Co-Operative Society Compliances and Audit

The Co Operative Societies registered under the Maharashtra StateCooperative Societies Act, today are playing vital role in strengthening the National economy. The sphere of activities conducted by these Co Operative societies has by now widened to a great extent. They are engaged in production, distribution, consumption, housing, banking, transport, export and import, etc. in Co Operative sector are being run successfully.Now all the procedures from registration, filing returns, appointing auditors, etc. needs mandatorily to be done online.
A chartered Accountant has to play a significant role in the development of co-operative organizations on scientific lines. Audit of Co-operative Societies is an integral part of the supervisory system. So proper and timely audit is very essential. It gives not only financial assessment of the Cooperative Society but also an assessment of the Management of that Society. Apart from audit some other professional services such as (1) online registration of the society, (2) filing of mandatory returns, (3) guidance in accounts writing, (4) installation of accounting system, (5)internal audit, (6) taxation, etc. could be rendered by chartered accountants. However, the main focus is to give some guidelines about the audit of co-operative societies in general.
We provide the following assistance and services:

Online Registration of the Society

Every Society is required to register itself on the website of the government www.mahasahakar.maharashtra.gov.in under the option Society Login on home page. The society should create user-id and password and then society details need to be entered and scanned copy of the society registration certificate needs to be attached. Then the society registration certificate needs to be taken to the ward office for validation of the society. Once the ward office validates the society, the society becomes active on Mahasahakar and then mandatory returns and other options could be seen. The auditor can facilitate the society enrolment work.

File Mandatory returns by 30th September

The society has to file its mandatory return u/s 79(1A) on the activities of the society in form Y on or before 30th September every year on the government website.
There are basically 6 mandatory returns which needs to be submitted by cooperative society which are as follows:
  • Annual Activity Returns
  • Audited Statements of Accounts: Balance Sheet
  • Audited Statements of Accounts: Profit and Loss Statement
  • Plan for Surplus Distribution
  • List of Amendments to Bye-Laws
  • Date of holding AGM and Election
  • Name of Auditor and Return Consent

Return of Appointment of Auditors by 31st October

The return of auditor and his written consent u/s 79(1B) needs to be filled within one month from the date of the AGM latest by 31st October. Here the society registration copy and the written consent of auditor appointed for current financial year needs to be given.

Uploading the Audit Report on Government website before issue of AGM notice

The auditor needs to submit his report in CD format to the society and to the Registrar and also needs to upload the Part A of the audit report, Audit Certificate and audited financial statement on the official website of Co-operation Department and hence the auditor should have the audit login for Department of co-operation site. The files need to be scanned in pdf format with less than 1MB and hence needs to be scanned in 75dpi and in black and white or greyscale so that the same can be uploaded easily.

Generate the Audit Appointment Order by 31st October

The Auditor also needs to generate the Audit Order for the societies who have appointed him/her as the Statutory Auditor for the current financial year, to generate the audit order, the same society should have been enrolled on the Mahasahakar site else the auditor will not be in position to view that society in his login. If the resolution copies and appointment letters are in hand, then auditor can generate the audit order by following second method i.e. Bye pass method as mentioned in the Audit Order Generation Manual. The hard copy of the appointment letters and resolutions received can also be submitted to DSA office in case of technical difficulties faced.

Auditor to give Remarks on Audit Rectification Report

The society has to do rectification of the audit queries and observations through “O” form which needs to be submitted to the auditor concerned to get the auditors remark on the same. The Rectification report with due remarks of the auditor to be submitted to the registrar within 3 months from the date of the submission of audit report.

Auditor to upload the Audit Rectification report with his remarks on Government website

The auditor has to ensure that the rectification report in “O” form is received by him and then he has to offer his remarks on the rectification and the same needs to be uploaded from auditor’s login to the official website of the Department of Co-operation. If technical difficulties are faced, then auditor should bring this to the notice of DSA and the registraroffice and at least submit the hard copy of rectification report along with his remarks and get the same acknowledged from the department.

Issue of auditor appointment letters by the registrar after 1st November

If the Auditors Orders are not generated by Auditor and even the mandatory returns of auditors appointment are not uploaded by the society then it is presumed that no auditor is appointed by the society and the appointment of said auditor becomes invalid and then the right to appoint auditor gets transferred to the Registrar who in turn issues orders under Proviso to section 81 of the MCS Act,1960 wef 1st November 2015.These orders are binding on the panel auditors and they have to conduct audits of all the societies allotted to them and non-acceptance of the orders or non-conduct of audits once you accept the order under proviso, may lead to removal of auditors name from the panel. The Order under proviso are reported to be till date orders and hence for pending audits the same auditor can conduct the audit for the beyond current financial year.

Income Tax Provision Applicable to the Co-Op Societies

  • It is compulsory under proviso to section 139(1) of the Income Tax Act, 1961 to file the income tax by every society including the housing cooperatives by 30th September in ITR -5 as AOP.
  • Failure to file the Return of income may attract penalty of Rs. 5,000/- under section 271 F of IT Act in addition to the concealment of income penalty which may go up to 300% of the tax avoided.
  • There is no threshold limit or amount not liable for tax for cooperative societies.
  • The tax slabs for a cooperative Societies are :
  • Sr. No. Income Tax Rate
    1. On taxable income up to Rs. 10,000 10%
    2. Taxable income is in excess 10,000 up to 20,000 20%
    3. Taxable income is in excess of 20,000 30%
    And education cess is 2% and Secondary higher education cess is 1%.
    For the assessment year 2016-2017 surcharge is12 % of income tax, where taxable income exceeds Rs 1 crore.

  • The surplus resulting from the collection of the maintenance and other charges from members is not taxable as per the Concept of Mutuality.
  • The interest income, rental income from mobile towers and any other income on case to case basis is taxable for the Co-Operative Housing society.
  • The Advance Tax Provision if tax liability after adjusting prepaid taxes and TDS is exceeding 10,000/- are also applicable to all types of societies.
  • Societies should also apply for PAN & TAN and also file quarterly ETDS returns for the TDS deducted on various payments.
  • Certain deductions u/s 80P are available to certain class of societies only and the same need to be studied and proper tax planning has to be done.
  • The due date for filling Income Tax Returns is 30th September and the same need to be studied in ITR-5 FORM.
  • Since Assessment year 2007-08, the cooperative Bank is liable for payment of income tax as deduction u/s 80P is excluded for cooperative Bank.
  • From financial year 2015-16, co-operative Banks are required to deduct income tax on the deposits kept by the shareholder members which was earlier not required.

Landmark Income Tax Case Laws

  • Taxability of Transfer Premium : There is a landmark Bombay HC judgement recently in Dec 2014 case of CIT c/s Darbhanga mansion CHS Ltd, aboutthe taxability of Transfer premium collected by the society in excess of Rs 25000 /- which is not taxable even though the Bye –law and Govt resolution provides for only Rs25000 as transfer premium.
  • Taxability of Mobile Tower Rent : Income received by co-operative from Mobile tower rent will be taxable under House Property income and accordingly standard deduction u/s 24(a) of 30% of Annual value towards repairs and maintenance allowed out of that.
  • Allowability of Deduction u/s 80P(2)(a)(i) for an Urban Co-op Credit society : Many assessing officers used to treat societies as doing banking business and entire surplus earned by credit societies used to taxed. A great relief is given by Hon’ble Karnataka HC Dharwad Bench judgement dated 21st Sept.2015 allowing deduction u/s 80P (2)(a)(i) to an urban Co-op Credit society.
  • Taxability of the TDR of the CO Operative Society : Many assessing officers used to assess the corpus or capital receipt received on redevelopment, or sale of TDR as the Capital gains and demand the taxes from societies, in a landmark judgement, Hon’ble Bombay HC judgement Dtd.11th September.2014 in case Commissioner of Income tax 18 v/s Sambhaji Nagar CHS Ltd by referring Hon’ble Supreme Court judgement in the case CIT V/S B.C. Srinivas Shetty, the sale of TDR does not amount to capital gains.
  • Taxability of Non-Occupancy Charges Commercial society : Non occupancy charges are held to be not taxable on the Concept of Mutuality as per Hon’ble Bombay High Court case in the matter of Mittal court Premises Co-operative Society Ltd v/s Income Tax Officer dated.July,2009
  • Case laws on Concept of Mutuality : There are certain types of cooperatives, like housing cooperatives, who collects monthly subscription from the members and spends the same to meet various joint expenses of society to give services to members like maintenance etc. In this process even if surplus is generated, it is not chargeable to tax as it is exempt based on ‘concept of Mutuality’. The cardinal requirement in case of mutual association is that ‘All the contributors to common fund must be entitled to participate in surplus & all the participators must be contributors to the common trade. In other words, there should be complete identity between contributors and the participators’. Thus if the cooperative earns interest from bank or parking income from non-members or rental income by letting roof of mobile towers, then all these income is chargeable.
    Walkeshwar Triveni CO-OP.Hsg.Society Ltd .V/s.ITO [2003]80TTJ 673 (Mumbai) (SBI),
    Chelmsford Club Ltd Vs CIT [2000]243 ITR 89(SC).
    Calcutta High Court in the case ofDIT Vs All India Oriental Bank of Commerce Welfare Society [2003]130 Taxman 575(Del).

Service Tax Applicability on Co-Op Societies

Service tax is applicable to all types of cooperative societies which are providing the services to its members or outsiders where the turnover exceeds Rs.10,00,000 per year and thereafter liable to obtain registration, collect the service tax, file the returns and liable for assessment also.
Applicability of Service Tax to Residential Co-Operative Societies

  • Provision introduced on 16.06.2005 vide Section 65(105) (zzle)read with S.65(25aa).
  • Prior to 1.07.2012, exemption was available under Notification no8/2007-ST dated 01.03.2007 if the total consideration received from individual member for services does not exceed Rs. 3,000/-pm.
  • After 01.07.2012, under negative list approach, Notification No.25/2012 ST provides for exemption up to Rs. 5,000/-pm.
  • Circular No.175/01/2014-ST Dated 10.01.2014 clarifies as under
    • Service tax is applicable to a resident cooperative society on payments made to third parties in respect of commonly used services or goods providing security services, maintenance & upkeep of common area and facilities like lift, health and fitness, common electricity etc.
    • If monthly contribution exceeds Rs. 5,000/- the member cannot avail of exemption granted under Notification No.25/2012-ST.
    • Threshold limit for exemption available under Notification No.22/2012-ST is applicable to resident societies of taxable services only-does not include exempt services.
    • Residential Society may avail cenvat credit and use same for payment of service tax.
    • Rule 5(2) of the Service Tax Rules, 2006 clarifies if any service is provided on actual reimbursement basis. However, common expenses would be taxable.
    • No clarity on contribution towards sinking fund/Repair fund.
    • Case law followed by Kolkata High Court in Saturday Club Ltd vs. Assistant Commissioner of Service tax
      -CIT Vs Darjeeling Club
      -CIT vs Bankipur Club
      These are judgements on the principle of mutuality.
    • The SC decision in the case of Joint Commercial Tax OFFICER vs Young Man’s Indian Association 1970(1) SCC 462 is the main leading judgement on this issue.
    • Service tax on club has been set aside by the Gujarat High Court by a judgement on 25.03.2015 in the sports club of Gujarat, Rajpath Club and Kamarti Club in Spl Civil Appl.No.13654-56 of 2005.

Applicability of MVAT and Professional Tax of Cooperative Societies

Applicability of MVAT to Cooperative Societies

Introduction from 1-4-2005, Value Added Tax System is brought in operation for levy of Sales Tax. VAT is State subject and different Legislation operates in respective State. Therefore, the position of VAT vis-a-vis Co-operative Society is required to be seen in relation to provisions of each State. The VAT law is generally applicable to persons dealing in goods. Thus all types of societies which are involved in manufacturing, processing and distribution will be liable to get registered under MVAT and comply with all requirements of MVAT like registration, filling of returns, collection of VAT, payment thereof, filling the returns and do the assessment, carry out MVAT audit and business audit etc.
Further it can be seen that as per definition of person under MVAT, a Society is also a person for MVAT Act. Society can be liable to VAT as any other dealer. Normally the Co-operative Housing Society, credit societies, Cooperative banks and other service providing societies, do not deal with buying or selling of goods. Therefore, MVAT is not applicable. The Co-operative Housing Society is actually allowing its immovable property to be used by hirer and hence there is no leasing of movable goods, which can fall in definition of sale. Therefore, it may be concluded here that, normally the Housing Society will not be liable to tax under MVAT Act. However, it may be mentioned that, subject to other laws applicable to Society and subject to its bye-laws, if Society engages in trading, etc. or other business, then it maybe liable for VAT.

TDS Liability under MVAT ACT, 2002

The more important issue is about liability of the Co-operative Housing Society to deduct TDS. The provisions can be noted, in brief, as under :
  • The Co-operative Housing Society is notified as an employer to deduct tax at source. In other cases, the threshold limit to deduct Tax at Source is Rs. 5 lakhs, in relation to Co-operative Housing Society it is Rs.10 lakhs in previous year or current year. In other words, if a Housing Society has awarded a works contract for Rs.10 lakhs or more then it will be liable to deduct tax if it has awarded works contract of an amount of Rs. 10 lakhs or more, in a year.
  • The Co-operative Housing Society should deduct tax as and when the bill of works contractor is credited. However, if the payment to contractor is before such credit it will be advisable to deduct tax at the time of making payment. TDS is not to be deducted from the Advance Payment. In such cases tax is to be deducted while adjusting the advance against regular bills.
  • The limit of Rs.10 lakhs is per contractor, i.e. even if the contractor has performed separate contracts, if total sum payable to contractor exceeds Rs10 lakhs in a year, TDS will be applicable.
  • The rate of TDS is 2% if the contractor is a registered dealer under MVAT Act. It will be 5% if contractor is unregistered dealer.
  • The tax is to be deducted on net amount of bill i.e. not to be deducted on Sales Tax or Service tax shown separately in the bills.
  • The TDS amount should not exceed the tax payable by such contractor on such contract, and if the contract is interstate works contract, no TDS is to be deducted.
  • If the contractor produces a no deduction certificate, obtained from Sales Tax Department, then Society is not liable to deduct tax.
  • Housing Society failing to deduct tax where applicable or failing to pay to government after deduction, will be considered to be dealers in arrears and all provisions of recovery will apply to it, including provisions for levy of interest.
  • The TDS amount should be paid into Government treasury within 10 days from end of month in which TDS is deducted. The payment is to be made in challan Form 210.
  • The Housing Society, deducting tax, should send statement in duplicate in Form 405 to the Joint Commissioner of Sales Tax (Returns) for Mumbai and to Joint Commissioner of Sales TAX (VAT) ADM for rest of Maharashtra within three months from the end of respective year.
  • The Housing Society should issue TDS certificate in Form 402 to the contractor after making payment in Government treasury.
  • The Housing Society should maintain a separate register in Form 404 about TDS. Thus the burden is cast on Housing Societies will be appointing contractors and application of TDS provisions be seen accordingly. If Housing Society purchase materials separately by itself and give only labour contract to contractor, then no TDS under MVAT Act.2002 will apply.

Profession Tax Act applicable to cooperative societies

Liability for enrolment. The other law administered by Sales Tax on Department, which can apply to Societies is the Maharashtra State Tax on Professions, Trades, Calling and Employments Act, 1975.There is schedule appended to Profession Tax Act which specifies the person liable to Profession Tax and rate of Profession Tax. Entry 16 in the schedule reads as under as on 1-4-2006.
Co-operative Societies registered or deemed to be registered under the Maharashtra Co-operative Societies Act,1960 and engaged in any profession, trade or calling –(i) State level Societies; Rs. 2,500 per annum (ii) Co-operative sugar factories and spinning Mills; Rs. 2,500 per annum. (iii) District level Societies; Rs.750 per annum. (iv) Handloom weavers co-operative societies; Rs 500 pa. (v)All other co-operative societies not covered by clauses (i), (ii), (iii) and (iv) above; Rs.750 per annum. It is clear from above entry that if at all Housing Society is covered; it can be covered by subentry (V) i.e. liable to tax at 750 per annum. However, to be liable to pay Profession Tax, such Housing Society should be engaged in the Profession, Trade or Calling. A Housing Society normally does not involve in such activities. There cannot be said to be any element of trade, business, etc. in above activity and hence no liability can be incurred under above entry.
The Commissioner of Sales Tax, Maharashtra State has clarified the liability position in the Circular No.25T of 2005 dated. 7-10-2005 (this circular is uploaded on www.mswacoopaudit.com). A reference can be made to Circular for more clarification. There are some instances where Housing Society uses its assets for earning some income. For example, it can let the roof top of building to Telephone Service providers for erecting a tower. It may earn rent from such letting activity. However, it cannot be said that it is in the nature of trade or business, etc. The renting is only to earn income out of ideal assets and it cannot be equated with any trade activities. In Determination order in case of M/s Anand Properties Ltd, the Commissioner of Sales Tax has held that earning rent income from renting the warehouses is not to be considered as trade etc. and it is held that such person is not liable to Profession Tax. Therefore, even under above circumstances also the Housing Society will not be liable to Profession Tax. It will not be required to obtain any Enrolment. However, if any Housing Society engages in trade, etc. then the said Society will be liable to pay Profession Tax and for that purpose apply for enrolment.

Liability for registration

Thus, it can be mentioned that normally Housing Societies will not be liable to pay any Profession Tax. However, the Society may be employing employees for carrying out various functions, like watchman, liftmen, etc. If Society is paying salary to these employees, exceeding 5,000 pm, it will be required to deduct Profession Tax from their salaries and pay to the government. The tax is to be deducted as per slab rates. The entry 1 of Schedule to Profession Tax Act provides the slab rates which may be referred by the societies and the practitioner and comply with the provisions of law.