Section 80P Deduction Sustained: ITAT Jodhpur Rejects Allegations Based on Unidentified Members

1. Background and Core Dispute

The appeal before the ITAT Jodhpur Bench in DCIT Vs Adarsh Credit Co-Operative Society Ltd. concerned the allowability of a large deduction claimed under Section 80P of the Income Tax Act 1961 for AY 2014-15.

• The assessee, Adarsh Credit Co-Operative Society Ltd., is a registered co-operative society under the Rajasthan Co-operative Societies Act, 1965 and later registered as a Multi-State Co-operative Society under the Multi-State Co-operative Societies Act, 2002.
• Its primary activities included:
  • Accepting deposits from members
  • Providing credit facilities to members
  • Conducting money-transfer agency business
  • Acting as an insurance agent
  • Engaging in certain trading transactions

For AY 2014-15:

• The assessee declared total income of Rs.7,28,28,186/-.
• It claimed a deduction of Rs.1,65,50,31,148/- under Section 80P.

The Assessing Officer (AO), after a scrutiny assessment under Section 143(3), denied the entire Section 80P deduction and assessed total income at **Rs.1,72,88,59,330/-, simultaneously initiating penalty proceedings under Section 271(1)(c)`.

The Revenue then appealed against the order of the CIT(A) dated 12.03.2018, which had largely allowed the assessee’s Section 80P claim, subject to a small protective disallowance.

2. AO’s Basis for Denial of Section 80P Deduction

During assessment, the AO drew extensively from observations made in earlier years and raised multiple objections:

2.1 Alleged Breach of Mutuality

The AO’s main line of reasoning was that the “principle of mutuality” had been compromised. He alleged:

• Inadequate verification of:
  • Creditworthiness of borrowers
  • End use of the loans
• Absence or insufficiency of collateral security
• Non-availability of certain share certificates
• Acceptance of deposits from:
  • Non-members
  • Nominal members
  • Non-existent or “dummy” persons
• Notices issued to some persons were allegedly returned unserved
• Claimed irregularities in compliance with the assessee’s own bye-laws

2.2 Diversion of Funds and Non-Member Activities

The AO also alleged:

• The assessee was involved in:
  • Insurance-agency business
  • Money-transfer agency business
  • Trading in shares, securities and bullion
• Salary and incentives amounting to Rs.24,55,00,000/- were paid to the Managing Director, which, according to the AO, amounted to diversion of funds for the benefit of select persons connected with management.

On this basis, the AO concluded:

• Mutuality was “ruptured”.
• The assessee was not entitled to any deduction under Section 80P.
• The entire Section 80P claim of Rs.1,65,50,31,148/- was disallowed.

3. Assessee’s Stand Before the CIT(A)

Before the CIT(A), the assessee raised, in substance, the following contentions:

• It is a co-operative society, not a co-operative bank.
• It does not carry out banking business with the public at large.
• It does not hold an RBI banking licence.
• Accordingly, the exclusion in Section 80P(4) does not apply.
• The AO had:
  • Not identified any specific non-member, nominal member or fictitious member for AY 2014-15.
  • Not quantified any income derived from alleged dealings with such persons.

The assessee also relied on its registration, bye-laws, and prior favourable findings, including proceedings before the Hon’ble Settlement Commission.

During appellate proceedings, the AO himself appeared before the CIT(A) and filed written submissions dated 09.02.2018, to which the assessee filed a rejoinder on 28.02.2018.

4. Findings of the CIT(A)

The CIT(A) closely followed his own adjudication in the assessee’s case for AY 2010-11, as the facts and issues were considered identical.

4.1 On Status as Co-operative Society vs Co-operative Bank

The CIT(A) noted:

• The AO had treated the assessee throughout as a co-operative society in the assessment order, not a co-operative bank.
• It was held, as in the earlier year, that:
  • The assessee was not carrying on banking activity as contemplated for Section 80P(4).
  • Therefore, it did not fall within the exclusion applicable to co-operative banks.

4.2 Misapplication of Mutuality and Misreading of Section 80P(2)(a)(i)

The CIT(A) found that:

• The AO had mixed up the statutory deduction under Section 80P with the general doctrine of mutuality.
• He had effectively read the expression in Section 80P(2)(a)(i) – “carrying on the business of banking or providing credit facilities to its members” – as if it required both activities (banking and providing credit) simultaneously.
• Such a reading was held to be incorrect; the term “or” could not be substituted with “and”.

4.3 No Concrete Evidence of Non-Members or Fictitious Members

For AY 2014-15 specifically, the CIT(A) observed: