Assessment of Co-operative Societies and Co … for Coop Soc...27-05-2019 1 1 CA Yatinder Khemka Partner SAMYNK & CO. E: [email protected] M: 981093421 25th May, 2019 NIRC

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CA Yatinder KhemkaPartner SAMYNK & CO.E: [email protected]: 981093421

25th May, 2019NIRC of ICAI

Assessment ofCo-operative Societies and

Co-operative Banks

Assessment ofCo-operative Societies and

Co-operative Banks

What is a co-operative society?

Co-operative society is a special type of business organisation differentfrom other forms of organisation.

It is a special form in which people voluntarily associate together on abasis of equality for the promotion of common interests.

Thus, following characteristics emerge from the definition – Open membership Voluntary Association State Control Source of Finance – usually from members themselves Democratic Management Limited interest in Capital Distribution of surplus Self help through mutual co-operation

Considering the above characteristics, let us analyse income taxincentives and applicability of various provisions.

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S. 2(19) of Income Tax Act, 1961 ‘Co-operative society’ means a co-operative society registered under

the Co-operative Societies Act, 1912 or under any other law for thetime being in force in any State for the registration of co-operativesocieties. However, it is assessable as ‘person’ as defined u/s. 2(31) ofIncome Tax Act, 1961.

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S. 2(31) of Income Tax Act, 1961"person" includes— (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or

not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-

clauses. Explanation.—For the purposes of this clause, an association of persons or a body of

individuals or a local authority or an artificial juridical person shall be deemed to bea person, whether or not such person or body or authority or juridical person wasformed or established or incorporated with the object of deriving income, profits orgains;

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Section 2(18)(ad) : "company in which the public aresubstantially interested"—a company is said to be acompany in which the public are substantially interested—

if it is a company, wherein shares (not being shares entitledto a fixed rate of dividend whether with or without a furtherright to participate in profits) carrying not less than fifty percent of the voting power have been allotted unconditionallyto, or acquired unconditionally by, and were throughout therelevant previous year beneficially held by, one or more co-operative societies.”

Where else we find the term co-operativesociety?

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No, it is not a person under 2(31). The co-operative societywould be assessed in the manner or AOP or BOI which is aperson under 2(31).

Although, status of a cooperative society is to be taken as anAssociation of Persons, the Section 67A (method of computinga member's share in income of association of persons or body ofindividuals) and Section 86 (Share of member of an association ofpersons or body of individuals in the income of the association or body)of the Act have been excluded from application to themembers of society.

Is co-op. society a person as defined u/s 2(31)?6

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Types of Co-operative Societies

Based on activities undertaken by a co-operative society, they areclassified as under – Agricultural Marketing Society Consumer Society Central Bank – Co-operative Bank as defined in State Laws Crop Protection Society Farming Society General Society Housing Society Federal Society Irrigation Society Process Society Producers’ Society Resource Society Apex Society

There could be a society which is not covered in above classifications butis other wise a co-operative society eligible for benefits under Income TaxAct, 1961.

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Principle of Mutuality

Principle of mutuality is not defined under Income Tax Act,1961.

However, its reference and reliance have been drawn fromvarious SC and HC judgments.

Prominent cases to be referred – Municipal Mutual Insurance Ltd v Hills 16 (TC) 430 (HL) CIT v Bankipur Club Ltd [1997] 226 ITR 97 (SC) CIT v Apsara Co-op. Hsg. Soc. Ltd. [1993] 204 ITR 662 (Cal) CIT v Adarsh Co-op. Hsg. Soc. Ltd. [1995] 213 ITR 677 (Guj) Sind Co-op. Hsg. Soc v ITO, Ward 1(7),Pune [2009] 317 ITR 47

(Bom)

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‘For this doctrine to apply, it is essential that allthe contributories to the common fund are entitledto participate in the surplus and that all itsparticipants in the surplus are contributors, sothat there is complete identity betweencontributors and participators.’ [Extract from CIT v Bankipur Club Ltd supra]

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Test of applicability of ‘Principle of Mutuality’ Is there any commerciality involved? From the monies received, are there services offered in the

nature of profit sharing or privileges, advantages andconveniences?

Are the participants and contributors identifiable andbelong to the same class of co-operative housing society?

Do the members have the right to share in the surplus anddo they have a right to deal with its surplus?

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The principle of mutuality assumes importance because where thesurplus arises from transactions by a co-operative society with its ownmembers, there is no question of such surplus being taxed.

This is because, one can not make profit from oneself. In the case of a co-operative society, the individual members may come

and go, but the members as a class remain the same and hence, so longas group of members or individuals are covered under members, thetransactions with them are covered under principle of mutuality andthus, need not be subject to tax.

The above principle applies so long as a co-operative society carries outtransactions with its own members and not outsiders.

As such, transactions with outsiders shall be taxed provided there istaxable surplus from such transactions.

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Exemptions and Deductions

The word ‘exemption’ signifies that the particulars income is notto be included in the total income as per the provisions of IncomeTax Act, 1961 whereas ‘deduction’ signifies that the particularamount of income or payment is eligible to be deducted aftercomputing the gross total income.

Hence, in the former case, the amount is not included at allwhereas in the latter case, the relevant taxable amount isincluded (in the case of income, as the case may be) and then, thesame is deducted under relevant provisions of income tax act toarrive at taxable income.

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APPLICABILITY OF SECTION 14A

Expenditure incurred in relation to incomenot includible in total income u/s 14A (1) For the purposes of computing the total income under this

Chapter, no deduction shall be allowed in respect of expenditureincurred by the assessee in relation to income which does not formpart of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditureincurred in relation to such income which does not form part of thetotal income under this Act in accordance with such method as maybe prescribed, if the Assessing Officer, having regard to the accountsof the assessee, is not satisfied with the correctness of the claim ofthe assessee in respect of such expenditure in relation to incomewhich does not form part of the total income under this Act.

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(3) The provisions of sub-section (2) shall also apply in relation to acase where an assessee claims that no expenditure has been incurredby him in relation to income which does not form part of the totalincome under this Act :

Provided that nothing contained in this section shall empower theAssessing Officer either to reassess under section 147 (incomeescaping assessment) or pass an order enhancing the assessment orreducing a refund already made or otherwise increasing the liabilityof the assessee under section 154 (rectification of mistake), for anyassessment year beginning on or before the 1st day of April, 2001.

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Method for determining amount ofexpenditure in relation to income notincludible in total income under rule 8D (1) Where the Assessing Officer, having regard to the accounts

of the assessee of a previous year, is not satisfied with—a) the correctness of the claim of expenditure made by the

assessee; orb) the claim made by the assessee that no expenditure has been

incurred,

in relation to income which does not form part of the totalincome under the Act for such previous year, he shalldetermine the amount of expenditure in relation to suchincome in accordance with the provisions of sub-rule (2).

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(2) The expenditure in relation to income which does not formpart of the total income shall be the aggregate of followingamounts, namely:—I. the amount of expenditure directly relating to income which

does not form part of total income; andII. an amount equal to one per cent of the annual average of the

monthly average of the opening and closing balances of thevalue of investment, income from which does not or shall notform part of total income :

Provided that the amount referred to in clause (i) and clause(ii) shall not exceed the total expenditure claimed by theassessee.

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APPLICABILITY OF SECTION 14A17

It is now established by various judicial pronouncementsthat section 14A has no applicability with regard to thedeductions allowable u/s 80P.

The provisions of section 14A apply to exemptedincome while 80P confers a right for deductionfrom the gross total income.

While exempted income is not at all included incomputing the Total Income, incomes subjected to 80Pdeductions are required to be made from the Gross TotalIncome following the provisions of section 80A & 80AB.

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Deduction under Income Tax Act u/s 80P

S. 80P has been incorporated in the I. T. Act as and by way of an incentive, witha view to encouraging and promoting growth of co-operative sector in theeconomic life of the country.

Though, there are different types of co-operative society based on variousparameters, S. 80P of Income Tax Act, 1961 covers applicability in followingmanner: Co-operative Credit Society [S. 80P (2)(a)(i)] Cottage Industry [S. 80P(2)(a)(ii)] Marketing Society marketing agricultural produce [S. 80P(2)(a)(iii)] Supportive society [S. 80P(2)(a)(iv)] Society processing of agricultural produce [S. 80P(2)(a)(v)] Society providing collective disposal of the labour[S. 80P(2)(a)(vi)] Society indulging in fishing or incidental activities [S. 80P(2)(a)(vii)] Primary society supplying milk, etc. to federal society & others [S. 80P(2)(b)] Consumers Co-operative society [S. 80P(2)(c)(i)] Co-operative Bank [S. 80P(4)] Any Other Society [S. 80P(2)(c)(ii)]

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S. 80P denotes various exemptions enumerated under different headsin the section.

Each is a distinct and independent head of exemption.

If one has to ascertain whether a particular type of a co-operativesociety is exempt from tax, one will have to see whether such incomefalls within any of the several heads of exemption.

[U.P.Co-operative Bank Ltd v CIT 61 ITR 563 (All)] [Surat Vankari Sahakari Sangh Ltd v CIT 79 ITR 722 (Guj)]

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Where, in the case of an assessee being a co-operative society, the grosstotal income includes any income referred to in sub-section (2), thereshall be deducted, in accordance with and subject to the provisions ofthis section, the sums specified in sub-section (2), in computing the totalincome of the assessee. [S. 80P (1)]

Accordingly, sub-section (2) gives deductions available as shownhereafter.

Such co-operative societies having such income are eligible fordeductions.

The quantum of deductions are also given therein.

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If a co-operative society carries on certain activity, income from which isexempt and also certain activity, income from which is not exempt, theprofits and gains attributable to the exempt activities shall enjoy theexemption and those attributable to the non-exempt activities shall betaxed.

At the same time, it is just and proper that in order to ascertain theincome referable to non-exempt activity, the proportionate expenditureout of the total expenditure should be deducted, in order to arrive atcorrect income from non-exempt activity.

Besides, if the society has income some of which is exempt under oneclause and the other under another clause of S. 80P(2), both will enjoyexemption. [Allahabad District Co-op. Bank Ltd v Union of India 83 ITR 895 (All)] [Addl.CIT v U P Co-operative Cane Union 114 ITR 70 (All)]

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As the provision of S. 80P is intended to encourage and promote thegrowth of co-operative societies, a liberal construction should be placedon the language employed in the provision. [CIT v South Arcot District Co-op. Marketing Society Ltd. 76 ITR 117 (SC)]

The benevolent purpose of the exemption scheme u/s. 80P (2)(a)(iii) isto encourage a vital national activity in the interest of rural economy.Therefore, the term ‘marketing’ occurring in that section has to beconstrued in a manner which would achieve the benevolent purpose ofexemption rather than defeat the said purpose. [Meenachil Rubber Marketing & Processing Co-op. Soc. Ltd v CIT 193 ITR 108 (Kar)]

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A Co-operative society is entitled to deduction only on its net amountof profits and gains, i.e. on income of its business otherwisecomputable in accordance with the provisions of the I.T. Act for thepurpose of charging income-tax thereon and which is included in itstotal income, and not on the amount of its gross profits and gains ofbusiness. [Sabarkantha Zilla Kharid Vechan Sangh Ltd Vs CIT 203 ITR 1027 (SC)

The deduction U/s 80-P is from gross total income determined inaccordance with other provisions of the Act. Therefore, unabsorbedlosses and unabsorbed depreciation of earlier years are to be set offbefore allowing deduction U/s 80- P. [C.I.T. Vs Kottagiri Industrial Co-operative Tea Factory Ltd 224 ITR 604 (SC)]

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A society is not disentitled from claiming exemption only because it alsocarries on the activities , the income from which is not exempt. All sales ofspecified commodities to members, irrespective of their proportion andquantum, would belong to exempted category and such sale to non-members,irrespective of their proportion and quantum, would belong to non-exemptcategory. [C.I.T. Vs Nagpur Jilla Krishi Audyogik Sahakari Sangh Ltd, 209 ITR 481(Bom)]

Similarly if a co-operative society carries on certain activities, income fromwhich is exempt and also certain activities, income from which is notexempt ; only profits attributable to exempted activities shall enjoy exemption. [C.I.T. Vs Ratanabad Co-operative Housing Society Ltd. 215 ITR 549 (Bom)]

Likewise, if a society carries on certain activities which are exempted andcertain other activities which are non-exempted, the profits and gainsattributable to such non-exempted activities must necessarily be taxed. [C.I.T. Vs Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd,

97 ITR 575 (Guj)]

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Where the co-operative society was earning income which was partlytaxable and partly entitled to special deduction U/s 80-P, proportionateshare of expenses attributable to the earning of income which is entitledto deduction, should be deducted in computing such income for thepurpose of deduction U/s 80-P. [Kota Co- operative Marketing Society Ltd Vs C.I.T. 207 ITR 608 (Raj)]

Similarly where assessee society has maintained a composite account ofexpenses in respect of both exempt income and taxable income, expensesrelated to non-exempt income have to be estimated, and expensesfound to be incurred for exempted activities, have to be deducted fromassessee’s income before allowing deduction U/s 80-P. [C.I.T. Vs Rajasthan Rajya Sahakari Upbhokta Sangh Ltd. 215 ITR 448 (Raj)]

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The exemption granted under the I.T. Act 1961 are of two kinds. Certain classes of income are exempt from tax and also excluded from the

computation of total income, while certain other classes of income, thoughnot taxable because of deductions are to be included in the assessee’s totalincome.

The former types of income fall under chapter III which comprises sections10, 10-A (Special provision in respect of newly established undertakings infree trade zone, etc), 10-B (Special provisions in respect of newlyestablished hundred per cent export-oriented undertakings), and 11 etc.

The latter types of income fall under chapter VI -A which are comprisedin sections 80-A to 80-U.

Further in latter types of cases, return of income is required to be filed,which is not the case regarding former types of income.

Therefore, it is necessary to compute the income of a co-operative society frombusiness under the relevant provisions of the I.T. Act, even though it may be100% deductible u/s 80-P.

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Significance of Terms

S. 80P specifies that the whole amount of profits and gains of businessattributable to the activities enumerated therein, shall be deducted fromthe income of the co-operative society.

The term ‘attributable to’ has been used in S. 80P(2)(b), 80P(2)(d),80P(2)(e) and 80P(2)(f).

The expression ‘attributable to’ has been treated of wider import. [Cambay Electric Supply Industrial Co. Ltd v. CIT 113 ITR 84 (SC)

In yet another case, interest on Government securities and dividends onshares of Industrial Finance Corporation were entitled to deduction U/s80-P (2) (a)(i), because such income was held by the ITAT as attributableto assessee’s business. [CIT v Bangalore District Co-operative Central Bank Ltd 233 ITR 282(SC)

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Co-operative Credit Society – 80P(2)(a)(i)

(a) in the case of a co-operative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members.

The quantum of deduction is ‘whole of the amount of profits and gains ofbusiness attributable to any one or more of such activities’.

However, with the insertion of sub-section (4) vide Finance Act, 2006w.e.f. 01.04.2007, a co-operative society carrying on the business ofbanking is not eligible for deduction.

The distinction between co-operative society ‘carrying on bankingbusiness’ AND ‘providing credit facilities to its members’ has been thebane of number of litigation matters.

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Credit Facilities

The expression ‘providing credit facilities’ would comprehend not only thebusiness of lending money on interest but also the business oflending services for guaranteeing payments [CIT v. U.P. Co-op. Cane Union Federation Ltd. 122 ITR 913 (All)]

When Section 80P (1)(a)(i) refers to a cooperative society engaged inproviding credit facilities to its members, it really refers to a credit societywhose primary object is to provide loans or other credit facilities to itsmembers; it does not include any society whose primary object issomething other than the provision of loans or other credit facilities, suchas a consumer co-operative society. [Rodier Mill Employees’ Co-op. Stores Ltd. v. CIT 135 ITR 355 (MAD)]

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Credit Facilities

Where assessee cooperative society could not be regarded as ‘Co-operative Bank’ on mere fact that an insignificant proportion of revenuewas coming from non-members and thus was entitled for deductionu/s. 80P(2)(a)(i). Quepem Urban Co-op. Credit Soc. Ltd v ACIT, Circle-1, Margao [2015] 58 taxmann.com 113

(Bom)

Where assessee had fulfilled all three basic conditions to be regarded asa primary co-operative bank, it was co-operative bank and therefore,provisions of section 80P(4) were applicable and it was not entitled fordeduction u/s. 80P(2)(a)(i). ITO, Ward-1(3), Belgaum v Shri Durundeshwar Urban Co-op. Credit Soc. Ltd. [2015] 53

taxmann.co, 165 (Panaji Trib)

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What is a co-operative Bank?

Section 80P provides that word ‘co-operative bank’ has meaningassigned to it in Chapter V of the Banking Regulations Act, 1949.

A co-operative bank is defined in section 5 (cci) of Banking RegulationAct, 1949 to mean a State Co-op. Bank, a Central Co-op. Bank and aprimary co-op. Bank.

A primary co-op. bank as per section 5(ccv) of Banking Regulation Act,1949 means a co-op. society which cumulatively satisfies followingconditions: Its principle business or primary object should be business of banking;

Its paid up share capital and reserves should not be less than rupees one lakh;

Its bye-laws do not permit admission of any other co-op. society as its member.

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What is a co-operative Bank?

The facility of selling goods on credit to members is an activity of businessof selling of goods, of which the credit facility is only an incidence; itwill not amount to providing credit facilities in the nature of thebusiness of banking so as to amount to carrying on the business ofbanking or providing credit facility to its members. [CIT v. Co-operative Supply & Commission Shop Ltd. 204 ITR 713 (Raj.)] [CIT v. Kerala State Co-operative Marketing Federation Ltd. 234 ITR 301 (Ker)]

Conducting chit fund amounts to providing credit facilities [CIT v. Kottayam Co- operative Bank Ltd. 96 ITR 181 (Ker.)]

Selling goods on hire-purchase basis does not amount to providing creditfacilities. [CIT v. Madras Autorickshaw Drivers’ Co-operative Society Ltd. 143 ITR 981 (Mad)]

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Co-operative Credit Society – 80P(2)(a)(i)

If a society regularly earns interest on funds (not required immediately forbusiness purposes), such interest income is taxable under Section 56under the head “Income from other sources” and not eligible for deductionunder Section 80P. [Totgars’ Co-operative Sale Society Ltd.v ITO 188 Taxman 282 (SC)]

Interest received on income-tax refund is subject to deduction underSection 80P(2)(a) (i) [Maharashtra State Co-operative Bank Ltd. v. CIT 38 SOT 325 (Mum.)(SB) [CIT v. Haryana State Co-operative Apex Bank Ltd. 322 ITR 404 (Punj. & Har)]

Further, full deduction is available in respect of any income by way ofinterest or dividends derived by the cooperative society from itsinvestment with any other cooperative society and in respect of anyincome derived by the cooperative society from the letting out ofwarehouses for storage, processing or facilitating the marketing ofcommodities.

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Other Societies

If a co-operative society is engaged in any other activity (eitherindependently or in addition to those specified in clause (a) or clause (b)then the following amount is deductible under Section 80P(2)(c) : In the case of a consumer co-operative society (i.e., a society for the benefits of

consumers): Rs. 1,00,000; and

In any other case: Rs. 50,000.

This is a general deduction available to any cooperative society whichdoes not carry any of the activities which are specified.

The explanation below this clause also defines the consumer’s co-operative society as a society for the benefit of consumers.

As is evident from the language of the section that it is a general sectionand no specific restriction or classification has been made. It onlymentions the cases which are to be excluded and, therefore, there isbound to be litigation on the issue.

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Other Societies

A co-operative bank is legally obliged to invest part of deposit receivedfrom its members as reserve fund in Government Securities.

Generally such reserve funds cannot be utilized as working capital andthe same can be withdrawn only to meet losses or when the bank iswound up.

Interest on such Government securities cannot be treated as essentialpart of banking activity as the same is not part of stock-in-trade orworking/ circulating capital. Such interest income is not fully deductibleunder Section 80P(2)(a)(i), but deduction is available under Section80P(2)(c). [Madhya Pradesh Co-operative Bank Ltd. v. CIT [1996] 84 Taxman 640 (SC)]

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Housing Societies

Housing societies would fall under ‘other societies’. Accordingly, the taxation of such societies would have to be looked at

with a different perspective. The ‘Principle of Mutuality’ would be squarely be applicable since here

the members constituting the society are the members who are alsobeneficiaries.

The services rendered by society to its members against service chargescollected shall be covered under ‘Principle of Mutuality’ andconsequently, the same would be exempt from tax.

However, some specific incomes peculiar to a housing society arenecessarily to be considered in different perspective.

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Tax Incidence on Specific Income

In the backdrop of earlier discussion, let us see thetaxability of incomes peculiar to a co-operative housingsociety. The specific incomes so considered are – Transfer Fees Non Occupancy Charges Rental from Cable Tower/Hoardings/Open Spaces (Terraces, etc) Parking Charges Transfer of TDR/FSI

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Transfer Fees

Transfer Fee has also been contentious issue andhas attracted various judgments. It is a fee collected from members

(existing/incoming) towards admission of newmembers to the benefits of various servicesrendered by the society including right to occupy thepremises. The quantum may differ and may have been

collected under various nomenclature.

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Transfer Fees

Prominent judgments to be referred are – CIT v Bankipur Club Ltd [1997] 226 ITR 97 (SC) CIT v Apsara Co-op. Hsg. Soc. Ltd. [1993] 204 ITR 662 (Cal) CIT v Adarsh Co-op. Hsg. Soc. Ltd. [1995] 213 ITR 677 (Guj) Walkeshwar Triveni Co-op. Hsg. Soc v ITO [2004] 88 ITD 159

(Mum)(SB) Sind Co-op. Hsg. Soc v ITO, Ward 1(7),Pune [2009] 317 ITR 47 (Bom) Mittal Court Premises Co-op. Soc Ltd v ITO, Ward 12(3)(1) [2009] 184

Taxman 292 (Bom)

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Non Occupancy Charges

Non occupancy Charges are the charges levied for notoccupying its premises by member of the society.

These are paid by member or non member depending uponthe facts and circumstances of the case.

Maharashtra Government has issued a notification dated01.08.2001 restricting the levy of non occupancy charges to10% of service charges (excluding municipalcorporation/nagar palika taxes).

Though the taxability is a contentious issue, the same washeld as non taxable in the following case- Mittal Court Premises Co-op. Soc Ltd v ITO, Ward 12(3)(1) [2009]

184 Taxman 292 (Bom)

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Rental Income from Hoardings

This is a common income for many housing societiesdepending on their locational advantages.

This is received from any outside agency or entity who is nota member of the society and is levied for display of hoardingof such an entity.

Since the tests of mutuality are not satisfied, the same istaxable in the hands of the society.

However, all direct and indirect expenses which are incurredfor earning as well as maintaining the hoarding facility canbe claimed as expenses.

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Rental Income from Cable Tower

Again, in view of various advantages, the mobile towerserected on the terraces of the housing society fetch rentalincome for society.

However, the same is taxable in the hands of the housingsociety.

This shall be taxable under the head ‘Income from HouseProperty’ and accordingly, the deductions of property taxesand other standard deduction can be claimed.

Principle of mutuality shall not be applicable.

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Rental Income from use of Open Spaces,Terraces etc.

These represent an income from temporarily letting out ofopen spaces by the housing society.

The taxability shall depend upon the recipient of suchservices, whether a member or a non member.

In case of member recipient, the ‘Principle of Mutuality’ shallapply and accordingly, the same will be exempt from incometax.

In case of non member recipient, the same shall be taxable inthe hands of housing society as ‘Income from HouseProperty’.

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Parking Charges

These are the charges collected by the housing society forparking vehicles in the society premises.

Municipal Corporations also levy certain share of property taxfor parking spaces as allowed under its Development ControlRules.

Though Supreme Court has held that the open spaces withinthe society premises can not be let out to its members forconsideration, the levy and collection of charges frommembers and in certain non members continues.

The taxability shall depend upon the status of recipient as towhether he is a member or non member.

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Transfer of FSI/TDR

FSI is ‘Floating Space Index’ and represents a right toconstruct an area based on various eligibilities underDevelopment Control Rules.

TDR is ‘Transfer of Development Rights’ under DevelopmentControl Rules represented by a certificate issued byauthorities.

Both these rights are generated by the plot/property/landheld by the housing society.

Since these are dependent on and related to immovableproperty, the gains represent ‘Capital Gains’ under IncomeTax Act, 1961.

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Transfer of FSI/TDR

The taxability on transfer of such FSI/TDR has raisedquestions on its taxability.

The issue needs to be understood in the light of provisions ofS. 48, 49 and 55 of Income Tax Act, 1961.

Though these are Capital Assets as seen earlier, the levy andcollection of provisions of Chapter on ‘Capital Gain’ failed toapply as held in – New Shailaja Co-op. Hsg. Soc. Ltd v Income Tax Officer [2010] 36 SOT

19 (Mum) CIT-18 v Sambhaji Nagar Co-op. Hsg. Soc. Ltd [2014] ITA No. 1356 of

2012 (Bom)

This was mainly because the description of various assetsreferred to in S. 55(2) does not include the above assets.

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Letting of Godowns-S. 80P(2)(e)

The whole of the income derived by a co-operative society from the lettingof godowns or warehouses for storage, processing or facilitating themarketing of commodities is deductible under Section 80P(2) (e).

For this clause the term godown or warehouses is very important. In a landmark judgment in the case of CIT v. Ahmedabad Maskati Cloth

Dealers Co-operative Warehouses Society Ltd. [1986] (162 ITR 142), theHon’ble Gujarat High Court has held that first of all it should be a godownor warehouse, which should be let out for the purpose specified in theclause.

However, if the godown or warehouse is let for a purpose other thanstorage, processing or facilitating the marketing of commodities, theincome derived therefrom by a co-operative society would not bedeductible under Section 80P.

The facts of letting out are very important and one should get theinspection of the let-out property done to ascertain the correct facts.

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Where the assessee was storing commodities in its godowns as its owntrading stock and, therefore, it was held to be not entitled for claim ofdeduction under Section 80P(2)(e). [Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 182 Taxman 287

(SC)]

Commission received by the assessee-society from State Government forstocking its goods in godown, would qualify for deduction under Section80P(2)(e). [CIT v. Coimbatore District Central Co-op. Supply & Marketing Society Ltd. 1995

Tax LR 1308 (Mad)]

Shops in which wholesale or retail business in cloth is carried on, cannotcome within the meaning of ‘godowns’ or ‘warehouses’. [CIT v. Ahmedabad Maskati Cloth Dealers Cooperative Warehouses Society Ltd.

[1986] 162 ITR 142 (Guj)]

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Amount received for letting of godowns, where incidental services oftaking delivery of stock at rail-head and transporting it to godowns arealso rendered is wholly exempt. [CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117

(SC)]

Where the assessee-co-operative society is appointed the sole agent andentrusted with the handling, distribution and sale of fertilizers and itreceived commission-cum-incidental charges, it is entitled to exemptiononly on that part of its income which is attributable to storage of fertilizersin its godowns. [CIT v. J & K Co-operative Supply & Marketing Federation Ltd. [1993] 204 ITR 289

(J & K)]

Deduction under Section 80P(2)(e) is available only in respect of incomefrom letting out of storage and if the assessee uses storage only formarketing, deduction is not permissible. [CIT v. Haryana State Co-op. Supply & Marketing Federation Ltd. [2011] 201

Taxman 169 (Punj & Har)]

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Interest on securities/property income-Section 80P(2)(f)]

The whole of the interest income from securities and property income inthe case of a co-operative society (other than housing society or an urbanconsumers’ society or a society carrying on transport business or a societyengaged in manufacturing operations with the aid of power) is deductibleunder Section 80P(2)(f)

provided the gross total income of such co-operative society does not exceed Rs. 20,000.

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Co-operative Banks-S. 80P(4)

As already seen, a co-operative credit society is different from co-operative bankOne needs to look at various judgments on related issues as there is a very thin linein credit operations and banking operations.

As such, it is seen that there have been many cases of litigation with AOs treating aco-operative credit society as co-operative bank and denying the benefit ofdeduction.

The provisions of section-80P shall not apply in relation to any co-operative bankother than a primary agricultural credit society or a primary co-operativeagricultural and rural development bank

Explanation.—For the purposes of this sub-section,— "co-operative bank" and "primary agricultural credit society" shall have the

meanings respectively assigned to them in Part V of the Banking Regulation Act,1949 (10 of 1949);

"primary co-operative agricultural and rural development bank" means a societyhaving its area of operation confined to a taluk and the principal object of whichis to provide for long-term credit for agricultural and rural developmentactivities.

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Section 80P

Perinthalmanna Service Co-Operative Bank Ltd. v. ITO[2014] 363 ITR 268 (Kerala)

After introduction of section 80P(4) necessarily, an enquiry has to beconducted into factual situation whether co-operative bank is conductingbusiness as a primary agriculture credit society or a primary co-operativeagricultural and rural development bank and depending upontransactions, Assessing Officer has to extend benefits available. AO shouldnot merely look at registration certificate issued under relevant Co-operative Societies Act or at nomenclature of co-operative bank.

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Further it was also held that assessee society being a co-operative bankproviding banking facilities to members was not eligible to claim thededuction under Section 80P(2)(i)(a) after introduction of sub-section (4)to Section 80P.

[Citizen Co-op. Society Ltd. VS. Addl CIT [2012] 24 taxmann. com 347 (HYD)]

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Disallowances of Expenses & u/s 80P Upon violation of the conditions specified under clause (ia)

the implication under section 40(a) would be that the sameamount will not be deducted in computing incomechargeable under the head ‘Profits and gains of business orprofession’.

Now, here the question arises that once any amount isdisallowed u/s 40(a)(ia), [or any other section like 43B etc]whether the same shall be considered for all purpose as a partof profit which in turn would form gross total income. If theanswer is affirmative, then deduction u/s 80P isavailable and vice versa.

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Section-40A - Expenses or payments not deductible incertain circumstances

Section-36(1)(iv) – Contributions to recognizedprovident fund and approved superannuation fund

Section-36(1)(v) – Contribution to approved gratuityfund

Section-36(1)(va) – Contributions to any provident fundor superannuation fund or any fund setup underEmployees’ State Insurance Act, 1948 or any other fund forwelfare of such employees, received from employees if thesame are credited to the employee’s account in relevantfund or funds before due date

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Assessee was a regional rural bank engaged in banking and financingactivity. It claimed deduction under Section 80P. Assessing Officerrejected assessee’s claim holding that assessee was neither a PrimaryAgricultural Credit Society (PACS) nor Primary cooperative Agriculturaland Rural Development Bank (PCARDB).

It was noted from records that range of assessee’s activities were notconfined to one taluk but was extended to entire district and, thus, in viewof Explanation to Section 80P(4), assessee was not PCARDB. Furtherprimary object as well as activities of assessee were not confined toagricultural purposes but other purposes also and, hence, assessee couldnot be regarded as PACS.

In view of above facts, the impugned order of Assessing Officer rejectingassessee’s claim was upheld by ITAT [Vidisha Bhopal Kshetriya Gramin Bank, Vidisha VS. ACIT [2012]

24 taxmann.com 278 (INDORE)]

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Misc. Issues-Co-operative Society

If a co-operative society is a mutual concern, exemption can be claimed onthe principle of mutuality.

[CIT v. Standing Conference of Public Enterprises [2010] 186 Taxman 142 (Delhi)]

No disallowance can be made under Section 14A in respect of income onwhich deduction is allowed under Section 80P.

[Commissioner of Income-tax VS. Kribhco [2012] 23 taxmann.com 312 (DELHI)]

Deduction under Section 80P(2)(e) is available only in respect of incomefrom letting out of storage and if assessee used storage only for marketing,deduction is not permissible.

[Commissioner of Income-tax, Panchkula VS. Haryana State Co-op. Supply &Marketing Federation Ltd -[2011] 12 taxmann.com 330 (PUNJ. & HAR)]

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Misc. Issues-Co-operative Society

Deduction under Section 80P(2)(d) would be allowed to assessee afterexcluding expenditure attributable to earning of eligible income.

[Punjab State Co-operative Milk Producer’s Federation Ltd. v Commissioner ofIncome Tax-II [2011] 336 ITR 495 (PUNJ. & HAR.)

Assessee-society was not entitled to deduction under Section 80P(2)(d)in respect of interest received on advances provided to its member co-operative societies.

[Punjab State Co-operative Milk Producers Federation Ltd. VS. Commissioner ofIncome Tax [2012] 20 taxmann.com 834 (PUNJ & HAR)]

Unabsorbed losses of earlier years are to be set off before allowingdeduction under Section 80P.

[Shahbad Cooperative Sugar Mills Ltd. VS. Deputy Commissioner of Income-tax.[2012] 20 taxmann.com 789 (PUNJ & HAR)]

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MAT v AMT

U/s 115JB, for companies, if tax payable under the normal provisions of the IncomeTax Act is less than 18.5% of its book profits, then tax payable shall be 18.5% of thebook profit which is known as MAT (Minimum Alternate Tax).

U/s 115JC, for cooperatives, if tax payable under the normal provisions of the IncomeTax 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 likecompanies, they are to pay a minimum tax based on adjusted total income which shallbe computed by increasing the deductions as claimed by assessee under any sectionincluded 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 totalincome as assessed by AO.

In other words, the cooperatives, which are only entitled to deduction u/s 80P, shallnot be affected by the AMT provisions.

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TDS

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No tax shall be deducted from any interest payable ondebentures issued by any co-operative society u/s 193.

TDS u/s 194A is deductible on interest paid exceedingRs.10,000/-

TDS provisions u/s 194A are not applicable for : if such income is credited or paid by a cooperative society(not being a co-

operative bank) to a member thereof or to any other cooperative society. Interest payment on deposits by a primary agricultural credit society or

primary credit society or co-operative land mortgage bank or co-operative landdevelopment bank

Interest payment on deposits other than time deposits by a co-operativesociety.

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Interest paid on time deposits liable for TDS. The banks used to make depositors as their members

and availed exemption from TDS FA 2015 has clarified that interest paid to members

by co-operative banks (not co-operative societies) ontime deposits are liable for TDS w.e.f.01/06/2015. Form 15G can be given when tax payable is NIL

because S.197A(1A) applies to all persons other thanCo. or Firm.

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Tax Slab for Co-Operative Society A.Y. 2019-2020:-63

TAXABLE INCOME TAX RATE

Upto Rs. 10,000 10%

Rs. 10,000 to 20,000 20%

Above 20,000 30%

a) Surcharge - 12% of the Income Tax, where total taxable income ismore than Rs. 1 crore.b) Total Cess = 4% of Income-Tax.SAMYNK & CO.

OTHER ISSUES

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Other than S. 80P which is applicable only in case ofa cooperative society, there are other incentivesapplicable to cooperative society (S. 80IA to 80IE)like any other category of person.

In fact in S. 80IB, co-operative societies are entitledto extra deduction of 2 years as compared to otherentities).

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Investment linked incentives u/s. 35AD are alsoavailable to co-operative societies – where 100% ofthe capital expenditure incurred in specifiedbusinesses are allowed as deduction.

S. 115JEE- Alternate Minimum Tax (AMT) does notapply to deduction u/s. 80P.

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Section 269SS : Restrictions on accepting deposits inexcess of Rs. 20000/- in cash exemption to Co-operative Bank.

Section 269T : w.e.f. 01/06/2002 no branch of abanking company or a Co-operative bank shall repayany loan or deposit….in excess of Rs. 20000/- incash.

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Other Issues

269ST. No person shall receive an amount of two lakh rupees or more— (a) in aggregate from a person in a day; or (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or an account payee bank draft oruse of electronic clearing system through a bank account:

Provided that the provisions of this section shall not apply to—

(i) any receipt by—a) Government;b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS; (iii) such other persons or class of persons or receipts, which the

Central Government may, by notification in the Official Gazette,specify.

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Other Issues

Proper KYC TAX Audit ICDS Section 68-Cash Credits. Section 69-Unexplained Investments. Section 69A-Unexplained Money, etc. Section 69B-Amount of investments, etc., not fully

disclosed in books of account. Section 69C-Unexplained Expenditure, etc. Section 69D-Amount borrowed or repaid on hundi

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THANK YOU

CA Yatinder KhemkaPartner SAMYNK & CO.

E: [email protected]: 9810693421

Documents

Assessment of Co-operative Societies and Co … for Coop Soc...27-05-2019 1 1 CA Yatinder Khemka Partner SAMYNK & CO. E: [email protected] M: 981093421 25th May, 2019 NIRC