Proportionate Section 80P Deduction Allowed Despite Excess Nominal Members: ITAT Bangalore Ruling

The intersection of state co-operative laws and federal income tax exemptions frequently generates complex litigation, particularly concerning the definition and threshold of "members" within a co-operative society. A pivotal legal development has emerged from the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, in the case of Kalikamba Vividhoddesha Sahakari Sangha Limited Vs ITO.

In its order dated 16/09/2026 (Appeal Number ITA 119/BANG/2025), the Tribunal addressed a critical question: Does exceeding the statutory limit of nominal members automatically invalidate a co-operative credit society's entire claim for deduction under Section 80P(2)(a)(i) of the Income Tax Act 1961? The ITAT ruled against an "all-or-nothing" approach, mandating a proportionate computation of eligible profits rather than a blanket denial of the tax benefit.

This comprehensive summary breaks down the factual matrix, the legal arguments, the interpretation of Supreme Court precedents, and the final directives issued by the Tribunal.

Factual Matrix and Assessment Proceedings

The assessee, Kalikamba Vividhoddesha Sahakari Sangha Limited, is a registered co-operative credit society governed by the Karnataka Co-Operative Societies Act, 1959. Its primary operational mandate involves providing credit facilities to its enrolled members.

For the Assessment Year (AY) 2017-18, the assessee filed its income tax return on 03/10/2017. The return disclosed a gross total income of ₹ 15,69,919. However, the assessee claimed this entire amount as a deduction under Section 80P of the Income Tax Act 1961, resulting in a declared taxable income of Nil.

The case was subsequently selected for scrutiny. The Assessing Officer (AO) issued statutory notices under Section 143(2) and Section 142(1) of the Income Tax Act 1961, requisitioning the society's bye-laws and a detailed bifurcation of its membership base. The submitted records revealed the following membership structure:

• Regular Members: 1,774 (individuals with voting rights and share subscriptions)
• Nominal Members: 1,967 (individuals admitted upon fee payment, lacking voting rights)

The Assessing Officer's Disallowance

Upon reviewing the membership data, the AO observed a statutory violation. Under the Karnataka Co-Operative Societies Act, 1959, the permissible limit for nominal (or associate) members is capped at 15% of the total regular membership. The assessee's nominal membership far exceeded this threshold.

Consequently, the AO concluded that the assessee was accepting deposits and advancing loans to individuals who legally could not be classified as legitimate members for the purposes of tax exemptions. The AO determined that the fundamental principle of mutuality had been compromised. Relying heavily on the Supreme Court's judgment in Citizen Co-operative Society Ltd. vs. ACIT, the AO held that the assessee was effectively operating as a commercial banking entity dealing with the general public.