Wednesday, October 20, 2010

Taxation of Co-operative Societies


Part 1
*      Special Feature

In India the co-operative Society has always enjoyed concessional treatment for the purpose of Income-tax. Every co-operative society like every other assessee has to compute the income under different heads and then look for permissible deductions. The taxation of co-operative societies revolves around two aspects.

(i)      Class of Income

(ii)    Concept of Mutulity

*      Housing Societies And The Principle Of Mutuality

A Co-operative Housing Society mainly provides the following services to its members:

(i)            Security,

(ii)          Water,

(iii)         Normal Maintenance of the premises of the society,

(iv)        Common Lighting,

(v)          Operation and maintenance of lifts,

(vi)        Maintenance of common health club house etc.

In order to provide such service or amenities a co-operative housing society collects contributions in advance from members on budgeted expenses, hence it is likely to have some surplus or deficit. The provision of the aforesaid facilities/services is governed by the principle of mutuality.  In simple language, it would mean that any surplus out of the payments received from the members for the provision of the aforesaid amenities or services would be exempt from income-tax. As such, a surplus would not take on the character of income.

*      Application of Section 80p(2)(C)
After discussion of the above we try to apply the same to the case of a housing society, Section 80P (2)(c) does not use the word “business” but refers to “profits and gains” attributed to such activities. The expression such “activities” refers to activities other than those specified in clause (a) or clause (b) of Section 80P(2). The clauses (a) and (b) refers to business activities. The rule of construction on the principle of EJUSDEM GENERIS would apply to the construction of clause (c). The above view gets strengthened when we read section 80P(3). Therefore, normally housing societies are outside the purview of Section 80P(2)(c).

*      Rate of Tax
Tax is charged to a Co-operative Housing Society as per rates prescribed under paragraph B of Part I of the first Schedule to they Finance Act’ 2006.

*      Filing of Return of Income
A housing society does not do business. Its main activity is to provide residential/commercial accommodation to its members. Excess collected from members is not income on the principal of Mutulity. However, incidental activities earn income. Every co-operative Housing society has to compute the income under different heads and then look for permissible deduction.

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