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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.

  • 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.
  • Taxability of Transfer Premium : 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).

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.