THE BHARATHI CO-OPERATIVE CREDIT SOCIETY,BENGALURU V. INCOME TAX OFFICER, WARD-7(2)(1), BANGALORE

ITA 851/BANG/2025

AI Insights

The case involves M/s The Bharathi Co-operative Credit Society appealing against the order of the National Faceless Appeal Centre (NFAC), which disallowed a deduction claimed under section 80P(2)(a)(i) of the Income Tax Act for the assessment year 2013-14. The primary issue was the interpretation of 'mutuality' in the context of different categories of members within the society. The Assessing Officer initially disallowed the deduction based on the absence of mutuality, as the society had associate and nominal members who did not participate in the surplus or profits. The CIT(A) upheld this decision, referencing the Supreme Court's ruling in Citizen Co-operative Society Ltd. The Tribunal, however, found that the matter required re-examination in light of its previous decisions and the Supreme Court's judgment in Mavilayi Service Co-operative Bank Ltd., which clarified the application of mutuality principles under section 80P.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 775216 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-09-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 11-04-2025
• Other Referred Cases: Citizen Cooperative Society Limited in civil appeal No. 10245 of 2017, Mavilayi Service Co-operative Bank Ltd. v. CIT (123 taxmann.com 161), Kavradi Co-operative Agricultural Bank, Kotekar Vyavasaya Seva Sahakara Sangha Niyamitha, Primary Agricultural Credit Co-operative Society Ltd. Vs. ITO
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUBRAMANIAN S
• Assessee Lawyers: SUNAINA BHATIA
• Keywords: Set aside; Co-operative Credit Society
• Section: 143(3); 234B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No. 851/Bang/2025 Assessment Year: 2013-14 M/s The Bharathi Co-operative Credit Society, 1718, 3rd Block, 9th Main Road, Jayanagar, Bengaluru – 560 011. PAN – AAALT 0604 R Vs. The Income Tax Officer, Ward – 7(2)(1), Bengaluru. . APPELLANT RESPONDENT Assessee by : Ms. Sunaina Bhatia, Advocate Revenue by : Shri Subramanian S, JCIT Date of hearing : 23.06.2025 Date of Pronouncement : 02.09.2025 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the NFAC, Delhi vide order dated 31/10/2023 in DIN No. ITBA/NFAC/ S/250/2023-24/1057532958(1) for the assessment year 2013-14. 2. The assessee has raised as many as 7 grounds of appeal which we are not inclined to reproduce the same here for the sake of brevity. 3. The Ground Nos. 1 and 7 of the assessee’s appeal are general in nature and do not require any separate adjudication. Likewise, the issue Printed from counselvise.com ITA No.851/Bang/2025 Page 2 of 9 . raised in Ground No. 6 of the appeal pertains to the levy of interest under section 234B of the Act which is consequential in nature and does not require any separate adjudication. Hence, the Ground Nos. 1, 6 & 7 are hereby dismissed as infructuous. 4. The issues raised by the assessee through Ground Nos. 2 to 5 of the appeal are interconnected and pertain to the disallowances of deduction claimed under section 80P(2)(a)(i) of the Act. 5. The relevant facts are that the assessee is cooperative society and engaged in providing credit facilities to the members. The assessee for the A.Y. 2013-14 filed return of income declaring income at NIL after claiming deduction under section 80P of the Act for Rs. 73,68,520/- only. Subsequently, the assessment under section 143(3) of the Act was completed vide order dated 31st March 2016 assessing the income at Rs. 73,68,520/- after making the disallowances of deduction claimed u/s 80P of the Act. 6. On appeal by the assessee, the learned CIT(A) vide order dated 11-10-2017 confirmed the disallowance by placing reliance on the ruling of Hon’ble Supreme Court in the case of Citizen Cooperative Society Limited in civil appeal No. 10245 of 2017 and held that the element of mutuality is missing. 7. On further appeal the Tribunal remanded the issue to the file of the AO for fresh adjudication. Printed from counselvise.com ITA No.851/Bang/2025 Page 3 of 9 . 8. In the set aside proceeding, the AO observed that the assessee has admitted associate and nominal members. As per the bylaws of the assessee society, the associate member does not have voting rights and nominal member does not have right to share in the profit. Accordingly, the AO held that the element of mutuality is missing and in absence of mutuality the deduction under section 80P of the Act cannot be allowed. 8.1 The aggrieved assessee carried the matter before the learned CIT(A). 9. The assessee before the learned CIT(A) submitted that it accepts deposits and grants loans only to its members for their various needs, charging reasonable interest and offering banking-related services like cheques facilities solely for members. Under its bye-laws, the assessee is prohibited from offering such services to the general public. The assessee contends that it does not accept deposits from the public, does not maintain deposits in commercial banks for business purposes, and does not earn any interest on investments. The surplus generated from its activities is used solely for the economic upliftment of its members. The credit facilities are restricted to members only, which is in line with the principles of mutuality and the cooperative movement’s objectives. The AO had wrongly applied the ratio of Citizens Co-operative Society (supra) in the present case. 10. The assessee argued that the AO originally disallowed the claim of deduction by holding the assessee as cooperative bank under the provisions of section 80P(4) of the Act. The matter was remanded by the Hon’ble ITAT Bangalore for fresh examination and directed to verify the Printed from counselvise.com ITA No.851/Bang/2025 Page 4 of 9 . applicability of ruling in case of Totgars Co-operative Sale Society Ltd. and Citizens Co-operative Society. The AO, instead of addressing the directions, introduced a new ground regarding the principle of mutuality and once again disallowed the deduction. This was done without appreciating the factual position and legal provisions, and without considering the assessee’s detailed submissions. 11. The assessee, therefore submits that the disallowance of deduction under section 80P(2)(a)(i) is incorrect in law and on facts, and prays for the claim to be allowed in full. 12. The learned CIT(A) after considering the facts in totality noted that the assessment had been completed after a remand by the Hon’ble ITAT, which had directed the AO to reconsider the claim under section 80P of the Act in the light of the decision of the Hon’ble Supreme Court in Citizen Co-operative Society Ltd. v. ACIT. On such examination, the Assessing Officer concluded that the appellant’s structure and operations were not in full conformity with the principles of mutuality. Specifically, the AO found that the appellant had two distinct classes of members i.e. (i) ordinary or resident members, and (ii) associate/nominal members. 13. The rights and privileges of associate and nominal members were significantly curtailed. They had no right to vote, no right to participate in annual general meetings, no right to receive notices of such meetings, and no right to receive the society’s annual financial statements or balance sheets. They also could not take part in the administration or directorship of the society and had no share in the profits or assets of the society. Their relationship with the society was essentially limited to Printed from counselvise.com ITA No.851/Bang/2025 Page 5 of 9 . placing deposits, primarily to earn interest. These members did not contribute to the surplus in the same manner as ordinary members, nor did they participate in its distribution. 14. The learned CIT(A) referred to the principle of mutuality as laid down by the Hon’ble Supreme Court in CIT v. Bankipur Club Ltd reported in 226 ITR 97 and reiterated in Citizen Co-operative Society Ltd. (supra), that for mutuality to exist, all contributors to the common fund must be entitled to participate in the surplus and all participants in the surplus must be contributors, ensuring complete identity between contributors and participants. In the appellant’s case, the creation of a separate category of nominal and associate members broke this identity. 15. It was also observed that the appellant’s activities were akin to those of a finance business, and that it had accepted deposits from nominal members without the requisite mutual participation. The AO had found that such activities were in violation of the provisions of the Karnataka Co-operative Societies Act and were undertaken without necessary approvals from the Registrar of Societies. The ld. CIT(A) noted that the Hon’ble Supreme Court, in Citizen Co-operative Society Ltd., had held that when a co-operative society caters to a category of persons who are not genuine members but are in substance customers, it cannot be considered a co-operative society “meant only for its members” for the purposes of section 80P of the Act. 16. After considering these aspects, the ld. CIT(A) held that there was no complete identity between contributors and participants in the appellant’s case, and thus the principle of mutuality was absent. Printed from counselvise.com ITA No.851/Bang/2025 Page 6 of 9 . Following the binding ratio of the Hon’ble Supreme Court’s decision in Citizen Co-operative Society Ltd. (supra), the appellant was held in- eligible for deduction under section 80P(2)(a)(i) of the Act. Consequently, the grounds challenging the disallowance of ₹73,68,520 were dismissed. 17. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us. 18. The learned AR before us submitted that the orders of the lower authorities are contrary to law, equity, weight of evidence, and the facts and circumstances of the case. It was argued that the learned CIT(A) erred in upholding the disallowance of deduction claimed by the appellant under section 80P(2)(a)(i) of the Act in respect of income derived from providing credit facilities to its members. The learned AR contended that associate and nominal members are also recognized as members under the Karnataka Co-operative Societies Act, 1959, and therefore the deduction cannot be denied merely on the ground that there are different categories of members. It was further argued that the alleged violation of the principles of mutuality on account of such categorization is misplaced in the appellant’s circumstances. 19. Without prejudice to the main contention, the ld. AR submitted that even if any portion of the income derived from transactions with associate and nominal members is held ineligible for deduction under section 80P(2)(a)(i) of the Act, the profits earned from dealings with regular members must still qualify for the deduction. The ld. AR also argued that the learned CIT(A) failed to appreciate that the cost of funds Printed from counselvise.com ITA No.851/Bang/2025 Page 7 of 9 . and proportionate administrative expenses should be deducted from the income considered as derived from associate and nominal members before making any disallowance. 20. On the contrary, the learned DR vehemently supported the findings of the authorities below. 21. We have heard the rival contentions of both the parties and perused the material available on records. The core issue in the present appeal relates to the assessee’s eligibility for deduction under section 80P(2)(a)(i) of the Act, in respect of income derived from providing credit facilities to its members. On going through the facts of the case and the orders of the lower authorities, we find that the controversy is identical to the one considered and decided by this Tribunal in the assessee’s own case for Assessment Year 2017–18, in ITA No. 1171/Bang/2023 dated 23.07.2024. 21.1 In that year, the Tribunal, after analyzing the provisions of the Act i.e. the Karnataka Co-operative Societies Act, 1959, and judicial precedents including the judgment of the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. CIT (123 taxmann.com 161), laid down clear directions for adjudication of similar disputes. As the facts in the present year are substantially the same, the ratio and directions given in that order squarely apply to the issue before us. 21.2 For ready reference and clarity, we reproduce below paragraphs 3.2 to 3.4 of the Tribunal’s order in ITA No. 1171/Bang/2023, which contain the relevant findings and directions as follows: Printed from counselvise.com ITA No.851/Bang/2025 Page 8 of 9 . 3.2 In view of the above decisions in the case of Kavradi Co-operative Agricultural Bank cited (supra) and in the case of Kotekar Vyavasaya Seva Sahakara Sangha Niyamitha cited (supra), the issue is required to be examined in the light of above orders of the Tribunal. 3.3 Contrary to this, ld. D.R. relied on the order of Tribunal in the case of Primary Agricultural Credit Co-operative Society Ltd. Vs. ITO in ITA No.947/Bang/2024 dated 3.7.2024 wherein held as under: [full extract as in original order] ************************************* 3.4 As seen from the above order of the Tribunal, there is no dispute regarding grant of deduction u/s 80P(2)(a)(i) of the Act in the light of judgement of Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd..Vs. CIT and another (123 taxman.com 161), if the nominal and associated members were not entitled for profit earned by the assessee and to grant proportionate deduction u/s 80P(2)(a)(i) of the Act. Similarly, when interest income received from investment from banks if it is not attributable to the main business of the assessee providing credit facilities to its members, there was no question of deduction u/s 80P(2)(a)(i) of the Act on that income. In view of the above, the issue in dispute is remitted to the file of ld. AO on similar directions to decide afresh. 21.3 In line with the above binding precedent in the assessee’s own case, we hold that the present issue also requires re-examination by the Assessing Officer. The AO shall verify, in the light of the principles laid down in the earlier order, whether the income in question is attributable to transactions with members as defined under the Karnataka Co- operative Societies Act, and if so found that nominal members or associate members were not found member for the purpose of the Act, grant deduction proportionately under section 80P(2)(a)(i) of the Act. Further, if any proportionate amount of deduction claimed is disallowed then the benefit of corresponding cost shall be granted. Accordingly, the order of the ld. CIT(A) is set aside, and the matter is restored to the file of the AO with said direction. Hence the grounds of appeal of the assessee are allowed for statistical purposes. Printed from counselvise.com ITA No.851/Bang/2025 Page 9 of 9 . 22. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in court on 2nd day of September, 2025 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 2nd September, 2025 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore Printed from counselvise.com "