Chapter 1
Review of Co-operative Societies

Review summary

-    Out of 4,25,993 co-operative societies identified by Audit in financial year 1999-00 only 18,801 co-operative societies existed on the records of the Department and on an average, 3.22 percent Co-operative Societies filed returns of income during 1997-98 to 1999-00.There was no coordination between Registering Authority of co-operative societies and the Income Tax Department.

(Para 1.7&1.9)

-    In 54 cases incorrect computation of income resulted in short levy of tax of Rs. 2,650.33 lakh.

(Para 1.10)

-    In 281 cases incorrect deduction of income from business of banking or providing credit facilities resulted in short levy of tax of Rs.13,716.45 lakh.

(Para 1.11)

-    In 52 cases incorrect deduction of income from marketing of non-agricultural produce had revenues effect of Rs.258.54 lakh

(Para 1.12)

-    In 52 cases incorrect deduction of interest and dividend income involved tax effect of Rs.427.60 lakh.

(Para 1.16)

-    In 84 cases, incorrect and irregular deduction of income from unspecified activities etc. resulted in short levy of tax of Rs.1,861.25 lakh.

(Para 1.18)

-    In 53 cases incorrect allowance of bad and doubtful debts involved tax effect of Rs.1,899.85 lakh.

(Para 1.21)

-    In 71 cases incorrect allowance of provisions on account of unascertained liabilities involved tax effect of Rs.2,428.50 lakh.

(Para 1.22 & 1.23)

-    In 52 cases incorrect valuation of closing stock involved short levy of tax of Rs.1,357.58 lakh.

(Para 1.25)

-    In 44 cases, incorrect deduction on account of tax, contribution to provident fund, bonus, interest on loans etc. on mere provisions on not on actual payments resulted in revenue effect of Rs.1,043.17 lakh

(Para 1.24 & 1.26)

-    Incorrect set off/carry forward of losses in 41 cases involved revenue effect of Rs.860.99 lakh.

(Para 1.28)

-    Incorrect deductions under Section 80I and 80IA in two cases involved tax effect of Rs.195.80 lakh

(Para 1.29)

-    There was no proper internal control system to monitor the assessments of the Cooperative sector and no control register to monitor the receipt of income tax returns from the eligible co-operative societies was maintained.

(Para 1.36)

1.1    Introduction

Co-operative movement was envisaged as an instrument of socio-economic policy for upliftment of rural and urban masses. Income Tax Act, 1961, has accorded favoured treatment to the Co-operative sector by introducing section 80P with a view to encourage and promote the growth of the co-operative sector in the economic life of the country. Section 80(P) exempts profits earned by Cooperative Societies when such profits are derived from certain specified activities. The philosophy of exemption is based on the perception that the institutions, workers and artisans involved in such activities should be beyond the purview of taxation in order to encourage the cooperative movement.

Section 2(19) of the Income Tax Act, 1961, has defined the “Co-operative Society” as a society registered under the Co-operative societies Act, 1912, or under any law for the time being in force in a state for the registration of Co-operative societies. A Regional Rural Bank (to which provisions of the Regional Rural Banks Act, 1976 apply) is deemed as a Co-operative Society.

Since the concessions granted to the co-operative societies involve sacrifice of considerable revenue, this topic has been selected for review.

1.2    Law and Procedure

Section 80P allows deduction in respect of income of Co-operative Society from various activities. Brief description of the sub-sections under Section 80P is as under:-

Section 80P(1):    Where the gross total income of a co-operative society includes any income of the nature given below, these shall be deducted in computing the total income of the Society:

Section 80P(2)(a):    Whole of the profits attributable to any one or more of the following activities:

  1. business of banking or providing credit facilities to the members of the society; or
  2. cottage industry; or
  3. marketing of agriculture produce grown by its members; or
  4. activities consisting of purchase of agriculture implements, seeds, livestock or other articles intended for agriculture and supply of these to the members of society; or
  5. processing, without the aid of power, of the agricultural produce of the members of the society; or
  6. the activity of the collective disposal of the labour of its members; or
  7. the business of fishing or allied activities, i.e. the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members.

Section 80P(2)(b):    The whole of the profits and gains of a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to -

  1. a federal co-operative society engaged in the business of supplying milk, oilseeds, fruits or vegetables; or
  2. the government or a local authority; or
  3. a government company or a corporation established by or under a Central, State or Provincial Act.

Section 80P(2)(c):    In the case of co-operative society engaged in activities other than those specified in clause (a) or (b) above, so much of its profits and gains attributable to such activities as does not exceed:

  1. Rs. 1.00 lakh (Rs.40,000 prior to 1 April 1999) in the case of consumer co-operative societies and
  2. In any other case, Rs. 50,000 (Rs.20,000 prior to 1 April 1999)

Section 80P(2)(d):    Whole of the interest and dividend income derived by a co-operative society from its investment with any other co-operative society.

Section 80P(2)(e):    Whole of the income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities.

Section 80P(2)(f):    Whole of the income derived by way of interest on securities or from house property provided the gross total income does not exceed twenty thousand rupees.

The Board vide circular No.722 of September 19, 1995 have clarified that a cottage industry, for availing of the benefits under section 80P, is required to satisfy the following criteria:

  1. The activities are carried on in a small scale with a small amount of capital and a small number of workers with correspondingly limited turnover; and the society is not required to be registered under the Factories Act;
  2. owned and managed by the co-operative society;
  3. the activities should be carried on by the members of the society and their families. It should not engage outside hired labour
  4. place of work could be an artisan’s/shareholder’s residence or a common place provided by the co-operative society;
  5. manufacture, production or processing activities must be carried on and should not be engaged merely in trade

1.3    Objectives of the review

The objective of the review was to :

(i)    examine whether all eligible co-operative societies are on the records of Income Tax Department.

(ii)    examine whether deductions/concessions were not misused and were allowed by the assessing officers in conformity with the provisions of the Income Tax Law,

(iii)    highlight irregularities in computation of the total taxable income of the co-operative societies and quantum of tax forgone by granting irregular deductions.

1.4    Period of Coverage

The review was conducted on test check basis of the assessments completed during the financial years 1997-98 to 1999-00. Co-operative Housing Societies were, however, kept outside the purview of the review.

1.5    Constraints

Audit scrutiny revealed that there was no adequate system in the Income tax department to monitor the filing of return by the Co-operative Societies. This led to difficulty in ascertaining as to whether a particular society had filed its return of income or not. There was also no database of the Cooperative Societies, which are required to file their return of income, and as such the identification of Range/Circle/Ward of assessment of the societies was rendered extremely difficult.

1.6    Audit Findings

Audit findings based on test check of assessment records are given in the succeeding paragraphs. The details of cases checked by audit are as under:

TABLE NO. 1    CASES TEST-CHECKED BY AUDIT

Cases on the
records of Deptt.

Total cases on
tax base

Cases checked
by Audit

Total cases

1

2

3

4

JCIT

DCIT/
ACIT

ITO

 

JCIT

DCIT/
ACIT

ITO

 

2,354

4,312

17,233

23,899

2,297

2,247

3,353

8,077

1.7    Whether all eligible co-operative societies exist on the records of the Income Tax Department

Under the Income Tax Act, every person, if his total income during the previous year exceeded the maximum amount not chargeable to tax, shall on or before the due date, furnish a return of his income in prescribed form. The total income of any previous year of a person includes all income from whatever source derived, which is received or deemed to be received in India or, which accrues or arises or is deemed to accrue or arise to him in India or outside India.

Audit scrutiny revealed that a large number of Cooperative Societies registered with the respective authorities were not filing their returns of income and they did not exist on the records of Income Tax Department. On an average, 3.22 percent societies have filed their returns of income during 1997-98 to 1999-00. In a very small number of cases, which is negligible as compared to total number of societies, the department has initiated action to bring them on their records. The position in this regard is as under:

TABLE NO. 2    EFFORTS OF THE DEPARTMENT TO BRING
COOPERATIVE SOCIETIES IN THE TAX NET

Financial Year

Total number of cooperative societies (other than cooperative housing societies)
registered with the Authorities

No. of cases out of Col.2 in which department 
could bring societies on their records (Percentage)

No. of societies out of Col.2 who
have filed 
the returns of income (Percentage)

No. of societies out of Col.2 who 
have not filed the returns of income

1

2

3

4

5

1997-98

4,04,034

268
(0.07%)

10,165
(2.52%)

3,93,869

1998-99

4,15,649

271
(0.06%)

11,328
(2.73%)

4,04,321

1999-00

4,25,993

310
(0.07%)

18,801
(4.41%)

4,07,192

Average

--

(0.07%)

3.22%

 

*    In Tamil Nadu charge, the details of co-operative societies, which had filed the returns of income, were not available.

1.8    Survey operations

Under the Income Tax Act, 1961, the Department has been empowered to conduct survey on the business premises of the tax payer and to locate new assessees. While survey under Section 133 (1) of the Act is a specific survey of the business premises of the tax payer, the survey under Section 133-B of the Act is to locate new assessees and thereby unearth unaccounted money. The Central Information Branch under the Director General (Investigation wing) is also required to collect the information from different sources e.g. telephone directory, yellow pages, journals etc., and forward it to the jurisdictional Additional/Joint Commissioner of Income Tax. The assessing officers are required to carry out this work by issuing notices under Section 133 (6) of the Act. The Directors General of Income Tax (Investigation) are overall responsible for reporting to the Board the ultimate use of the information.

As per data shown in the preceding para only 0.07 per cent of assessees have been brought on the records of the Department by departmental efforts thereby indicating that no specific surveys were conducted by the department to locate and bring the eligible cooperative societies on their records.

1.9    Lack of coordination between Registering Authority and Income Tax department

In order to check the leakage of tax revenue from the co-operative sector, it is necessary to have co-ordination between the Registering Authority (Co-operative society) and the Income Tax Department.

As shown in para 1.7 of this review, a small number of co-operative societies existed on the records of the Income Tax Department as compared to the societies registered with the Registering Authorities of the Societies (i.e. Registrar / Commissioner of Co-operative Societies). Co-ordination between the two authorities could have helped in identifying the cases where tax was being evaded due to non-filing of returns of income. Details of the charges where huge difference between the number of co-operative societies and those existing on the records of the Income Tax Department are as under:

TABLE NO. 3    COMPARISON OF NUMBERS OF SOCIETIES ON 
RECORDS OF IT DEPARTMENT VIS-A-VIS REGISTERING AUTHORITIES

Charge

1997-98

1998-99

1999-00

Total societies

On records 
of IT Dept (%age)

Total societies

On records
of IT Dept. (%age)

Total societies

On records
of IT Dept. (%age)

1

2

3

4

5

6

7

Andhra 
Pradesh

10457

90
(0.86)

10457

140 
1.34)

10457

171
(1.63)

Assam

21600

61
(0.28)

22902

61
(0.27)

23030

57
(0.25)

Bihar

30631

66
(0.21)

32990

70
(0.21)

33604

74
(0.22)

Gujarat

35654

1205
(3.38)

36819

1580
(4.29)

38059

1998
(5.25)

Haryana

14804

540
(3.65)

16057

559
(3.48)

20259

614
(3.03)

Himachal Pradesh

4332

76
(1.75)

4334

79
(1.82)

4305

74
(1.72)

Karnataka

21345

1597
(7.48)

22185

1952
(8.80)

22743

2098
(9.22)

Madhya
Pradesh

33892

107
(0.32)

34595

92
(0.27)

35543

62
(0.17)

Orissa

8428

80
(0.95)

8344

80
(0.96)

8344

80
(0.96)

Punjab

15761

518
(3.29)

15761

509
(3.23)

15761

215
(1.36)

Rajasthan

18467

356
(1.93)

18646

384
(2.06)

18000

350
(1.94)

Uttar
Pradesh

36326

233
(0.64)

36326

233
(0.64)

36326

233
(0.64)

Delhi

3159

15
(0.47)

3193

11
(0.34)

3214

10
(0.31)

Maharashtra

94475

3975
(4.21)

97887

4162
(4.25)

100854

4964
(4.92)

West Bengal

17870

1222
(6.84)

18192

1392
(7.65)

18433

1421
(7.71)

1.10    Incorrect computation of income

Under the Income Tax Act, 1961, the total income of a person for any previous year includes income from whatever source derived, which is received or deemed to be received, or which accrues or arises during such previous year unless specifically exempted from tax by the provision of the Act. Gross total income is computed after excluding income exempted under section 10 of the Act and after set off of carried forward loss and depreciation and thereafter deduction under section VIA are allowed.

Audit scrutiny revealed that in 54 cases of Uttar Pradesh, Chhattisgarh, Karnataka, Rajasthan, Kerala, Maharashtra, Gujarat, Punjab, Assam, Tamil Nadu and Andhra Pradesh charges, Rs.5,738.65 lakh was under assessed due to incorrect computation of income involving tax effect of Rs.-Rs.2,650.33 lakh.

Some of the illustrative cases are given below:-

(i)    In Chhattisgarh, Raipur Charge the assessment of a co-operative Dugdha Mahasangh (Milk Society), for the assessment year 1996-97 was completed after scrutiny in February 1999 at a loss of Rs.2.83 lakh. Audit scrutiny revealed that a sum of Rs. 74.96 lakh on account of ‘re-imbursement of expenditure under Technical Input Programme’ which was accounted for in the Appropriation Account, was not assessed in scrutiny assessment. Omission resulted in over assessment of loss of Rs. 74.96 lakh involving potential tax effect of Rs. 26.02 lakh.

(ii)    In Kerala, Trivandrum charge, in the assessments of M/s Kollam District co-operative Bank Ltd. and Kerala Kera Karshaka Sahakarana Federation for the years 1995-96 and 1998-99 respectively deduction under section 80P was allowed before adjusting the brought forward losses. Mistake resulted in underassessment of income with short levy of tax of Rs. 72.84 lakh.

(iii)    In Maharashtra, Nagpur charge, the assessment of a co-operative society Gramin Bank, for the assessment year 1999-00 was completed in summary manner in February 2000 allowing deduction of Rs. 119.20 lakh under section 80P before adjusting unabsorbed depreciation/loss aggregating Rs. 99.93 lakh. This resulted in excess allowance of deduction u/s 80 P to the extent of Rs. 99.93 lakh leading to a short levy of tax of Rs.41.10 lakh.

(iv)    In Tamil Nadu V, Chennai charge, in the assessment of M/s Tamil Nadu Co-operative Marketing Federation Ltd. for the assessment year 1996-97 to 1998-99 completed in a summary manner between March 1998 to August 1999, deduction of Rs. 233.71 lakh under section 80P was allowed on the gross profits of the “profit making units” alone without setting off the losses reported by the other units in the same year. The mistake resulted in excess deduction of Rs. 233.71 lakh involving potential tax effect of Rs.66.45 lakh.

(v)    In Andhra Pradesh, Vijayawada charge, in the assessment of M/s Chaitanya Grameena Bank,Tenali for the assessment year 1998-99 completed in summary manner in February1999, deduction under section 80P was allowed without set off of earlier year’s losses. Mistake resulted in excess carry forward of loss of Rs.111.10 involving tax effect of Rs.46.87 lakh (including potential tax of Rs.38.85 lakh).

1.11    Incorrect deduction of income from business of banking/provision of credit facilities (sec 80P(2)(a)(i))

(1)    While computing the total income of a co-operative society, a deduction equal to whole of the profits attributable to business of banking or providing credit facilities to its members is allowable. It has been judicially held (143 ITR 981 (Madras) ) that selling goods on credit basis to its members does not amount to providing credit facilities within the meaning of section 80P(2)(a)(i).

(i)    In Rajasthan, Kerala and Punjab charges in 12 cases, income not attributable to banking activities was allowed as deduction. The mistake resulted in underassessment of income of Rs.188.04 lakh involving tax effect of Rs.85.50 lakh.

(ii)    In Tamil Nadu, Chennai charge, in the assessment of M/s Tamil Nadu Co-operative Silk Producers Federation Ltd. for the assessment years 1997-98 and 1999-00 deduction on account of interest on loans given to the members aggregating Rs. 64.27 lakh was not disallowed though the main and primary objective of the federation was not banking business. The mistake resulted in short levy of tax of Rs.26.74 lakh.

(iii)    In Gujarat, Gandhinagar charge, in the assessment of M/s Modasa Road Transport Co-operative Society and in Karnataka in Mysore and Panaji charges, in the assessments of Taluk Agricultural Produce Co-operative Marketing Society, income earned from sale of tools and parts, television and other electronic goods on credit basis to the members of the society was allowed as deduction. Since the selling of goods on credit basis to members of the society does not amount to providing credit facilities to the members, the mistake resulted in underassessment of. income of Rs.18.34 lakh involving tax effect of Rs.13.08 lakh.

(2)    It has been judicially held (218 ITR 438 SC) that investment in government securities which cannot be easily encashed and which can be utilised only on arising of certain contingencies can not be regarded as circulating capital or stock in trade and hence income derived from that cannot be attributed to banking activity entitled for deduction.

Audit scrutiny revealed that in 153 cases of Rajasthan, Orissa, UT Chandigarh, Haryana, Assam, Maharashtra, Gujarat, Bihar, Madhya Pradesh, West Bengal, Delhi and Tamil Nadu charges entire amount of interest earned from government securities was allowed as deduction. The mistake resulted in underassessment of income of Rs.24,666.23 lakh involving tax effect of Rs.11,708.47 lakh.

Some of the illustrative cases, where income on account of interest from investment in government and other securities was allowed as deductions, are given below:-

(Rs. in lakh)

TABLE NO. 4    INCORRECT ALLOWANCE ON DEDUCTIONS ON INTEREST FROM SECURITIES

Charge

Assessee

Assessment
Year (Date of completion)

Section
under which assessed

Under
assessed amount

Tax effect

1

2

3

4

5

6

Bihar

M/s Bhojpur Rohtas Grameen Bank, Arah

1998-99 and 1999-00
(7/99 to 11/99)

143(1)(a)

975.01

375.38

Madhya Pradesh

M/s Madhya Pradesh Rajya Sahkari Bank Ltd., Bhopal

1995-96
(12/97)

143(1)(a)

1877.73

1148.04

Chandigarh

M/s Punjab State Co-operative Bank Ltd.

1995-96 to 1997-98
(12/97 to 3/2000) 

143(3) 

4430.00 

1550.00 

M/s The Punjab Co-operative Agricultural Development Bank Ltd 1997-98 (2/2000) 143(1)(a) 217.00 76.17

West Bengal

M/s West Bengal State Co-operative Society 

1996-97 (12/98)

143(3) 

931.97 

448.78 

M/s Bankura District Central Co-operative Bank Ltd. 1996-97 to 1998-99
(10/97 to 3/99)
143(1)(a) 253.80 129.97

Delhi

M/s Delhi State Co-operative Bank Ltd.

1997-98 to 1999-00
(11/99 to 9/2000)

143(3) / 143(1)(a)

1302.39

600.89

Tamil Nadu

M/s Chennai Central Cooperative Bank,  Cooperative Bank 

1996-97 to 1998-99 (1/98 to 5/99)  

143(3)

888.63

466.87

M/s Tamil Nadu Industrial 1995-96 to 1997-98 (1/98 to 5/99)
M/s Salem District Central Cooperative Bank 1997-98 to 1998-99 (3/99 to 5/99)

(3)    Investment in Kisan Vikas Patra or Indira Vikas Patra are not approved securities in terms of RBI letter no UBO/BPR/50A/12(2A) 89-90 dated 18.1.1990. Though the Co-operative institutions are permitted to invest their surplus funds in these securities, the interest earned on such investments does not qualify for any deduction on the pretext of banking business as these investments are made solely for the purpose of earning interest and there is no provision to withdraw these investments prematurely.

In Karnataka, Uttar Pradesh, Gujarat and Andhra Pradesh charges in 64 cases, Audit scrutiny revealed that the assessees had invested their funds in unapproved securities with Scheduled Banks, Commercial Banks, Private banks, besides Kisan Vikas Patra/Indira Vikas Patra and had derived interest income from these investments. The deduction was allowed on the pretext of treating these investments as routine banking activities, which was irregular under the provision of the Act read with guidelines of RBI. The mistakes resulted in under assessment of income of Rs.4806.37 lakh involving tax effect of Rs.1804.25 lakh.

(4)    It has been judicially held (174 ITR 150 (MP) ) that interest on securities earmarked against reserve and provident funds is not an income from banking business.

In Gujarat Gandhinagar charge, in the assessment of M/s.Sarvodaya Nagrik Sahakari Bank Ltd and M/s.The Gozaria Nagrik Sahakari Bank Ltd for the assessment years 1997-98 and 1996-97 respectively deduction was allowed in respect of interest income from investment in Sardar Sarover Narmada Nigam Ltd. and Indira Vikas Patra out of provident fund which resulted in under assessment of income of Rs.14.02 lakh with short levy of tax of Rs.8.23 lakh.

(5)    It has been judicially held (225 ITR 425 (MP) )that the income derived from locker rent is not eligible for deduction as this is not the income from banking activities.

Audit scrutiny revealed that in the assessments of 47 cases for the assessment years 1996-97 to 1999-00 of Rajasthan, Himachal Pradesh, Maharashtra, Gujarat, Karnataka, West Bengal and Andhra Pradesh charges, amount received from locker rent was allowed as deduction. The omission resulted in under assessment of income of Rs.116.05 lakh involving tax effect of Rs.70.18 lakh.

Some illustrative cases are given below:-

(i)    In Gujarat (Gandhinagar) charge the assessment of two co-operative societies, M/s Sabarkanthan District Central Co-operative Bank Ltd. Himatnagar and Sabarmati Co-operative Bank Ltd. were completed for assessment years 1987-88 to 1997-98 after scrutiny between January 2000 to March 2000. Audit scrutiny revealed that deduction on account of locker rent was allowed resulting in under assessment of income of Rs.27.22 lakh involving tax effect of Rs.26.79 lakh (including interest).

(ii)    In West Bengal XI charge the assessment of a co-operative society The Burdwan Central Cooperative Bank Ltd., for the assessment years 1995-96 to 1997-98 were completed in summary manner allowing deduction of Rs. 21.26 lakh in respect of income from locker rent. The irregular deduction resulted in under assessment of income of Rs.21.26 lakh involving tax effect of Rs.13.13 lakh (including additional tax and interest).

1.12    Incorrect deduction of income from marketing of agriculture produce etc. (sec 80P (2)(a)(iii)(iv) & (v).)

(1)    The whole of the profits of a co-operative society attributable to marketing of agriculture produce grown by its member, purchase of agriculture implements, seeds, live stock or other articles intended for agriculture and supply of these to the members of the society and processing, without aid of power, of the agriculture produce of the members of the society, shall be deducted in computing the total income of the society. It has been judicially held (171 ITR 50 ST (SC) ) that the activity of agriculture produce grown by its members must be confined to the direct produce from agriculture and not anything manufactured or processed out of it.

Audit scrutiny revealed that in Rajasthan, Karnataka, Kerala, Haryana and Tamil Nadu charges in 49 cases though the profits during the assessment years between 1997-98 to 1999-00 of the assessees was not attributable to above mentioned activities, the entire profit was allowed as deduction in computing the total income. The mistake resulted in under assessment of income of Rs.471.18 lakh involving tax effect of Rs.192.30 lakh as shown in the table below:-

(Rs in lakhs)

TABLE NO. 5    INCORRECT DEDUCTION OF INCOME FROM MARKETING 
OF AGRICULTURE PRODUCE

Charge

Cases

Nature of business in which
assessee was dealing

Income under assessed

Tax effect

1

2

3

4

5

Rajasthan

28

Dealing in controlled commodities, i.e. wheat,
rice & other consumer articles

106.24

36.57

Karnataka

16

Trading of khadi products and extraction, refining
and sale of oil, trading of cement, cloths, ration
articles and petroleum products

54.60

23.33

Kerala

1

Dealing in processing of rubber latex,
manufacturing crape and scrap rubber

20.05

10.05

Haryana

1

Manufacturing of sugar from sugar cane
and selling of same on profit

33.63

13.96

Tamil Nadu

3

Purchase of Paddy from members, milling it
and selling the same on its own account, hiring out
tractors, road rollers, borewell to various Govt. departments and sale of foreign liquor and consumer goods

256.66

108.39

Total

49

 

471.18

192.30

(2)    It has been judicially held (128 ITR 189 (Pun) and 156 ITR 422 (Bom) ) that amount of commission received by the assessee society in respect of agency transaction is not exempt under the law.

In Maharashtra, in the assessment of M/s Maharashtra State Co-operative Cotton Growers Marketing Federation Ltd, and in Gujarat in the assessment of M/s. Khambat Taluka Purchase and Sales Union Ltd & Cambay and Vijapur Taluka co-operative Purchase and Sales union Ltd (total 3 cases) for the assessment years 1997-98 to 1999-00 completed in summary manner, deduction allowed was inclusive of income on account of commission of Rs.50 lakh received in each year. This resulted in incorrect deduction of income aggregating Rs.157.53 lakh involving short levy of tax of Rs. 66.24 lakh.

1.13    Incorrect deduction attributable to collective disposal of members’ labour (section 80P(2)(a) (vi))

Whole of the profits attributable to the activity of the collective disposal of the labour of members of society is deductible from the total income of the cooperative society.

Audit scrutiny revealed that in 11 assessment cases of Rajasthan, Orissa, Punjab, West Bengal and Tamil Nadu charges for assessment years 1995-96 to 1999-00 expenditure incurred on employment of outside labour was allowed as deduction. The mistake resulted in under assessment of income of Rs.119.50 lakh involving tax effect of Rs.42.31 lakh.

1.14    Incorrect deduction of income available to primary society (section 80P(2)(b))

Deduction of the whole amount of profits and gains of a co-operative society being a primary society, engaged in supplying milk, oil seeds, fruits and vegetables raised or grown by its members, to a federal co-operative society is available. Such deduction is not allowable to a federal co-operative society.

In Karnataka- II charge, in the assessment of an assessee, M/s K.M.F Ltd. having the status of a federal co-operative society, and procuring milk from its member (milk unions), engaged in supply of milk to the public and was allowed deduction of Rs.8.01 lakh under the above provisions. The deduction of Rs.8.01 lakh allowed was irregular, as the society was a federal co-operative society and not a primary co-operative society. Mistake resulted in under assessment of income of Rs.8.01 lakh involving tax effect of Rs.4.70 lakh.

1.15    Incorrect deduction of threshold income (section 80P(2)(c))

(1)    In the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b), so much of its profits and gains attributable to such activities as does not exceed:

(i)    where such co-operative society is a consumer co-operative society - one hundred thousand rupees (forty thousand rupees prior to 1 April, 1999)

(ii)    In any other case, fifty thousand rupees (twenty thousand rupees prior to 1 April, 1999)

Audit scrutiny revealed that in Rajasthan, Mumbai, Madhya Pradesh and Bihar charges, in the assessment of 6 cases for assessment years 1996-97 to 1999-00 deduction of entire amount of Rs.377.90 lakh was allowed though the deduction actually allowable was Rs.2.80 lakh. The mistake resulted in excess deduction of Rs.375.10 lakh involving tax effect of Rs.201.88 lakh.

(2)    It has been judicially held (172 ITR 443 (Kerala) ) the deduction is not admissible in respect of income from house property.

Audit scrutiny revealed that in Kerala and Andhra Pradesh charges in 7 assessment cases from assessment year 1990-91 to 1998-1999 deduction was allowed in respect of the income from house property. The mistake resulted in under assessment of income of Rs.28.96 lakh involving tax effect of Rs.15.55 lakh.

1.16    Incorrect deduction of dividend and interest (section 80P(2)(d))

The whole of the interest and dividend income derived by co-operative society from its investment with any other co-operative society is allowable as deduction.

Audit scrutiny of 52 assessment cases for the assessment year 1997-98 to 1999-00 of Rajasthan, Assam, Karnataka, Gujarat and Andhra Pradesh charges revealed that the deduction of interest and dividend income was allowed though it was earned from investments with institutions other than co-operative societies. The mistake resulted in under assessment of Rs.1,002.10 lakh involving tax effect of Rs.427.60 lakh.

1.17    Incorrect deduction of income from godowns/warehouses (section 80P(2)(e))

The whole of the income derived by a co-operative society from the letting of godowns or warehouses for storage, processing, or facilitating the marketing of commodities.

In 4 cases of Rajasthan and Karnataka charges, audit scrutiny revealed the deduction was allowed of the income received from sale of godowns/letting of shops for commercial purposes. Mistake resulted in under assessment of income of Rs.11.72 lakh involving tax effect of Rs.5.03 lakh.

1.18    Other irregular deduction of incomes

(1)    Hundred percent deductions under section 80P is available only where income is from activities specified in the section. Income received from other activities are not eligible for full exemption. Further, the business of the assessee must have a direct or proximate connection or nexus to the earnings.

Audit scrutiny of 63 cases of Rajasthan, Kerala, Maharashtra, Bihar, Karnataka, West Bengal and Himachal Pradesh charges revealed that deductions were allowed though the income was not from the specified activities or the income had no direct nexus to the business of the assessee or the deduction was not allowable. Omissions resulted in under assessment of income of Rs.1834.04 lakh involving tax effect of Rs. 991.64 lakh. Details of some charges are as under:-

(Rs. in lakh)

TABLE NO. 6    IRREGULAR DEDUCTIONS OF INCOME

Charge

Cases

Nature of income

Under assessed amount

Tax effect

1

2

3

4

5

Rajasthan

10

Commission income in respect of collection and deposit of electricity bills, interest on income tax refunds, commission on labour, profit on sale of jeep etc.

46.98

24.01

Kerala

2

Deduction of Rs.157.99 lakh was allowed towards “Reserve and Provision” though the Statutory Audit of the Registrar Co-operative Societies objected to the amount.

157.99

72.89 *(P)

Maharashtra

18

Commission, house rent and other receipts.

1457.16

805.28

Karnataka

28

Rental income, income from lorry business etc.

137.68

74.54

*    (P) indicates Potential

(2)    It has been judicially held (245 ITR 498 (Bombay) that members’ refundable and non-refundable deposits constitute trading receipts of the assessee. As these trading receipts represent income from the activity other than those specified in section 80P, therefore the amount representing the trading receipts is not allowable as deduction.

In Maharashtra charge, audit scrutiny revealed that in 7 cases of sugar factories, incorrect deduction on member’s refundable or non-refundable deposits was allowed. The mistake resulted in under assessment of income of Rs.928.05 lakh involving tax effect of Rs.485.07 lakh

(3)    In order to earn exemption under section 80P, a co-operative society must be registered under Co-operative Societies Act or any other law for the time being in force in any State with the registering authority.

Audit scrutiny revealed that in Maharashtra charge in 14 cases deduction under section 80P was allowed though the societies were not registered with the registering authority. Incorrect deduction resulted in under assessment of income of Rs.582.35 lakh involving tax effect of Rs.384.54 lakh.

1.19    Avoidable mistakes in computation of income

Under the Income Tax Act, 1961, while computing the income chargeable to tax, the assessing officer takes the profit or loss as per profit and loss account as the starting point and then adds back or deducts the amount not allowable or allowable.

Audit scrutiny revealed that in 17 cases of Orissa, Assam, Maharashtra, Gujarat, Rajasthan and Tamil Nadu charges income of Rs. 201.09 lakh was under assessed due to negligence of assessing officers resulting in short levy of tax of Rs. 79.71 lakh. Position of some of the charges is as under:

(Rs. in lakh)

TABLE NO. 7    AVOIDABLE MISTAKES IN COMPUTATION OF INCOME

Charge

Cases

Assessment 
years

Audit 
observation

Under assessment

Tax effect

1

2

3

4

5

6

Orissa

1

1997-98

Profit of Rs. 71.49 lakh was taken as loss.

142.97

50.00 *(P)

Gujarat

6

1991-92,
1997-98 &
1998-99

Interest income was wrongly computed.

28.17

15.15

Tamil Nadu

3

1993-94,
1994-95 &
1997-98

Due to arithmetical error and omission to add back book depreciation.

13.69

8.13

*    (P) indicates Potential

1.20    Incorrect allowance of depreciation

While computing the business income of an assessee, deduction of depreciation on plant and machinery or other assets is admissible at the prescribed rates provided these are owned by the assessee and used for the purpose of his business during the relevant previous year.

Audit scrutiny revealed that in 10 cases of Orissa, Kerala, Himachal Pradesh, Maharashtra, Tamil Nadu and Andhra Pradesh charges depreciation of Rs.466.58 lakh was incorrectly allowed resulting in short levy of tax of Rs.195.22 lakh. Details of some of the charges are as under:

(Rs. in lakh)

TABLE NO. 8    INCORRECT ALLOWANCE OF DEPRECIATION

Charge

Cases

Assessment year

Audit observation

Excess depreciation/
Under assessment

Tax effect

1

2

3

4

5

6

Kerala

1

1998-99

Sale value of assets was not deducted from the value of Block of Assets

9.67

3.34

Maharashtra

4

1997-98 & 1998-99

Depreciation allowance was not computed correctly

19.76

9.41

Tamil Nadu

2

1998-99 1995-96

Depreciation was not restricted to 50% of the admissible rate as the P&M was used for less then 180 days. Depreciation was allowed on land and site improvement.

422.92

144.85 *(P) 31.89

*    (P) indicates Potential

1.21    Incorrect allowance of bad and doubtful debts

Under the Income Tax Act, 1961 deduction towards bad and doubtful debts would be allowed if they have become bad and written off in the accounts of the assessee. The Act also provides that the amount of deduction relating to any bad debt or part there of shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts accounts. Further deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank shall be allowed to the extent of an amount not exceeding 5% of the total income computed before making any deduction under this clause and chapter VI A and ten percent of the aggregate average advances made by the rural branches of such banks.

Audit scrutiny revealed that the provisions of the Act were not being followed properly in allowance of bad and doubtful debts as detailed below:-

(Rs. in lakh)

TABLE NO. 9    INCORRECT ALLOWANCE OF BAD AND DOUBTFUL DEBTS

Charge

Cases

Assessment 
year

Audit 
observation

Under 
assessment of income

Tax effect

1

2

3

4

5

6

Rajasthan

6

1997-98 to 
1999-00

No information on record whether bad debts actually written off. No detailed working of aggregate average advances made by assessee were available.

127.22

45.27

Madhya Pradesh

1

1998-99

No amount out of provision of ‘Bad & doubtful debts’ was actually written off from the account

97.54

40.92

Chhattisgarh

2

1998-99

No amount out of provision of ‘Bad & doubtful debts’ was actually written off from the account. Provision for bad debts included Rs. 23.98 lakh and Rs.94.51 lakh on account of ‘time barred interest’. Being contingent liability, it was not admissible deduction.

118.49

55.98

Karnataka

11

1997-98 to 1999-00

Provisions for bad and doubtful debts, bonus, etc. were allowed though assessee was engaged in banking activity and income was deductible.

494.12

72.63

Maharashtra

29

1995-96 1997-98 to 1999-00

Provisions for bad and doubtful debts, was allowed though income of assessee was fully deductible

3209.93

1539.50

Gujarat

2

1995-96 & 1998-99

Provision of bad and doubtful debts was not restricted to 5% of total income.

43.87

25.85

Orissa

1

1998-99 to 1999-00

Held excess provision for bad and doubtful debts, which should have been written back.

290.00

110.69 *(P)

Tamil Nadu

1

1996-97 to 1998-99

Provision towards doubtful debts was allowed though it was not an ascertained liability

25.73

9.01

Total

53

   

4406.90

1899.85

*    (P) indicates Potential

1.22    Incorrect allowance of provisions

Under the Income Tax Act, 1961 a provision made in the accounts for an accrued or known liability is an allowable deduction while other provisions made do not qualify for the deduction.

Audit scrutiny revealed various discrepancies in allowance of deductions as detailed below:-

(Rs in lakh)

TABLE NO. 10    INCORRECT ALLOWANCE OF PROVISIONS

Charge

Cases

Assessment Year

Audit
observation

Under assessment

Tax effect

1

2

3

4

5

6

Karnataka

1

1996-97

Provisions towards sales tax, gratuity, bonus, shortage of stock and difference in rate was allowed.

10.22

4.90

Madhya Pradesh

1

1995-96

Provision of Income Tax and expenditure on account of Income Tax paid was allowed.

252.82

164.58

Gujarat

3

1993-94, 1995-96 and 1998-99

Provisions for overdue interest, trust maintenance fund, special building fund and special ujavani fund, provision for investment fund and depreciation fund, state training fund etc. was allowed though it was not ascertained liability.

132.09

95.69

Tamil Nadu

3

1996-97 to 1998-99

Provision for overdue interest and provision for damages was allowed though it was not ascertained liability.

424.57

203.05

Andhra Pradesh

2

1997-98 to 1999-00

Provisions/reserves bad debts overdue interest etc. was erroneously allowed.

1317.24

525.92

Orissa

10

1995-96, 1997-98 to 1999-00

Debits under “provision and contingency”, ”profit and loss account provision”, provision for non-performing assets without any basis, provision for reserve and provision for shortage of stock were allowed in the assessments.

2434.55

797.81

Total

20

   

4571.49

1791.95

1.23    Incorrect allowance of business/non-business expenditure

(1)    Under the Income Tax Act, 1961, any expenditure (not being in the nature of capital expenditure or personal expenditure of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing income chargeable under the head “Profits and gains of business or professions”. As per Govt. of India notification (248 ITR(St.)257) the expenditure on Voluntary Retirement Scheme would constitute capital expenditure.

(i)    In Tamil Nadu V, Chennai charge, in the assessment of Kancheepuram Kamakshi Ammn Co-operative Spinning Mills for the assessment year 1998-99, Audit scrutiny revealed that expenditure on voluntary retirement was disallowed but in the assessment of return of income for 1999-00 completed in summary manner such expenditure of Rs.6.96 lakh was allowed. Omission resulted in underassessment of similar amount involving potential tax effect of Rs.2.40 lakh.

(ii)    In Maharashtra, Pune and Kolhapur charges, in 14 cases for the assessment years 1997-98 to1999-00, expenses of miscellaneous nature viz. State Cadre Service Fund, Education Fund, Development Fund, Building Fund, Dharmaday Fund, Silver Jubilee Fund, Dividend Equalization Fund etc. was allowed though these funds did not relate to banking activities. Omission to disallow the expenditure resulted in underassessment of income of Rs.221.57 lakh involving tax effect of Rs.100.38 lakh.

(2)    Grants from State Government are released to Co-operative Societies for specific purpose/scheme and for specific time limit. Any expenditure incurred by the assessee in excess of grant is either to be borne by the assessee or got reimbursed by the Government by obtaining proper sanction.

In 36 cases of Rajasthan and Uttar Pradesh charges, while completing the assessments for the years 1997-98 to 1999-00, expenses in excess of grant received from government for sponsored schemes was allowed as deduction. As the expenses were not related to the business activity of the assesses the deduction should not have been allowed. Omission to do so resulted in under assessment of income of Rs.1,243.54 lakh involving short levy of tax of Rs. 533.77 lakh.

1.24    Incorrect deduction of Income Tax

Under the Income Tax Act, 1961, any sum paid on account of tax levied on profits and gains of any business or profession shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”.

Audit scrutiny revealed that in three cases of Tamil Nadu and Madhya Pradesh charges for the assessment years 1996-97 and 1998-99, income tax paid was allowed as business expenditure. The mistakes resulted in under assessment of income of Rs. 378.21 lakh involving potential tax effect of Rs. 227.46 lakh.

1.25    Incorrect valuation of closing stock

It has been judicially held (188 ITR 44 SC) that valuation of stock only at the actual cost of raw materials/finished goods and not taking into account the overhead charges is not a correct mode of valuation. Excise and custom duties payable by the manufacturer are manufacturing expenses and should go into calculation of production cost and the closing inventory should include an element of such duties. This position has also been reaffirmed by the Board in 1981.

During test check of the records, audit scrutiny revealed that in 52 cases of Maharashtra and Uttar Pradesh for the assessment years 1997-98 to 1999-00, excise duty amounting to Rs.3,310.57 lakh payable on finished goods had not been included in the value of closing stock. The omission resulted in under assessment of income of Rs.3,310.57 involving tax effect of Rs. 1,357.58.

1.26    Incorrect allowance of deductions allowable on actual payments

Under the Income Tax Act, 1961, any sum paid on account of tax, cess or contribution to provident fund, gratuity fund, interest on loans, bonus etc. is allowed on actual payments only. No deduction on other items would be allowed on mere provisions in the books of accounts.

In Rajasthan, Orissa, Uttar Pradesh, Maharashtra and Madhya Pradesh charges in 41 cases for the assessment years 1997-98 to 1999-00, deductions on account of provisions made for gratuity, overdue interest, bonus, reserve fund for income tax, employer’s contribution to provident fund, cane purchase tax, excise duty, sales tax and profession tax were allowed though the payments were not actually made. These mistakes resulted in under assessment of income of Rs. 1,994.63 lakh involving tax effect of Rs. 815.71 lakh.

1.27    Income escaping assessment

Under the Income Tax Act, 1961, the total income of a person for any previous year includes all income from what ever source derived, which is received or deemed to be received or which accrues or arises or deemed to accrue or arise during the relevant previous year unless specifically exempted from tax. It has been judicially held (177 ITR 321 SC) that deduction made from the cane purchase price payable to the cane suppliers in respect of various funds is to be treated as income of the society.

Illustrative cases where income had escaped assessment are detailed below:-

(Rs. in lakh)

TABLE NO. 11    INCOME NOT ASSESSED

Charge

Cases

Assessment year

Audit 
observation

Income not assessed

Tax effect

1

2

3

4

5

6

Kerala

6

1994-95 to 1997-98

Interest received on refunds on account of Income Tax was not added to income.

14.99

8.09

Gujarat

2

1997-98 & 1998-99

Interest income earned on deposit with SBI/Dena Bank was credited to reserve account and not to P&L account and was not taxed.

244.18

123.05

Tamil Nadu

1

1998-99

Hank-yarn subsidy received was not credited to P&L account and was not offered for tax.

15.52

6.21

Maharashtra

5

1997-98 & 1998-99

Deduction made from the cane purchase price payable to the cane suppliers in respect of Cane Development Fund, Chief Minister’s Fund, Area Development Fund, Small Savings and Sakhar Sankal (Sugar Complex) Fund was not treated as income of the society.

48.94

26.49

Total

14

   

323.63

163.84

1.28    Incorrect set off of losses

Under the Income Tax Act, 1961, such business losses which cannot be wholly set off against the income under any other head of the relevant year, can be carried forward and set off against the profits and gains of business or profession of the succeeding eight assessment years.

Audit scrutiny revealed that in 41 cases of Rajasthan, Haryana, Kerala, Maharashtra, Bihar, Karnataka, Madhya Pradesh and West Bengal charges unabsorbed business losses were incorrectly allowed to be carried forward/ set off. These mistakes have resulted in incorrect carry forward/ incorrect set off of losses of Rs. 2,210.72 lakh involving tax effect of Rs. 860.99 lakh. One such case is given below:-

In West Bengal III charge, the assessment of Murshidabad Gramin Bank for the assessment year 1996-97 was completed in November 1998 after scrutiny disallowing carry forward loss assessed for that year. However, while rectifying the assessment of the assessment year 1997-98 in August 1999, the business loss of the years 1995-96& 1996-97 from the source, which was entirely exempted from the tax under section 80P was irregularly set off against the taxable income. The irregular set off resulted in under assessment of income of Rs.136.63 lakh with consequential tax effect of Rs.57.33 lakh (potential) including additional tax of Rs.9.56 lakh.

1.29    Incorrect allowance of deduction under chapter VIA

(1)    Under the Income Tax Act, 1961, where the gross total income of an assessee includes any profits and gains derived from a newly established industrial undertaking which goes into production after 31st March, 1981, the assessee is entitled to a deduction of 20% of such profits provided the individual undertaking does not manufacture or produce any article or thing specified in the eleventh schedule. Gross total income has been defined in the Act as the total income computed in accordance with provisions of the Act before making any deduction under chapter VIA.

In Gujarat Baroda charge, the scrutiny assessment of M/s Petrofil Co-operative Ltd, for the assessment year 1990-91 was completed in October 1998. Audit scrutiny revealed that the profit was worked out incorrectly after allowing deduction u/s 80I. Deduction of Rs.158.53 lakh was allowed at 20 per cent of profit of Rs.732.60 lakh computed before allowing deduction under Section 32A of the Act. The omission resulted in under assessment of income of Rs. 133.13 lakh and short levy of tax of Rs.175.98 lakh (including interest).

(2)    Under the Income Tax Act, 1961, where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking which begins to manufacture or produce articles or things after a specified date there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to percentage specified in the Act subject to fulfillment of the prescribed conditions. It has been judicially held (13 ITR 84 (SC) ) that the use of the term ‘derived from’ in the relevant provisions of the Act indicates the restricted meaning given by the legislature to cover only the profits and gains directly accruing from the conduct of the business undertaking.

In Gujarat charge, in the case of a co-operative society, The S K Dist. Co-operative Producer Union, for the assessment year 1997-98 completed in scrutiny manner in March, 2000, audit scrutiny revealed that deduction u/s 80IA was allowed on interest income earned from investment in the Sardar Sarovar Nigam Limited and fixed deposits with the State Bank of India resulting in underassessment of income of Rs. 37.11 lakh and consequent short levy of tax of Rs. 19.82 lakh.

1.30    Incorrect payment of interest

Under the Income Tax Act, 1961, where any refund is due to an assessee he shall be entitled to receive in addition to the said amount, simple interest thereon at the rate of one percent per month (from 1 October 1991) for every month or part thereof from the first day of April of the assessment year to the date on which the refund is granted. Board has clarified vide a circular No.549 of October 1989 that any delay in granting refund, if any, attributable to the assessee will be excluded from the period for which interest is payable.

In Madhya Pradesh, Bhopal charge, the assessment of a Co-operative Bank, Madhya Pradesh Rajya Sahkari Bank Maryadit, for the assessment year 1994-95 was completed in scrutiny manner in July 1998. Audit scrutiny revealed that the assessee had defaulted in filing the correct TDS Certificates worth Rs.98.82 lakh in time. Therefore interest allowed for period of delay (32 months) in filing the correct TDS Certificates was not allowable. The mistake resulted in excess allowance of interest amounting to Rs.31.62 lakh.

1.31    Incorrect credit for advance tax

Credit of advance tax paid by an assessee during the year is given in the assessment of the relevant assessment year.

Audit scrutiny revealed that in Rajasthan and Maharashtra charges in two cases advance tax deposited for assessment years 1998-99 and 1996-97 was wrongly adjusted against the income for assessment year 1997-98. The mistake resulted in short demand of tax of Rs.5.77 lakh.

1.32    Non-levy of interest for delay in payment of tax demand

Under the Income Tax Act, 1961, any demand of tax should be paid by the assessee within 30 days of service of demand notice. Failure to due so attract simple interest at one and half percent per month and part thereof from the date of default till the date of actual payment.

In Maharashtra charge, in respect of Saraswat Co-operative Bank the assessment for the assessment year 1997-98 was completed after scrutiny and a demand of Rs. 91.33 lakh was raised in March 2000. Audit scrutiny revealed that the total refund of Rs. 165.85 lakh was due to assessee for assessment year 1999-00 against which outstanding demand for the assessment year 1997-98 to the extent of Rs. 73.95 lakh was adjusted. The balance demand of Rs. 17.37 lakh and interest in delayed payment of tax from date of demand to date of adjustment Rs. 7.76 lakh was not adjusted against refund even though the same was available for adjustment. In another case, Shamrao Vithal Co-operative Bank, assessed in summary manner for assessment year 1999-00, a demand of Rs.33.77 lakh for the assessment year 1997-98 was adjusted against the refund for 1999-00 without levy/recovery of interest on account of delayed payment of demand. Mistake resulted in non-levy of tax of Rs.5.57 lakh.

1.33    Non-levy of interest for late submission of return

Under the Income Tax Act, 1961, where return of income is not filed within the due date, simple interest is leviable at the rate of two percent prior to 1 June 1999 and one and half percent from 1 June 1999 for every month from the due date of furnishing returned to the date of actual filing of return, on the amount of tax determined on regular assessment reduced by advance tax or TDS, if any.

Audit scrutiny of 5 cases of West Bengal, Rajasthan, Gujarat, Karnataka and Andhra Pradesh charges revealed that the returns were either not submitted at all or submitted late but the interest for non-submission/ late submission of return was not levied. The mistake resulted in non-levy of tax of Rs. 8.40 lakh.

1.34    Non-levy of interest for default in payment of advance tax

Where in any financial year an assessee who is liable to pay advance tax has failed to pay such tax or where advance tax paid by such assessee is less than 90% of the assessed tax, the assessee shall be liable to pay simple interest @ one and half percent (2% prior to 1 June 1999) for every month or part of a month comprised in the period from the 1st April next following such financial year to the date of assessment.

Audit scrutiny revealed that in 9 cases of Rajasthan, Kerala, Punjab, Gujarat and West Bengal, during the assessment year 1990-91 to 1998-99, though the assessee had defaulted in payment of advance tax, interest of Rs.222.09 lakh leviable for the default was not levied.

1.35    Omission to levy penalty for non-furnishing of Audit Report

(1)    Where the business turnover of a co-operative society during the previous year relevant to any assessment year exceeds Rs.40 lakh, the society is required to get its accounts audited under cooperative law before the specified date and to furnish the audit report before the due date of filing of the return of income. Failure to comply with the provisions attract penal action u/s 271B.

Audit scrutiny revealed that in 78 cases of Rajasthan, Kerala, Gujarat, Bihar, Karnataka and Madhya Pradesh the tax audit reports were either not furnished or furnished belatedly during the assessment year 1997-98 to 1999-00 but no penal action was initiated. The omission resulted in non-levy of penalty of Rs.62.35 lakh.

(2)    It has been judicially held (202 ITR 1993 ALL) that where the return is filed along with tentative profit and loss account and tax audit report, the return filed be treated as defective and hence invalid since the profits and loss account submitted with the return of income was provisional in nature.

In Orissa charge, in the assessment 6 co-operative societies for the assessment years 1995-96 to 1999-00 though the returns were filed along with the provisional P&L account and balance sheet certified by the Chartered Accountant/Cooperative Auditors, the assessing officer neither rejected the returns as defective nor initiated any penalty proceedings u/s 271B. The omission resulted in loss of revenue of Rs.18.72 lakh.

(3)    Under the Income Tax Act, 1961, method of estimating income at 8% of the gross receipt from the business of civil construction or supply of labour for civil construction is provided. If the gross total income is claimed to be lower than the estimated profit and gains of the business, the assessee is required to maintain books of accounts and other documents as per section 44AA of the Act and to get his accounts audited and furnish a report of such audit as prescribed under section 44AB of the Act. The Assessing Officer is required to make scrutiny of books of accounts by issuing prescribed notice.

In West Bengal charge, the assessment of 47 Co-operative societies for the assessment years prior to assessment years 1998-99 were completed in summary manner during the period 1997-98 to 1999-00 without observing the provisions as mentioned above. Audit scrutiny revealed that the assesses filed returns declaring profits lower than 8% of the gross receipts. These societies neither got their accounts audited before the specified date nor submitted the same alongwith the returns of income to authenticate lower profit. The assessing officer did not make any scrutiny assessments against the claim of the lower profit. In absence of any scrutiny assessment the assessees’ claim of lower income than the estimated income had not been judged. In such cases, due to non-production of prescribed records the income of the assessees should have been assessed at the minimum of 8% of the gross receipts paid or payable to the assessee. The mistake resulted in underassessment of income Rs. 24.64 lakh with consequent short levy of tax of Rs.12.54 lakh (including penalty).

1.36    Non- maintenance of Control Registers

Audit scrutiny has revealed that Income Tax Department was not maintaining Control Registers to monitor receipt of income tax returns from the co-operative societies. A test check of the records of Haryana, U T Chandigarh, Assam, Maharashtra, Gujarat, Bihar, Karnataka, West Bengal and Delhi charges has revealed that no separate control register to monitor the receipt of returns of income from the eligible co-operative societies was maintained. Consequently a sizeable number of co-operative societies escaped the rigours of taxation. As mentioned in Para No 9, only 3.22 percent co-operative societies, on an average, have filed the returns of income during 1997-98 to 1999-00. The department could have effectively exercised the control over receipt of returns by serving notices to the defaulting societies through the Control Registers.

1.37    Audit Recommendations

Filing of returns of income should be made compulsory for all the co-operative societies to enable the department to examine whether deduction of income from certain activities claimed by the societies are in accordance with the provisions of the Income Tax Act and Rules.