ITAT Rules in Favour of Rural Co-op Society: Section 80P Deduction Extended to Nominal Members
In a significant relief for cooperative credit societies, the Income Tax Appellate Tribunal (ITAT) recently ruled that deduction under Section 80P is valid even when loans are extended to nominal members. This decision overturns the earlier order of the Commissioner of Income Tax (Appeals) [CIT(A)], reaffirming the cooperative principle at the heart of rural credit systems.
Focus Keyphrase: Section 80P deduction
What Is Section 80P Deduction?
Section 80P of the Income Tax Act, 1961 provides tax deductions to cooperative societies engaged in specified activities like banking, cottage industries, marketing of agricultural produce, etc.
For credit societies, Section 80P(2)(a)(i) allows a 100% deduction of profits earned from providing credit facilities to its members.
ITAT Judgment: Key Highlights
The case involved a rural co-operative credit society that was denied deduction on income from loans given to nominal members. The Assessing Officer and CIT(A) claimed that nominal members do not qualify as “members” under Section 80P.
However, the ITAT disagreed.
Tribunal’s Reasoning:
- Membership definition under Co-operative Societies Act (applicable in the respective state) includes nominal members, even if they do not have voting rights.
- Nominal members were admitted as per the society’s bylaws, thus recognized under the cooperative structure.
- The society’s income from such loans still flowed from a genuine cooperative activity, not from commercial banking or non-member lending.
Expert View:
CA Ramesh Subramanian notes, “This ITAT ruling restores the spirit of cooperatives. Denying benefits based on internal class of membership is a stretch not supported by law.”
Legal Basis and Case Reference
- Section 80P(2)(a)(i) of the Income Tax Act, 1961
- Relevant Co-operative Societies Act of the State
- Case Reference: Read ITAT Order on taxguru.in
Key takeaway: There is no explicit restriction in Section 80P disallowing deduction when loans are given to nominal members, provided the society acts within its legal framework.
Comparison Table: Regular vs Nominal Members for 80P
| Criteria | Regular Member | Nominal Member |
|---|---|---|
| Voting Rights | Yes | No |
| Eligible for Loans | Yes | Yes (if bylaws allow) |
| Covered under 80P? | Yes | Yes (per ITAT ruling) |
| Recognized in Co-op Act? | Yes | Yes |
Practical Impact for Rural Societies
- Avoids unnecessary litigation: Tax authorities often disallowed claims arbitrarily, citing “non-member lending.”
- Encourages financial inclusion: Nominal members are often small farmers or rural borrowers without full membership due to operational reasons.
- Strengthens tax planning: Societies can now structure their lending portfolios confidently, as long as nominal members are legally enrolled.
CBDT Circular and Judicial Trends
While CBDT Circular No. 133/06/2007 restricted deductions for cooperative banks (especially urban co-ops), it does not override the legislative benefit under 80P for credit societies serving rural or restricted-member bases.
The Supreme Court in Citizen Co-operative Society Ltd (2017) had ruled against urban co-ops functioning like commercial banks. However, rural credit societies with genuine cooperative structure continue to enjoy 80P benefits.
How to Safeguard Your 80P Claim?
- Ensure all members, including nominal ones, are properly enrolled as per the society’s bylaws.
- Maintain proper documentation of loan approvals and recoveries.
- Avoid lending to the general public or entities outside the cooperative’s defined scope.
- File Form 10BA and other disclosures correctly while claiming deduction.
Summary
ITAT holds that rural cooperative societies can claim Section 80P deduction even on income from loans to nominal members, provided such members are legally admitted and served under cooperative principles.
FAQs on Section 80P Deduction for Co-op Societies
Q1. Can a credit society lend to nominal members and still claim 80P?
Yes, if the society’s bylaws permit and members are enrolled under the Co-operative Societies Act.
Q2. Does this apply to urban co-op banks too?
No, urban co-op banks are treated differently due to past SC rulings. This relief mainly applies to rural credit societies.
Q3. What documents should be kept ready during scrutiny?
Member admission registers, loan sanction files, recovery records, and society bylaws.
Final Thoughts
This ITAT ruling is a reminder that tax law must align with ground realities, especially in India’s cooperative ecosystem. Rural co-op credit societies should revisit past disallowances under 80P and, if applicable, consider appealing based on this precedent.
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