ITAT: Co-operative Society Eligible for Section 80P Deduction Despite Nominal Members; Interest Income Partly Taxable as “Other Sources”

The assessee, M/s. B U E H Co-operative Society Ltd., filed returns for A.Y.s 2017-18 and 2018-19 claiming deduction under Section 80P of the Income Tax Act, 1961. The case was selected for scrutiny, and the Assessing Officer disallowed the deduction on the ground that the assessee had nominal members, considering them as dealings with the general public. The AO further denied deduction on interest income earned from investments in banks, holding that such income was not eligible under Section 80P(2)(a)(i) or 80P(2)(d).

CIT(A)’s Decision: On appeal, the CIT(A) passed ex-parte orders confirming the disallowance, citing non-response by the assessee. The assessee contended before the Tribunal that non-appearance was due to technical issues under the faceless regime and argued that deduction under Section 80P could not be denied merely due to the presence of nominal members.

Main Issue: Whether the assessee co-operative society is entitled to deduction under Section 80P despite having nominal members, and whether interest income from various bank deposits qualifies for deduction or taxation under “other sources.”

ITAT’s Ruling: The Tribunal held that the denial of deduction under Section 80P solely based on the presence of nominal members was not justified. Relying on judicial precedents, it observed that where the governing State Co-operative law permits admission of nominal members, the benefit of Section 80P cannot be denied. Thus, the AO was directed to grant a deduction on interest income attributable to the business of providing credit facilities to members.

The Tribunal drew distinctions based on the nature of deposits. Interest earned from deposits with the Apex Bank, made under statutory compulsion, and savings bank interest required for operational purposes were held eligible for deduction under Section 80P(2)(a)(i). Interest earned from co-operative bank deposits was held eligible under Section 80P(2)(d). However, interest earned on fixed deposits with the State Bank of India was held taxable under the head “Income from other sources”, with a direction to allow deduction of expenses under Section 57.

For A.Y. 2018-19, the Tribunal held that housing co-operative societies advancing loans to members are also eligible for deduction under Section 80P, as the provision does not exclude such societies. The AO was thus directed to grant the deduction.

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