income tax
This case involves a society that provides funds to non-members, raising questions about its eligibility for tax deductions. The tribunal ruled that the society does not meet the definition of a cooperative focused solely on its members or providing credit facilities to them. Therefore, it is not entitled to the deductions outlined in Section 80P(2)(a)(i) of the Income Tax Act, 1961, as it has failed to adhere to the principle of mutuality.
The ITAT has referred the appeal back to the CIT (A) for further review, considering the observations made in this ruling. Furthermore, the exclusion stated in Section 80P(4) applies only to cooperative banks recognized by the Reserve Bank of India (RBI), such as urban cooperative banks. Non-banking credit societies, like the appellant, retain eligibility for deductions if they comply with mutuality and focus on member-centric activities.
The principle of mutuality necessitates a clear identity between the contributors (depositors) and participators (borrowers). The Supreme Court's decision in Citizen Cooperative Society establishes that transactions involving nominal or inactive members contravene this principle.
The current appeal stems from a disagreement over the CIT (A) order dated December 18, 2017, related to the assessment year 2009-10.
The Learned Departmental Representative (DR) contended that the CIT (A) overlooked the binding precedent set by the Hon'ble Supreme Court in Citizen Cooperative Society v. ACIT, noting that:
It is important to note that only cooperative banks, not credit societies, require an RBI license. Non-banking credit societies may claim deductions under Section 80P(2)(a)(i) if they meet the mutuality requirements.
The DR asserted that the society's lending activities are directed toward non-members. The assessment findings indicated that the Assessing Officer (AO) determined the society’s status and deemed it ineligible for the deduction under Section 80P(2)(a)(i) due to a lack of mutuality.
In contrast, the Learned Authorised Representative (AR) cited the Tribunal's ruling in the case of M/s. Udaya Souharda Credit Cooperative Society Ltd, arguing that the society is not engaged in banking activities, thus negating the necessity for an RBI license. Furthermore, the society’s registration under the Karnataka Cooperative Societies Act, 1959, permits it eligibility for deductions under Section 80P(2)(a)(i).
After reviewing the submitted arguments and pertinent records, the Tribunal referenced the Supreme Court's ruling in Citizen Cooperative Society as significant. Furthermore, the Tribunal’s decision in M/s. Udaya Souharda Credit Cooperative Society Ltd emphasized the ongoing applicability of both the Karnataka Cooperative Societies Act, 1959 and the Karnataka Souharda Sahakari Act, 1997, facilitating transitions between the two society types. The Tribunal determined that deductions under Section 80P apply exclusively to societies registered under the Karnataka Cooperative Societies Act, 1959, thus ordering a referral back to the AO for a fresh determination based on appropriate inquiries. The circumstances of this case are strikingly similar.
The order was delivered on March 29, 2019. Following this, provisions of the Karnataka Souharda Sahakari Act, 1997, allow for deductions if the society's activities are primarily member-centric.
According to CBDT Circular No. 14/2024 (dated October 30, 2024):
Post-2020, Tribunals emphasize substance over form: Societies, regardless of state registration, must demonstrate genuine member-focused activities, such as maintaining over 90% of transactions within members.
For instance, in the case of the BSNL Employees’ Co-operative Society (ITAT Bangalore, 2023), deductions were permitted as the society exclusively served employees.