Taxation of Cooperative Housing Societies

There is a general misconception that income of Cooperative Housing Societies (CHS) is not chargeable to tax and therefore many do not bother to obtain PAN and file tax return. Though certain incomes of CHS are exempt there are other incomes which are chargeable to tax. With requirement of on line electronic filing of tax returns CHS may not be able to escape filing of tax returns for long.

Basically the surplus arising from various charges collected from the members towards maintenance, municipal taxes, parking charges etc. after deducting expenditure incurred towards maintenance expenses, water charges, municipal taxes, security etc is not liable for tax on the ‘Principle of Mutuality’. The cardinal requirement in case of mutual association is “All contributors to the common fund must be entitled to be participators to the surplus and all participators to the surplus must be contributors to the common pool.” In other words there should be complete identity between the contributors and participators. 

Any amount collected from non-members towards rental charges for hoardings, mobile towers, use of open space, hall hire, parking charges or for any other facility is chargeable to tax.

Tax liability for non-occupancy charges collected from members is debatable, since though member is contributor, he is not enjoying amenities of the society and is thus not a participator and therefore mutuality concept is not satisfied. There are conflicting high court decisions in this regard. Same is the case with ‘transfer fee’ collected on transfer of membership of the society. 

The surplus generated by the CHS at the end of the year which can be represented by corpus fund, building fund, sinking fund, development  fund, etc is normally invested in bank fixed deposits on which interest is earned. There used to be controversy and litigation on whether interest earned on bank fixed deposit is exempt from tax on the “principles of mutuality” or not. This matter is now finally settled with Supreme Court judgement in Bangalore Club vs. Commissioner of Income Tax which  held that such interest on bank fixed deposits is liable for income tax as same is out of ambit of mutuality principles. This problem can be resolved by keeping deposits in any co-operative bank of repute.

Under section 80 P(2) ( c ) (ii), deduction upto Rs 50,000 is allowed to CHS from gross total income. Interest on deposits and dividends from investments in any other co-operative society is fully exempt u/s 80P(2)(d) of the Act. 

There is no basic income exemption limit for CHS. Income upto Rs 10,000 is charged to tax @ 10%; between Rs 10,000 to Rs 20,000 @ 20% and above Rs 30,000 @30%. In addition there is 3% tax on tax payable by way of education and higher education cess if income exceeds Rs 1 crore. Income tax return is required to be filed online electronically in Form No 5 before September 30 of every year since CHS are subject to audit under Cooperative Societies Act. CHS are also liable for all the obligations as are applicable to other business entities in the matters of TDS payments, advance tax, returns etc.

Even if CHSs income is nil after considering deduction of Rs 50,000 as above they should file the tax return since they do not have basic exemption limit. In case society has incurred loss, same will not be allowed to be carried forward for setoff against income of subsequent years unless return is filed within due date.

The CHS are also liable for GST registration, if value of all services in a financial year exceeds Rs 20 lakh. The current GST rate on services is 18%. However, maintenance charges upto Rs 5000 per month per member is exempt.

It is advisable for Managing Committees of CHS to review their tax compliance matters to avoid loss to members.