Assessment of Co-operative Societies under the Income Tax Act 1961

Co-operative societies are voluntary associations formed with the objective of promoting the economic interests of their members. Governed by the Co-operative Societies Act, 1912, or respective state acts, these societies play a vital role in India's financial and social infrastructure. To ensure equity and fair taxation, the Income Tax Act, 1961 contains special provisions for the taxation of co-operative societies. Chapter VIA, especially Section 80P, offers several tax benefits to such societies, depending on the nature of their activity.

This article delves into the assessment procedures, applicable tax provisions, deductions, exemptions, and judicial interpretations concerning co-operative societies under the Income Tax Act, 1961.

What is a Co-operative Society?

As per Section 2(19) of the Income Tax Act, 1961:

"Co-operative society means a society registered under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies."

These entities can include credit co-operatives, agricultural marketing societies, housing co-operatives, and producer co-operatives.

Section 80P – Deduction in Respect of Income of Co-operative Societies

Section 80P(1): General Provision

Section 80P(1) provides that where an assessee is a co-operative society and its gross total income includes any income mentioned in sub-section (2), the assessee shall be entitled to a deduction of such income while computing its total income. This provision aims to encourage the growth of co-operative societies by exempting income derived from specific activities that are generally beneficial to their members and to society at large.

Section 80P(2): Specific Incomes Eligible for Deduction

Under sub-section (2), several categories of income are eligible for deduction. Clause (a) allows a full deduction for co-operative societies engaged in specific activities such as carrying on the business of banking or providing credit facilities to their members; operating a cottage industry; marketing agricultural produce grown by their members; purchasing and supplying agricultural inputs like seeds, implements, and livestock to their members; processing agricultural produce of members without the aid of power; and the collective disposal of labour by members.

Additionally, it includes fishing or allied activities such as catching, curing, processing, preserving, storing, marketing of fish, or the purchase of materials and equipment used in these activities for supply to members.

However, a proviso applies to co-operative societies falling under the categories of collective labour or fishing. In such cases, the society’s rules and bye-laws must restrict voting rights only to specific classes of members—namely, individuals who contribute their labour or carry on fishing activities, co-operative credit societies that provide financial assistance, and the State Government.

Clause (b) deals with primary co-operative societies that supply milk, oilseeds, fruits, or vegetables grown by their members. If these supplies are made to a federal co-operative society in the same line of business, the Government or local authority, or a Government company/statutory corporation engaged in similar activities, the whole of the profits and gains from such business are deductible from total income.

Clause (c) provides partial deductions for co-operative societies not falling under the categories specified in clauses (a) or (b). In such cases, a consumer co-operative society is eligible for a deduction of up to ₹1,00,000, whereas other co-operative societies are allowed a deduction of up to ₹50,000. A consumer co-operative society is defined as a society established for the benefit of consumers.

Clause (d) permits a full deduction of any income earned by a co-operative society in the form of interest or dividends derived from investments made with any other co-operative society. Similarly, clause (e) provides that the entire income earned from letting of godowns or warehouses used for storage, processing, or marketing of commodities shall also be eligible for full deduction.

Clause (f) applies to smaller co-operative societies not engaged in housing, urban consumer services, transport, or manufacturing operations with the use of power. Where such a society’s gross total income does not exceed ₹20,000, the full amount of income earned by way of interest on securities or from house property (chargeable under Section 22) is deductible. An "urban consumer co-operative society" for the purpose of this section refers to societies functioning within a municipal or notified urban area.

Section 80P(3): Interaction with Other Deductions

Sub-section (3) of Section 80P addresses situations where an assessee is also eligible for deductions under other sections, such as Section 80HH (for industrial undertakings in backward areas), Section 80HHA (for rural small-scale industries), Section 80HHB, 80HHC, 80HHD, 80-I, or 80-IA. In such cases, the deduction under Section 80P(1) for incomes falling under clauses (a), (b), or (c) of sub-section (2) shall be calculated only after reducing the amount of deductions already claimed under these specified sections from the gross total income.

Section 115BAD – Special Taxation Regime

Inserted by the Finance Act, 2020, Section 115BAD allows co-operative societies to opt for a concessional tax rate of 22% (plus 10% surcharge + 4% cess) subject to certain conditions:

• No deduction under Chapter VIA (including Section 80P) allowed.
• No additional depreciation allowed.
• Option must be exercised before the due date of filing return.

Objective: To provide parity to co-operative societies vis-à-vis companies which were allowed concessional tax rates under Section 115BAA.

Distinction between Co-operative Bank and Credit Society

After the Finance Act, 2006, a major change was brought in Section 80P(4), which states:

"The provisions of this section shall not apply to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank."

This means co-operative banks are excluded from availing deductions under Section 80P(2)(a)(i), but credit co-operative societies are still eligible if they fulfill the required conditions.

Filing and Assessment Procedure

1. PAN and Registration

A co-operative society must obtain a Permanent Account Number (PAN) and be registered under the applicable Co-operative Societies Act.

2. Filing of Income Tax Return

• Income tax return is to be filed using Form ITR-5.
• Filing is mandatory irrespective of income threshold if the gross income (before claiming 80P) exceeds the basic exemption limit.

3. Audit Requirement

As per Section 44AB, if the total turnover exceeds ₹1 crore (or ₹10 crore if cash receipts are less than 5%), audit is mandatory.

4. Books of Accounts

Under Section 44AA, co-operative societies are required to maintain books of accounts if income exceeds ₹1.2 lakhs or turnover exceeds ₹10 lakhs.

Challenges in Assessment

• Misuse of Section 80P deduction by societies operating as banks.
• Improper classification between income from business and investment.
• Confusion regarding eligibility under 80P(2)(d) for interest from co-operative banks (resolved partially by rulings).
• Applicability of Section 115BAD requires careful evaluation, especially regarding forfeiture of 80P deductions.

Judicial Pronouncements

[1] The Citizen Co-operative Society Ltd. v. Assistant Commissioner of Income Tax (2017)

In the Citizen Co-operative Society Ltd. v. ACIT, the Supreme Court dismissed the Society’s appeal seeking deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. Although registered as a co-operative society, the appellant was found to be accepting deposits and granting loans to non-members (termed "nominal members") in violation of the Mutually Aided Co-operative Societies Act, 1995, and was effectively functioning as a finance business catering to the general public.

The Court held that such a society, whose operations were not restricted to its members, could not be considered a true co-operative society entitled to claim benefits under Section 80P. Despite not qualifying as a co-operative bank under Section 80P(4), the Society’s activities fell outside the scope of Section 80P(2) due to lack of mutuality and engagement in commercial lending to non-members.

[2] The Mavilayi Service Cooperative Bank Ltd. & Ors. v. Commissioner of Income Tax, Calicut & Anr. (2021)

In The Mavilayi Service Cooperative Bank Ltd. & Ors. v. Commissioner of Income Tax, Calicut & Anr., the Supreme Court held that in order to claim deductions under Section 80P(2)(a)(i) of the Income Tax Act, 1961, a cooperative society must establish that it is genuinely engaged in the business of banking or providing credit facilities to its members.

The Court emphasised that mere registration as a cooperative society is not sufficient to avail of the deduction; the actual conduct of business, including compliance with statutory by-laws and restriction of benefits to members (as opposed to the general public), must be examined by tax authorities.

The judgment reiterated that Section 80P is a beneficial provision meant to promote the cooperative sector and should be interpreted liberally, but misuse or deviation from core objectives could disentitle a society from the tax benefit

Income Tax Rates for Co-operative Societies under the Finance Act, 2025

As per the provisions of the Finance Act, 2025, the applicable slab-wise income tax rates for co-operative societies are as follows:

1. Where the total income does not exceed ₹10,000

 ➡ Tax Rate: 10% of the total income.

2. Where the total income exceeds ₹10,000 but does not exceed ₹20,000

 ➡ Tax Rate: ₹1,000 plus 20% of the amount by which the total income exceeds ₹10,000.

3. Where the total income exceeds ₹20,000

 ➡ Tax Rate: ₹3,000 plus 30% of the amount by which the total income exceeds ₹20,000.

References

[1] Income Tax Act, 1961

[2] The Citizen Co-operative Society Ltd. v. ACIT, (2017) 9 SCR 361

[3] The Mavilayi Service Cooperative Bank Ltd. & Ors. v. Commissioner of Income Tax, Calicut & Anr., 2021] 1 S.C.R. 78

[4] Finance Act, 2006

[5] Finance Act, 2020

[6] Finance Act, 2025