Taxation of Cooperative Societies
A cooperative society means, a society registered or deemed to be registered under any law relating to cooperative societies for the time being in force in any State or under the Central act.
Cooperative societies may be governed by the respective State cooperative societies Act or by the Multi-State Cooperative Societies Act, 2002. The societies, whose main objective is to serve the interests of its members in a particular State, are governed by the Cooperative Societies Act of that particular State. While, a Society whose main objectives is to serve the interests of its members, in more than one State, are governed by the Multi-State Cooperative Societies Act, 2002.
According to the Cooperative Societies Act of each State, a cooperative society registered within any State under the law of that State is not allowed to operate in other States without the permission of the Government or Registrar of Cooperative Societies of that State. In case of multi-State cooperative society, it can operate in more than one State as a matter of right, under the Act and no permission of any State is required to do its business.
Provisions for Taxation of a Cooperative Society
A Cooperative Society is a taxable entity under the Income Tax Act, 1961. A Cooperative Society under the Act is to be treated as an association of persons (AOP), which is included in the definition of ‘person’ under the Income Tax Act, 1961.
Even though, for taxation purposes, the status of a cooperative society is to be taken as an Association of Persons, the section 67A and section 86 of the Act have been excluded from application to the members of society.
A Cooperative Society is taxed at rates, which are different from those applicable to an AOP. Under the annual Finance Act , though individuals, Hindu undivided family, AOP or body of individuals, whether incorporated or not, or every artificial juridical person referred to in the Income Tax Act, are chargeable at rates prescribed in paragraph A, of the Finance act. A Cooperative society is chargeable to tax as per rates prescribed under paragraph B of Part1 of the first schedule to the annual Finance Act.
The amount of income tax computed in accordance with the provisions of paragraph B , shall in the case of every cooperative society, be increased by a surcharge. The rate of surcharge is prescribed in each of the Finance Acts.
The Cooperative Societies are entitled to several concessions, in the computation of their taxable income. Besides, they also enjoy the benefit of concessional rate of tax on their chargeable income under the annual Finance Act.
As per Wealth Tax Act [Section 3(1)], only individuals, Hindu undivided families and companies are liable to wealth tax. Thus, no wealth tax is charged in the case of cooperative society.
Exemptions and Deductions granted to the Cooperatives under the Income Tax Act
There are various types of exemptions and deductions available to cooperative societies.
Exemptions :- It includes certain classes of income which do not form part of total income and are exempted from income-tax. These are excluded from the computation of gross total income of an assessee. A return of income is also not to be filled for them. Such types of income fall under Chapter III of the Income Tax Act. Some of the permissible exemptions provided are:-
Exemption of profits and gains from a new industrial undertaking in a free trade zone for ten years[Section 10A].
Exemption of the profits and gains for ten years from a 100% export oriented undertaking [Section 10B],etc.
Deductions :- It 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 basically deductions to be made in computing total income. A return of income is required to be filled for them. Such types of income fall under Chapter VI-A (Sections 80A to 80U) of the Income Tax Act. Some of the permissible deductions provided are:-
As per Section 80A, in computing the total income of an assessee, the deductions specified in Section 80C to 80U shall be allowed from his gross total income.
Section 80AB deals with deductions that need to be made with reference to the gross total income.
Deduction of any amount under Section 80G in respect of donations given to certain funds, charitable institutions, etc.
Deduction of 50% of profits and gains of projects implemented outside India [Section 80HHB].
Deduction of the entire profits from income from export business [Section 80HHC], etc.
Relevance of Section 80P
The deductions in respect of income provided under Section 80P of the Income Tax Act are applicable to the cooperative societies alone. The provision has been incorporated in the Act for growth of cooperative societies. There are different heads of deductions enumerated in the section such that each is distinct and independent of other. To decide whether a particular category of income of a cooperative society is to be exempted from tax, it shall have to be seen whether it falls under the said heads or not. The deductions allowable under this section are in respect of net incomes from the activities or businesses, specified in the various clauses of the section.
If a cooperative society carries on such activities, income from which is exempt and also carries on such activities, income from which is not exempt, then profits/gains attributable to former activity shall enjoy exemption and those attributable to latter one shall be taxed. Where a cooperative society earns income, which is partly taxed and partly entitled to special deduction, proportionate share of the expenses attributable to the earning of income, entitled to deduction, should be deducted in computing such income.
In general the perception is that income of Co–operative Societies is not chargeable to tax and therefore many societies do not bother to take PAN No. & file Income Tax returns. This is a wrong perception since though certain types of income of CHS are exempt there are other incomes which are chargeable to Tax.
We now examine on a case by case basis the income which is normally earned by a Co – Operative Society’s:
- a) Contribution from Members:
This are the most commonly credited accounts in profit &loss account of any CHS. They are credited under different heads namely Maintenance charges Municipal Taxes, Electricity Charges, Lift Maintenances Charges, Water Charges etc.
It may be emphasized that the society merely acts as an agent who collects this charges on behalf of members & spends the same to meet the various joint expenses of the society. Any surplus generated due to these types of income is not chargeable to tax as it is exempt based on the ‘concept of Mutuality’. The basic principle of Mutuality is a mutual association arises when persons forming a group; associate together for a common object and contribute money for achieving that object and divide the surplus amongst them in the character. 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.
- b) Interest Charged on member Outstanding:
Interest charged by society on outstanding dues of members again forms a part of contribution from members. Moreover it qualifies the test of mutuality since the contributors & participators are the same persons. Thus this is also exempt on concept of Mutuality.
- c) Interest Income Earned on Investments:
Interest income earned can be further classified into interest earned from investments made in Co-operative Banks & interest from other Investments. Interest earned from any investment made in Co-operative Banks qualifies for deduction @ 100% under section 80P(d). However other interest income on investments is fully taxable.
- d) Dividend:
Dividend income received from Indian Companies is fully exempt u/s 10 (34). Dividend received from Co-operative Banks qualifies for exemption under 80P(d) is therefore 100% deductible.
- e) Rental Income from Advertisement Hoardings :
This is fully taxable under the head Business Income / Income from other sources. However expenses which can be directly attributable to earning of this income can be claimed against this income on a proportionate basis.
- f) Rental from Mobile / Cable Towers etc :
Rental from mobile & Cable Towers is taxable under the head Income from House Property; considering the same it is eligible for standard deduction u/s 24 (a) @ 30 % of the rent. Also if society has borrowed capital to construct said building in which the tower has been erected than a proportionate deduction can be claimed for interest paid on borrowed capital.
- g) Rentals from use of open Spaces / Terrace :
If the Rentals are received for use of open ground or terrace the point be noted is whatever it is received from Members or Non-members. If it is received from Members than it can be argued that it is not taxable on the grounds of “Mutuality”. If it is received from Non-members or outsiders it shall be fully taxable under the head Income from House Property & will qualify for deductions as mentioned earlier.
- h) Non –Occupancy Charges :
Though non – occupancy charges are being collected from members in their periodic Bills the income tax departments view point has been that this amount is received from a members who has not been staying in the premises of the society. Therefore though he is a contributor he is not enjoying the amenities of the society is thus not a participator. Considering the same the mutuality concept is not satisfied & therefore this income is chargeable to tax.
However this view point is debatable and can always be argued in society’s favour as in some of the courts case’s the ruling given is that “While comparing the contributors and participators in concept mutuality they should be compared as a class an not isolated or individual contributors”.
- i) Parking Charges : Again in this case the point to be seen is whether the collections are from members or Non – members. In case of collections from members they are covered by concept of Mutuality. However in case of Societies having shopping complexes parking charges collected from outsiders would be taxable.
We have covered most of the incomes likely to be earned by Co-operative Housing Society. However we have not touched upon Transfer fees as it is requires to be discussed at length & will be covered in a separate article. Moreover it may be hereby specified that all CHS earning business income qualify for a general deduction under section 80 P(2)(c) of Rs. 50000/-.This deduction can be claimed against business income and not against interest or any other income.
Also we may hereby emphasize that since most of the incomes of societies can fall in tax net it is compulsory to file Income tax return. Also if society is not having taxable income due to deduction available u/s 80 P(d) (i.e. interest from Co-operative Banks being exempt) it is imperative on the part of the society to prove the same and this can be done only if Income Tax return is filed. Thus it may me said in conclusion that it is compulsory on the part of CHS to filing Income Tax returns regularly.
Further the societies are taxed as per the following slab: _
Income upto Rs 10000 10 %
Income upto Rs 20000 20 %
Above 20000/- 30 %
The income tax as arrived above has to be increased by 3 % of tax payable towards Education Cess and Higher education Cess.
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