2025 (7) TMI 1216 - AT - Income Tax

Disallowances of deduction claimed u/s 80P(2)(a)(i) - e-stamping commission earned from non-members - HELD THAT - The authorities below disallowed the entire deduction u/s 80P solely on the ground that a minor portion of income was earned from e-stamping commission involving transactions with non-members thereby allegedly violating the principles of mutuality but we find that this approach is legally and factually unsustainable. The principle of mutuality applies to assess whether the core activities of the cooperative society qualify for deduction u/s 80P of the Act. It is well settled that incidental or minor transactions with nonmembers which are negligible compared to the total business activities do not disentitle the assessee from claiming the benefit of section 80P of the Act on its main activities with members. We are of the considered view that that the doctrine of mutuality is not destroyed merely because the club or organization earns income from incidental or minor transactions with non-members. What matters is whether the predominant activity is mutual in nature. Courts have consistently ruled that the eligibility for deduction u/s 80P(2)(a)(i) must be determined with reference to the predominant or main business activity of the society not incidental or minimal income from non-members. Accordingly we hold that the AO and CIT(A) were not justified in denying the entire deduction u/s 80P of the Act on account of the minimal e-stamping commission earned from nonmembers. The assessee is entitled to the deduction u/s 80P(2)(a)(i) of the Act for its income from business with members. Interest income earned on the FD with Cooperative Bank - As per section 57(2) every co-operative society is required to set aside at least 25% of its net profit each year as a reserve fund. Further as per section 58 of said Act such reserve funds must be mandatorily invested in specified institutions including Co-operative Banks. We find that this statutory requirement imposes a legal obligation on the assessee society to maintain such deposits thereby restricting its ability to freely use or withdraw these funds for its business operations without prior approval from the Registrar of Co-operative Societies. Given this statutory compulsion we find that the interest income arising from these deposits cannot be equated with interest income derived from surplus funds voluntarily parked in banks for earning a return. Therefore we hold that the interest income earned from such statutory deposits should be considered as operational income derived in the course of the assessee s business and consequently qualifies for deduction u/s 80P(2)(a)(i) of the Act. In holding so we also draw support and guidance from the Judgment of Hon ble Supreme court in the case of CIT versus Karnataka State cooperative apex bank 2001 (8) TMI 9 - SUPREME COURT . Thus we hold that the assessee is entitled to deduction u/s 80P(2)(a)(i) on the interest income earned from deposits made in compliance with statutory requirements. We further note that the assessee during the assessment proceeding has provided the working of the amount required to be deposited as per statutory requirement. AO and CIT(A) have not given any finding on the same. Hence we direct the AO to verify such working and allow the appropriate deduction as per above finding. Hence the ground of appeal filed by the assessee is hereby allowed.

Summary

ISSUES:

Whether the entire claim of deduction under section 80P of the Income Tax Act is disallowed due to minor income from e-stamping commission earned from non-members, allegedly violating the principle of mutuality.Whether interest income earned on fixed deposits with a cooperative bank, made pursuant to statutory requirements under the Karnataka State Co-operative Societies Act, 1959, qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act.

RULINGS / HOLDINGS:

Minor incidental income from non-members, such as e-stamping commission, does not destroy the principle of mutuality or disentitle the cooperative society from claiming deduction under section 80P of the Act on its predominant business activities with members; the entire deduction cannot be denied on this ground.Interest income earned on deposits mandatorily made under statutory obligations pursuant to sections 57(2) and 58 of the Karnataka State Co-operative Societies Act, 1959, constitutes operational income derived in the course of the cooperative society's business and qualifies for deduction under section 80P(2)(a)(i) of the Income Tax Act.

RATIONALE:

The principle of mutuality is applied to assess whether the core activities of a cooperative society qualify for deduction under section 80P. Incidental or minimal transactions with non-members do not negate mutuality if the predominant activity remains mutual in nature. This is supported by judicial precedents including the ruling that exemption on the principle of mutuality is not lost due to minor non-member transactions.The statutory framework under the Karnataka State Co-operative Societies Act, 1959, mandates cooperative societies to set aside a portion of net profits as reserve funds and invest them in specified institutions, including cooperative banks. Such deposits are not voluntary investments but compulsory for carrying on business, as per sections 57(2) and 58 of the Act.Judicial authority, including the Supreme Court decision in CIT versus Karnataka State Cooperative Apex Bank, clarifies that income derived from funds mandatorily placed to carry on business is business income eligible for deduction under section 80P(2)(a)(i). The income cannot be treated as income from other sources merely because it arises from deposits.The assessment authorities erred in treating interest income from such statutory deposits as income from other sources and denying deduction under section 80P. The correctness of the amount deposited as per statutory requirement must be verified to allow appropriate deduction.