2025 (6) TMI 1535 - AT - Income Tax

Disallowance of deduction u/s 80P(2)(a)(i) - interest earned by the assessee society from nominal members / B class members - AR submitted that as per the said Act members include nominal members and therefore the assessee has rightly claimed deduction under section 80P(2)(a)(i) - HELD THAT - As on perusal of the relevant provisions of the Maharashtra Cooperative Societies Act 1960 find that the members under the said Act include non-members thereby making the assessee eligible for its claim of deduction under section 80P(2)(a)(i) of the Act. We find that the impugned issue is no more res-integra and covered in favour of the assessee by the decision of Mavilayi Service Co-operative Bank Ltd. 2021 (1) TMI 488 - SUPREME COURT it is relevant to note that the term Member has been defined u/s 2(19) in the Maharashtra Act to mean a person joining in an application for the registration of a Cooperative society which is subsequently registered or a person duly admitted to membership of a society after registration and includes a nominal associate or sympathizer member . On going through the above definition of Member it becomes overt that the term Member also includes a Nominal Member. Once it is accepted that the assessee governed by the Maharashtra Act made advances to certain Nominal Members from whom interest income was earned there can be no doubt whatsoever that the deduction u/s 80P(2)(a)(i) has to be allowed. Thus assessee is eligible for deduction u/s 80P(2)(a)(i) of the Act on the impugned interest earned by it from the nominal members/B class during the relevant AY 2017-18.

The core legal questions considered in this appeal are:

1. Whether the deduction claimed under section 80P(2)(a)(i) of the Income Tax Act, 1961 is allowable in respect of interest income earned by the cooperative society from nominal members or B class members.

2. Whether the decision of the Hon'ble Supreme Court in Citizen Co-op Society Ltd. v. ACIT, which disallowed such deduction for nominal members, applies to a cooperative society registered under the Maharashtra Cooperative Societies Act, 1960.

3. Whether the definition of "members" under the Maharashtra Cooperative Societies Act, 1960 includes nominal members, and if so, whether such nominal members qualify for the deduction under section 80P(2)(a)(i).

4. The applicability and precedential value of decisions of coordinate benches of the Income Tax Appellate Tribunal (ITAT), particularly the Pune Bench, in similar cases involving nominal members and section 80P deductions.

Issue-wise Detailed Analysis

Issue 1: Allowability of Deduction under Section 80P(2)(a)(i) for Interest Income from Nominal Members

Relevant Legal Framework and Precedents: Section 80P(2)(a)(i) of the Income Tax Act provides deduction for the whole of the profits and gains of a cooperative society engaged in the business of banking or providing credit facilities to its members. The fundamental principle underlying this deduction is the principle of mutuality, which requires that the income be derived from dealings with bona fide members of the cooperative.

The Hon'ble Supreme Court in Citizen Co-op Society Ltd. v. ACIT held that nominal members are not members in the real sense and thus income from them does not qualify for deduction under section 80P.

Court's Interpretation and Reasoning: The Assessing Officer (AO) and the Additional/Joint Commissioner of Income Tax (Appeals) ("Addl./JCIT(A)") relied on the Citizen Co-op decision to deny deduction for interest income earned from nominal members, treating them as akin to the general public, thus not fulfilling the mutuality principle.

The appellant argued that the Citizen Co-op decision is not applicable as it pertained to the Andhra Pradesh Mutually Aided Cooperative Societies Act, which did not include nominal members within the definition of members. The appellant relied on the Maharashtra Cooperative Societies Act, 1960, which explicitly includes nominal members within the definition of members.

Key Evidence and Findings: The assessee is registered under the Maharashtra Cooperative Societies Act, 1960, and the relevant statute defines "member" to include nominal members, associate members, and sympathizer members. The interest income in question was earned from such nominal members.

Application of Law to Facts: The Tribunal examined the definition of "member" under the Maharashtra Cooperative Societies Act, 1960, specifically section 2(19), which includes nominal members. The Tribunal distinguished the Citizen Co-op decision on the basis that the latter involved a different statutory framework where nominal members were excluded.

Treatment of Competing Arguments: The Revenue contended that the Citizen Co-op decision is binding and applicable, emphasizing the principle of mutuality and the lack of real membership rights for nominal members. The assessee countered that the statutory definition under the Maharashtra Act includes nominal members, and therefore, the deduction should be allowed.

Conclusion: The Tribunal held that since the Maharashtra Act includes nominal members within the definition of members, the interest income earned from such members qualifies for deduction under section 80P(2)(a)(i). The principle of mutuality is satisfied in the context of the relevant state law.

Issue 2: Applicability of the Citizen Co-op Society Ltd. Decision to Societies Registered under the Maharashtra Cooperative Societies Act, 1960

Relevant Legal Framework and Precedents: The Citizen Co-op decision was based on the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995, which did not recognize nominal members as members for the purpose of claiming deductions under section 80P.

The Hon'ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT revisited the Citizen Co-op decision and clarified its applicability, emphasizing the need to interpret the term "member" in the context of the relevant state cooperative law.

Court's Interpretation and Reasoning: The Tribunal relied heavily on the Supreme Court's decision in Mavilayi Service Co-operative Bank Ltd., which held that the term "member" in section 80P must be construed in light of the state law under which the cooperative society is registered. The Supreme Court observed that the Kerala Cooperative Societies Act included nominal members within its definition of members, unlike the Andhra Pradesh Act.

Key Evidence and Findings: The Maharashtra Cooperative Societies Act, 1960, defines "member" to include nominal members, which aligns with the Kerala Act considered in Mavilayi. Therefore, the reasoning in Citizen Co-op is not directly applicable.

Application of Law to Facts: The Tribunal applied the Supreme Court's directive to interpret "member" according to the Maharashtra Act, thereby recognizing nominal members as members for section 80P purposes.

Treatment of Competing Arguments: The Revenue's reliance on Citizen Co-op was countered by the assessee's reliance on Mavilayi and coordinate bench decisions from Pune ITAT, which supported the assessee's position.

Conclusion: The Tribunal concluded that the Citizen Co-op decision is distinguishable and not applicable to societies registered under the Maharashtra Cooperative Societies Act, 1960, where nominal members are recognized as members.

Issue 3: Definition of "Members" under the Maharashtra Cooperative Societies Act, 1960 and Its Impact on Eligibility for Deduction under Section 80P

Relevant Legal Framework and Precedents: Section 2(19) of the Maharashtra Cooperative Societies Act, 1960 defines "member" as including nominal, associate, or sympathizer members. This statutory definition is pivotal in determining eligibility for deductions under section 80P.

Court's Interpretation and Reasoning: The Tribunal emphasized that the statutory definition must govern the interpretation of "member" under section 80P. Since nominal members are included in the definition, income earned from them is attributable to dealings with members.

Key Evidence and Findings: The assessee's advances and interest income from nominal members fall within the scope of "members" as per the Maharashtra Act.

Application of Law to Facts: The Tribunal applied the statutory definition to hold that the interest income from nominal members qualifies for deduction under section 80P(2)(a)(i).

Treatment of Competing Arguments: The Revenue argued that nominal members lack real membership rights such as voting or dividend entitlement, thus failing the mutuality test. The Tribunal rejected this argument, relying on the statutory inclusion of nominal members and the Supreme Court's directive to interpret "member" in accordance with state law.

Conclusion: The Tribunal held that nominal members are members for the purpose of section 80P deduction under the Maharashtra Act.

Issue 4: Precedential Value of Pune ITAT Decisions in Similar Cases

Relevant Legal Framework and Precedents: The Pune ITAT in cases such as Sai Prerana Gramin Biggar Sheti Sahakari Pat Sanstha Ltd. and Nivruttisheth Gramin Bigarsheti Sahakari Patsanstha Ltd. has ruled in favor of allowing deductions under section 80P for interest income earned from nominal members under the Maharashtra Act.

Court's Interpretation and Reasoning: The Tribunal relied on these coordinate bench decisions, which followed the Supreme Court's ruling in Mavilayi, to support the assessee's claim.

Key Evidence and Findings: These decisions establish a consistent judicial trend favoring the inclusion of nominal members within the ambit of section 80P deductions when the society is registered under the Maharashtra Act.

Application of Law to Facts: The Tribunal applied this precedent to the facts of the present case, where the assessee is similarly situated.

Treatment of Competing Arguments: The Revenue did not produce any contrary judicial authority to rebut these precedents.

Conclusion: The Tribunal found the Pune ITAT decisions persuasive and binding on the facts, thereby allowing the deduction.

Significant Holdings

"The expression 'members' in Section 80P(2)(a)(i) must 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."

"While a co-operative society may have various categories of members as per the relevant state laws, it must also comply with the requirements under the Income Tax Act, particularly under Section 80P, to claim deductions. However, the fundamental principle of mutuality is satisfied if the statutory law recognizes such members."

"The Hon'ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. clarified that the deduction under section 80P must be read liberally and reasonably, and if there is ambiguity, in favor of the assessee."

"Nominal members, as defined under the Maharashtra Cooperative Societies Act, 1960, are members for the purpose of section 80P(2)(a)(i) deduction, and income earned from such members qualifies for deduction."

"The decision in Citizen Co-op Society Ltd. is distinguishable and not applicable to cooperative societies registered under the Maharashtra Cooperative Societies Act, 1960."

"In absence of any contrary material brought on record by the Revenue, the assessee is entitled to deduction under section 80P(2)(a)(i) on interest income earned from nominal members/B class members."

Accordingly, the Tribunal set aside the orders of the AO and Addl./JCIT(A) and allowed the appeal, directing the AO to grant the deduction claimed by the assessee under section 80P(2)(a)(i) for the relevant assessment year.

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