TAXABILITY OF COOPERATIVE SOCIETIES

[Mr. M. GOVINDARAJAN]

Introduction

Like that of companies, LLP etc. cooperative societies are also business entities.  Cooperative institutions provide an alternative approach to financial inclusion in India through their geographic and demographic outreach to the urban and rural populace.  Under the Indian Constitution, cooperation is a state subject covered under the seventh schedule.  The growth of the cooperative societies is multifold.  This area also paves the way for the Company Secretaries in employment as well as in practice.  It is not mandatory to appoint a Company Secretary as key managerial personnel in cooperative society.  But the knowledge of company secretary may be utilized by employing him in the best position.  The practicing Company Secretary may form the cooperative societies and do the compliances under the respective cooperative Act.  He may also act a consultant in legal, accounts, HR, Finance etc. to the cooperative.

Cooperative

The term 'cooperative' means working together and with others for a common purpose. It 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. 

Cooperative Acts

The British Government during their regime passed the following acts for cooperative societies-

• Deccan Agriculture Relief Act (1879)
• Land Improvement Loan Act (1883)
•  Agriculturists Loan Act (1884)
• Cooperative Credit Societies Act, 1904

In 1958, the National Development Council (NDC) had recommended a national policy on cooperatives.   In 1984, Parliament of India enacted the Multi-State Cooperative Societies Act to remove the plethora of different laws governing the same types of societies.  Based on the recommendations of the Mirdha Committee and the Model Cooperative Societies Act, the Government of India passed the Multi-State Co-operative Societies Act in 2002.

A cooperative society may be governed by the respective state’s Cooperative Societies Act or by the Multi-State Cooperative Societies Act, 2002.  A society registered under the State Act is to perform its business within that State and not allowed in other State without the permission or sanction of the Government or Registrar of that State.  A society registered under Multi-State Cooperative Society can do business in more than one State and no specific permission or sanction of the respective State Government or Registrar of the respective State is required.

The cooperative society works on the principle of mutual help and welfare. Hence, the principal of service dominates its working. If any surplus is generated, it is distributed amongst the members as a dividend in conformity with the bye-laws of the society.

Objectives

The objectives of the cooperative societies are-

• To promote cooperative movement;
• To encourage and promote the growth of co-operative societies.
• To render services that are non profit;
• To help mutually but not competitively;
• To promote self help and not dependence on any other.

Types of cooperative societies

The following are the types of cooperatives-

• Producer cooperative;
• Consumer cooperative;
• Credit unions;
• Marketing cooperative society;
• Housing cooperative society;
• Cooperative Farming society.

Taxability

The cooperative Society is a separate legal entity and is liable to taxation under Indian Tax laws.             

Section 2(19) of the Income Tax Act, 1961 (‘Act’ for short) defines the expression ‘cooperative society’ as a cooperative society registered under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies.

Income of cooperative society

The following are the income of the following types-

• Interest on securities;
• Income from house properties;
• Profits or gains of a business or profession;
• Capital gains income;
• Income from other sources.

The society may adopt either cash basis method or mercantile basis method for accounting.  Whatever the method the society may follow it should be followed continuously in all years.  The profits and gains from the business of society are to be determined according to the regularly employed method for such computation and according to accepted commercial principles.  The gross income of the society is first to be ascertained.  Then the eligible deductions/exemptions are deducted from the gross income and the net income is arrived at.  On the net amount income tax is applicable according to the prevailing rate of the respective financial year.  In additional to education cess and Surcharge are also levied from the net income of the society.

Deductions

The cooperative Societies are assessee within the meaning of the Act.  The Act provides gives exemption to the income generated by the cooperative Societies.  There is no complete exemption to the income.  The cooperative societies are entitled to certain specified deductions from the total gross income.

Section 80P of the Act provides for deduction from income of cooperative societies.  Section 80P provides that the income of the following cooperative societies is eligible to be deducted from computing the total income the cooperative society-

1. A cooperative society engaged in-

1. carrying on the business of banking or providing credit facilities to its members; or
2.  a cottage industry; or
3. the marketing of agricultural produce grown by its members; or
4. the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members; or
5.  the processing, without the aid of power, of the agricultural produce of its members; or
6. the collective disposal of the labour of its members; or
7. fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,

the whole of the amount of profits and gains of business attributable to any one or more of such activities;

2.  in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to-

1. a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or
2. the Government or a local authority; or
3.  a Government company as defined in section 617 of the Companies Act, 1956, or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),

the whole of the amount of profits and gains of such business;

3. in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,-

1. where such co-operative society is a consumers’ cooperative society, ₹ 1,00,000/-; and
2. in any other case, ₹ 50,000/-;

4.  in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other cooperative society, the whole of such income;
5. in respect of any income derived by the cooperative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income;
6.  in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed ₹ 20,000/-, the amount of any income by way of interest on securities  or any income from house property chargeable under section 22.

In M/S. M.P. STATE COOPERATIVE MARKETING FEDERATION LTD. BHOPAL VERSUS ACIT-2 (1) BHOPAL [2022 (3) TMI 126 - ITAT INDORE], the assessee has claimed a total deduction of ₹ 33,43,57,235/- under section  80P out of which the deduction to the extent of ₹ 5,02,23,957/- related to the income from the letting of CAP (Cover and Plinth) storage. The Assessing Officer  observed that section 80P(2)(e) allows deduction in respect of income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities. The Assessing Officer further observed that the CAP storage is merely an improvised arrangement for storage of food grains which was born of necessity because harvests increased faster than the storage capacity over the time, but there is no construction of permanent structure involved in the CAP storage.   The Assessing Officer, therefore, held that the CAP storage does not fit in ‘godown’ or ‘warehouse’ and hence the income derived there from is not eligible for deduction under section 80P.  The Commissioner (Appeals) confirmed the findings of the Assessing Officer. 

The Appellate Tribunal observed that there is no specific definition of ‘godown’ and ‘warehouse’ prescribed in Income-tax Act, 1961.  Section 80P does not state in specific terms that there must be a structure of permanent nature.   Section 80P requires is only ‘godown’ or ‘warehouse’.  The definition of ‘warehouse’ in Section 2(s) of The Warehousing (Development and Regulation) Act, 2007 and Section 2(d) of The Madhya Pradesh Agricultural Warehouse Act, 1947 provides that even a protected place or protected enclosure used for the purpose of storage of commodities, is also a ‘warehouse’.    CAP storage is a protected place for storage of commodities approved by the statutory Orders.   CAP storage must be held to be a ‘warehouse’ for the purpose of section 80P.  Section 80P is a beneficial provision and the purpose is to incentivize the warehousing activity of cooperative societies. Therefore, the interpretation of section 80P must be liberal so as to advance the avowed objective.   The Income Tax Appellate Tribunal held that the income from letting of CAP storage derived by the assessee is eligible for deduction under section 80P and there is no justification in denying the same to the assessee. 

Tax Rate

The following is the rate of tax applicable to the cooperative society for the Financial Year 2021-22-

• Taxable income up to ₹ 10,000/- =  10% tax;
• Taxable income ₹ 10,000/- to ₹ 20,000/- = 20% tax;
• Above ₹ 20, 000/- = 30% tax.

In addition to the income tax surcharge is leviable @ 12% of the tax if the total income exceeds ₹ 1 crore.  The said surcharge shall be subject to marginal relief if the income exceeds ₹ 1 crore, the total amount payable as income tax and surcharge shall not exceed the total amount payable as income tax of ₹ 1 crore by more than the amount of income that exceeds ₹ 1 crore.  In additional Health and Education Cess will be levied @ 4% of such income tax and surcharge.

Special rate of tax

Section 115BAD was inserted by Finance Act, 2020 with effect from 01.04.2021.    A cooperative society is given an option to avail a special rate of tax @ 22% + 10% surcharge + 4% health and education cess.  The option is to be exercised on or before 31^st October of the assessment year.  Once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

The availing of Special rate of tax is subject to the following conditions, -  the total income of the co-operative society shall be computed,-

• without any deduction under the provisions of –

• section 10AA – Special provisions in respect of newly established units in Special Economic Zones; or
•  clause (iia) of sub-section (1) of section 32 - depreciation; or
•  section 32AD – Investment in new plant or machinery in notified backward areas in certain cases; or
•  section 33AB – Tea development account, coffee development account or rubber development account; or
•  section 33ABA – Site restoration fund; or
•  sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35 – Expenditure in scientific research; or
•  section 35AD – deduction in respect of expenditure on specified business; or
•  section 35CCC – Expenditure on agricultural extension project; or
•  under any of the provisions of Chapter VI-A (deductions to be made in computing total income) other than the provisions of section 80JJAA (deduction in respect of employment of new employees ;

• without set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in above; and
• by claiming the depreciation, if any, under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

Alternate Minimum Tax

Section 115JC provides for the alternate minimum tax payable by the cooperative societies @ 18.5%.  The current year budget proposes that cooperatives to pay alternate minimum tax and surcharge at reduced rate of 15% and 7% respectively.

Return of income

A cooperative society is required to file its income tax return in Form ITR – 5.  The said return is to be filed on or before 30^th September of a particular fiscal year despite the fact that that most of the State Co-operative Laws allow holding the Annual General Meeting within the calendar year, i.e. 31^st of December.

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.

TDS

No tax is deductible under section 193 of the Act on any interest payable on such debentures, issued by any institution or authority, or any public sector company, or any co-operative society (including a co-operative land mortgage bank or a co-operative land development bank), as the Central Government may, by notification in the Official Gazette, specify in this behalf.

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.

The 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.

GST

Section 2(87)(i) of the Central Goods and Services Tax, 2017 (‘CGST Act’) includes a cooperative society registered under any law relating to co-operative societies in the definition of ‘person’.  A co-operative society provides services to its member in the form of facilities or benefits to it member (in course of business) for a consideration. Hence co-operative society also gets covered under GST.

If the aggregate turnover of a cooperative society exceeds ₹ 20 lakhs then it is liable to be registered under section 22 of the CGST Act. 

A Society is akin to a club, which is composed of its members. So, a service provided by a Housing Society to its members can be treated as service provided by one person to another. As per section 2(17)(e) of the CGST Act, 2017 provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members is deemed to be a business. The activities of the housing society would thus attract the levy of GST and the housing society would be required to register and comply with the GST Law.

Notification No.12/2017 -Central Tax (Rate) dated 28.06.2017 at sr.no.77 provides for the exemption to housing societies.  The said Sl. No. 77(c) provides that service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution up to an amount of  ₹ 7500/- per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex.

The following points are to be noted in respect of levy of GST by the Housing Society-

• Property Tax, Water Tax, if collected by the Cooperative Society on behalf of the MCGM from individual flat owners, then GST is not leviable.
• If electricity charges etc., are collected by the Society for generation of electricity by Society’s generator or to provide drinking water facility or any other service, then such charges collected by the society are liable to GST.
• Sinking fund, repairs and maintenance fund, car parking charges, Non- occupancy charges or simple interest for late payment, attract GST, as these charges are collected by the Cooperative Society for supply of services meant for its members.

Conclusion

The cooperative movement in India plays a crucial role in the agricultural sector, banking and housing.  There are 854,355 cooperatives with 290.06 million members. Cooperatives in India are broadly present in credit and non-credit sectors. The presence of a large network of social organizations, like cooperatives, would aid in the generation and utilization of social capital and greater the social capital, greater would be the possibility of development.  There is also in increase in the formation of cooperative sectors in all sectors that will be benefits to individuals.  This sector also gives a wide area for Company Secretaries in practice as well as in employment.

References:

1. https://www.jagranjosh.com/general-knowledge/gk-questions-and-answers-on-the-cooperative-movements-in-india-1517399675-1.

2. https://coops4dev.coop/en/4devasia/india#:~:text=Summary,credit%20and%20non%2Dcredit%20sectors.