ICAI issued Guidance Note on Assessment of Co-operatives

The Institute of Chartered Accountants of India (ICAI) has issued the Guidance Note on Assessment of Co-operatives.

A Co-operative Society is a Society that has as its objective the promotion of the economic interests of its members in accordance with the co-operative principles. As per Section 2(19) of the Income Tax Act, ‘Co-operative society’ means a co-operative 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. For purposes of eligibility for deduction u/s 80P, the assessee must be a “co-operative society” within the meaning of u/s 2(19).

However, this area of taxation, has been marred by litigation. In fact, Hon’ble SC in The Mavilayi Service Co-op. Bank Ltd. & Ors. vs. CIT [Civil Appeal Nos. 7343-7350 of 2019 dtd. 12.01.2021] (Para 28) held that only the societies registered under the Co-operative Societies Act within the meaning of section 2(19) of the Income-tax Act, 1961 are eligible for deduction u/s 80P but due to plethora of judicial decisions and myriad interpretation have rendered the taxation of co-operative societies, a difficult area for the assessing officers and this note attempts to provide necessary assistance being reference point when faced with complex issues in assessment of cooperatives.

Scheme of Taxation of Co-operative Societies

Finance Act prescribes separate tax structure for Co-operative Societies. Section 2(19) defines co-operative society as a Co-operative Society registered under the Co-operative Societies Act, 1912 or under the relevant state Act. The states have different Acts apart from Co-operative Societies Acts. Entities registered under other relevant Act but not other Co-operative Societies Act also claim deduction u/s 80P, causing unnecessary litigations.

With effect from 1/4/2007, clause (vila) was introduced under section 2(24) expanding scope of income of a cooperative society as under: Section 2(24)(viia)- the profits and gains of any business of banking (including providing any credit facilities) carried on by a cooperative society with its members.

Status of Cooperative Societies under Income-tax Act, 1961

Section 2(31) Definition of ‘Person’ does not include co-operative society as a separate category of assessee. It is considered as an ‘AOP’. Return of Income is thus required to be filed in Form ITR-5, which is a common form for Firms, AOPs and BOI.

Cooperative Societies Covered under Section 80P

Based on the amount of allowable deduction u/s 80P the cooperative societies are of the following three types:

100% deduction: If the cooperative society falls under any sub-clause of clauses (a) and (b) of section 80P(2) it is entitled for 100% deduction of the amount of gains attributable to such specified activities subject to other conditions.

Deduction of Rs.1 lakh: For the consumer cooperative societies falling under sub-clause (i) of clause (c) of section 80P(2), a maximum deduction of Rs.1 lakh is allowable.

Deduction of Rs. 50,000: For a cooperative society not falling under any of the above clauses a maximum deduction of Rs. 50,000 is allowable.

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