Section 80P of the Income Tax Act, 1961 provides for deduction in respect of income of co-operative societies. These incomes and the respective conditions are briefly as follows-
- 100% of the profit and gains attributable to certain businesses.
- 100% of the profit and gains of primary society carrying out supply of milk, oilseeds, fruits or vegetables raised or grown by its members to certain entities.
- Specified limit of profit and gains for co-operative societies not falling in the above two categories:
- If consumer co-operative society, upto Rs. 1,00,000/-.
- In any other case, upto Rs. 50,000/-.
- 100% of the income by way of interest/dividend from investment with any other co-operative society.
- 100% of income from the letting of godowns or warehouse for storage, processing or facilitating the marketing of commodities.
- The amount of any income by way of interest on securities or any income from house property chargeable under Section 22 of a co-operative society (not being a housing society/urban consumers society/society carrying on transport business/society engaged in the performance of any manufacturing operation with the aid of power) where the gross total income does not exceeds 20,000.
Clause (4) was inserted in 2007 which provided for non-application of the benefits of this section to co-operative banks.
Discussed below are 5 of many issues that crop up in this provision:
Can a cooperative society in the business of banking be treated as a cooperative bank for the purpose of s. 80P(4)?
Short answer: No.
ITAT Bangalore, decided on 8th April, 2011
Reasoning: The bench sided with the assessee holding that an assessee-society engaged in the business of providing credit facility to its members is entitled for deduction u/s. 80P(2)(a)(i) despite s. 80P(4) stating that the benefits under s. 80P is not available for a cooperative bank.
The Tribunal noted that, principally, sub-section (4) was introduced in 2007 with the aim to treat cooperative banks at the same level as commercial banks (except banks in the nature of a primary agricultural credit society or a primary cooperative agricultural and rural development bank) when it comes to income generated through banking activities. The tribunal further held that if the intention of the legislature was to stop the tax benefit for cooperative societies providing credit facilities to its members, s. 80P(2)(a)(i) would have been scrapped. A cooperative society cannot be treated as a cooperative bank merely because they carry out business in the nature of banking activities especially when they are registered only under the Societies Act and not Banking Regulation Act.
On appeal, Karnataka High Court confirmed the order of the Tribunal.
Other important cases on this issue:
ITO Bangalore vs. Divyajyothi Credit Co-operative Society Ltd., Bangalore (ITAT Bangalore, cited 118+ times)
Jafari Momin Vikas Co-op. Credit Society Ltd., Patan vs Income Tax Officer (ITAT Ahmedabad, cited 30+ times)
Statutory vs. Non-Statutory Deposits: Does s. 80P differentiate between the two for computing total income?
Short answer: No.
Commissioner Of Income Tax vs. Andhra Pradesh State Cooperative Bank Ltd. (Cited 103+ times)
Andhra Pradesh High Court, decided on 7th June, 2011
Reasoning: As an industry practice, banks or entities which engage in banking activities would not ideally let surplus funds be inactive. It makes business sense for them to park the amount in other banks which do not require those funds immediately, so that the society, and its members by extension, can profit – which is the aim of a cooperative society. Such an activity would fall under “business of banking” in section 80P(2)(a)(i).
It was held that a cooperative bank can utilise the reserve fund over and above 25 per cent of the working capital for the purpose of banking business which includes such deposits. Liberally interpreting the sub-clause 2(a)(i), the High Court held that the provisions do not differentiate between “voluntary” and “non-voluntary” deposits. Profits and gains of business of a co-operative society attributable to its banking transactions or credit transactions with members is exempt from income-tax.
Interpreting ‘credit cooperative society’: Is carrying on banking business good enough to attract denial of deduction u/s. 80P(4)?
Short answer: No.
ITAT Nagpur, decided on 1st February, 2013
Reasoning: The Court ruled in favour of the assessee noting 4 reasons for treating it as a cooperative society rather than a cooperative bank –
- No licence obtained from RBI to function as a bank.
- No power to issue cheque facilities to its members.
- Mandatory compliance with rules made for cooperative societies.
- No obligation to follow Reserve Bank Regulations.
The biggest difference lies with the fact that while credit co-operative societies are similar to ‘credit resource society’ whose aim is to obtain credits for its members with the objectives of facilitating credit to individuals, co-operative banks are extensive banking organisations which cater to the public.
Is rent from locker an income attributable to banking activity, hence eligible for deduction u/s. 80P(2)(a)(i)?
Short answer: No.
Madhya Pradesh HC, decided on 23rd June, 1987
Reasoning: The bench of MP High Court provided an interesting perspective on this issue. Relying upon the definition of “banking” in Banking Regulation Act, 1949, the Court observed the activity involves accepting, for the purpose of lending or investment, deposits of money from the public, which can be withdrawn or repaid. Hence, income derived out of these activities falls under ‘income attributable to banking’, however, income from locker rent does not appear to have any connection with the ‘banking activities’. The Court held that while such an income does not fall under the scope of section 80P(2)(a)(i), deduction can be claimed under section 80P(2)(c) (where the exemption is limited unlike sub-clause (a) where the entire income is exempted).
Is the income earned by a co-operative society from recovery of pay made from the staff, training cost and security forfeiture from staff eligible for deduction u/s. 80P(2)(a)(i)?
Short answer: Yes.
Gorakhpur Kshetriya Gramin Bank vs. Commissioner Of Income Tax (Cited 9+ times)
Allahabad HC, decided on 19th April, 2007
Reasoning: Allahabad High Court, while ruling in favour of the assessee, drew a simple correlation between these activities and banking activities. A banking activity cannot be carried out without the help of employees, and any income coming by way of termination of service by employee or recovery of training cost is a banking activity especially since no argument was made that the Assessee was carrying on an activity apart from banking. The Court relied on a couple of other cases to justify its stand-
- Cambay Electric Supply Industrial Co. Ltd.: The expression ‘attributed’ has to be given wide meaning.
- Ahmednagar District Central Co-operative Bank Ltd.: Income arising by way of collection of electricity bills on behalf of MSEB from the public is attributable to business of banking.
- Grain Merchants Co-operative Bank Ltd.: Income from rent received by letting out parts of building is eligible for deduction u/s. 80P.
(Written by Ankit Sinha, Product Manager @ Riverus)