Principle of Mutuality and Tax Incidence
There are certain types of cooperatives, like housing cooperatives, who collects monthly subscription from the members and spends the same to meet the various joint expenses of the society to give service to members like maintenance, security etc. In this process even if any surplus is generated, it is not chargeable to tax as it is exempt based on the ‘concept of Mutuality’. The cardinal requirement in case of mutual association is that ‘All the contributors to the common fund must be entitled to participate in the surplus & all the participators to the surplus must be contributors to the common trade. In other words there should be complete identity between the contributors and the participators.’ Thus if the cooperative earns interest from bank or parking income from non-members or rental income by letting roof for mobile towers, then all these incomes are chargeable.
Compliance of Income Tax Provisions
A cooperative society has to get PAN, TAN etc like any other form of business. Even to get itself registered under GST Laws or Import Export Regulations, it has to obtain the PAN.
It has to pay advance income tax in four instalments: within 15th June – 15%, 15th September – 45%, within 15th December – 75% and within 15th March – the whole amount of such advance tax as reduced by the amount paid in earlier instalment(s).
It has to comply with all the TDS provisions excepting few: No tax shall be deducted from any interest payable on debentures issued by any cooperative society u/s 193. Similarly, TDS provisions u/s 194A are not applicable for interest other than interest on securities, if such income is credited or paid by a cooperative society to a member thereof or to any other cooperative society. Though a cooperative society is not covered u/s 115-O i.e. not required to pay tax on distributed profit like domestic companies, TDS provision for dividends u/s 194 is not applicable. Compliances of other TDS provisions like time limit for deposit of TDS, electronic filing TDS returns, issuance of NSDL generated Form 16A etc are all applicable for cooperatives. Though most of the cooperatives are village level or block level cooperatives, no relaxation has been granted by the statute with respect to imposition of interest, penalty or prosecution for any violation.
A cooperative society u/s 44AA, is required to maintain books of accounts and other documents as may enable the Assessing Officer to compute its total income in accordance with the provisions of the Income Tax Act. Further, its accounts are required to be audited by a Chartered Accountant u/s 44AB notwithstanding the fact that its accounts are subjected to audit by the administrative department (Directorate of Cooperative Audit) as provided in the State Cooperative Laws. However, tax audit provisions are generally not applicable to societies which do not carry on any business. For example, housing societies in the years of construction of building premises, provisions of section 44AB would not apply as there is no business activity.
A cooperative society requires to file its return of income in ITR-5 within 30th September notwithstanding the fact that most of the State Cooperative Laws allow to held the AGM within the calendar year i.e.31st December. Just like a Company, without filing a ‘loss return’ within the stipulated time, business loss and loss under the head capital gains of a cooperative cannot be carried forward. Loss under the head income from house property and unabsorbed depreciation also cannot be carried forward if loss return is not filed at all. Provisions relating to e-filing and use of digital signature are also applicable in spite of the fact that most of cooperatives are still having limited exposure in respect of computerised accounting or internet use.
There is no threshold limit for taxability of income in case of a co-operative society. The slab rate for AY 2020-21 is as under:
|Up to Rs. 10,000
|Rs. 10,000 to Rs. 20,000
|Above Rs. 20,000
Surcharge: 12% of taxable income if net income exceed 1 crore. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).
Health and Education Cess: 4% of Income Tax Plus Surcharge
Compliances of Co-operative Societies
Unpaid interest on borrowings from Government / Cooperative Bank v. 43B
U/s 43B, deduction otherwise allowable, shall not be allowed unless the amounts are actually paid before due date for filing return of income u/s 139(1). Generally state level cooperative bodies participate in the minimum support price operation of the Union Government where State Government acts as nodal agent. To procure food grain (paddy, wheat etc) or agricultural produce (jute, potato etc), lending are made either by State Governments or by cooperative banks. Since interest expenditures for borrowings other than specified institutions or other than scheduled banks are outside the purview of section 43B, a cooperative which made provisions in the accounts for interest payable but does not paid actually for the loan taken from Govt or from cooperative banks , there would be no disallowance. While borrowings directly from State Government is not covered u/s 43B(d) as State Governments are not specified financial institutions, borrowings from cooperative banks are not covered u/s 43B(e) as cooperative banks are not fallings under the definition of schedule bank.
Deduction u/s 80P
Section 80P of the Income Tax Act 1961 allows deduction in respect of income of cooperative societies which are attributable to specified activities. When a cooperative is engaged in carrying on the business of banking or providing credit facilities to its members, the profit attributable to such business is deductible. However the same is not applicable for a cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. Deductions are available when a cooperative is engaged in any of the specified activity like cottage industry, marketing of agricultural produce grown by its members, the purchase of agricultural implements or other articles intended for agriculture for the purpose of supplying them to its members, processing of agricultural produce of its members without the aid of power, collective disposal of the labour of its members, fishing or allied activities. With regard to the allowability of deduction, few principles already established by Courts, are as follows:
- A liberal construction should be given to section 80P
- Deduction is not deniable even if society carries on some un-specified activities
- The expression ‘attributable to’ is much wider than the expression ‘derived from’, and it suggests that the Legislature intended to cover receipts from sources other than the actual conduct of the business of the assessee
- Subsidies received from Government are to be treated as business income
- There should be no hired labour to get deduction wrt cottage industry
- Sugar, Rice etc are not agricultural produce
- Member should own the produce – may or may not produce by himself
- Member is not restricted to society members or agriculturist
This apart, when a primary cooperative society is engaged in supplying milk, oil seeds, fruits or vegetables grown by its members to a federal cooperative or to the Govt or local authority or a Govt Company or a statutory corporation – the whole of the amounts of profits and gains of such business is deductible.
Further, full deduction is available in respect of any income by way of interest or dividends derived by the cooperative society from its investment with any other cooperative society and in respect of any income derived by the cooperative society from the letting of warehouses for storage, processing or facilitating the marketing of commodities.
Applicability of Section 14A
It is now established by various judicial pronouncements that section 14A has no applicability with regard to the deductions allowable u/s 80P. The provisions of section 14A apply to exempted income while 80P confers a right for deduction from the gross total income. While exempted income does not at all includible in computing the Total Income, incomes subjected to 80P deductions are required to be made from the Gross Total Income following the provisions of section 80A & 80AB.
Disallowances of expenses & eligibility of deduction thereof u/s 80P
Upon violation of the conditions specified under clause (ia) the implication under section 40(a) would be that the same amount will not be deducted in computing income chargeable under the head ‘Profits and gains of business or profession’. Now, here the question arises that once any amount is disallowed u/s 40(a)(ia), [or any other section like 43B etc] whether the same shall be considered for all purpose as a part of profit which in turn would form gross total income. If the answer is affirmative, then deduction u/s 80P is available and vice versa. In this context it may be mentioned that while ITAT, Pune in the case of Kalbhar Gawade Builders, dismissed the appeal of Revenue, the Ahemedabad Bench in the case of Rameshbhai C Prajapati, allowed the appeal of Revenue on the ground that ‘it is not permissible to impose a supposition on a supposition of law.’