Tax on income of certain new manufacturing co-operative societies

204(1) Irrespective of anything contained in this Act but subject to the

provisions of Part A, B and this Part other than section 203, the income-tax payable in respect of the total income of an assessee, being a co-operative society, resident in India, engaged in the business of manufacture or production of any article or thing, shall at the option of such assessee, be computed at the rates specified in column A of the said Table, if the conditions contained in column B thereof are fulfilled.

204(2)

The option under this section shall be exercised by the assessee in the manner as prescribed subject to the following conditions:––

• (a) it shall be exercised on or before the due date specified under section 263(1) for furnishing the first of the returns of income for any tax year; and
• (b) such option, once exercised, shall apply to subsequent tax years;
• (c) once the option has been exercised for any tax year, it shall not be subsequently withdrawn for the same or any other tax year;
• (d) where the assessee fails to fulfil the conditions contained in sub-section (1)(Table: Sl. No. 1. B) in any tax year,–– (i) the option shall become invalid in respect of the tax year and subsequent tax years; and (ii) the other provisions of this Act shall apply, as if the option had not been exercised for that tax year and subsequent tax years.

204(3)

For the purposes of sub-section (1), the total income of the assessee shall be computed,—

• (a) without any deduction under–– (i) Chapter VIII other than the provisions of section 146; or (ii) sections specified in 205(1)(a) to (g);
• (b) without set off of any loss carried forward or depreciation from earlier tax year, if such loss or depreciation is attributable to any of the deductions referred to in clause (a).

204(4)

While computing the income of the assessee, the loss and depreciation, or both, as specified in sub-section (3)(b) be shall be deemed to have been given full effect to and no further deduction for such loss or depreciation, or both, shall be allowed for any subsequent year.

Explanation

Section Summary:

This section introduces a special tax regime for new manufacturing co-operative societies in India. It allows such societies to opt for a lower tax rate on their total income, provided they meet specific conditions outlined in the law. The option to avail this benefit is irrevocable once exercised and applies to all subsequent tax years unless the conditions are not met.

Key Changes:

1. New Tax Regime for Co-operative Societies: This section introduces a new option for co-operative societies engaged in manufacturing or production to compute their income tax at a reduced rate, as specified in the table (Column A), provided they fulfill the conditions in Column B.
2. Irrevocable Option: Once the option is exercised, it cannot be withdrawn in subsequent years. If the conditions are not met in any year, the option becomes invalid for that year and all future years.
3. Restrictions on Deductions and Loss Set-Off: The total income is computed without certain deductions (e.g., under Chapter VIII, except Section 146) and without setting off losses or depreciation carried forward from earlier years if they are linked to disallowed deductions.

Practical Implications:

1. For Co-operative Societies: Eligible societies can benefit from lower tax rates, which may improve cash flow and profitability. However, they must carefully evaluate whether they can consistently meet the conditions to avoid losing the benefit.
2. Compliance Burden: Societies opting for this regime must ensure they meet the conditions every year. Failure to do so will result in the loss of the tax benefit and require recalculation of taxes under the normal provisions of the Income Tax Act.
3. Impact on Loss Utilization: Societies cannot carry forward or set off losses or depreciation attributable to disallowed deductions, which may affect long-term tax planning.

Critical Concepts:

1. Total Income Computation: The total income is calculated without certain deductions (e.g., under Chapter VIII, except Section 146) and without setting off losses or depreciation from earlier years if they relate to disallowed deductions.
2. Irrevocable Option: Once the option is exercised, it applies to all future years unless the conditions are not met, in which case the option becomes invalid.
3. Interaction with Other Provisions: This section overrides other provisions of the Income Tax Act, except those specified in Part A, B, and this Part (excluding Section 203).

Compliance Steps:

1. Exercise the Option: The society must exercise the option before the due date for filing the first return of income for the relevant tax year.
2. Maintain Conditions: Ensure all conditions specified in Column B of the table are met every year to retain the benefit.
3. Documentation: Maintain records to demonstrate compliance with the conditions and eligibility for the reduced tax rate.
4. Recompute Taxes if Conditions Fail: If the conditions are not met in any year, recompute taxes under the normal provisions of the Income Tax Act for that year and all subsequent years.

Example:

A co-operative society engaged in manufacturing textiles opts for the reduced tax rate under this section in its first year of operation. It meets all conditions in the first two years and benefits from the lower tax rate. In the third year, it fails to meet one of the conditions (e.g., minimum production threshold). As a result:

• The option becomes invalid for the third year and all subsequent years.
• The society must recompute its taxes for the third year and future years under the normal provisions of the Income Tax Act.
• Losses or depreciation attributable to disallowed deductions cannot be carried forward or set off in future years.