Co-operative Societies Meaning And Taxation Under Income Tax Act

Co-operative societies are profit-oriented entities which aim to obtain marketability for the products produced by agricultural and other labour-intensive businesses. Based on the recommendations of the Mirdha Committee and the Model Co-operative Societies Act, the Government of India passed the Multi-State Co-operative Societies Act in 2002 which provided for a democratic and autonomous working of the Co-operatives. This article mentions the essential aspects of Co-operative Societies in India.

A co-operative society is often a voluntary association of individuals who come together with the intention to work together and to promote their economic interest. These societies work on the principle of self-help as well as mutual help. The primary goal is to provide support to the members. Nobody leaves a co-operative society without earning a profit. People of the same interest come forward as a group, pool their resources, utilise these resources in the best possible manner and derive a common benefit out of it. It is an association of persons who voluntarily share their resources for using them for the mutual welfare of its members itself. A co-operative society is formed for the promotion of thrift, self-help and mutual assistance of the members.

A co-operative society may be governed by the respective state’s Co-operative Societies Act or by the Multi-State Co-operative Societies Act, 2002. The societies whose primary objective is to serve the interests of its members in a particular State are governed by the co-operative societies Act of that specific state. While, a Society whose primary objective is to serve the interests of its members in more than one state, is governed by the Multi-State Co-operative Societies Act of 2002. The National Co-operative Union of India (NCUI) and the National Co-operative Development Corporation (NCDC) are the essential agencies working for the promotion of co-operative movement in India.

Objectives of Co-operative Societies

The following are the primary objectives of co-operative societies:

• Promotion of cooperative movement.
• To encourage and promote the growth of co-operative societies.
• Render services, not for profit.
• Mutual help, not competition.
• Self-help, not dependence.

Differences between a co-operative Society and an NGO/Foundation

Co-operative societies and Non-governmental organizations are often times mistaken to be one and the same, this is because they bear a lot of similarities. However there are a few striking differences which include;

• A Co-operative can be defined as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. While a non-governmental organization (NGO) is a citizen-based association that operates independently of government, usually to deliver resources or serve some social, humanitarian or political purpose.
• To protect the interest of members, co-operative societies are placed under state control through registration. While getting registered, a society has to submit details about the members and the business it is to undertake. While NGOs’ are under the control of the Corporate Affairs commission.
• A co-operative society is totally based on voluntary membership. Persons having a common interest can join as members. A member can join the society as and when he likes. Continue for as long as he likes, and leaves the society at will. While there exists a more rigid procedure for appointment and removal of a trustee of an NGO.
• One primary difference between a co-operative and an NGO is how money flows back into the community: a non profit organisation cannot distribute profits to members or trustees, while a co-operative society generally distributes profits based on members’ participation in the co-operative (through patronage dividends). The primary source of funding may also be different: whereas a co-operative generates most or all of its revenue through the sale of goods and services, a non-profit organisation can receive tax-deductible donations from community members and foundations, and is limited in the amount of business activity it conducts unrelated to its charitable purpose.
• Another striking difference is that a non-profit organization may have more limits on its activities than a co-operative society, as it must be organized and operated exclusively for charitable, educational, or other specified purposes. Specified purposes can include relief of the poor, distressed, or underprivileged; combating community deterioration; eliminating prejudice and discrimination; and education, to name a few. These purposes must benefit the broader public and a charitable class of people (such as low-income, distressed, marginalized, etc). Thus, a non-profit is primarily accountable to the public, though, like a co-operative, may choose to have a membership to which it is accountable.

Co-operative Societies under the Income Tax Act

As stated in Section 2(19) of the Income Tax Act, 1961, “Co-operative Society” means a co-operative society officially registered under the co-operative societies Act, 1912 (2 of 1912), or under any other declared law for the time being in force in any State for the registration of co-operative societies. According to the Co-operative Societies Act of each State, a Co-operative Society registered within any State under the law of that particular State is not allowed to operate in any other State without the permission and sanction of the Government or Registrar of co-operative societies of that State. In the case of a Multi-State co-operative society, it can work in more than one State as a matter of right, under the Act and the permission of any other State is not required to do its business.

Eligibility

The following are the individuals who may become members of a Co-operative Society at the State level as per the State Act.

• An individual competent to contract, attained majority and is of sound mind and belongs to a class of persons if any for whom the society is formed as per its bye-laws.
• A society registered or deemed to be so under the Co-operative Societies Act.
• The Central Government and any State Government, or the Government of a Union Territory

Checklist to Form a Co-operative Society

The following are the steps involved in establishing a Co-operative Society under the State Act.

• The prescribes application duly filled in shall be made to the Registrar of Co-operative Societies.
• The application should be attached along with four copies of the proposed bye-laws of the co-operative society.
• All the applicants must be individuals, and the number of applicants shall be above ten.
• All the applicants should sign the application if the applicants are individuals.
• If the applicant is a society by itself, then by a member duly authorised by such society.

Types of Co-operative societies

There are different types of co-operative societies registered under the Co-operative Societies Act, 1912. A few are as follows.

• Housing Society
• Producer’s Society
• Agricultural Marketing Society
• Consumers Society
• Co-operative Bank
• Federal Society
• Laws Regulating Co-operative Societies

The following laws govern the functioning of Co-operative Societies in India.

• State Co-operative Societies Acts of individual states.
• Multi-State Co-operative Societies Act, 2002 for the Multi-State Co-operative Societies with an area of operation in more than one state.

Taxability

The co-operative society is a separate entity under the Income Tax Act of 1961. However, it is not explicitly mentioned either in the definition of ‘assessee’ or the ‘person’. One has to look for the provisions of Section 80P which provide tax incentives to co-operative societies to find out whether co-operative society is an ‘assessee’ or not. 

As per the section, since co-operative societies are explicitly mentioned for the availability of exemption benefit, it can be inferred that co-operative societies are also assessees within the meaning of the Act. Taxpayers should remember that the co-operative societies do not enjoy complete exemption from taxes. They are entitled to certain specified deductions from the total gross income. The total gross income is determined in the same way as in the case of any other assessee. That is, the income is computed under specified heads of income and then aggregated to arrive at Gross Total Income. In the case of a co-operative society, the total income is computed as in the case of any other assessee. From the Gross Total Income, the deductions available under Section 80 are deducted to arrive at Total Income. The deductions under Section 80 may be grouped into two for convenience.

• General Deductions: The deductions available to all the assessees including co-operative society.
• Specific Deductions: The deductions available individually to a co-operative society.

Incomes of a Co-operative Society

A co-operative society may mainly have the following types of income.

• Interest on Securities
• Income from House Property
• Capital Gains Income
• Income from Business

Most of the societies, nowadays are found to be carrying on business activities. The profits and gains from such business by society are to be determined according to the regularly employed method for such computation and according to accepted commercial principles. The approach adopted by society must be consistently followed every year. Thus, a co-operative society may adopt a cash basis method or a mercantile basis method. What is important is that the same system should generally be continued.

Procedure for Computation of Taxable Income

First compute the total income under various heads, i.e. “income from house property”, “profits or gains of a business or profession”, “capital gains”, and “income from other sources”, while ignoring the prescribed income exemptions. Therefore, “gross total income” is obtained. Next, from the amount, the permissible deductions prescribed under the Income Tax Act are implemented. To the ‘net income’ so finally computed, the ‘rates of tax’ as per the Finance Act for the respective year applies to Co-operative Societies. Now to the amount of tax, per cent of Income Tax and Cess, a surcharge as prescribed in the Finance Act is added.

Exemptions and Deductions under the IT Act

There are different types of exemptions and deductions available to co-operative societies.

Exemptions

This includes certain classes of income which do not form part of the total revenue and exempt from income tax. These are excluded from the computation of total gross income of an assessee. A return of income is not to be filed for them - such types of income come under Chapter III of the Income Tax Act. Some of the permissible exemptions are provided below.

Section 10A: Exemption of profits and gains from a new industrial undertaking in a free trade zone for ten years.

Section 10B: Exemption of the profits and gains for ten years from a 100 per cent export-oriented undertaking, and so on.

Deductions

This includes certain classes of income which are included in computing the total income of an assessee but are exempted from income tax as they are deductions to be made in total computing income. A return of income is to be filed for them necessarily - such types of income fall under Chapter VI-A (Section 80A to 80U) of the Income Tax Act. Some of the permissible deductions are provided below:

• In computing the total income of an assessee, the deductions specified in Sections 80C to 80U shall be allowed from his total gross income.
• Section 80AB deals with deductions that need to be made concerning the total gross income.
• A deduction of any amount under Section 80G in respect of donations given to certain funds, charitable institutions.
• Deduction of 50 per cent of profits and gains of projects implemented outside India as stated in Section 80HHB.
• A deduction of the entire profits from income from the export business as stated in Section 80HHC.

Deduction under Section 80P

The deductions concerning income provided under Section 80P of the Income Tax Act apply to the co-operative society alone. The provision has been included in the Act for the growth of co-operative societies. There are various heads of deductions listed in the section such that each one is distinct and independent of the other. To decide whether a specific category of income of a co-operative society is exempted from taxes, it has to be seen if it comes under the mentioned heads or not. The deductions permitted under this Section are in respect of the net incomes from the businesses or activities, specified in the various clauses of the section.

If a co-operative society carries on such activities, income from which is exempt and also takes on such activities, revenue from which is not exempt, then profits/ gains attributable to a former activity shall enjoy exemptions, and those due to latter one shall be taxed. Where a co-operative society earns income, which is partly entitled to a particular deduction, a proportionate share of the expenses attributable to the drawing of income, entitled to a deduction, should be deducted in computing such income.

Activities and amount eligible for deduction under Section 80P

Specific exclusions

Section 80P is made not applicable to any co-operative bank (including Regional Rural Banks) other than a primary agricultural credit society (as defined in the Banking Regulation Act) or a primary co-operative agricultural and rural development bank (a society having its area of operation confined to a taluk and the principal object of which is to provide long-term credit for agricultural and rural development activities).

Benefit of deduction is withdrawn with an intention to treat co-operative banks on par with commercial banks who do not enjoy any such tax benefit.

What if a co-operative society is also eligible for profit-linked deductions under other Sections?

If a co-operative society is also eligible for profit-linked deduction under Section 80HH, 80HHA, 80HHB, 80HHC, 80HHD, 80-I, 80-IA, 80J, the deduction allowed under Section 80P is from the gross total income after reducing the deductions under these sections.

Key points to be noted

• Section 80P, for different scenarios, uses different terms for the purpose of deduction such as ‘profits and gains of business attributable to such activities’, ‘profits and gains of such business’, ‘profits and gains attributable to such activities’, ‘income derived’ etc. These terms need to be analyzed in depth considering the various commentaries on income tax and case laws.
• Various high courts have held that all co-operative societies other than those coming under the control of RBI are eligible for a deduction. A co-operative society conducting banking activities is not a co-operative bank licensed by the Reserve Bank of India. It can, therefore, claim deductions under Section 80P.
• Meaning of various other terms such as ‘cottage industry’, ‘marketing’, ‘members’ ‘industry’, ‘investment’ etc., are also analyzed in various decisions.
• Section 80P profit is not considered to increase the adjusted total income for Alternate Minimum Tax levy

Applicability of Section 14A

Section 14A has no applicability concerning the deductions allowable under Section 80P. The provisions provided in Section 14A apply to exempted income while Section 80P confers a right for deduction from the total gross income. While exempted income is not at all includible while computing the Total Income, incomes subjected to Section 80P deductions are required to be made from the Gross Total Income following the provisions of Sections 80A and 80AB.

Mutuality and Tax Incidence

There are some types of cooperatives, like Housing Co-operatives, who collect monthly subscription from its members and uses the same to meet the various joint expenses of the co-operative society to give service to its members such as maintenance, security etc. In this process, even though any surplus is generated, it is not chargeable to tax as it is exempted based on the ‘Concept of Mutuality’. The crucial requirement in a case of mutual association is that ‘ All the contributors to the collective fund must be entitled to participate in the surplus and all the participators to the surplus must be contributors to the standard trade. In other words, there should be a complete identity between the contributors and the participants. Thus, if the co-operative earns interest from a bank or parking income from other non-members or any rental income by letting a place for mobile towers, then these incomes are chargeable.

Compliance with TDS provisions

No tax will be applicable from any interest payable on debentures issued by any co-operative society under Section 193. Similarly, TDS provisions under Section 194A are not applicable for interest other than the same on securities, if such an income is credited or paid by a co-operative society to a member thereof or any other co-operative society. Though a co-operative society is not covered under Section 115-O, i.e. not required to pay taxes on distributed profits like domestic companies, TDS provision for dividends under Section 194 is not applicable. Compliances of other TDS provisions like a time-limit for the deposit of TDS, the electronic filing TDS returns, the issuance of NSDL generated Form 16A and more, are all applicable for Co-operatives. Thought most of the Co-operatives are at village level or block level Co-operatives, no relaxation has been granted by the statute concerning the imposition of interest, penalty or prosecution for any violation.

Books and Audit of Accounts

A co-operative society under Section 44AA is required to maintain its books of accounts and other records as may enable an Assessing Officer to compute its total income following the provisions of the Income Tax Act. Furthermore, its accounts are required to be audited by a Chartered Accountant under Section 44AB even though its accounts are subjected to audit by the administrative department (Directorate of Co-operative Audit) as provided in the State Co-

operative Laws. However, tax audit provisions are usually not applicable to societies that do not carry on any business activities. Such as housing societies, which in the years of construction of its building premises, provisions of Section 44AB would not apply as there are no business activities carried out.

Rate of Tax

A Co-operative Society has no threshold limit for the taxability of income. It is required to follow a slab rate for the computation of tax liability.

Tax Rates the Assessment year 2014-15 to 2020-21

Tax Rates for the Assessment year 2021-22 and 2022-23 (for Old tax regime)

Alternative Tax Regime under section 115BAD - The income shall be taxable at a flat rate of 22%. Further, surcharge shall be levied at a flat rate of 10% of the income tax, irrespective of the income of such society.

Tax Rates for the Assessment year 2023-24 (for Old tax regime)

Alternative Tax Regime under section 115BAD - The income shall be taxable at a flat rate of 22%. Further, surcharge shall be levied at a flat rate of 10% of the income tax, irrespective of the income of such society.

Filing of Return of Income

A co-operative society requires to file its return of income in ITR-5 within the 30th of September of a particular fiscal year notwithstanding the fact that most of the State Co-operative Laws allow holding the AGM within the calendar year, i.e. 31st of December. Similar to a Company, without filing a ‘loss return’ within the stipulated time, business loss and loss under the head ‘capital gains’ of the assessee cannot be carried forward. Loss under the head ‘income from house property’ and unabsorbed depreciation also cannot be carried forward if a loss return is not filed at all. Provisions relating to e-filing and the use of digital signature are also applicable. 

Frequently Asked Questions

Can all types of co-operative societies claim deduction under Section 80P?

No, if the co-operative society is not engaged in activities related to agriculture, it cannot claim deduction under this section.

How to claim deduction under section 80P?

Assessee must furnish a return of income in the prescribed manner and form to avail deduction under Section 80P. The income return must be furnished on or before the due date specified in the Income Tax Act.

What are the documents required to claim deduction under Section 80P?

• A copy of the latest Income Tax Return (ITR) filed by the assessee
• An audit report from a Chartered Accountant (CA) in case the assessee is required to get their accounts audited
• A declaration from the assessee mentioning the amount of deduction claimed under this section

What are the conditions to get deduction under Section 80P?

Following are the conditions to claim deduction under Section 80P:

• The co-operative society must have derived income or made profit from agricultural activities carried out in India, and
• The agricultural activities must be the primary source of income for the co-operative society

Can deductions under Section 80P be clubbed with other deductions?

Yes, deductions under this section can be clubbed with other deductions available under the Income Tax Act, 1961.

Should co-operative societies maintain books of accounts?

Yes, under Section 44AA, co-operative societies should maintain books of accounts and other records for tax computation. They must also get their accounts audited by a Chartered Accountant (CA) under Section 44AB.