income tax

Tax Obligations of Cooperative Credit Societies Under Section 80P Explained

Introduction

Determining the tax obligations of cooperative credit societies providing banking or credit facilities to their members can be complex. This discussion focuses on whether these societies are taxable under Section 80P of the Income Tax Act, 1961.

Definitions and Legal Framework

Cooperative Society

According to Section 2(19) of the Income Tax Act, 1961, a "cooperative society" is one that is registered under the Co-operative Societies Act, 1912, or any other relevant statute in force for cooperative societies in a given state.

Urban Consumer’s Cooperative Society

Under Section 80P(2) (explanation), an "urban consumer’s cooperative society" is defined as a society established for the benefit of consumers within specified urban limits.

Cooperative Bank and Primary Agricultural Credit Society

These terms are defined as per the Banking Regulation Act, 1949.

Primary Cooperative Agricultural and Rural Development Bank

This refers to a society that operates within a taluk and primarily focuses on providing long-term credit for agricultural and rural development.

Consumer Cooperative Society

This is defined as a society established for consumer benefits.

Tax Deduction Provisions Under Section 80P

Full Deduction Allowance

Cooperative societies can claim a full deduction for incomes derived from specific activities:

  1. Profits from Specified Activities [Section 80P(2)(a)]

    • 100% of profits attributable to:
      • Banking or credit facilities for members
      • Cottage industries
      • Marketing of members' agricultural produce
      • Supplying agricultural implements and seeds
      • Processing agricultural produce
      • Collective labor disposal
      • Fishing and related activities.

  2. Income from Investments in Other Cooperative Societies [Section 80P(2)(d)]

    • 100% of profits from interest or dividends earned from investments with other cooperative societies.

  3. Exclusions Under Section 80P(4)

    • Notably, as per Section 80P(4), cooperative banks have been excluded from claiming deductions since the Assessment Year 2007-08, aligning them with commercial banks. The amendment clarifies that the provisions of Section 80P do not extend to cooperative banks, with the exception of primary agricultural credit societies and primary cooperative agricultural and rural development banks.

Licensing and Operations of Cooperative Banks

Under the Banking Regulation Act, existing primary urban cooperative banks as of March 1, 1966, were required to apply to the Reserve Bank of India for banking licenses within three months. Primary credit societies qualifying to operate as banks due to their share capital must also obtain licenses following similar guidelines.

Classification Criteria for Cooperative Societies

For a cooperative society to be classified as a cooperative bank, it must meet the following criteria outlined in Section 5(C)(CV) of the Banking Regulation Act, 1949:

  • The principal business must be banking.
  • Paid-up share capital and reserves must be at least ₹1,00,000.
  • By-laws should prohibit the admission of other cooperative societies as members.

If these criteria are not met, the society cannot be recognized as a cooperative bank, which means it can still claim deductions under Section 80P(2)(a)(i) for income derived from banking operations.

Judicial Perspectives on Cooperative Credit Societies

The Income Tax Department has, in some cases, denied deductions under Section 80P(2)(a)(i) while invoking Section 80P(4). However, cooperative societies earning interest from cooperative banks can still benefit from deductions under Section 80P(2)(d). It is important to file returns on time to avoid disallowance of deductions, as stipulated by Section 80AC of the Income Tax Act.

Cooperative societies must document their activities and ensure compliance with relevant taxation records, including reconciliation of interest and dividend income with Form 26AS. Tax exemptions apply only if activities directly align with members' agricultural produce or needs, and not where non-member operations or mechanized processes are involved.

It is also crucial to note that even without a banking license, the nature of the cooperative society’s operations determines their classification. The legality of banking operations is not the primary concern for tax assessments.

For deductions under Section 80P(2)(d), cooperative credit societies can also claim tax benefits for interest and dividends from investments made with other cooperative societies and banks, supported by various judicial interpretations, including Solitaire CHS Ltd. vs. PCIT and CIT vs. Rajasthan Rajya Sahakari Kray Vikray Sangh Ltd.

Conclusion

Cooperative credit societies involved in banking operations have various tax benefits under Section 80P, provided they do not meet the criteria for classification as a cooperative bank. Understanding the specific provisions and legal definitions is essential to navigate potential deductions and comply with the Income Tax Act.