Income Tax Act does not define "member", nor has provided distinction between 'regular member' and 'nominal member' and therefore, its meaning and objects has to be understood in the context of definition given in the State Act for the purpose of determining deduction u/s 80P (of Income Tax Act, 1961).

The assessee has filed an appeal against the order of Commissioner of Income Tax (Appeals), Mangalore passed under Section 143(3) (of Income Tax Act, 1961) and 250 (of Income Tax Act, 1961) ('the Act').

2. The assessee has raised the following grounds of appeal as under :

3. The Brief facts of the case are, the assessee is a Primary Agriculture Co- operative Society formed for the benefit of Members primarily engaged in the business of accepting deposits and lending of finances to Members. Further the assessee is a co-operative society registered under Karnataka Co-operative Societies Act, 1959 and filed the return of income on 15.10.2016 with total income of Rs.40,730/- after claiming deduction u/sec 80P (of Income Tax Act, 1961). The Return of Income was processed under Section 143(1) (of Income Tax Act, 1961) and the case was selected for scrutiny under CASS, and Notice under Section 143(2) (of Income Tax Act, 1961) was issued. In compliance, the ld. AR appeared from time to time and furnished the details and the case was discussed. The assessee has claimed deduction under Section 80P (of Income Tax Act, 1961), as the society earns interest on deposits with South Canara Dist Co-operative Bank relying on the decision of jurisdictional High Court. But the Assessing Officer issued Show Cause Notice for disallowance of the claim relying on the decision of Hon'ble Supreme Court in the case of Citizen Co-operative Society in Civil Appeal No.10245/2017. The explanations were filed by the assessee on the two disputed issues considered at Para 07 and 8.3 of the order. The Assessing Officer dealt on the submissions, financial statements and on status of the nominal members who do not have voting rights and also not eligible for dividend, and the provisions under Section 80P (of Income Tax Act, 1961). Further the assessing officer found that there are three categories of members i.e. A Class, C & D Class being the nominal members. Whereas A Class members are having voting and dividend rights, C Class members eligible only for dividend and no voting rights, whereas D Class members are nominal members with no voting rights and no dividend. The Assessing Officer observed that the assessee society has accepted deposits from members and lend to members and, further accepts deposits from D Class nominal members and lend loans. Whereas, the D Class members does not have right to vote and no dividend is received. Accordingly, the Assessing Officer disallowed the claim of deduction under Section 80P(2)(a) (of Income Tax Act, 1961) and assessed the total income of Rs.1,21,26,993/- and passed the order under Section 143(3) (of Income Tax Act, 1961) dt.20.12.2018. Aggrieved by the order, the assessee has filed an appeal with the CIT(Appeals), whereas the CIT(Appeals) concurred with the action of the Assessing Officer and dismissed the appeal. Aggrieved by the order of CIT (Appeals), the assessee has filed an appeal with the Tribunal.

4. At the time of hearing, the ld. AR submitted that the CIT(Appeals) has erred in confirming the denial of deduction under Section 80P(2) (of Income Tax Act, 1961) and the decisions relied by the CIT(Appeals) are distinguishable. Further the society accepts the deposits and lends finances to its members and supported his arguments with the decision of Tribunal and jurisdictional Hon'ble High Court and prayed for allowing the appeal. Contra, the ld. DR relied on the orders of the CIT (Appeals).

5. We heard the rival submissions and perused the material on record. The sole matrix of the disputed issue is with respect to denial of deduction under Section 80P(2) (of Income Tax Act, 1961) by the Assessing officer, as the assessee is in the Banking business accepts the deposits from the general public being D Class nominal members and also lend the funds. Whereas, the nominal members are the contributors for earning surplus and does not participate /share the surplus of the society, hence the concept of mutuality cease to exist. The Ld. AR supported his arguments relying on the co-ordinate bench decision of the Tribunal in the case of M/s. Kodavoor Vyavasaya Seva Sahakari Sangha Niyamitha & Others Vs. ITO (ITA No.707/Bang/2019 Dt.26.08.2019). We found the disputed issues are with respect to claim of deduction under Section 80P(2) (of Income Tax Act, 1961) and the criteria of nominal members. We considered the observations of the co-ordinate bench of the Tribunal in the case of M/s. Kodavoor Vyavasaya Seva Sahakari Sangha Niyamitha & Others Vs. ITO (supra) at page 5 to 12 Para 4 & 5 which is read as under :

“ 4. We heard the rival submissions and perused the material on record. Prima facie, the sole disputed issue being denial of claim of deduction under Section 80P(2)(a)(ii) (of Income Tax Act, 1961). The Assessing Officer has dealt on the interest income from investment / deposits in Banks, whereas the assessee society is engaged in business of carrying on banking and providing credit facilities. In the present assessment year, the assessee has made fixed deposits with Karnataka DCC Bank and received interest income and the assessee has claimed deduction under Section 80P(2)(a)(i) (of Income Tax Act, 1961) further Assessing Officer found that the assessee has provided Banking facilities to the nominal members. Whereas the ld. AR has restricted his arguments to the extent of denial of deduction under Section 80P(2) (of Income Tax Act, 1961) and further submitted that the nominal members has been categorized as members and are eligible for benefits. Whereas CIT (Appeals) has relied on the judicial decisions, which shall apply to a society which is engaged in numerous activities but in the present case the assessee society is engaged in providing facilities of Banking business or credit facilities to its members. We found the issue of denial of deduction under Section 80P(2) (of Income Tax Act, 1961) and treatment of interest on deposits and also nominal members are treated as members for the purpose of benefit of section 80P(2) (of Income Tax Act, 1961) was dealt by the judicial forums. We consider it proper to refer to the decision of the co-ordinate Bench of the Tribunal in the case of The Jayanagar Co-operative Society Vs. ITO in ITA No.3254/Bang/2018 in respect of interest income earned by the society were the Assessing Officer denied the claim of the assessee observing that interest income earned on investment of surplus funds has to be assessed as ‘income from other sources’ and not from business at Page No.3 paras 4 & 5 held which read as under :

“ 4. The issues that arise for consideration in this appeal by the assessee are as to whether the Revenue authorities were justified in holding that the assessee was not entitled to the benefit of deduction under section 80P(2)(a)(i) (of Income Tax Act, 1961) (in short ‘the Act’) on interest income earned and under section 80P(2)(d) (of Income Tax Act, 1961) in respect of interest received from Co-operative institutions. The Assessing Officer (AO) denied the claim of the assessee on the ground that interest income earned by making investment of surplus funds has to be assessed under the head “Income from Other Sources” and not income from business and since interest income is not assessed as business income, the claim for deduction under section 57 (of Income Tax Act, 1961) cannot be allowed. In upholding the above conclusions, the CIT(A), inter alia, relied on the decision of the Hon’ble Supreme Court in the case of The Totgar’s Co- operative Sales Society Ltd., Vs. ITO 322 ITR 283 (SC) wherein the Hon’ble Supreme Court held that the benefit of deduction under section 80P(2)(a)(i) (of Income Tax Act, 1961) is only on income which is assessable under the head “Income from Business”. Interest earned on investment of surplus funds not immediately required in short term deposits and securities by a Co-operative Society providing credit facilities to members or marketing agricultural produce to members is not business income but income from other sources and the society is not entitled to special deduction. 5. While learned AR relied on the decision of the Hon’ble Karnataka High Court in the case of Tumukur Merchants Souharda Credit Co-operative Ltd., 230 taxman 309 (Karn), the DR relied on a subsequent decision of the Hon’ble Karnataka High Court in the case of PCIT Vs. Totgars Co-operative Sale Society Ltd., 395 ITR 611 (Karn.). We have carefully gone through the said judgment. The facts of the case before the Hon’ble Karnataka High Court was that the Hon’ble Court was considering a case relating to Assessment Years 2007-08 to 2011-12. In case decided by the Hon’ble Supreme Court in the case of the very same assessee, the Assessment Years involved was Assessment Years 1991-92 to 1999-2000. The nature of interest income for all the Assessment Years was identical. The bone of contention of the Assessee in AY 2007-08 to 2011-12 was that the deduction under Section 80P(2) (of Income Tax Act, 1961) is claimed by the respondent assessee under Section 80P(2)(d) (of Income Tax Act, 1961) and not under Section 80P(2)(a) (of Income Tax Act, 1961) which was the claim in AY 1991-92 to 1999- 2000. The reason given by the Assessee was that in AY 2007-08 to 2011-12 investments and deposits after the Supreme Court's decision against the assessee Totgar's Co-operative Sale Society Ltd. (supra), were shifted from Schedule Banks to Cooperative Bank. U/s.80P(2)(d) (of Income Tax Act, 1961), income by way of interest or dividends derived by a Co-operative Society from its investments with any other Co-operative Society is entitled to deduction of the whole of such interest or dividend income. The claim of the Assessee was that Co- operative Bank is essentially a Co-operative Society and therefore deduction has to be allowed under Clause (d) of Sec.80P(2) (of Income Tax Act, 1961). The Hon'ble Karnataka High Court followed the decision of the supreme Court in The Totgars Co-operative Sales Society Ltd. (supra) and held that interest earned from Schedule bank or cooperative bank is assessable under the head income from other sources and therefore the provisions of Sec.80P(2)(d) (of Income Tax Act, 1961) was not applicable to such interest income. It is thus clear that the source of funds out of which investments were made remained the same in AY 2007-08 to 2011-12 and in AY 1991-92 to 1999-2000 decided by the Hon'ble Supreme Court. Therefore whether the source of funds were Assessee's own funds or out of liability was not subject matter of the decision of the Hon'ble Karnataka High Court in the decision cited by the learned DR. To this extent the decision of the Hon'ble Karnataka High Court in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra) still holds good. Hence, on this aspect, the issue should be restored back to the AO for a fresh decision after examining the facts in the light of these judgment of the Hon'ble Apex Court rendered in the case of The Totgars Co-operative Sale Society Ltd. (supra) and of Hon'ble Karnataka high Court rendered in the case of Tumukur Merchants Souharda Co-operative Ltd. (supra).”

5. Similarly, on the issue of definition of the Member where Nominal Members are also eligible for benefits. The Member defined under the co-operative society Act bye-laws includes Nominal Member. We found Ahmadabad Bench of ITAT in ITA No.1328/Ahmd/2018 for Asst. Year 2015-16 in the case of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT (supra) at para 7 has held as under :

“ 7. We have heard ld.DR and gone through the record. We have also gone through case laws cited both the sides before ld.CIT(A). We find that fundamental facts which are not disputed by the Revenue authorities are that the assessee is a primary agricultural credit society registered under the Gujarat Cooperative Societies Act, 1961. It is engaged in providing credit facilities to the farmers in the region of Bhavnagar district. As per the AO, members of the assessee-society consisted of two types viz. regular member and nominal members. It is the case of the Revenue that assessee is doing more business with nominal members than the regular member in order to earn more profit, which is against the law, and therefore, there is a break-down of principle of mutuality resulting disentitlement of exemption under section 80P (of Income Tax Act, 1961). The ld.AO relied upon the judgment of Hon’ble Supreme Court in the case of Citizens Cooperative Society Ltd. (supra) to support his view. While the case of the assessee is that being a primary agriculture credit society, it is entitled for exemption under sub-section (4) of section 80P (of Income Tax Act, 1961). Judgment of Hon’ble Apex Court relied upon by the Revenue is distinguishable on facts. In that case assessee was a cooperative society registered under Multi State Cooperative Societies Act, 2002, while in the present case, assessee is a primary agriculture credit society registered under Gujarat State Cooperative Societies Act. The Hon’ble Supreme Court disentitled the assessee from claiming exemption under section 80P (of Income Tax Act, 1961) due to violation of provisions of MACSA, under which it was formed, and most of the business of the assessee was with carved out category of persons without approval of Registrar of the societies. Weighing point of view of both sides, we find that balance tilt in favour of the assessee. We find that by virtue of sub-section (4) of section 80P (of Income Tax Act, 1961), the assessee is entitled for deduction under section 80P(2) (of Income Tax Act, 1961). Further, Income Tax Act does not define “member”, nor has provided distinction between ‘regular member’ and ‘nominal member’ and therefore, its meaning and objects has to be understood in the context of definition given in the State Act. The Revenue authorities are trying to extrapolate the meaning of expression “Member” contrary to the spirit of the Act. It is evident from the definition of “member” provided in section 2(13) of the Gujarat Cooperative Societies Act that “Member” includes nominal, associate or sympathizer member. Therefore, in the present case, the nominal members are members as provided in the Act and that deposits received and loan advanced to the nominal cannot be treated as from non-members or from public and in the nature of banking business. That being so, then, an assessee engaged in primary agriculture activities and providing credit facilities and agriculture facilities to the farmer-members of a particular region, claim of deduction under section 80P(2) (of Income Tax Act, 1961) cannot be denied. It is not denied by the Revenue that the activities of the assessee society are of primary agriculture activities. Competent authority has also recognized the assessee as primary agriculture credit society. In the earlier assessment year also, Revenue has accepted this fact and allowed the claim of the assessee. Judgment of Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd. (supra) is distinguishable on facts. In that case, status of the assessee is that of co-operative bank, whereas assessee in the present case is a primary agriculture credit society and applicability of section 80P(2)(4) (of Income Tax Act, 1961). Considering all these facts, we are not convinced with the reasoning and finding given by the Revenue authority in denying claim of the assessee under section 80P(2) (of Income Tax Act, 1961). We allow the claim of the assessee and direct the ld.AO to re-compute income of the assessee by allowing claim under section 80P(2)(4) (of Income Tax Act, 1961).”

Also in Tax Case Appeal No.882 and 891 of 2018 of Hon'ble Madras High Court in the case of The Prin. Commissioner of Income Tax Vs. S-1308 Ammapet Primary Agricultural Co-operative Bank Ltd. held in paras 11 to 18 as under We found the facts of the present case are similar to the decision rendered by the co-ordinate Bench and the jurisdictional High Court in respect of “Members” definition and “chargeability of interest income under ‘income from other sources’ ”. We follow the judicial precedence and restore the entire disputed issue to the file of Assessing Officer to adjudicate afresh in the light of the decision of chargeability of interest income under the head ‘income from other sources’ and the observations of Hon'ble Supreme Court in the case of Totgar’s Co-operative Sales Society Ltd. Vs. ITO 322 ITR 283 (SC) and Hon'ble Karnataka High Court decision in the case of Tumkur Merchants Souharda Credit Co-operative Ltd. 230 Taxman 309 (Kar) as discussed in above paras. Whereas in respect of the claim of Nominal Members included in the definition of Member we find support on our view rely on the decision of Trapaj Vibhageeya Khet Udyog Mal Rupantar Food Processing Sahakari Mandali Ltd. Vs. DCIT (supra) and Prin. CIT Vs. S-1308 Ammapet Primary Agricultural Co-operative Bank Ltd. (supra) which is covered in favour of the assessee. Accordingly, we are of the substantive opinion that the nominal members are also eligible for the Benefits of credit society. Accordingly we restore entire disputed issue to the file of Assessing Officer to grant the benefit to the nominal members and the assessee should be provided adequate opportunity of hearing and co-operate in submitting the information for early disposal of the case and allow the grounds of appeal of the assessee for statistical purposes.”

We found the facts of the present case are similar to the decision of the co-ordinate bench of the Tribunal. Accordingly, we follow the judicial precedence and restore the entire disputed issues to the file of Assessing Officer to examine and verify the eligibility of nominal members under Karnataka Co-operative Societies Act, 1959. Further the assessee should be provided adequate opportunity of hearing and shall co-operate in submitting the information and allow the grounds of appeal of the assessee for statistical purposes.

6. In the result, the assessee's appeal is allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.