Cooperative Societies – Income Tax Provisions
U/s 2(19) of the Income Tax Act 1961, ‘cooperative society’ means a cooperative society registered under the Cooperative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of the cooperative societies.
A business can be formed under the organisational set up of a cooperative society just like it can be formed as a Company. There is a general belief that cooperative societies are exempted from the various compliances of direct or indirect taxation. In fact it is not so – rather to get the various tax reliefs, particularly for income tax, a cooperative society must set up a process for tax compliance, tax management and tax planning.
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 Central Excise / Service Tax Laws or with the State VAT Laws or Import Export Regulations, it has to obtain the PAN.
It has to pay advance income tax in three instalments: within 15th September – 30%, within 15th December – 60% 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. It has to follow a slab rate for computing tax liability: Income up to Rs. 10,000 – tax @10%, Income from Rs. 10,001 to Rs. 20,000 – tax @20% and Income Rs. 20,001 onwards – tax @30%; The same implies, that if a society has any taxable income, it has to file a return of income. From AY 2014-15, like companies, cooperatives are also requires to pay surtax @ 10% when the profit exceeds Rs.1 Crore.
MAT v. AMT
U/s 115JB, for companies, if tax payable under the normal provisions of the Income Tax Act is less than 18.5% of its book profits, then tax payable shall be 18.5% of the book profit which is known as MAT (Minimum Alternate Tax). U/s 115JC, for cooperatives, if tax payable under the normal provisions of the Income Tax Act is less than 18.5% of its adjusted total income, then tax payable shall be 18.5% of the adjusted total income which is known as AMT (Alternate Minimum Tax). Thus it is seen that while cooperatives are not exposed to tax based on book profit like companies, they are to pay a minimum tax based on adjusted total income which shall be computed by increasing the deductions as claimed by assessee under any section included in Chapter VI-A of the heading ‘C – Deductions in respect of certain incomes’ (but excluding any deduction u/s 80P) and deduction claimed u/s 10AA, with the total income as assessed by AO. In other words, the cooperatives, which are only entitled to deduction u/s 80P, shall not be affected by the AMT provisions.
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.’
Wealth Tax & Cooperative Societies
The provisions of the Wealth Tax Act are not applicable to Cooperative Societies.
Indirect Taxation & Cooperative Societies
The laws of indirect taxation, namely customs, excise, service tax and sales tax are uniformly applicable for any form of business and accordingly there is neither any special benefit nor any additional compliance for a cooperative society. However, a cooperative society may be required to take registration under Service Tax Laws though it is not engaged in providing services because of the requirement to pay service tax under ‘reverse charge mechanism’ (e.g. payment to Lawyer etc)
However, mention may be made for non-applicability of the reverse charge mechanism under the Service Tax Laws to the cooperative societies. In terms of serial no 9 of the table in notification no. 30/2012 dated 20.6.12, the partial reverse charge mechanism is applicable to services provided in execution of a works contract by any individual, HUF or firm to a business entity registered as a body corporate located in the taxable territory. It reveals that the nature of the service and the status of both the service provider and service receiver are important to determine the applicability of partial reverse charge provisions.
Many cooperative societies are appointed by State Governments as implementing agency for construction of warehouses, cold storages, rice mills, seed processing units etc of Central Govt’s RIDF project, which are falling under the category of works contract services and accordingly are covered by the reverse charge mechanism. Since cooperatives are receiving the WC services from individual contractors, the provisions of notification 30/2012 are normally applicable but since cooperatives are not treated as ‘body corporate’, these provisions are not applicable and no service tax needs to be paid while making payments to the contractors.
Further many cooperatives are providing various services related with agricultural produce such as handling, storing, transporting, testing etc. Whenever these services are provided in relation to agricultural produce, they are fully exempted either vide 66D (covered by negative list) or vide Mega Exemption Notification (25/2012 dated 20.6.12).
Conclusion- The above analysis reveals that cooperatives need a strong process for Tax Management to ensure Tax Compliance as well as Tax Reduction. However none of the State Cooperative Acts, till date specifies appointment of CFO with prescribed qualification. Further in most of the States, Statutory audit is not required to be carried out by a Chartered Accountant compulsorily. Accordingly, this sector faces a risk of low governance which needs to be addressed through the respective State Cooperative Laws
Reproduced Courtesy :
Kalpataru Ghosh, CA, CS
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