Section 80P of Income Tax Act

As per Section 80P of the Income Tax Act, a cooperative society can get a tax deduction on the income it earns from certain specified activities. However, this deduction is allowed only if the income from these specified activities is part of the society's “total income” for tax purposes.

It must be noted that Income tax laws in India provide various profit-linked deductions to encourage investments in specific industries. Be aware that these deductions are detailed in Chapter VI-A of the Income Tax Act, 1961, under the section titled ‘Part C – Deductions in respect of certain incomes’.

These deductions are available from Sections 80H to 80RRB and cover profits and gains from specific industries like export businesses, hotel businesses, housing projects, infrastructure development, and small-scale industrial undertakings.

Amid this range of sections lies Section 80P, which offers deductions to cooperative societies by exempting the amount of profit they earn from certain specified activities. Let’s understand some key provisions of Section 80P in detail, learn about the various available deductions, and check out some key points to remember while claiming deductions.

What is Section 80P of the Income Tax Act?

Section 80P of the Income Tax Act provides tax deductions to cooperative societies (excluding cooperative banks) for specific agricultural activities. Let’s look at some major provisions:

• Only those societies registered under the Co-operative Societies Act, 1912, or similar state laws qualify.

• The societies must earn income from certain specified agricultural activities to be eligible for deductions.

• These societies can claim a complete deduction on the income earned from these activities. Such a 100% deduction reduces their taxable income to zero for that portion.

• The deduction is specifically available to primary agricultural credit societies or rural development and primary cooperative agricultural banks. However, this benefit does not apply to co-operative banks.

100% deductions under Section 80P of the IT Act

Section 80P allows 100% tax deductions to cooperative societies for performing specific activities. Let’s check out the various cases where a cooperative society is eligible for the available deduction:

• If the cooperative society markets agricultural produce grown by its members, it can claim a full income tax deduction.

• Expenses for purchasing seeds, livestock, or agricultural tools to supply to members are fully deductible.

• Societies that process agricultural products from their members without using power can benefit from a full tax deduction.

• Cooperative societies involved in cottage industries are eligible for complete income tax deductions.

• Societies that offer banking services or provide credit facilities to their members can deduct these operations entirely from their income for tax purposes.

• Societies that collectively manage the labour of their members can claim this deduction.

• Societies involved in fishing activities, including purchasing materials and equipment for fishermen, are eligible for deductions.

• Societies that supply products to government bodies, government companies, or other cooperative societies are eligible for these deductions.

• Any interest and dividends earned from investments in other cooperative societies are deductible.

• Income from renting out godowns or warehouses qualifies for a tax deduction.

• Societies earning income from interest or house property can benefit from these deductions.

Moreover, societies engaged in managing the labour of their members (point 6) and fishing activities (point 7) need to satisfy this additional condition to qualify for these deductions:

Such societies must restrict voting rights to:

• The state government

• Members who contribute their labour to society

• A cooperative society that provides financial assistance

Other deductions u/s 80P of the Income Tax Act

Under Section 80P of the Income Tax Act, consumer cooperative societies (other than cottage industries) can claim extra deductions on their profits and gains beyond the specific activities previously mentioned. For those unaware, consumer cooperative societies are primarily meant to benefit consumers. This category does not include cooperative societies that supply coal and diesel for brick and tile production.

The available additional deduction is:

• If a consumer cooperative society earns profits and gains below Rs. 1,00,000 from activities not listed in points (1) to (11) above, it can claim additional deductions based on its income.

• Whereas, if the profits and gains exceed Rs. 1,00,000, the society can still claim a deduction, but it is capped at Rs. 50,000.

Additionally, these extra deductions are also available to cooperative societies providing banking services. This encourages their growth, which ultimately supports the cooperative sector.

Specific exclusions u/s 80P

It is worth mentioning that the Finance Act of 2016 introduced certain exclusions under Section 80P of the Income Tax Act. These exclusions limit cooperative banks, including regional rural banks, from claiming deductions under Section 80P. Be aware that now only the following types of financial institutions can claim deductions:

• A primary agricultural society defined under the Banking Regulation Act.

• A primary cooperative agricultural and rural development bank that provides long-term credit for agricultural and rural development.

Furthermore, under Section 80P(2f), income from securities or house property is generally excluded from deductions. However, certain types of cooperative societies can still claim a 100% deduction for this income. These include:

• Urban consumer societies

• Housing societies

• Transportation societies, and

• Cooperative societies engaged in manufacturing

However, it must be noted that for a manufacturing cooperative society to qualify for this deduction, its gross total income must not exceed Rs. 20,000. Other cooperative societies are not eligible for this specific deduction.

Things to remember while claiming a deduction under Section 80P

While claiming a deduction under Section 80P, the following provisions must be remembered:

• Income from "Interest on securities" or "Income from house property" is fully deductible if the society's gross total income does not exceed Rs. 20,000. However, the society must not be a housing society, an urban consumer society, or involved in the transport business. Also, societies using power for manufacturing operations are not eligible for this deduction.

• Most cooperative societies are eligible for deductions under Section 80P. However, these societies should not be under the control of the Reserve Bank of India (RBI). It must be noted a cooperative society conducting banking activities is not considered an RBI-licensed cooperative bank and can claim deductions under Section 80P.

• When calculating AMT, do not include the profit after claiming the deduction under Section 80P. This ensures that the Section 80P deduction does not impact the AMT calculations.

• If a cooperative society opts for special tax rates under Section 115BAD, it cannot claim deductions under Section 80P, and vice versa. For the uninitiated, Section 115BAD provides special tax rates for certain resident cooperative societies.

Key points related to Section 80P

• Section 80P of the Income Tax Act involves various terms like "profits and gains from business related to these activities," "profits and gains from this business," "income generated.", and more. To apply the deductions correctly, gain a thorough understanding of all these terms.

• Most cooperative societies, except those controlled by the Reserve Bank of India (RBI), can claim deductions under Section 80P. Be aware that a cooperative society involved in banking activities is different from a cooperative bank licensed by the RBI. Such societies can still claim deductions under Section 80P.

• It is worth mentioning that definitions of terms like "cottage industry," "marketing," "members," "industry," and "investment" have been clarified through various legal decisions and interpretations. Learn the correct meaning of these terms to ensure accurate application of the law.

• Profits eligible for deduction under Section 80P are not included when calculating the adjusted total income for the Alternative Minimum Tax (AMT). Due to this exclusion:

• The deductions under Section 80P do not affect the AMT calculations

• and

• Cooperative societies can benefit from these deductions without impacting their AMT liability.

Conclusion

Section 80P of the Income Tax Act provides 100% tax deductions to cooperative societies for income from specified activities. These activities commonly include marketing agricultural produce, purchasing agricultural supplies, processing products without power, offering banking services, and more.

The Finance Act 2016 listed several exclusions that excluded cooperative banks from claiming this deduction and disallowed “income from securities or house property”. However, it allowed a few specific societies like urban consumers or housing societies to claim a deduction in respect of this income.

Furthermore, societies under the Reserve Bank of India (RBI) control cannot claim any deduction under Section 80P. Also, if a cooperative society opts for special tax rates under Section 115BAD, it cannot claim deductions under Section 80P. Importantly, profits eligible for these deductions are excluded from Alternate Minimum Tax (AMT) calculations, allowing societies to benefit without affecting their AMT liability.

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