ITAT Bangalore Confirms Section 80P(2)(a)(i) Benefit for Souharda Co-operative Credit Society

Background of the Appeal

The Bangalore Bench of the ITAT in the case of Mookambika Vividoddesha Vs ITO (ITAT Bangalore), ITA No. 2522/Bang/2025, delivered its order on 31/08/2026 for Assessment Year 2017-18. The dispute centred on the allowability of deduction under Section 80P(2)(a)(i) of the Income Tax Act 1961 to a credit co-operative registered under the Karnataka Souharda Sahakari Act, 1997.

The assessee, Shree Moorambika Vividodesha Souhradra Sahakari Limited, was:

  • Registered under Section 6 of the Karnataka Souharda Sahakari Act, 1997
  • Governed by the Karnataka Souharda Sahakari Act, 1997 and the Karnataka Souharda Sahakari Rules, 2004
  • Engaged in the business of extending credit facilities to its members only

For AY 2017-18, the assessee filed a return on 30 October 2017, declaring Nil income after claiming deduction of ₹1,564,262 under Section 80P(2)(a)(i). The return was selected for scrutiny and culminated in a regular assessment under Section 143(3).

Findings of the Assessing Officer and CIT(A)

Disallowance of Section 80P Deduction by AO

The Assessing Officer (AO), Income Tax Officer, Ward–2, examined the claim under Section 80P(2)(a)(i) and rejected it primarily on two counts:

  1. Status under Souharda Law vs Co-operative Societies Act

    • The AO noted that the assessee was a “Souharda Sahakari” registered under the Karnataka Souharda Sahakari Act, 1997, and not under the Karnataka Co-operative Societies Act, 1959.
    • On this basis, the AO concluded that the assessee was not a “co-operative society” within the meaning of Section 2(19) of the Income Tax Act and hence not entitled to deduction under Section 80P.

  2. Alleged Breach of Mutuality due to Associate/Nominal Members

    • The AO observed that there were associate/nominal members whose numbers exceeded a prescribed limit and held that they could not be equated with regular members.
    • According to the AO, this resulted in a loss of complete identity between contributors and participants, thereby violating the principle of mutuality.
    • Relying on Citizen Co-operative Society Ltd. v. ACIT, reported in 397 ITR 1 (SC), the AO treated the assessee as not existing solely for the benefit of its members and denied the deduction of ₹1,564,262 under Section 80P(2)(a)(i).

Order of the CIT(A)

The assessee challenged the assessment before the Joint Commissioner of Income Tax (Appeals)–2, Surat. By appellate order dated 30 June 2025, the CIT(A):

  • Upheld the AO’s view that the assessee, being a Souharda entity, could not be treated as a “co-operative society” for the purposes of Section 80P.
  • Agreed that the presence and treatment of associate/nominal members resulted in the erosion of mutuality.
  • Confirmed the determination of total income at ₹1,564,260, thereby affirming complete denial of the Section 80P(2)(a)(i) deduction.

Aggrieved, the assessee approached the ITAT, Bangalore.

Proceedings Before ITAT Bangalore

Although notice of hearing was duly served, no one appeared on behalf of the assessee at the time of hearing. The Tribunal, therefore, proceeded:

  • By hearing the learned Departmental Representative, Shri Sandeep Kumar, Assistant Commissioner of Income Tax, who supported the orders of the lower authorities, and
  • By relying on the material already available on record, including the return, assessment order, appellate order, and other documents.

The Tribunal framed the core controversy as:

  1. Whether a co-operative registered under the Karnataka Souharda Sahakari Act, 1997 can be treated as a “co-operative society” under Section 2(19) and thereby qualify for deduction under Section 80P.
  2. Whether the admission of associate or nominal members, in the manner disclosed, leads to the loss of the principle of mutuality.
  3. How interest income from depositing surplus funds with banks is to be treated for the purpose of Section 80P(2)(a)(i), particularly in light of judicial precedents such as Tumkur Merchants Souharda Credit Cooperative Ltd. v. Income-tax Officer, Ward-V, Tumkur and Totgars Co-operative Sale Society Ltd. v. Income-tax Officer.

Tribunal’s Analysis on Factual Matrix

The ITAT recorded, based on the assessment records and grounds of appeal, that:

  • The assessee was engaged exclusively in granting credit facilities to its members.
  • There were no transactions with non-members.
  • The entity functioned as a Souharda co-operative credit institution, maintaining its operations within the membership framework.

In light of these facts, the Tribunal concluded that:

  • The principle of mutuality remained intact since dealings were restricted to members only.
  • Profits arose solely from the activity of providing credit facilities to members.

Thus, subject to the legal position on Souharda entities and interest income, the basic character of income was that of business profits from member-credit operations, an activity directly covered by Section 80P(2)(a)(i).