TAXATION OF CO-OPERATIVE SOCIETIES

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1 TAXATION OF CO-OPERATIVE SOCIETIES CA Pramod Shingte Pune In recognition of the importance of co-operative movement in modern society the governments of all states in India and the Central Government have provided several facilities, concessions and privileges which are peculiar to such societies registered under the Co-operative Societies Acts of different states in the country, though several of such societies may be engaged in commercial, industrial or social activities. Among such facilities or concessions are facilities or concessions in respect of payment of income tax liability. The Maharashtra Co-operative Societies Act, 1960 itself in Section 42 provides for granting exemption or reduction or remission in payment of stamp duty, registration fee, court fee and other taxes or duties which are within the competence of the state government to levy. Similar provision can be found in the Co-operative Societies Acts in force in other states in the country. A Co-operative Society registered under the Co-operative Societies Act is treated as an assessee liable to pay income tax under the provisions of the Income Tax Act, 1961 and every such society is therefore governed by the provisions of that Act and liable to be assessed to income tax as per the provisions of that Act like any other assessee. Activities of Co-operative Societies Co-operative societies may be formed for the purpose of carrying out different activities. Some co-operative societies are formed mainly for mutual benefit activities, whereas others are formed for carrying out business activities. A receipt out of an activity involving the principle of mutuality cannot partake the character of profit liable to tax. Therefore the receipts of co-operative societies, wherein the principle of mutuality is involved are not eligible to income tax. On the other hand receipts from business activities (not involving mutuality) are liable to tax. Section 80 P of the Income Tax Act has provided a number of exemption and deductions in respect of receipts or income from various kinds of activities carried on by the co-operative societies. A co-operative society may have a number of

2 activities. The income from some activities may be exempt from income tax, whereas income from other activities may not be so exempt. The Principle of Mutuality The principle of mutuality is applicable to mutual benefit funds for societies or members club. The basic principle underlain herein is that no one can make profit out of himself. [CIT v. Royal Western India Turf Club Ltd. (1953) 24 ITR p. 551 (SC)] In other words the general principle applicable to mutual concerns is that the surplus accruing to it cannot be regarded as income, profits or gains for the purpose of the Income Tax Act. The essence of mutuality is complete identity between contributors and participators. [CIT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR p. 241 (SC)] In the aforesaid case, the Supreme Court has laid down that the essence of mutuality lies in the return of what one has contributed to a common fund, and if th profits are distributed as share holders, the principle of mutuality is not satisfies. In this case, the Supreme Court has also laid down that all participators must be contributors to the common fund; mere entitlement to contribute will not suffice. The Bombay High Court in the case of [Surat District Cotton Dealers Association v. CIT 35 ITR p. 121] has however held that identity of contributors and participators does not mean that there must be actual contribution by all members. The Madras High Court in the case of [CIT v. Madras Race Club (1976) 105 ITR p. 433] has held that the application of the principle of mutuality is not destroyed by the presence of transactions with, or profits derived from non-members. Similarly, the Patna High Court in the case of [CIT v. Ranchi Club Ltd. (1992) 196 ITR p. 137] (pat-fb) has held that merely because assessee company had entered into transaction with nonmembers and earned profit out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not lost. The Bombay High Court in the case of [CIT v. Bombay Oil Seeds and Oil Exchange Ltd.(1993) 202 ITR p. 198] has laid down that the cardinal principle to apply the test of mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators must be contributors to the common fund; in other words there must be complete identity between contributors and participators.

3 The Supreme Court in the case of CIT v. Bankipur Club Ltd. (1997) 226 ITR p. 97 (SC) has settled the aforesaid principle. The relevant part of the head note is as follows : under the income tax Act, what is taxed is the income, profits or gains earned or arising or accruing to a person Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between contributors and participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regard certain activities, certain members only of the association take advantage of the facilities which it offers, does not affect the mutuality of the enterprise. Chemsford Club v. CIT (2000) 243 ITR 89 (SC). The Supreme Court has further held that if the activity of a Mutual Concern or club is commercial in nature or it is a trade or an adventure in the nature of trade and the transaction entered into with the members or non-members alike, is a trade/business and the resultant surplus is profit the income is liable to tax. The relevant part of the head note is as follows: The decision of the Supreme Court in CIT v. Royal Western India Turf Club Ltd. (1953) 24 ITR p. 551; CIT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR p. 241 and Fletcher (on his own behalf and on behalf of Trustees and Committee of Doctors Cave Bathing Club v. ITC (1971) 3 All ER 1185 (PC) lay down the broad proposition that, if the object of the assessee company claming to be a Mutual Concern or Club, is to carry on a particular business and money is realized both from the members and from the non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole, disclose the same profit earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claming to be a Mutual Concern or Club is a trade or an adventure in the nature of trade and the transaction entered into with the members or non-members alike, is a trade/business/transaction and the resultant surplus is profit the income is liable to tax. On the basis of the aforesaid principle

4 the Supreme Court has held that excess over expenditure received by the club from facilities extended to it s members as part of advantages attached to such membership was not taxable as income. Thus, the receipts or surplus arising form the sales of drinks, refreshments etc., or amount received by way of admission fees, periodical subscriptions and receipts of similar nature from it s members, would be entitled to exemption. In this context other observations of the Supreme Court are also important. These observations are as follows: In other words, the services offered on the above counts were not done with any profit motive and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and there friends, if any, availing of the facilities occasionally). From the aforesaid observations of the Supreme Court, it is clear that the principle of Mutuality will not be destroyed even if facilities offered by social club to it s members, are, once in a while, availed of by their friends or guests. Specific provisions under The Income Tax Act, 1961 : Under the Income Tax Act Co-operative Society enjoys a preferential status. Scheme of Taxation : Under the Income Tax Act there are several provisions under the act, where one find the reference of term Co-operative Society. Let s first examine those relevant provisions of the Income Tax Act. Definition : * Section 2(18)(ad) : Company in which the public are substantially interested If it is a company, wherein shares (excluding preference shares etc.)carrying not less than 50% of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous beneficially held by, one or more Co-operative Societies [w.e.f. 01/04/93 Circular No. 636 dt. 31/08/92]

5 *Section 2(19) : Co-operative Society A Co-operative Society registered under the Co-operative Society Act, 1912, or under any other law for the time being in force in any state for the registration of Cooperative Societies. Section 4 of the Co-operative Societies Act,1912 A Society which has as it s objective the promotion of the economic interests of it s members in accordance with the co-operative principles, or a society established with the object of facilitating the operations of such a Society may be registered with limited liability. (M.S.C. Society Act, 1960 Section 4 ) Section 2(24)(vii) : Insurance Business profit to be computed as per r.w.s. 44 : First schedule Rules. Exemption : House Property Section 10(27) : Any income of a Co-operative Society formed for promoting the interests of the members of SC/ST or both. Section 27(iii) Owner of a House property A member of a Co-operative Society Business Section 36(1)(ia) : Other deduction Premium paid by Federal Milk Co-operative Society on Cattle. Section 40(ba) : AOP/BOI Other than Co-operative Society Capital Gains Section 45(3) : AOP (excluding Co-operative Society) Becoming member by contributing to capital asset in the form of capital contribution.

6 TDS Section 193(iib) : Interest on Securities No tax is required to be deducted on any interest payable on such debentures, issued by any institution, or any co-operative society, including a Co-operative Land Mortgage Bank or a Co-operative Land Development Bank. Section 194A : Interest other than Interest on Securities i) First part makes it applicable to all Co-operative Societies, which are carrying on the business of banking /branch wise. Clause v to such income credited or paid by a Co-operative Society to give exemption, a member thereof or to any other Co-operative Societies. Viia) Deposits with a primary agricultural credit society or a primary credit society or a Co-operative land mortgage bank or a Co-operative land development bank. Other Provisions Section 269SS : Restrictions on accepting deposits in excess of Rs /- in cash exemption to Co-operative Bank. Section 269T : w.e.f. 01/06/2002 no branch of a banking company or a Co-operative bank shall repay any loan or deposit.in excess of Rs /- in cash. Special deduction : Section 80P(2) : Deduction in respect of income of Co-operative Societies Gross Total Income includes any income referred to in case of 100% deduction a) In the case of Co-operative Societies engaged in i) Carrying on the business of banking or providing credit facilities to it s members ii) A cottage industry : Circular no. 722 dated 19/09/1995 iii) The marketing of agricultural produce grown by it s members

7 iv) The purchase of agricultural implements, seeds, live stock or other articles intended for agriculture for the purpose of supplying them to it s members. v) The processing without the aid of power of the agricultural produce of it s members. vi) The collective disposal of the labour of it s members. vii) Fishing or allied activities, i.e. 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 it s members. b) Primary Society engaged in supplying milk, Oil Seeds, Fruits, or Vegetables raised or grown by it s members to i) Federal Co-operative Society. ii) Government or Local Co-operative Society iii)the Government Company Section 617 companies c) Partial deduction for other types of societies i) Consumer Co-operative Society Rs /- ii) Any other case Rs /- d) In respect of any income by way of interest or dividend from any other cooperative society the whole of such income. e) Letting of godown or warehouses for storage, processing or facilitating the marketing or commodities, the whole of such income. f) Residual clause Gross Total Income not exceeding Rs /- Caluse (4) has been added to Sec. 80 P w.e.f. A.Y , in effect withdrawing the exemption for Co-operative Banks. Some Issues : i) Status Section 2(31) Association of Persons Generally Co-operative Societies will be included here but specific exclusions 40(ba) and such other places.

8 For 40A(2) Decision of Poona ITAT in Shivamrut Doodh Utpadak Cooperative Society confirmed by Bombay High Court exclude Co-operative Societies from AOP.(71 ITD 157) ii) Banking Business *Investments of funds and SLR and Voluntary reserves. Contraversy. *Various other incomes received by bank (Locker Rent, DD commission, other commission etc.) *Members and nominal members Denial of section 80P(2)(a)(i) benefit. Contraversy w.r.t. 194A (Resolved to certain extent by 9/2003/ further confusion on member nominal member issue) Jalgaon Dist (Bombay High Court) * Contravention of bye laws. Whether Society is not entitled for beneficial 74TTJ 793 Mahavir Nagri Co-operative Patsanstha. iii) Sugar Co-operative Societies. Bombay High Court 245 ITR 498, Chhatrapati case. iv) Transfer charges received by Housing Co-operative Society Principle of mutuality Favourable Adarsh Co-operative Housing Society 213 ITR 677 (Gujarat) Apasara Housing Co-operative Society 204 ITR 662 (Kolkata) Against Presidency Co-operative Housing Society 216 ITR 321 Bombay. (decided T/F as revenue receipt not applies the taste and the principle of mutuality). Mumbai ITAT spl. Bench : unreported decision in case of M. Walkeshwar Triveni Co-operative Housing Society Limited, Mumbai v/s ITO v) Whether insertion of clause 4 to Sec. 80P will also be made applicable to Co-operative Societies?

TAXATION OF CO-OPERATIVE SOCIETIES

TAXATION OF CO-OPERATIVE SOCIETIES 1 MANOJ PANDIT ADVOCATE WHAT SOCIETY IS? 2 Section 4 of the Co-operative Societies Act, 1912 defines cooperatives as a society which has in its objectives the promotion