. However we observe that the AO has not verified this fact and for the sake of justice and fair play we find it appropriate to set aside this issue to the AO. We direct the AO to examine the status and number of members in light of section 18 of the KCS Act and to verify whether the society s associate members comply with the prescribed limit. AO further directed that if any member not found in conformity of the section 18 of the KCS Act then only the proportionate income earned from those associate member be excluded from for deduction u/s 80P(2)(a)(i). Accordingly whereas income pertaining to regular member and nominal member continue to be allowable as deduction. Interest income earned from fixed deposits (FDs) with cooperative banks - We understand the assessee s argument that such deposits are part of the statutory requirements under the KCS Act and should therefore be considered eligible for deduction. AO had treated the interest income from FDs as taxable under income from other sources disallowing the deduction. We direct the AO to specifically examine the statutory obligations under the KCS Act for making such FDs. If it is found that the deposits were indeed statutory and mandatory the AO shall allow the deduction to the extent of the interest income earned from these statutory deposits. In case any excess deposit than statutory obligation then proportionate interest income shall be excluded from deduction provided that the corresponding cost shall be allowed. AR s argument that the AO does not have the jurisdiction or authority to examine whether the assessee society complies with the provisions of KCS Act as this responsibility lies solely with the Registrar of Cooperative Societies - In this case section 18 of the KCS Act imposes a restriction on the proportion of associate members. This restriction is relevant to determining whether the principle of mutuality and the statutory framework are maintained for the purposes of section 80P deductions. Therefore we hold that the AO is within his rights to examine factual details such as the number and category of members especially when these details are critical to deciding the eligibility for tax deductions. In view of the above we set aside the relevant issues to the AO for fresh examination after verifying the factual and statutory positions. The AO is instructed to give the assessee a proper opportunity to present evidence and make submissions before passing the fresh order. Hence the ground of appeal of the assessee is allowed for statistical purposes.
Issues Presented and Considered
The core legal questions addressed by the Tribunal in these appeals concern:
Issue-wise Detailed Analysis 1. Eligibility for Deduction under Section 80P(2)(a)(i) in Presence of Multiple Classes of Members Legal Framework and Precedents: Section 80P(2)(a)(i) provides deduction to cooperative societies carrying on banking business. The principle of mutuality is central to this deduction, which requires that the society's business is carried out for the benefit of its members. The Supreme Court judgment in Citizen Cooperative Society Ltd. vs. ACIT, relied upon by the AO, held that the presence of nominal members (not permitted under the Multi-State Cooperative Societies Act, 1995) negates mutuality and thus disqualifies the society from claiming deduction under section 80P. However, the KCS Act explicitly permits nominal and associate members, with section 18 restricting associate members to a maximum of 15% of total membership. The Supreme Court decision in Mavilayi Service Cooperative Bank Ltd. vs. CIT was cited by the learned CIT(A), which recognized eligibility for deduction under section 80P even with such membership structure, subject to compliance with statutory limits. Court's Interpretation and Reasoning: The Tribunal acknowledged the difference in statutory frameworks between the MACS Act and the KCS Act. It emphasized that the restriction on associate members under section 18 of the KCS Act is relevant and must be verified. The Tribunal directed the AO to verify whether the number of associate members was within the 15% limit and to exclude income proportionate to any non-compliant members from the deduction. The Tribunal further held that nominal members, unlike associate members, are not subject to any statutory restriction and their income should continue to be eligible for deduction. Key Evidence and Findings: The society had 609 regular members, 14 associate members, and 3202 nominal members. The associate members were well within the 15% limit, but the AO had not verified this fact. The Tribunal found it appropriate to remit this issue to the AO for fresh examination. Application of Law to Facts: The Tribunal applied the statutory provisions of the KCS Act and the Supreme Court precedents to hold that the society is prima facie eligible for deduction under section 80P subject to compliance with section 18 of the KCS Act. Treatment of Competing Arguments: The AO's reliance on Citizen Cooperative Society Ltd. was distinguished on the basis that the MACS Act does not permit nominal members, unlike the KCS Act. The AR's contention that the AO lacked jurisdiction to examine compliance with the KCS Act was rejected, with the Tribunal holding that the AO has the duty to verify facts relevant to eligibility for tax deduction, including membership composition. Conclusion: The issue was remitted to the AO to verify membership compliance under section 18 of the KCS Act, with directions to exclude income proportionate to non-compliant associate members from deduction under section 80P(2)(a)(i). Income from regular and nominal members remains eligible. 2. Eligibility of Interest Income from Fixed Deposits with Cooperative Banks Legal Framework and Precedents: Section 80P(2)(a)(i) allows deduction for income from banking business carried on by cooperative societies. The AO disallowed interest income from FDs with cooperative banks as not arising from eligible business and taxed it under "income from other sources." The AR relied on the Supreme Court ruling in Mavilayi Service Cooperative Bank Ltd., arguing that income from investments made as part of statutory obligations should be eligible for deduction. Court's Interpretation and Reasoning: The Tribunal recognized the AR's argument that deposits with cooperative banks may be statutory or mandatory under the KCS Act. It directed the AO to examine whether such deposits were indeed statutory obligations. If so, the interest income earned thereon should be allowed deduction under section 80P(2)(a)(i). If deposits exceed statutory requirements, proportionate interest income should be excluded from deduction, though corresponding costs would be allowed. Key Evidence and Findings: The AO had not examined the statutory nature of the deposits. The Tribunal's direction to the AO to verify the statutory obligations ensures that only income from mandatory deposits is allowed deduction. Application of Law to Facts: The Tribunal applied a purposive interpretation of section 80P to promote cooperative societies and held that statutory deposits are integral to the business and thus eligible for deduction. Treatment of Competing Arguments: The AO's categorical disallowance was moderated by the Tribunal's direction to examine statutory requirements, balancing the revenue's interest with the cooperative's legitimate claim. Conclusion: Interest income from statutory fixed deposits with cooperative banks is eligible for deduction under section 80P(2)(a)(i), subject to verification by the AO. 3. Allowability of Provision for Bad and Doubtful Debts (RBDD) Legal Framework: Provisions that are not actual expenditure or ascertained liabilities are generally not allowable deductions under the Income Tax Act. Court's Interpretation: The AO disallowed the RBDD provision of Rs. 5 lakh, holding it was neither expenditure nor an ascertained liability. The Tribunal did not specifically reverse or comment on this finding, implying acceptance of the AO's view. Conclusion: The RBDD provision was rightly disallowed as deduction. 4. Jurisdiction of AO to Examine Compliance with KCS Act Legal Framework: The Registrar of Cooperative Societies is the primary authority for compliance under the KCS Act. However, for tax deduction claims under section 80P, the AO must verify eligibility conditions under the Income Tax Act. Court's Interpretation and Reasoning: The Tribunal held that the AO has jurisdiction to examine factual aspects such as membership composition and statutory limits under the KCS Act, insofar as they affect eligibility for tax benefits. This is necessary to ensure that the principle of mutuality and statutory framework are maintained for section 80P deductions. Conclusion: The AO's role in verifying compliance with relevant statutory provisions affecting tax eligibility is affirmed. Significant Holdings "Section 18 of the KCS Act imposes a restriction on the proportion of associate members. This restriction is relevant to determining whether the principle of mutuality and the statutory framework are maintained for the purposes of section 80P deductions. Therefore, we hold that the AO is within his rights to examine factual details such as the number and category of members, especially when these details are critical to deciding the eligibility for tax deductions." "If it is found that the deposits were indeed statutory and mandatory, the AO shall allow the deduction to the extent of the interest income earned from these statutory deposits. In case any excess deposit than statutory obligation then proportionate interest income shall be excluded from deduction provided that the corresponding cost shall be allowed." Core principles established include:
Final determinations on each issue were that the appeals were allowed for statistical purposes with directions for the AO to re-examine the membership composition and statutory deposits in light of the above principles, ensuring compliance with the KCS Act and correct application of section 80P deductions for the assessment years 2016-17, 2017-18, and 2018-19.
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