Nominal Members and Bank Deposit Interest: ITAT Bangalore Reboots Section 80P Claim of Cooperative Society

Background of the Dispute

Adarsha Multipurpose Cooperative Society Ltd., Puttur, a cooperative entity registered under the Karnataka Co-operative Societies Act, claimed deduction under Section 80P of the Income Tax Act for multiple assessment years, including A.Y. 2016-17, 2017-18, 2018-19 and 2020-21. The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) examined the lead year A.Y. 2016-17 and directed that its findings would mutatis mutandis apply to the other years.

The controversy primarily revolved around:

  • Eligibility of deduction under Section 80P(2)(a)(i) on interest income earned from deposits with cooperative banks.
  • Deduction under Section 80P(2)(d) in respect of interest earned from deposits placed with another cooperative society, namely MASS Ltd.
  • Impact of the presence of nominal members on eligibility under Section 80P(2)(a)(i).
  • Whether the assessee, being a multipurpose cooperative society and not a Primary Agricultural Credit Society (PACS), was disentitled from Section 80P(2)(a)(i) benefits.
  • Disallowance of provision for bad and doubtful debts.

The Tribunal eventually remanded the matter to the Assessing Officer (AO) for a fresh examination with specific legal directions.

Assessment Proceedings and Initial Disallowances

Scrutiny and Proposed Adjustments

For A.Y. 2016-17, the assessee filed its income tax return claiming deduction under Section 80P on various income streams, including interest. The return was initially processed under Section 143(1) and later subjected to scrutiny under CASS. Statutory notices were issued under Section 143(2) and Section 142(1), and the assessee responded to these notices.

During the assessment, the AO:

  • Proposed to disallow:
    • Provision for bad and doubtful debts, and
    • Provision for staff gratuity.
  • Sought to deny the assessee’s Section 80P claim on interest income derived from fixed deposits (FDs) placed with institutions other than cooperative societies.

The AO estimated the relevant interest income at Rs. 12,69,844/-, treated it as “income from other sources”, allowed a limited deduction under Section 57, and computed income from other sources at Rs. 12,69,844/-. Simultaneously, the AO confirmed the disallowance of the provision for bad and doubtful debts.

First Appeal Before CIT(A)

The assessee took the matter to the Commissioner of Income Tax (Appeals) [CIT(A)] and raised several grounds:

  • Interest income arising from statutory investments was argued to be attributable to the business of the cooperative society and therefore eligible for deduction under Section 80P(2)(a)(i).
  • It was contended that such interest income should not be treated as “income from other sources”.
  • The disallowance of provision for bad and doubtful debts was also challenged.

The CIT(A):

  • Confirmed the disallowance of provision for bad and doubtful debts.
  • Rejected the claim that interest earned from cooperative banks qualified for deduction under Section 80P(2)(d).
  • Held that deduction under Section 80P(2)(a)(i) could not be granted because:
    • The assessee was transacting with nominal / non-members.
    • The assessee was not a Primary Agricultural Credit Society, but a multipurpose cooperative society engaged in general credit activities.
  • Directed the AO to identify profits relatable to lending operations with regular members only and to grant deduction restricted to the income from such members, effectively excluding non-member related income.

Dissatisfied, the assessee carried the matter to the ITAT.

Arguments Before the ITAT

Contentions of the Assessee