Law: Income Tax Act, 1961

Section: 81

Income-tax-----Cooperative society---Special deduction---Scope of S. 81---Apex body controlling District Cooperative Banks---Reserve fund of Apex bank invested in Government securities under instructions of the State Government---State Government instructions stating that reserve fund could not be utilised as working capital---Interest on Government securities forming part of reserve fund---Not entitled to special deduction---Indian Income Tax Act, 1961, S.81---Madhya Pradesh Cooperative Societies Act, 1960, S.44---Madhya Pradesh Government Instructions No. CR 25/26, dated 7-10-1960. The object of section 81 of the Income Tax Act, 1961, is to encourage cooperative movement in the country by providing tax exemption to those cooperatives engaged in activities set out in clauses (a) to (f) thereof. One such activity is the carrying on of the business of banking or providing credit facilities to its members by a cooperative society. The section, therefore, provides that income-tax shall not be payable by a cooperative society in respect of the profits and gains of business carried on by it, if it arises from the business of banking or providing credit facilities for its members. However, if such a cooperative society also engages itself in activities other than the business of banking or providing credit facilities the profits derived from such business shall not be exempt from tax if it exceeds rupees fifteen thousand. It is, therefore, obvious that the entire income derived by a cooperative society from the business of banking or providing credit facilities to its members is exempt from income-tax, but if that society also engages itself in any other activity and earns profit therefrom, the income so derived becomes liable to assessment and payment of income-tax or if it exceeds the ceiling amount. The normal banking activity is to receive deposits and utilise such deposits by advancing loans, etc., to borrowers. Since the rate at which interest is paid to depositors is lower than the rate charged from borrowers, the difference in the rates generates income for the banks. The banks may have to maintain certain reserves to meet emergencies, e.g., a spurt in…

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