Credit Co-operative Society

Interest Income earned by Co-operative Societies Eligible for Tax Deduction

Tax deductions are claims made to minimize your taxable income and result from a taxpayer’s varied investments and costs. Therefore, taking an income tax deduction lowers your entire tax obligation. It is a type of tax benefit that enables tax savings. Furthermore, the type of tax benefit you claim will determine how much tax you can save. It is a type of exemption that individuals have from the income tax department.
The National Pension Scheme (NPS), Public Provident Fund (PPF), investments made under Section 80 of the Income Tax Act (ITA), 1961, in Equity Linked Savings Scheme funds, etc., are a few instances of Income Tax (IT) deductions. Under Section 80P, the deduction for co-operative society is elucidated as a deduction in respect of the income of co-operative societies. Various High Courts held that all co-operative societies that are not controlled by the RBI are qualified for a deduction.

A co-operative society under section 44AA is required to keep its books of accounts and other documents that could help an assessing officer to compute total income using the guidelines of the Income Tax Act. Even though its accounts are subjected to audit by the administrative department as stated in the State Co-Operative Laws, section 44AB mandates that they should be audited by a Chartered Accountant. Moreover, tax audit requirements often do not apply to societies that are not engaged in commercial activities.

Interest Income

Interest income is money that a person or business receives in exchange for lending their funds. The phrase is typically used to report the interest generated on cash held in savings accounts, certificates of deposits, or other investments in a company’s income statement. It determines the return that a business is earning, and the total interest income can be compared to the investment’s balance. The ordinary income tax rate is applied to interest income because it is usually taxable.

Co-Operative Society under Income Tax Act, 1961

 According to the (IT) Income Tax Act of 1961, a co-operative society is a distinct legal person. Even though it is not addressed, there is a connection between tax and co-operative societies. As per section 2(19), “Co-operative Society means a co-operative society registered under the Co-operative Societies Act, 1912¹, or under any other law for the time being in force in any of the State for the registration of co-operative societies”.

A Co-operative Society registered within any State under the law of that specific State is not permitted to function in any other State without the consent and sanction of the Government or Registrar of Co-operative Societies of that State, as per the Co-operative Societies Act of each State. According to the Act, a Multi-State Co-operative Society has the ability to operate in multiple States and is not necessary to obtain the consent of any other State in order to conduct business.

It is an association of people who works voluntarily together to promote a common Interest. In other words, these institutions are based on the ideas of “self Help” and “Mutual Help”. A co-operative society’s main objective is for its members to help one another and contribute economically as a group. Additionally, no one is allowed to leave a co-operative society without earning money from it.

Exemption and Deduction That Applies to Co-operative Societies Under the Act

The IT Act provides a number of exemptions and deductions for co-operative societies that are engaged in business. Co-operative Societies are not entirely exempted from paying taxes. They are qualified for a specific reduction in their gross income.

Exemptions- Co-operative Societies can essentially receive exemptions for specific income classes. Mostly, those that are exempt from income tax and do not contribute to overall revenue. Here are the exemptions that are legal for an Indian co-operative society:

• Section 10A: This includes a ten-year exemption for revenues from a new industry that a co-operative society undertakes from a free trade zone.

• Section 10B: This contains a ten-year of exemption for profits made by an enterprise that is export-oriented

Deductions- Deductions are included when the co-operative societies fall within a specific income category. However, it is mandatory to file an income tax return in accordance with Income Tax Act Chapter VI-A (section to section 80U). As a result, the following situations are given below, with some deductions:

• The deductions mentioned in sections 80C to 80U must be deducted from the assesses total gross income while calculating his total income.
• Deductions that are based on total gross income are covered by section 80AB.
• A tax deduction of any kind under section 80G for donations made to particular institutions or charitable funds.
• The deduction is allowed from 50 per cent of profits and gains from projects carried outside of India in accordance with section 80HHB.
• A deduction of entire profits from export-related business income as stated in section 80HHC.

Section 80P and Deductible Interest Income under Income Tax Act, 1961

The Co-Operative Society is the only entity that is eligible for the income-related deductions offered under Section 80P. The Act now contains the provision that will help co-operative societies’ growth. According to section 80P of the Income Tax Act of 1961, if an assessee is a co-operative society, the total gross income of the organization, which includes any income mentioned in subsection 2 of section 80(P), shall be deducted in accordance with the provisions of the section, and the amount specified in subsection2 of the section80(P) is taken into account when calculating the co-operative society’s total income. The deduction is available only for the specific activities which are mentioned in the section. 

The following activities are eligible for full deduction under section 80(P) 2(a) with regard to profits and gains:

• The Co-operative society conducts banking operations or offers credit facilities to the society’s members.
• A society that markets the agricultural products that its members are cultivating.
• When the cottage industry was established by the co-operative society.
• In order to provide its members with agricultural products, including seeds, cattle, and other items, the society is engaged in the procurement of these items.
• The labour of its members is disposed of collectively by co-operative societies.
• The society processes its member’s agricultural products without the need for electricity.
• Fishing or related activities are offered by co-operative societies with the goal of supplying its members.
• Fish catching, curing, processing, storage, selling, and even the purchase of materials and equipment related to it is an examples of linked operations.

Under Subsection 2(b), the primary society that supplies products like milk, oilseeds, fruits, and or vegetables is a co-operative society. These goods are produced by the co-operative society’s members and supplied to the group of people listed below:

• The Federal Co-operative Society is in the business of manufacturing the goods mentioned above.
• The Government company is a corporation involved in supplying the goods mentioned above.

The amount of income by way of any interest on securities or any income from the house property that is chargeable under section 22 in the case of co-operative society where the total gross income does not exceed ₹20,000/- and the society is not a housing society, an urban consumers’ society, a society engaged in a transport business, or a society performing any manufacturing operations using power. 

Deduction towards interest income from any other activity other than those specified in clauses (a) and (b) in such a case, a deduction up to ₹1,00,000/- is available in case of consumer co-operative society, and a deduction of ₹50,000/- is available for any other case.

Under Sub-section 2(d), a deduction is possible for interest income or dividend income that the co-operative society receives as a result of investments in other co-operative societies. In such a situation, the full amount of interest is deductible.

Under Sub-section 2(e), the deduction for income from renting out warehouses or godowns for the purpose of storing, processing, or facilitating the marketing of goods. All such activity income is eligible for deduction.

When a society receives income that is partially eligible for particular deductions, the income should be computed after deducting a proportionate amount of the expenses related to the income draw that are eligible for a deduction. It must be determined if a particular category of income falls under the aforementioned headings in order to determine whether it is exempt from taxes. The deductions allowed by this section relate to the net incomes from the enterprises or activities listed in the different segments of this section.

Computation of Taxable Income

A few steps must be taken in order to calculate the taxable income earned by an Indian Co-operative Society that was established in accordance with the definition of this society. Place the income into various categories of income from capital gains, house property and income from other sources to calculate the overall income. Then you must exclude the required income exemptions, leaving you with ‘Gross Total Income’. The application of the indicated deductions in accordance with the Income Tax is the next stage. The “rates of tax” outlined in the finance act for the relevant year are applied to the net income that was ultimately calculated for co-operative societies. Now to the amount of tax, per cent of income tax and cess, a surcharge is added as prescribed by the finance act. 

Recent Rulings Regarding the Eligibility of Tax Deduction for Co-Operative Society Under the Act

The Income Tax Appellate Tribunal (ITAT) has allowed the deduction under section 80P(2) (d) of the Income Tax Act in respect of interest income earned by co-operative societies from investments made with co-operative banks in many cases. Some of the recent cases are ITO vs Mittal Court Premises Co.Op. Society Ltd and Amore Commercial Premises Co-Op Society Ltd Vs Central Processing Centre, where the members of the tribunal relied on the decision of the Hon’ble High Court of Karnataka in the case of Pr.CIT & Anr. Vs. Totgar’s Co-operative Sale Society Ltd. (2017) and the Hon’ble Gujarat High Court in the case of State Bank of India vs CIT (2016) had held that interest income earned by a co-operative on its investment held with another co-operative bank would be eligible for deduction under section 80P(2)(d) of the Act.

Conclusion

Interest income earned by the co-operative societies is eligible for the tax deduction as ordered by Income Tax Appellate Tribunal, and section 80P is specially designed for co-operative societies for their tax deductions. This section has listed several deductions on which each clause is different and independent of the other. For greater development and equitable possibilities, the government supports the formation, implementation, and operation of co-operative societies. If the proper guidelines and standards are followed, having a co-operative society might be advantageous for business activity.

Also Read:
Objectives, Advantages Co-operative Society
What is the process of co-operative Housing Society Registration?

1. https://lddashboard.legislative.gov.in/actsofparliamentfromtheyear/co-operative-societies-act-1912