Recommendations by CAG on the Compliance of Tax provisions specific to Co-operative Societies and Co-operative Banks

Recommendations by CAG on the Compliance of Tax provisions specific to Co-operative Societies and Co-operative Banks

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Recommendations by CAG on the Compliance of Tax provisions specific to Co-operative Societies and Co-operative Banks

Report No. 16 of 2020 (Performance Audit) by the CAG points out various recommendation and instances it has observed during the course of its audit.  The recommendation by the CAG for better tax compliances by the Co-operative Societies and Co-operative Banks were as under:
a) The CBDT may consider devising a Standard Operating Procedure for testing the principles of mutuality during scrutiny assessments of Co-operative Societies. It may also consider adopting a consistent approach for assessment of Co-operative Societies to address the practice of registering nominal and associate members with unequal rights as regular members, which defeat the principle of mutuality. The CBDT stated (July 2020) that the Assessing Officers do look into details and documents which is the basic requirement for completing the assessment. However, an SOP will be issued to cover this issue. It further stated that CBDT has formulated the E-assessment Scheme 2019, where the process of assessment has been made faceless reducing the human intervention. Team based assessment procedure has been put in place to avoid the mistakes. Under this scheme the process of Review is also put in place which will ensure that the assessments by the Assessing officers are properly reviewed before the assessment orders are passed to eliminate the error if any. Audit noticed instances where the Assessing Officers were allowing deduction under section 80P of the Act to assessees that did not meet the Co-operative principles and hence did not satisfy the principles of mutuality. Audit is of the view that devising of Standard Operating Procedure for testing the principles of mutuality during scrutiny assessments would facilitate uniformity and consistency in assessments of Co-operative Societies.
b) The CBDT may devise a mechanism to effectively monitor the nature of activities undertaken by a Co-operative Society while also verifying the incomes on which deduction is being claimed by the Co-operative Societies/ Banks to ensure allowance of claim to eligible assessees only. The CBDT stated (July 2020) that monitoring is done through Computer Aided Scrutiny Selection once the case is selected for scrutiny assessment. During the course of scrutiny assessments, the verification of the income on which deductions is claimed by the Co-operative Societies/ Banks is undertaken by ITD. Suitable remedial action would be taken in appropriate cases if any mistake is discovered subsequently during audit. It is further proposed to incorporate these issues in the proposed SOP so that the mistakes do not occur. Audit noticed that major reasons for disallowance of claim of deduction were on account of assessee either not engaged in activities listed out in the Act for Co-operative Societies or engaged in small proportion compared to principal activity or business. This entailed major risk of entities not working based on principles of mutuality, claiming benefits wrongfully and there being potential abuse of provisions applicable to Co-operative Societies. The CBDT may therefore consider devising a mechanism to monitor the nature of income on which deduction is being claimed by Co-operative Societies. The CBDT may also consider making a provision in the ITR form to capture the sub-section of 80P under which the assessee claims deduction under section 80P of the Act.
c) To ensure allowance of deduction to eligible assessees only, minimise possibility of ineligible claims and for effective monitoring of claims, the activity code and status code of assessee may be linked with the sub-sections of 80P and 36(1) of the Act under which deduction is claimed at the stage of filing of income tax return. The instances where deductions claimed by assessees engaged in ineligible activities was disallowed during assessment may be used to identify activities, sector(s) and assessees to accord priority in selection for scrutiny in subsequent years. The same may also be reported to the concerned regulatory authorities (ROCS, RBI etc.).” The CBDT replied (July 2020) that the recommendation is under consideration by TPL Division of the CBDT.
d) The actual claim of deduction made under section 36(1)(viia) of the Act may be captured alongwith distinct figures/ details of deduction claimed on total income and rural advances in the relevant schedule of ITR forms for effective monitoring, better MIS and assessment of impact of deduction as the actual claim is not getting captured in the existing format. The CBDT replied (July 2020) that the recommendation is under consideration by TPL Division of the CBDT.
e) The CBDT may ensure that the PAN status of the assessees claiming deductions as Co-operative Societies to be only AOPs. CBDT may review the PAN registration status and ensure uniformity in PAN registration to identify the assessees pertaining to Co-operative Societies/ Co-operative Banks, to facilitate meaningful information from data available with ITD. The CBDT stated (July 2020) that for the purpose of Income Tax Act, 1961, Co-operative Societies are treated as Association of Persons (AOPs). Audit noticed instances where benefits of claim of deduction as Cooperative Society and Co-operative Bank were availed of by those Cooperative Societies and Co-operative Banks who were registered as other than AOPs, viz. AOP(Trust), AJP, BOI, Firm etc., which was not in order. Audit is of the view that the CBDT may review the PAN registration status to ensure uniformity in PAN registration of Report No. 16 of 2020 (Performance Audit) 69 assessees pertaining to Co-operative Sector and to ensure allowance of deduction admissible to Co-operative Societies to assessees registered as AOPs only.
f) Class of assessees and sections of the act under which the possibility of irregular allowance of claims were higher may be identified and monitored. ITD may devise a checklist outlining the same for use by the Assessing Officers to prevent recurrence of irregular allowance of deductions. The CBDT replied (July 2020) that the recommendation would be considered in the SOP proposed to be issued in respect of assessment of Co-operative Societies.
g) The CBDT may examine the reasons for wide variations in the applicability of same law under similar conditions and issue directions, if required, to ensure consistency and uniformity in assessment of similar class of assessees engaged in similar activities in Co-operative Sector. The CBDT may also co-ordinate with regulatory bodies to align the assessment of such assessees in accordance with the categorisation under the structure of Co-operative Banking as per the regulatory bodies. The instances of ineligible assessees claiming deductions admissible to Co-operative Societies and engaged in commercial banking business noticed during assessment procedure may be reported to the regulatory authorities (RBI, ROCS etc.).
h) The CBDT may issue SOP for assessment of claims made by sugar manufacturing Co-operative Societies under section 36(1)(xvii) to ensure that the allowance of deduction is in accordance with Government policies with respect to pricing of sugar at Central and State level.

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