To form or setup a co-operative society one has to follow certain set rules or guidelines which have to be followed in sequential order which will be dealt in the latter part of this paper, but firstly it is important to ascertain the nature and importance or advantages of forming a society in present scenario over other business structures.
The co-operative movement started because to protect the interests of weaker sections of society. The primary or main objective of this movement is ‘how to protect economically weaker sections of society’ from the middlemen who gain illegally by eating away the major chunk of the profits. In all forms of business structures whether be it is a sole trade, partnership or joint stock company, the primary motive is to increase profits.
The laws governing the societies are “THE co-operative societies act, 1912” which is a central Act formed by the Union with the liberty to the concerned states to form their State Act governing the societies to suit their local conditions but the condition being that it should not be in derogation to the central Act. Many states have enacted their own co-operative society Act and rules there under but more or less the requirements to be met by persons who want to form the society remains the same.
A co-operative society may be governed by the respective state’s Co-operative Societies Act or by the Multi-State Co-operative Societies Act, 2002. The societies whose primary objective is to serve the interests of its members in a particular State are governed by the co-operative societies Act of that specific state. While, a Society whose primary objective is to serve the interests of its members in more than one state, is governed by the Multi-State Co-operative Societies Act of 2002. The National Co-operative Union of India (NCUI) and the National Co-operative Development Corporation (NCDC) are the essential agencies working for the promotion of co-operative movement in India.
Types of Co-operative societies
- Housing Society
- Producer’s Society
- Agricultural Marketing Society
- Consumers Society
- Co-operative Bank
- Federal Society
Objectives of Co-operative Societies
- Promotion of cooperative movement.
- To encourage and promote the growth of co-operative societies.
- Render services, not for profit.
- Mutual help, not competition.
- Self-help, not dependence.
Laws Applicable to Co-Operative Society
The Cooperative Societies Act, 1912 expanded the sphere of cooperation between its members and provided for supervision by central organization. A cooperative society, which has its object the promotion of the economic interests of its members in accordance with the co-operative principles may be registered with limited or unlimited liability by filing application to the registering authority with requisite documents to be submitted by them
- Co-operative Societies Act under which the same is registered whether it be under state Act or Cental Act.
- Co-operative Societies rules made there under whether it be central or state rules
- Bye-laws approved by the registrar at the time of registration and amendments made from time to time and approved by the registrar, these bye-laws have to be formed by the concerned members themselves and present it to the registration authority for its approval.
- Notification and Orders by the concerned Government
Co-operative Societies under the Income Tax Act
As stated in Section 2(19) of the Income Tax Act, 1961, “Co-operative Society” means a co-operative society officially registered under the co-operative societies Act, 1912 (2 of 1912), or under any other declared law for the time being in force in any State for the registration of co-operative societies. According to the Co-operative Societies Act of each State, a Co-operative Society registered within any State under the law of that particular State is not allowed to operate in any other State without the permission and sanction of the Government or Registrar of co-operative societies of that State. In the case of a Multi-State co-operative society, it can work in more than one State as a matter of right, under the Act and the permission of any other State is not required to do its business.
Eligibility
- An individual competent to contract, attained majority and is of sound mind and belongs to a class of persons if any for whom the society is formed as per its bye-laws.
- A society registered or deemed to be so under the Co-operative Societies Act.
- The Central Government and any State Government, or the Government of a Union Territory
Checklist to Form a Co-operative Society
The following are the steps involved in establishing a Co-operative Society under the State Act.
- The prescribes application duly filled in shall be made to the Registrar of Co-operative Societies.
- The application should be attached along with four copies of the proposed bye-laws of the co-operative society.
- All the applicants must be individuals, and the number of applicants shall be above ten.
- All the applicants should sign the application if the applicants are individuals.
- If the applicant is a society by itself, then by a member duly authorised by such society.
Taxability
The co-operative society is a separate entity under the Income Tax Act of 1961. However, it is not explicitly mentioned either in the definition of ‘assessee’ or the ‘person’. One has to look for the provisions of Section 80P which provide tax incentives to co-operative societies to find out whether co-operative society is an ‘assessee’ or not. As per the section, since co-operative societies are explicitly mentioned for the availability of exemption benefit, it can be inferred that co-operative societies are also assessees within the meaning of the Act. Taxpayers should remember that the co-operative societies do not enjoy complete exemption from taxes. They are entitled to certain specified deductions from the total gross income. The total gross income is determined in the same way as in the case of any other assessee. That is, the income is computed under specified heads of income and then aggregated to arrive at Gross Total Income. In the case of a co-operative society, the total income is computed as in the case of any other assessee. From the Gross Total Income, the deductions available under Section 80 are deducted to arrive at Total Income. The deductions under Section 80 may be grouped into two for convenience.
- General Deductions: The deductions available to all the assessees including co-operative society.
- Specific Deductions: The deductions available individually to a co-operative society.
Incomes of a Co-operative Society
A co-operative society may mainly have the following types of income.
- Interest on Securities
- Income from House Property
- Capital Gains Income
- Income from Business
Most of the societies, nowadays are found to be carrying on business activities. The profits and gains from such business by society are to be determined according to the regularly employed method for such computation and according to accepted commercial principles. The approach adopted by society must be consistently followed every year. Thus, a co-operative society may adopt a cash basis method or a mercantile basis method. What is important is that the same system should generally be continued.
Procedure for Computation of Taxable Income
First compute the total income under various heads, i.e. “income from house property”, “profits or gains of a business or profession”, “capital gains”, and “income from other sources”, while ignoring the prescribed income exemptions. Therefore, “gross total income” is obtained. Next, from the amount, the permissible deductions prescribed under the Income Tax Act are implemented. To the ‘net income’ so finally computed, the ‘rates of tax’ as per the Finance Act for the respective year applies to Co-operative Societies. Now to the amount of tax, per cent of Income Tax and Cess, a surcharge as prescribed in the Finance Act is added.
Exemptions and Deductions under the IT Act
There are different types of exemptions and deductions available to co-operative societies.
Exemptions
This includes certain classes of income which do not form part of the total revenue and exempt from income tax. These are excluded from the computation of total gross income of an assessee. A return of income is not to be filed for them — such types of income come under Chapter III of the Income Tax Act. Some of the permissible exemptions are provided below.
- Section 10A: Exemption of profits and gains from a new industrial undertaking in a free trade zone for ten years.
- Section 10B: Exemption of the profits and gains for ten years from a 100 per cent export-oriented undertaking, and so on.
Deductions
This includes certain classes of income which are included in computing the total income of an assessee but are exempted from income tax as they are deductions to be made in total computing income. A return of income is to be filed for them necessarily — such types of income fall under Chapter VI-A (Section 80A to 80U) of the Income Tax Act. Some of the permissible deductions are provided below:
- In computing the total income of an assessee, the deductions specified in Sections 80C to 80U shall be allowed from his total gross income.
- Section 80AB deals with deductions that need to be made concerning the total gross income.
- A deduction of any amount under Section 80G in respect of donations given to certain funds, charitable institutions.
- Deduction of 50 per cent of profits and gains of projects implemented outside India as stated in Section 80HHB.
- A deduction of the entire profits from income from the export business as stated in Section 80HHC.
Deduction under Section 80P
The deductions concerning income provided under Section 80P of the Income Tax Act apply to the co-operative society alone. The provision has been included in the Act for the growth of co-operative societies. There are various heads of deductions listed in the section such that each one is distinct and independent of the other. To decide whether a specific category of income of a co-operative society is exempted from taxes, it has to be seen if it comes under the mentioned heads or not. The deductions permitted under this Section are in respect of the net incomes from the businesses or activities, specified in the various clauses of the section.
If a co-operative society carries on such activities, income from which is exempt and also takes on such activities, revenue from which is not exempt, then profits/ gains attributable to a former activity shall enjoy exemptions, and those due to latter one shall be taxed. Where a co-operative society earns income, which is partly entitled to a particular deduction, a proportionate share of the expenses attributable to the drawing of income, entitled to a deduction, should be deducted in computing such income.
Applicability of Section 14A
Section 14A has no applicability concerning the deductions allowable under Section 80P. The provisions provided in Section 14A apply to exempted income while Section 80P confers a right for deduction from the total gross income. While exempted income is not at all includible while computing the Total Income, incomes subjected to Section 80P deductions are required to be made from the Gross Total Income following the provisions of Sections 80A and 80AB.
Mutuality and Tax Incidence
There are some types of cooperatives, like Housing Co-operatives, who collect monthly subscription from its members and uses the same to meet the various joint expenses of the co-operative society to give service to its members such as maintenance, security etc. In this process, even though any surplus is generated, it is not chargeable to tax as it is exempted based on the ‘Concept of Mutuality’. The crucial requirement in a case of mutual association is that ‘ All the contributors to the collective fund must be entitled to participate in the surplus and all the participators to the surplus must be contributors to the standard trade. In other words, there should be a complete identity between the contributors and the participants. Thus, if the co-operative earns interest from a bank or parking income from other non-members or any rental income by letting a place for mobile towers, then these incomes are chargeable.
Compliance with TDS provisions
No tax will be applicable from any interest payable on debentures issued by any co-operative society under Section 193. Similarly, TDS provisions under Section 194A are not applicable for interest other than the same on securities, if such an income is credited or paid by a co-operative society to a member thereof or any other co-operative society. Though a co-operative society is not covered under Section 115-O, i.e. not required to pay taxes on distributed profits like domestic companies, TDS provision for dividends under Section 194 is not applicable. Compliances of other TDS provisions like a time-limit for the deposit of TDS, the electronic filing TDS returns, the issuance of NSDL generated Form 16A and more, are all applicable for Co-operatives. Thought most of the Co-operatives are at village level or block level Co-operatives, no relaxation has been granted by the statute concerning the imposition of interest, penalty or prosecution for any violation.
Books and Audit of Accounts
A co-operative society under Section 44AA is required to maintain its books of accounts and other records as may enable an Assessing Officer to compute its total income following the provisions of the Income Tax Act. Furthermore, its accounts are required to be audited by a Chartered Accountant under Section 44AB even though its accounts are subjected to audit by the administrative department (Directorate of Co-operative Audit) as provided in the State Co-operative Laws. However, tax audit provisions are usually not applicable to societies that do not carry on any business activities. Such as housing societies, which in the years of construction of its building premises, provisions of Section 44AB would not apply as there are no business activities carried out.
Rate of Tax
A Co-operative Society has no threshold limit for the taxability of income. It is required to follow a slab rate for the computation of tax liability.
Tax Rates the assessment year 2017-2018 to 2018-2019
| Serial Number | Income Range | The rate of Income Tax |
| 1 | Income up to INR 10,000 | 10 per cent of the total income |
| 2 | Income from INR 10,000 to INR 20,000 | INR 1,000 plus 20 per cent of the amount by which the income exceeds INR 10,000 |
| 3 | Income exceeds INR 20,000 | INR 3,000 plus 30 per cent of the amount by which the income exceeds INR 20,000 |
Tax Rates for the assessment year 2019-2020
| Serial Number | Income Range | The rate of Income Tax |
| 1 | Income up to INR 10,000 | 10 per cent of the total income |
| 2 | Income from INR 10,000 to INR 20,000 | INR 1,000 plus 20 per cent of the amount by which the income exceeds INR 10,000 |
| 3 | Income exceeds INR 20,000 | INR 3,000 plus 30 per cent of the amount by which the income exceeds INR 20,000 |
Add: Surcharge at 12 per cent of tax is applicable if income exceeds INR 1 Crore. However, a surcharge is subject to limited relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total revenue of One Crore Rupees by more than the amount of revenue that exceeds one crore rupees).
Add: The Health and Education Cess at the rate of 4 per cent shall be levied on the amount of tax calculated, inclusive of surcharge.
Filing of Return of Income
A co-operative society requires to file its return of income in ITR-5 within the 30th of September of a particular fiscal year notwithstanding the fact that most of the State Co-operative Laws allow holding the AGM within the calendar year, i.e. 31st of December. Similar to a Company, without filing a ‘loss return’ within the stipulated time, business loss and loss under the head ‘capital gains’ of the assessee cannot be carried forward. Loss under the head ‘income from house property’ and unabsorbed depreciation also cannot be carried forward if a loss return is not filed at all. Provisions relating to e-filing and the use of digital signature are also applicable although most of the co-operatives are still having limited exposure in respect of computerised accounting or internet use.
The following steps have to be followed while forming a Co-operative society
Step 1: Ten Individuals together who are desirous of forming a Society
To form a society, law mandates that 10 members minimum must show intention to be part of the society having same aim and objective to be achieved through the society for their mutual benefit and thereby be desirous to be part of it.
Step 2: Provisional Committee to select Chief Promoter
Once a group of individuals have a desire to form a society the next step should be there must be a provisional committee of which everyone is part of and all of them should by mutual consent or by majority whichever their prefer must choose a person who will be a chief promoter of the society which is going to be formed by them.
Step 3: A Name for the Society has to be selected
Thereafter once a chief promoter is selected by set of individuals among them, they have to select a name for the co-operative society which they wish to form
Step 4: Application has to be made to the Registration Authority
Once the name of the society is selected by the members then they have to make a application to the registration authority stating that they have a intention to form a society and the name of the society has to be given to the authority for its approval and registering authority has to confirm that name is in conformity with laws and issue a confirmation certificate to the members. Then when the members get their name approval from the authority it is valid for 3 months from the date of approval.
Step 5: entrance fees and share capital
Thereafter once name approval comes from the concerned authority, the entrance fee and the share capital must be collected from the concerned prospective members to meet the statutory requirements under law and it can be prescribed by the members themselves or society act mandates certain fees to be paid by them.
Step 6: Bank Account
Thereafter once the prescribed fee and share capital is collect from the prospective members, then as per the directions of the registering authority promoter has to open a bank account in the name of the society and deposit the said fees and share capital in that account and a certificate has to be obtained from the bank to that effect
Step 7: Application for registration
Once the bank formalities are completed then the promoter has to apply for the society formation to the registration authority and it has to be accompanied with set of documents, they are
Form No. A in quadruplicate signed by 90% of the promoter members
1. List of promoter members
2. Bank Certificate
3. Detailed explanation of working of the society.
4. Four copies of proposed bye-laws of the society.
5. Proof of payment of registration charges.
6. other documents such as affidavits, indemnity bonds, any documents specified by the Registrar also have to be submitted.
Step 8: Registrar has to acknowledge
After the submission of the said documents has mentioned in step 7, the registrar of that municipal ward has to enter the particulars in the book called the “register of Application” which is generally specified in form B and give it a serial number to the application. Thereafter the registrar has to issue a receipt to that effect and give it to prospective members to know the status of the application when it is pending.
Then the registrar after perusal of the records submitted to him/her has to make a decision whether has to issue a certificate of registration or not and if there are any discrepancies noticed then he/she has to inform the members of the same and get it rectified if any.
Step 9: Registration
Last step is that the registering authority after being satisfied with the documents meeting the legal requirements will notify the registration of the society in the official gazette mentioned by the state or central government and should issue the registration certificate of the society and give it to the members of the society.
FAQs
What is the definition of Cooperative Societies ?
A mutually owned and democratically controlled enterprise is defined as “an autonomous association of persons who have come together voluntarily to meet their common economic, social, and cultural needs and aspirations through the operation of a jointly owned and democratically controlled enterprise.”
In India, which act helped to structure and shape the cooperative movement and why?
The Cooperative Credit Societies Act of 1904 established cooperative credit societies.