Updated: Aug 6, 2021
Section 80P of the Income Tax Act allows for Income Deductions for Co-operative Societies in India. Section 80P is one of the controversial sections in the Income Tax Act, with number of cases still running in the Courts. The deduction under section80P is allowable in respect of following incomes, which are included in gross total income of cooperative societies: A. 100% of the profits of a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to – The government or a local authority; or – A government company or a statutory corporation; or – A federal co-operative society, engaged in the business of supplying the above-said products. B. 100% of the profits of co-operative society engaged in any one of the following activities: – Carrying on the business of banking or providing credit facilities to its member, or – A cottage industry, or – The marketing of agricultural produce grown by its members, or – The purchase of agricultural implements for the purpose of supplying them to its members, or – The processing, without the aid of power, of agricultural produce of its members, or – The collective disposal of the labour of its member, or – Fishing or allied activities for the purpose of supplying them to its members. Provided, in the case of last two types of co-operative societies, the deduction, is available subject to the condition that the rules and bye-laws of the society restrict the voting rights to the members like, State Government, Co-operative Credit Society which provide financial assistance to the society and individual, who contributes their labours. W.e.f. Assessment Year 2007-08 this exemption is not available to co-operative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. C. Profits and gains of co-operative society other than those specified in A and B above is exempt up to the specified limits: – Is case of a consumer co-operative society – Rs.1, 00,000?
– Is any other case – Rs.50, 000? D. All profits by way of interest or dividend from its investment with any other co-operative society. E. 100% of income or profit of a Co-operative Society from the letting of godowns or warehouse for storage, processing or facilitating the marketing of commodities. F. 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 operation with the aid of power, where the gross total income does not exceeds ` 20,000. The amount of any income by way of interest on securities or any income from house property chargeable under Section22 will also be allowed as deduction. One of the crucial issues that have become controversial is Interest earned from investment in Co- operative & other banks particularly by Cooperative Housing Solidities and other Societies not in the activities of providing Credit is the disallowance of entire Interest Income earned by these Societies. In this regard, the provisions with regard to allowing deduction in respect of interest income earned by a co-operative society are contained in section 80P (2)(d) of the Income tax Act, 1961, which read as under : “in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other co-operative society, the whole of such income” As quoted above, the provisions of I.T. Act does not extend the deduction further i.e. interest received from the investments made with co-operative or other banks. Interest Earned by Cooperative Society (other than credit Society) from Investment of Funds with co- operative or other banks or other permitted Financial Instruments as per Indian Trust Act should be fully allowed as exempt under Section 80P of the Income Tax Act, 1960 for following reasons: 1. The very basis of functioning of any co-operative society would be the principle of mutuality. If we go through the principle of mutuality, the three important basic conditions of the Principle are as under: a) There must be a complete identity between the contributors and participators. b) The actions of the participators and contributors must be in furtherance of the mandate of the association. c) There must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. 2. Law governing Cooperative Society mandates Society to create funds out of Contribution of Funds on regular and recurring basis and invest these Funds in interest yielding instruments. Thus the Society has to mandatorily collect funds and invest the same in specified instruments (as specified in Trust Act).
These funds are for specified medium to long term purposes (enumerated below) and can be spent as mandated in Cooperative Act of respective Sates. These Funds are: 1. Sinking Fund: At the rate (minimum 0.25% in Maharashtra of Construction Cost) decided by AGM to be used by the Society for Reconstruction of the Building or for carrying out structural additions or alteration to the Building as in the opinion of the Society`s Architect would be necessary to strengthening or for carrying out heavy repairs as may be certified by Architect and approved by AGM. 2. Building Repair Fund: At the rate (minimum 0.75% in Maharashtra of Construction Cost) decided by AGM to be used by the Society for meeting expenses of normal medium time major repairs of the Society`s Building. 3. Special Repair Fund: At the rate decided by AGM to be used by the Society for meeting major repairs expenses of the Society`s Building such as Painting, Change of Flooring, Plastering etc. 4. Surplus Funds to meet expenditure for next Quarter: Society have to keep funds ready to meet regular expenses including statutory dues like Property Taxes, Electricity, NA Tax, Lift and other small repair expenses, Salaries of staff etc. Collection of these regular charges is quarterly basis in many cases and Society also has to provide for funds required for non-payment by Defaulters. Thus these Funds are to be kept in Short term maturity Bank FD which earns Society small amount of Interest and the same should be exempt as these Funds are created to meet regular need of funds and to take care of timing difference between collection and payments. 5. Education and Training Fund: At the rate of Rs.10/- per members per month as provided under section 24A of MCA Act so as to impart training& education on Co Operative Act, Rules and Bye Laws to all members. This will facilitate members to discharge their obligation and duties as member and especially as Management Committee Member. These Collections have to be kept in Bank FD for short to medium tome and these funds will earn Interest and the same should be exempt from taxation. Funds collected on recurring basis have to be invested in approved instruments like Bank FD or other Financial Instruments (as specified in Indian Trust Act) and Interest earned and accrued on these Funds have also to be Capitalised and carried along with Funds and cannot be taken to Income & Expenditure Account. Thus strictly speaking Interest on Funds is a capital receipt and not revenue receipt and should not be taxed as Income every year because source of these funds is contributions from members. It is recommended that the Society should have identified FDs against respective funds on a matching basis to further reinforce the argument that these funds are specific to the purpose for which it is created. The words “the whole of the amount of profits and gains of business” in section 80P (2) of the Income- tax Act, 1961, emphasise that the income in respect of which deduction is sought by a cooperative society must constitute the operational income and not the other income which accrues to the society. Therefore Interest Earned by Society from Funds Invested as required by local Cooperative law cannot be treated as “profits and gains of business” as these interest are capitalized and carried to respective Funds and are not part of Income& Expenditure Account(Profit and Gains of Business).
Arguments advanced by Income Tax Officer
It is well-settled rule of interpretation that the Legislative mandate should be so read that no word used by the Parliament should be rendered nugatory. If the word “cooperative society” is to read as “Cooperative bank” the same would render the entire provision redundant, otiose and nugatory, an outcome which the Parliament could surely not have intended. It has also been further clarified in Oswal Agro Mills case reported in 1993 (66) ELT 37 (S.C.) that “where the words of the statute are plain and clear, there is no room for applying any of the principles of interpretation which are merely presumption in cases of ambiguity in the statute. The Court would interpret them as they stand. The object and purpose has to be gathered from such words themselves. Words should not be regarded as being surplus nor be rendered otiose”.
Extract from SC Judgement in Citizen`s case.
With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a co-operative bank. However, if it is a primary agriculture credit society or a primary co-operative agriculture and rural development bank, the deduction would still be provided. Thus, co-operative banks are now specifically excluded from the ambit of Section 80P of the Act.
Undoubtedly, if one has to go by the aforesaid definition of ‘co-operative bank’, the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a co- operative bank, it is imperative to have a licence from the Reserve Bank of India, which the appellant does not possess. Not only has this, as noticed above, the Reserve Bank of India itself clarified that the business of the appellant does not amount to that of a co-operative bank. The appellant, therefore, would not come within the mischief of sub-section (4) of Section 80P.
Conclusion: Interest earned and Capitalised to be carried along with Funds would be exempt as The primary aim of the CHS in earning this Interest is not Investment income but it`s the CHS`s Income to run the CHS on the principles of “Mutuality” dealt with by SC in the case of VENKATESH PREMISES COOPERATIVE SOCIETY LTD - SC CIVIL APPEAL NO.2706 OF 2018
However, Interest Earned by Investing Surplus Funds (including those on General Reserve) would fall in to category of “Taxable” Income based on the judgement of Citizens Co Operative Society.