Direct Tax Proposals relating to Co-operative Societies

Background & Parity with Corporate Tax Regime (Section 115BAB)

The Taxation Laws Amendment Act, 2019 (effective AY 2020-21) provided for the lowest tax regime in Indian corporate history by introducing a concessional tax rate of 15% for newly incorporated domestic companies exclusively engaged in manufacture or production of any article or thing and research/distribution related thereto, via Section 115BAB.

Exactly on the same lines, the Finance Bill, 2023 introduces Section 115BAE providing a concessional tax rate of 15%* for newly set up co-operative societies in the manufacturing sector. *(The effective tax rate is 17.16%, including a 10% surcharge and 4% Health & Education Cess).

A. Qualifying Conditions for Section 115BAE

1. Incorporation Window: The co-operative society must be set up or registered on or after 01.04.2023.
2. Commencement Date: It must commence manufacturing before 31.03.2024 (Note: The Notes on Clauses mentions the date as 31.03.2025).
3. Exclusive Manufacturing Object: It must be exclusively engaged in the manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it.
   • Inclusions: Includes the business of generation of electricity.
   • Negative List (Non-Manufacturing Businesses):
     1. Development of computer software in any form or media;
     2. Mining activities;
     3. Conversion of marble blocks or similar items into slabs;
     4. Bottling of gas into cylinders;
     5. Printing of books or production of cinematograph films; or
     6. Any other business as may be notified by the Central Government.
4. No Reconstruction: It must not be formed by splitting up or reconstruction of an existing business.
5. Prohibition on Past Hotel/Convention Centre Buildings: It does not use any building which was previously used as a hotel or a convention centre.
6. New Plant & Machinery (80/20 Rule): It must not use machinery or plant previously used for any purpose.
   • Imported Machinery: Plant and machinery used outside India by any other person is treated as new if imported into India.
   • 20% Allowance: Second-hand machinery up to 20% of the total value of plant and machinery is permitted.

B. Applicable Rates on Special Incomes

• Short-term capital gains on non-depreciable assets are taxed @ 30%.
• Capital gains covered u/s 111A, 112, and 112A are taxed at their respective special statutory rates.
• Net business profit is taxed at the base rate of 15% (effective 17.16%).

C. Procedural Requirements

• The option to avail of Section 115BAE must be exercised on or before the due date specified under Section 139(1) for furnishing the first return of income in the prescribed manner.
• This option, once exercised for any previous year, cannot be withdrawn subsequently for that or any other previous year.

D. Forgone Deductions, Exemptions & Incentives

Total income must be computed without claiming the following deductions or exemptions:

• Exemption under Section 10AA (SEZ units);
• Additional Depreciation under Section 32(1)(iia);
• Deductions under Section 33AB (Tea/Coffee/Rubber development) or Section 33ABA (Site Restoration Fund);
• Deductions for scientific research under Section 35(1)(ii), (iia), (iii) or Section 35(2AA);
• Capital expenditure on specified businesses under Section 35AD or agricultural extension projects under Section 35CCC;
• Deductions under Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” (other than Section 80JJAA for new employment);
• No set-off of carried-forward losses or unabsorbed depreciation from any earlier assessment year if attributable to any of the deductions listed above.

E. Safeguard against Artificial Profit Shifting

Safeguards have been introduced under sub-section (4) to curb artificial inflation of profits arising from close business connections with related entities. Any excess business profits determined by the Assessing Officer will be taxed at the maximum rate of 30% rather than 15%.

Background of Decades-Old Litigation: FCP vs. SMP

It has been typical of sugar manufacturing co-operative societies to determine and pay a Final Cane Price (FCP) to cane-growers after taking into account various end-of-season factors such as total crushing, recovery percentage, and expenditure incurred.

Because of this methodology, the Income Tax Department consistently took the stand that the portion of FCP paid over and above the Statutory Minimum Price (SMP) fixed by the Central Government under the Sugarcane Control Order, 1996 constituted a distribution or appropriation of profits rather than a charge on profit. Disallowance of this final installment resulted in massive tax demands and decades of litigation all the way to the Supreme Court.

Recognizing this hardship, the Government had introduced clause (xvii) in Section 36(1) prospectively with effect from AY 2016-17, providing deduction for sugarcane expenditure incurred at a price equal to or less than the price fixed or approved by the Government. However, disputes for earlier assessment years remained locked in litigation.

New Rectification Mechanism under Section 155(19)

To provide conclusive closure, a new sub-section (19) has been inserted in Section 155. This introduces a statutory rectification mechanism granting relief from disallowances pertaining to Assessment Year 2014-15 and all earlier assessment years:

• Application by Assessee: Affected sugar co-operatives can file a formal rectification application before their respective Assessing Officer.
• Recomputation by AO: The AO shall recompute total income for such previous year, allowing deduction to the extent expenditure was incurred at a price equal to or less than the price fixed or approved by the Government for that previous year.
• Applicability of Section 154: The provisions of Section 154 apply, and the 4-year limitation period specified in Section 154(7) is reckoned from the end of the previous year commencing on 1st April 2022 (i.e. applications and orders can be made up to 31st March 2027).

Section 194N (introduced w.e.f. 01.07.2020) provides for deduction of tax at source on cash withdrawals from banks (including co-operative banks) and post offices exceeding specified limits during a financial year.

Section 269SS prohibits acceptance of loans or deposits of Rs. 20,000 or more in cash, with contravention attracting a 100% penalty under Section 271D. Similarly, Section 269T prohibits repayment of loans or deposits of Rs. 20,000 or more in cash, attracting a 100% penalty under Section 271E.

Finance Bill 2023 increases this limit from Rs. 20,000 to Rs. 2,00,000 (Two Lakh Rupees) in respect of two specific classes of co-operative entities:

1. Primary Agricultural Credit Societies (PACS)
2. Primary Co-operative Agricultural and Rural Development Banks (PCARD)

Author’s Critical Perspective: PACS and rural co-operative banks are the backbone of the rural economy, freeing persons of small means from the clutches of unscrupulous private money lenders. While the hike to Rs. 2 Lakhs is commendable, it would have been highly advisable to extend this relief across the platform to all co-operative credit societies.

• Inadequate Setup Window under Section 115BAE: The one-year time window provided under Section 115BAE (incorporation from 01.04.2023 and commencement of manufacturing by 31.03.2024) is excessively narrow for establishing greenfield manufacturing units. An extension of this window is urgently needed so that deserving co-operatives can realistically avail of the 15% rate.
• Unresolved Interest Deduction Controversy under Section 80P(2)(a)(i) / 80P(2)(d): The author notes that the sector was expecting statutory clarity on the allowability of deduction on interest received by co-operative societies from co-operative banks. Assessing officers continue to apply the controversial ruling of the Karnataka High Court in Pr. CIT v. Totagars Co-operative Sales Society [2017] 83 taxmann.com 140 / 395 ITR 611 (Kar.) to create massive demands, despite the judgment having been distinguished by several other High Courts and appellate tribunals.

Conclusion: The direct tax proposals in Finance Bill 2023 represent a landmark recognition of the co-operative sector, resolving generational disputes in sugar manufacturing, providing tax rate parity with corporates, and easing cash transaction norms in rural India.