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Section 80P of Income Tax Act: What is a Co-Operative Society?

Updated: Jun 11


Section 80P of Income Tax Act: What is a Co-Operative Society

Co-operative societies play a very important role in developing the community and economic association among their members. These are recognized under the Income Tax Act and receive specific financial incentives to help them grow and function effectively. Section 80P of the Income Tax Act offers co-operative societies a unique opportunity to claim deductions on their income, reduce the tax liabilities, enhance the ability to serve their members, and their goals. This article will discuss the concept of co-operative societies and its eligibility for deductions under Section 80P, along with a step-by-step guide on how to effectively claim the deductions and maximize the tax benefits.

 

Table of Contents

 

Section 80P of Income Tax Act: What is a Co-Operative Society? 


A co-operative society is a voluntary association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. A co-operative society is based on the values of self-help, self-responsibility, democracy, equality, equity, and unity. Members of a co-operative society believe in the ethical values of honesty, openness, social responsibility, and care for others.


Features of a co-operative society:


  • Democratic Member Control: Co-operative societies are democratic organizations controlled by their members, who actively participate in setting policies and making decisions.

  • Economic Participation: Members contribute equitably to the capital of their co-operative and manage it in a democratic manner.

  • Autonomy and Independence: Co-operative societies are self-help organizations controlled by their members. If they enter into association with other organizations or raise capital from sources outside the co-operative society, they do this on terms that keep democratic control with their members while safeguarding their co-operative independence.

  • Education, Training, and Information: Co-operative societies provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-ops.


Types of Co-operative Societies

Co-operative societies vary immensely in their nature and scope but can be broadly classified into several types:


  • Consumer Co-operative Societies: These are owned by the consumers who buy the goods or services from their co-operative.

  • Producer Co-operative Societies: Owned by the producers of commodities or crafts who have joined hands to process and market their products.

  • Credit Unions and Financial Co-operative Societies: These provide financial services to their members. The focus is often on mutual financial support at reasonable rates.

  • Housing Co-operative Societies: These offer a unique model of home ownership, wherein the co-operative owns the housing in which the members live, making it more affordable.

  • Worker Co-operative Societies: Owned and democratically governed by employees who become co-op members.

  • Marketing Co-operative Societies: Assist small producers in selling their products in local and international markets.

  • Service Co-operative Societies: The services provided to members encompass health care, education, and care for children.


Section 80P of Income Tax Act

Section 80P of the Income Tax Act was introduced with the intent of supporting and promoting the growth of co-operative societies by granting them specific tax incentives. This section aims at enhancing the viability and efficiency of these organizations, which are crucial in various sectors of the economy, mainly including agriculture, retail, and banking, with special importance in rural and semi-urban areas. Section 80P enables co-operative societies to engage in sustainable development by saving them from some of the tax burdens faced, thereby helping them serve their members and contribute towards the economy.


Key Objectives:


  • Encouragement of Participation in Co-operative Movements: The idea is that through tax incentives, more people and groups will be incentivized to start and become members of co-operative societies.

  • Enhancing Financial Stability: Reduction in tax liabilities will help co-operative societies stand strong on a financial footing, thereby enabling them to reinvest in their operations and community initiatives.

  • Rural and Agricultural Development: Many co-operative societies are deeply involved in agriculture and rural development. Section 80P helps these entities grow, thus supporting national food security and rural employment.


Benefits Available

The deductions available under section 80P of the Income Tax Act are several tax deductions which are available to co-operative societies that reduce the co-operative society's income. These benefits are aimed at encouraging the special structure and community-focused activity of co-operative societies.


Specific Tax Benefits Under Section 80P Include:


  • Deduction of Income from Providing Credit Facilities to Members: Co-operative societies that offer credit facilities to their members. For example, banks and credit unions are eligible to deduct the interest income generated from such activities.

  • Deduction of Income from Consumer Business: Consumer co-operative societies selling goods and commodities to their members for consumption can deduct income from such sales.

  • Deduction of Income from Cottage Industries: Co-operative societies that deal in cottage industries are eligible to deduct the amount generated from such activities, fostering small-scale and artisanal production.

  • Complete Deduction for Certain Co-operative Societies: Certain classes of co-operative societies, like those that are involved with fishing or collective farming, may be entitled to 100% deduction under this section; hence, the total income of such co-operative societies becomes zero.


Who is eligible for deductions?

Primary Agricultural Credit Societies and Primary Co-operative Agricultural and Rural Development Banks are eligible for deduction of their total income.

Other Co-operative Societies are allowed deductions towards their profits so long as the said profits pertain to eligible activities as determined under the Income Tax Act.


Eligibility Criteria for Claiming Deduction under Section 80P

Not all co-operative societies automatically qualify for these deductions, and there are clear guidelines about who can claim these benefits and who cannot. Understanding these criteria is crucial for co-operative societies to correctly claim deductions and comply with tax laws.


Who Can Claim Deduction under Section 80P?

Any co-operative society registered under the Co-operative Societies Act, 1912 or under any other law for co-operative societies in any state is eligible, provided it engages in certain types of activities.


Types of Activities Eligible:

  • Providing credit facilities to its members.

  • Marketing agricultural produce grown by its members.

  • Purchasing agricultural implements, seeds, livestock, or other articles intended for agriculture for the purpose of supplying them to its members.

  • Processing (without the aid of power) the agricultural produce of its members.

  • Collective disposal of the labor of its members.

  • Fishing or allied activities, i.e., catching, curing, processing, preserving, storing, or marketing of fish or purchase of materials and equipment in connection therewith for the purpose of supplying them to its members.


Income from Specific Sources:

  • Interest income from loans provided to members.

  • Income from the leasing of properties and interest on funds invested in securities.


Who Cannot Claim Deduction under Section 80P?


  • Co-operative Banks: Including co-operative land mortgage banks and co-operative land development banks, do not qualify for deductions under Section 80P(2) as per the clarifications issued in the Finance Act of 2006. These entities are treated akin to other commercial banks for the purpose of taxation.

  • Co-operative Societies Engaging in Non-Qualifying Activities: If a co-operative society's income is derived from activities that do not directly benefit its members or are of a commercial nature that competes with other commercial enterprises, such deductions may not be applicable.

  • Income from House Property: Rental income from house property owned by the co-operative society which is not used for the direct benefit of the members or is let out to non-members may not qualify for deduction. 

  • Provisions of Section 80P(4): This subsection specifically denies the deduction under Section 80P to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.


Section 80P of Income Tax Act: How to Claim Deduction under Section 80P


Section 80P of the Income Tax Act provides deductions to co-operative societies to encourage and facilitate their role in various sectors of the economy. How to claim co-operative society deductions under section 80P of the Income Tax Act is mentioned in the below guide.


  1. Step 1: Check Eligibility

To apply for a deduction under Section 80P, a co-operative is required to satisfy the following eligibility conditions:

  • It should be registered as a co-operative society.

  • The activities should be those that have been specified under section 80P, which benefit its members primarily and pertain to the provisions of agricultural, marketing, or credit requirements.


  1. Step 2: Identify Eligible Incomes

Find out which part of your income is eligible for deductions under section 80P. It may be as follows: 

  • Income by way of providing credit facilities to its members.

  • Profits earned through the marketing of agricultural produce of its members.

  • Interest earned on loans given to its members.

  • Income earned through fishing or allied activity that involves the supply of material to its members.


  1. Step 3: Proper Maintenance of Documentation

Appropriate and complete documentation helps ensure:

  • Recording details of transactions and activities for which deductions are allowable.

  • Record the audited financials and the other details, which back the claims of the co-operative society, such as a list of members, minutes of a meeting in which the financial decisions were taken, and financial transactions in eligible activities.


  1. Step 4: Calculate Deduction

Compute the amount of deduction:

  • Compute deductions under section 80P, which is generally a percentage of the eligible income. One should apply the rates provided under the Income Tax Act on the eligible income of the co-operative.

  • Find out the incomes and the expenses incurred on account of the eligible activities separately so that the deduction amount can be found out easily.


  1. Step 5: Filing Tax Returns

Carry out and file tax returns:

  • One has to furnish the details of the deduction in its ITR form. Most co-operative societies file ITR-5.

  • Ensure that under the section mentioning about the profits and gains, the deductions are clearly mentioned under the section of the tax return form given for section 80P.


  1. Step 6: Claim the Deduction

While filling in the tax return: 

  • Enter the eligible amount of income to claim a deduction under section 80P in the fields provided.

  • A clear description and relevant documents should be provided to verify the claim in the process of filing


  1. Step 7: Maintain Records for the Future

After e-filing the return of income:

  • Keep one copy of the return of income document and all the annexures and documents used to file the income tax return. It is an essential requirement so that document is available to answer any queries of the tax department in the future.

  • All records should be kept ready for audit, if need be, for at least six years from the end of the relevant assessment year.


Eligible Activities and the Amount of Deduction under Section 80P


Following are the eligible activities and the amount of deduction allowable under Section 80P:

Eligible Activities and the Amount of Deduction under Section 80P

Key Points Related to Section 80P of the Income Tax Act


Here are the key points related to Section 80P of the Income Tax Act:


Interpretation of terms as used in Section 80P


  • Terms of use: Section 80P uses different terms to describe eligible activities for deductions, like 'profits and gains from business related to these activities,' 'profits and gains from this business,' and 'income generated.' Each term needs to be examined discreetly in the context of the operations carried out by a co-operative society to qualify for deductions.

  • Legal Interpretations: The terms used in this section, such as 'cottage industry,' 'marketing,' 'members,' 'industry,' and 'investment,' have undergone several legal interpretations and decisions. These decisions further explain what is allowed for deduction under Section 80P.


Allowability of Deductions


  • Co-operative Societies versus Co-operative Banks: ITO is important to make a distinction between a co-operative society carrying on banking activities and a co-operative bank. While licensed co-operative banks by the RBI, by and large, may not claim deductions under Section 80P, co-operative societies which are carrying on banking activities but are not considered banks by the RBI are allowed to claim such benefits.

  • Judicial Decisions: Various high courts have reaffirmed the view that all co-operative societies (except directly controlled by the RBI) are entitled to deductions under Section 80P, be those engaged in credit, marketing, or other activities under the Act.


Effect on Tax Calculations


  • Exclusion from AMT: Profits considered under Section 80P are excluded in the computation of adjusted total income while assessing Alternate Minimum Tax (AMT). This shall ensure that co-operative societies benefitting under Section 80P are not subjected to further taxation under the AMT provisions, with a view to retaining the effectiveness of the incentive.


Practical Implications


  • Documentation and Compliance: Co-operative societies have to put in place detailed records and documentation indicating eligible activities and their earnings. This is crucial for auditing and verification purposes.

  • Consultation with Tax Professionals: Due to the complexities of and niceties involved in the interpretation of Section 80P, it is advised that co-operative societies consult with tax professionals, which would enable them to fully conform to the tax laws and maximize their potential deductions.

  • Continuous Monitoring of Changes in Legal Provisions: Co-operative societies should make sure that there is always an updated status on any changes in the law or any judicial pronouncements that may have a bearing on their eligibility under Section 80P. The changes in law or novel court interpretations would change the way deductions are taken or processed.


FAQ

Q1. What is a co-operative society?

Co-operative societies are autonomous associations of individuals united voluntarily to address the common economic, social, and cultural needs and aspirations. They work together in agreement to put into action the generally approved co-operative principles and are registered under the Co-operative Societies Act. Co-operative Societies manage business activities in order to benefit members.


Q2. What are the benefits covered under Section 80P of the Income Tax Act?

Section 80P covers specified benefits to co-operative societies with regard to incomes generated from credit facilities to members, marketing in agricultural produce or fishing, to support their economic activities and to set off tax liabilities.


Q3. Who can claim benefits under Section 80P?

Any registered co-operative society can claim benefits provided under the specified section so long as it performs specific activities as considered relevant, with the exception of co-operative banks and other co-operative bodies under the regulatory control of the Reserve Bank of India.


Q4. Are all co-operative societies permitted to claim the benefits under Section 80P?

No. The benefits are permitted according to the activities in which the co-operatives are engaged. For example, co-operative banks are generally exempted, while credit co-operatives and marketing co-operatives may sometimes claim full benefits of the deductions allowed on specified incomes.


Q5. What are the major types of income for which co-operatives can claim deductions under Section 80P?

Co-operative societies can claim deduction under Section 80P on income derived from the provision of credit to members, marketing of agricultural products that are produced by members, processing without power facility, and other specified activities.


Q6. What is the process for claiming deductions under Section 80P for co-operative societies?

The co-operative societies have to offer their profit and gains of business to tax, including the eligible income, and apply the deduction rules provided in Section 80P. They have to maintain appropriate documentation and evidence of the eligible activity.


Q7. Can a co-operative society, which undertakes banking activities, claim deductions under Section 80P?

Only those co-operative societies that do not fall under the definition of a co-operative bank as defined by the RBI can claim deductions under Section 80P for limited banking activities restricted to their members.


Q8. What kind of documents need to be maintained by a co-operative society to claim deduction under Section 80P?

The co-operatives have to maintain their financial statements, member transactions, and books of accounts details of activities from which the eligible income is generated, and an audited report, wherever applicable.


Q9. Are there any prescribed monetary restrictions for the amount a co-operative can claim under Section 80P?

There is no monetary limit defined for the amount that a co-operative can claim under Section 80P. However, this income should be generated only from the activities defined as such under this section.


Q10. How claiming a deduction under Section 80P helps in overall tax liability for a co-operative society?

The deduction under Section 80P can help reduce the taxable income of a co-operative society and, consequently, reduce tax liabilities. This can help in the financial sustainability of a co-operative and its capability to use more funds for reinvestment in operations.




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