Co-operative society’s deduction under Section 80P is valid despite nominal/associate members,

By | July 7, 2025
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I. Co-operative society’s deduction under Section 80P is valid despite nominal/associate members, as permitted by state law and consistent with mutuality.

II. Eligibility of co-operative bank FD interest for Section 80P deduction is remanded to AO to verify mandatory deposit limits; proportionate interest on excess deposits disallowed after allowing Section 57 costs.

III. Rental income and certain other miscellaneous incomes of a co-operative society are not eligible for Section 80P deduction, but timing differences in TDS under Section 40(a)(ia) must be considered.

I. Co-operative Society’s Deduction Under Section 80P is Valid Despite Nominal/Associate Members, as Permitted by State Law and Consistent with Mutuality.

Issue:

Whether a cooperative society carrying out banking business and providing credit facilities to its members can be denied deduction under Section 80P of the Income-tax Act, 1961, solely on the ground that it has different classes of members (regular, associate, and nominal) with varying rights regarding share profit and dividend, thereby allegedly vitiating the concept of mutuality.

Facts I:

  • For Assessment Year 2017-18, the assessee was a cooperative society conducting banking business and providing credit facilities to its members.
  • The assessee had three classes of members: regular members, associate members, and nominal members.
  • The Assessing Officer (AO) disallowed the deduction claimed under Section 80P. The AO’s reasoning was that the assessee catered to different classes of members having different rights with regard to participation in share profit and dividend, and therefore, the essential feature of mutuality was missing.
  • The assessee submitted that as per Section 18 of the Karnataka Cooperative Societies Act, 1959 (the relevant state law governing its operations), a cooperative society was legally allowed to admit nominal and associate members.

Decision I:

The court held in favor of the assessee. It ruled that since the assessee operated under the Karnataka Cooperative Societies Act, which permits the inclusion of nominal and associate members, and the Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income-tax (ITR 1 (SC)) held that eligibility under Section 80P must be determined under the relevant State law, the presence of such members did not vitiate mutuality.

Key Takeaways I:

  • Mutuality Principle for Cooperative Societies: The principle of mutuality (where contributors to a common fund are also the beneficiaries of the fund) is central to the concept of cooperative societies. Income generated from transactions with members is often treated as not taxable on the principle that one cannot make a profit from oneself.
  • Section 80P Deduction: Section 80P allows deductions for certain incomes of cooperative societies, including profits attributable to providing credit facilities to members.
  • Impact of State Cooperative Laws: The Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd. is a landmark ruling that clarified that the eligibility of a cooperative society for deduction under Section 80P must be primarily determined based on its registration and operations under the relevant State Cooperative Societies Act. If the State Act permits different classes of members (like nominal or associate members), their mere existence does not, by itself, break the mutuality principle for Section 80P purposes, as long as the core cooperative character is maintained as per the State law.
  • Legal Permissibility of Member Classes: The fact that the Karnataka Cooperative Societies Act explicitly allows nominal and associate members is crucial. This legitimizes their inclusion within the cooperative framework.
  • “In favour of assessee”: The presence of nominal/associate members alone is not a valid ground for disallowing Section 80P deduction.

II. Eligibility of Interest Income from Fixed Deposits with Co-operative Bank Remanded for Verification of Mandatory Deposit Limits.

Issue:

Whether interest income earned by a cooperative society from fixed deposits (FDs) with a cooperative bank is eligible for deduction under Section 80P(2)(a)(i) (for providing credit facilities to members) or Section 80P(2)(d) (for interest/dividend from other cooperative societies), and if so, whether the deductibility depends on the mandatory requirement for making such FDs as per the Karnataka Cooperative Societies Act, 1959.

Facts II:

  • (Same as Part I regarding the assessee’s nature of business).
  • The assessee claimed deduction under Section 80P on interest income earned from fixed deposits with a cooperative bank.
  • The Assessing Officer (AO) held that this interest income was neither eligible for deduction under Section 80P(2)(a)(i) (income from credit facilities to members) nor eligible under Section 80P(2)(d) (income from investments in other cooperative societies).

Decision II:

The court held that the issue of eligibility of interest income from fixed deposits with a cooperative bank was to be set aside to the file of the Assessing Officer to verify the mandatory requirement for making FDs as per the provisions of the Karnataka Cooperative Societies Act, 1959.

  • If the deposit was found to be within the limit of the mandatory requirement (i.e., deposits were made because mandated by law), then the interest earned from such deposit would be allowed.
  • In case excess deposit (than the mandatory requirement) was found, then proportionate interest income from such excess deposit was to be excluded from eligible income, but after allowing corresponding cost as per Section 57 (income from other sources). The matter was remanded.

Key Takeaways II:

  • Interest Income from Co-operative Banks (Controversial Issue): The eligibility of interest income from fixed deposits with cooperative banks for deduction under Section 80P has been a contentious issue.
    • Historically, the view was often to disallow it under 80P(2)(a)(i) if it’s not from active credit facilities to members, and debate existed under 80P(2)(d) if the recipient bank was also a “cooperative society.”
    • The Mavilayi Service Co-operative Bank Ltd. (SC) judgment somewhat clarified that income from deposits by a cooperative bank with a higher-tier cooperative bank (or another cooperative bank) is indeed deductible under 80P(2)(d).
  • Mandatory Deposits & Deduction: The key finding here is the relevance of mandatory deposits. If a cooperative society is legally mandated by its governing State Act (Karnataka Cooperative Societies Act, 1959) to maintain certain deposits or investments (e.g., for liquidity requirements, regulatory compliance) with other cooperative banks, then the interest earned on such mandatory deposits can be treated as eligible for Section 80P deduction. This is because these deposits are essentially a part of fulfilling the primary cooperative objective mandated by law.
  • Proportionate Disallowance & Section 57 Cost: If there are deposits beyond the mandatory requirement, the interest earned on such excess deposits might not be eligible for deduction under 80P. However, in such cases, the court directed that if income from these excess deposits is taxed under “Income from Other Sources,” then corresponding expenses incurred in earning that income (e.g., interest paid on borrowed funds, administrative costs) must be allowed as a deduction under Section 57. This prevents taxing gross income without allowing related expenses.
  • Remand for Factual Verification: The matter is remanded to the AO to specifically verify the mandatory nature and limits of the FDs as per the Karnataka Cooperative Societies Act, which is a factual inquiry.

III. Rental and Miscellaneous Income Not Eligible for Section 80P Deduction, But TDS Reconciliation Required.

Issue:

Whether rental income, commissions, and other small miscellaneous income heads earned by a cooperative society carrying out banking business and providing credit facilities to its members are eligible for deduction under Section 80P of the Income-tax Act, 1961, and whether disallowance under Section 40(a)(ia) for TDS timing differences should be considered.

Facts III:

  • (Same as Part I regarding assessee’s nature of business).
  • The assessee claimed deduction under Section 80P on rental income, commissions, and small other income heads.
  • The Assessing Officer (AO) disallowed these claims.

Decision III:

The court partly ruled in favor of the assessee.

  1. It held that rental income, commissions, and small other income heads were not arising from the business of the assessee as envisaged under Section 80P, and thus, their disallowance was to be confirmed. (This part is in favor of revenue).
  2. However, the assessee’s explanation regarding timing differences in relation to tax deduction at source (TDS) under Section 40(a)(ia) needed to be considered before finalizing any disallowance related to those expenses. (This part is in favor of assessee).

Key Takeaways III:

  • Income Attributable to “Business of Society” (Section 80P): Section 80P generally allows deductions for profits “attributable to” specific activities of cooperative societies (like providing credit facilities, marketing agricultural produce). Income from activities like renting out property or earning miscellaneous commissions, which are not directly connected or “attributable” to the core cooperative business (banking/credit facilities), are typically not eligible for deduction under Section 80P. Such income is usually taxed under other heads (e.g., “Income from House Property” for rental income, “Income from Other Sources” for miscellaneous income).
  • Confirmation of Disallowance for Rental/Miscellaneous Income: The court upheld the disallowance of Section 80P deduction for rental income, commissions, and other small income heads, confirming the view that these are not integral to the core cooperative business eligible for Section 80P benefits.
  • Section 40(a)(ia) and Timing Differences: Section 40(a)(ia) disallows certain expenses if TDS is not deducted or paid within specified due dates. “Timing differences” relate to situations where TDS might have been deducted but deposited late, or there’s a dispute over the exact timing of deductibility.
  • Consideration of Assessee’s Explanation (Natural Justice): Even if a disallowance is generally warranted, the assessee must be given a proper opportunity to explain any timing differences or other issues related to TDS compliance under Section 40(a)(ia). Failure to consider such explanations would be a violation of natural justice.
  • Partial Relief: The assessee gets partial relief in that while the disallowance of rental/miscellaneous income from 80P stands, any disallowance under 40(a)(ia) on expenses related to these incomes will need fresh consideration based on the assessee’s explanation for timing differences.
IN THE ITAT BANGALORE BENCH ‘B’
Income-tax Officer
v.
Sahakara Nagar Credit Co-operative Society Ltd.
Waseem Ahmed, Accountant Member
and SOUNDARARAJAN K. , Judicial Member
IT Appeal No.1733 (Bang) of 2024
[Assessment year 2017-18]
MAY  29, 2025
Subramanian S. , JCIT (DR) for the Appellant. Aprameya K, Adv. for the Respondent.
ORDER
Waseem Ahmed, Accountant Member.- This is an appeal filed by the Revenue against the order passed by the NFAC, Delhi dated 28/02/2024 in DIN No. ITBA/NFAC/S/ 250/2023-24/1061657647(1) for the assessment year 2017-18.
2. The issue raised by the Revenue in its grounds appeal are interconnected and pertains to allowances of deduction claimed under section 80P of the Act.
3. The relevant facts are that the assessee is a cooperative society carrying out banking business and providing credit facilities to the members. The assessee society has 8606 members which are categories into 3 different classes of members. The numbers of members of each class and their rights are detailed as under:
ParticularClass A’ regular memberClass B’ associate memberCalss ‘C’ nominal member
Total number of members219725223663
Right to VoteYesNoNo
Right in share profitYesYesNo
Dividend RightYesYesNo
Right to participate in activityYesYesYes

 

4. The assessee for the year under consideration declared gross total income of Rs. 1,76,24,174/- which consist of business income of Rs. 1,75,65,121/- and income from house property of Rs. 59,053/- only. The entire gross total income of Rs. 1,76,24,174/- claimed as deduction under section 80P(2)(a)(i) of the Act.
5. In the assessment proceeding, the AO found that the assessee is catering to the different classes of members having different rights with regard to participate in the share profit and dividend. Therefore, the essential feature, i.e. the concept of mutuality, is missing in the case of the assessee, hence the assessee is not eligible to claim the benefit of the provision of section 80P(2)(a)(i) of the Act. The AO in this regard referred to and placed heavy reliance on the judgment of Hon’ble Supreme Court in the case of Citizen Cooperative Society Ltd v. ACIT 
6. Besides the above, the AO found that the business income declared by the assessee includes the following receipts;
(i)E-Stamp CommissionRs.35,000/-
(ii)Other incomeRs.50,236/-
(iii)CommissionRs.620/-
(iv)Pickmy CommissionRs.65,439/-
TotalRs.1,51,295/-

 

7. The AO held that these receipts are not attributable to the eligible business, therefore the same are not eligible for deduction under section 80P(2)(a)(i) of the Act and accordingly held that these are taxable as income from other sources.
8. The AO further found that the business income includes interest income of Rs. 79,28,908/- earned from FD with the Cooperative Bank. The AO held that the income earned from the FD with cooperative bank is neither eligible for deduction under section 80P(2)(a)(i) of the Act nor eligible under section 80P(2)(d) of the Act. Thus, the same is taxable as income from other sources.
9. Likewise, the AO found that the Auditor in the Form 3CD reported expenses amounting to Rs. 2,58,825/- incurred/paid without deducting eligible tax at source (TDS). Therefore, in accordance with the provision of section 40(a)(i) of the Act, an amount of Rs. 77,648/- (30%) was required to be disallowed. However, the assessee instead of disallowing impugned amount has reduced gross total income by Rs. 11,032/-. only.
Hence, the AO made the disallowances of Rs. 88,680/- (77648 + 11,032) only.
10. Furthermore, the AO found that the assessee has received rent amounting to Rs. 1.1 Lakh and computed income on the same as per the provision applicable to the income from house property. The AO held that the assessee cannot be allowed to compute income as per section 22 of the Act. As such the AO held the receipt covered under section 80P(2)(c) of the Act and accordingly after providing deduction of Rs. 50000/- brought balance amount of Rs. 60,000/- to tax. Accordingly, the AO in view of the above, worked out the total income of the assessee at Rs. 1,77,12,854/- only.
11. The aggrieved assessee preferred an appeal before the learned CIT(A).
12. The assessee before the learned CIT(A) submitted that it is a credit co-operative society, and its operations were fully compliant with the provisions of the Karnataka Cooperative Societies Act (KCSA) and the bye-laws of the society. The assessee emphasized that membership, as per the Act (KCSA), includes nominal and associate members, and thus, the restriction on voting rights does not affect their participation in the society’s activities. The assessee contended that there was no violation of the KCSA or any deviations from the bye-laws.
13. Regarding judgment of Hon’ble Supreme Court in the case of Citizen Co-operative Society Ltd. (supra), the assessee clarified that the ruling is not applicable on given facts, as that case pertained to a society formed under a different state Act and involved transactions with the general public, thereby violating the principles of mutuality. In contrast, the assessee society strictly follows the principle of mutuality and engages only with its members. It was also highlighted that the Income Tax Act has not been amended to reflect any change in the treatment of such co-operative societies, indicating the government’s intent not to penalize compliant societies.
14. Further, the assessee pointed out that the issue of deduction under section 80P(2)(a)(i) had already been settled in its favor for earlier assessment years (AYs 2009-10 and 2010-11) by the ld. CIT (Appeals), with a clear order dated 11.09.2013. It stressed that there has been no change in the legal provisions since then, and therefore, the disallowance of such a deduction by the AO was unwarranted.
15. On the rental income, the assessee argued that the receipts from renting out two premises, totaling Rs. 1,10,000, were correctly classified under ‘income from house property’, and a deduction under section 24(a) of the Act for repairs and maintenance had been appropriately claimed. The AO’s denial of this deduction and failure to provide the assessee an opportunity to explain its claim was unjustified.
16. Moreover, the assessee contended that all its income, including estamp commission and other miscellaneous receipts, fall within the scope of section 80P(2)(a)(i) of the Act, being integral to its stated objectives.
17. Lastly, the assessee challenged the addition under section 40(a)(ia) of the Act for Rs. 88,680/-, arguing that the discrepancy arose due to timing differences in deduction and remittance of tax, and that the concerned expenses were disallowed in the financial year 2015-16 and claimed correctly in the financial year 2016-17. Therefore, the deduction claimed in the assessment year 2017-18 was valid.
18. The learned CIT(A) after considering the AO’s finding and submission of the assessee found that the assessee is in the business of providing credit facilities to the members which is carried well within the law and permitted by its byelaws approved by registrar of cooperative societies. The assessee has not entered into business transaction other than with the members. Therefore, the assessee in the light of judgment of Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. v. CIT ITR 1 (SC) is eligible for deduction under section 80(2)(a)(i) of the Act.
19. Regarding the interest income earned from FD, the learned CIT(A) held that impugned income is incidental to the business activity of the assessee i.e. providing credit facilities to members and having close nexus. Further the assessee did not carry any other business other than providing credit facility. Therefore, interest income is eligible for deduction u/s 80P(2)(a)(i) of the Act.
20. The learned CIT(A) regarding the dispute with respect to rental receipt, commission, E-stamp commission, other income and section 40(a)(i) disallowances directed the AO to allow the assessee’s claim after considering assessee submission.
21. Being aggrieved by the order of the learned CIT(A) the Revenue is in appeal before us
22. The learned DR before us relied on the order of this tribunal in the case of Primary Agricultural Credit Co-operative Society Ltd. v. Income-tax Officer  (Bangalore – Trib.)/ITA No. 947/Bang/2024 dated 3rd July 2024. As per the learned DR the principles of mutuality in the given facts and circumstances were missing. Accordingly, the learned DR contended that the assessee is not eligible for deduction under section 80 P of the Act.
23. On the other hand, the learned AR before us submitted that the presence of Category ‘C’ members i.e. nominal or associate members, who do not participate in the profits of the respondent assessee, does not impact or breach the principle of mutuality. It is submitted that as per section 18 of the Karnataka Cooperative Societies Act, 1959 (KCSA), a cooperative society is legally allowed to admit nominal and associate members. The law itself clearly lays out the distinctions that nominal members cannot hold shares or participate in the profits or assets of the society and cannot become office bearers, while associate members may hold shares but are still not entitled to become office bearers. This categorization between A, B, and C members is not an artificial creation by the assessee but is established by law, and hence, their presence does not affect the mutuality principle under which the society operates. The learned AR further argued that the provisions of section 80P of the Act, specifically allows deductions on income earned by the cooperative societies from their members, particularly in respect of banking or providing credit facilities. Since, the KCSA provides for these different member categories, and the law explicitly recognizes nominal and associate members, the assessee is entitled to claim deductions on the income earned from transactions with all these members, including Category ‘C’ members. Importantly, the learned AR highlighted that the Hon’ble Supreme Court’s ruling in the Citizen Cooperative Society Ltd (supra) does not apply in the present case because that judgment was based on the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995 (MACSA), which has no provision for nominal members. In contrast, the assessee in this case operates under the KCSA, which does provide for such members, making the facts and legal framework distinctly different.
24. Moreover, the learned AR referred to the Supreme Court’s judgment in the case of Mavilayi Service Cooperative Bank (supra), which clarified that the term ‘members’ under section 80P(2)(a)(i) must be understood in the context of the provisions of the respective State Cooperative Societies Act under which the society is formed. As per the KCSA, nominal and associate members are validly recognized, and any income or loans provided to such members would qualify for deduction under section 80P of the Act. Therefore, the ld. AR strongly submitted that the deduction claimed by the respondent assessee under section 80P(2)(a)(i) is fully justified and must be allowed, as the activities of the assessee align with the legal framework and the principle of mutuality remains intact despite the presence of non-profit-sharing members.
25. Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.
26. We have heard the rival contentions of both the parties and perused the materials available on record. The core issue is whether the society is entitled to claim a deduction under section 80P(2)(a)(i) of the Act, which gives tax relief to cooperative societies engaged in providing credit facilities to their members. The Revenue argued that because the society has three classes of members — regular (Class A), associate (Class B), and nominal (Class C) — and only some have rights to profits or voting, the principle of mutuality (that members collectively benefit) is broken. The AO had relied on an earlier ruling of Hon’ble Supreme Court in the case of Citizen Cooperative Society (supra) to deny the deduction, claiming that business with non-profit-sharing members disqualified the society from the benefit.
26.1 However, we find that this reasoning did not hold here because the present assessee operates under the Karnataka Cooperative Societies Act (KCSA), which explicitly allows the inclusion of nominal and associate members. By law, these members may not vote or share profits, but they are still valid members, and the society’s dealings with them fall under the cooperative framework. We note that the Citizen Cooperative (supra) case was based on a different state law that did not allow nominal members, making the facts and legal background entirely different. Furthermore, the Hon’ble Supreme Court’s ruling in the case of Mavilayi Service Cooperative Bank (supra) has clarified that the eligibility under section 80P should be assessed in the light of the relevant state cooperative law, and under KCSA, the presence of nominal and associate members is lawful and does not break the mutuality principle. Hence, the ground of appeal of the Revenue is hereby dismissed.
26.2 Moving ahead to the issue of eligibility of the interest income from fixed deposits with a cooperative bank, we also set aside this issue to file of the AO to verify mandatory requirement for making FD as per the provision of KCSA if the deposit is found within the limit of mandatory requirement, then interest earned from such deposit be allowed in view of judgment of Hon’ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank ITR 194 . In case, the excess deposit, than the mandatory requirement, is found then the proportionate interest income be excluded from the eligible income but after allowing the corresponding cost as per section 57 of the Act.
26.3 As for the rental income, commissions, and small other income heads, we hold that these incomes are not arising from the business of the assessee as envisaged under section 80P of the Act. Accordingly, we disallow the same. On the disallowance under section 40(a)(ia) of the Act relating to tax deduction at source (TDS), we note that the assessee’s explanation regarding timing differences needs to be considered before finalizing any disallowance. In view of the above detailed discussion, the grounds of appeal filed by the revenue are by partly allowed for statistical purposes.
27. In the result, the appeal of the revenue is partly allowed for statistical purposes.