Deposits with Co-operative Societies & Section 11(5): A Common but Costly Mistake for Charitable Trusts
Introduction
One of the most frequent & yet least understood compliance issues for charitable & religious trusts relates to investment of funds u/s 11(5) of the Income-tax Act, 1961. A recurring question is whether deposits made with co-operative societies qualify as a permissible mode of investment.
In practice, many trusts place surplus funds with co-operative credit societies or similar entities under the belief that such deposits are compliant. Unfortunately, this assumption is often legally incorrect & can result in serious tax consequences, including denial of exemption u/s 11.
This article seeks to clarify the legal position & dispel common misconceptions.
Statutory Framework of Section 11(5)
Section 11(5) prescribes the exclusive & exhaustive modes in which a charitable or religious trust may invest or deposit its funds in order to retain exemption u/s 11.
Among the permitted modes, clause (iii) allows deposits only with:
- A scheduled bank, or
- A co-operative bank.
The wording of section 11(5) leaves no scope for liberal interpretation. Any investment outside the specified modes constitutes a violation of the provision.
Co-operative Society vs. Co-operative Bank – The Critical Distinction
A key source of confusion is the assumption that every co-operative society accepting deposits is equivalent to a co-operative bank. This is not correct in law.
What qualifies as a co-operative bank?
A co-operative bank must:
- Be engaged in the business of banking, &
- Hold a valid banking licence under the Banking Regulation Act, 1949.
What does not qualify?
- Credit co-operative societies,
- Thrift societies,
- Mutual benefit societies, or
- Any co-operative society without a banking licence.
Mere acceptance of deposits from members & granting loans to members does not amount to carrying on banking business under banking law.
Why Deposits with Most Co-operative Societies Fail Section 11(5)
In many cases:
- The co-operative society is not licensed to carry on banking business.
- It is legally prohibited from functioning as a bank.
- It does not meet the statutory definition of a co-operative bank.
Equating “acceptance of deposits & lending” with “banking” is a fundamental legal error. Section 11(5) requires compliance not in substance alone, but also in legal form & status.
Judicial & Departmental Approach
Courts & tax authorities have consistently held that:
- Section 11(5) must be strictly complied with.
- Investments made outside the prescribed modes are non-compliant, irrespective of intent or bona fides.
The consequence of such non-compliance is:
- Violation of section 11(5), &
- Potential denial of exemption u/s 11, to the extent provided under the Act
A Practical Problem: Misrepresentation & Lack of Awareness
A concerning practical issue is that:
- Many trusts are unaware of the legal distinction, &
- Some co-operative societies mislead trusts, either by nomenclature or by incorrect assurances that they are “like banks”.
Trustees often rely on representations rather than verifying the legal status of the entity, thereby exposing the trust to avoidable litigation & tax demands.
Professional Guidance for Trustees & Advisors
Trusts should adopt the following safeguards:
- Deposit funds only with scheduled banks or licensed co-operative banks.
- Do not rely on names such as “urban bank”, “credit bank”, or “members’ bank”.
- Obtain documentary evidence of:
- Banking licence, &
- Status as a co-operative bank under banking law.
- Periodically review existing investments to ensure ongoing compliance.
Conclusion
Deposits with a co-operative society are NOT eligible u/s 11(5)
unless the society is a licensed co-operative bank engaged in banking business under the Banking Regulation Act, 1949.
This issue, though technical, has significant tax implications. Greater awareness among trustees, auditors, & advisors is essential to prevent inadvertent violations & loss of exemption.
It is noteworthy that many credit co-operative societies themselves consistently assert that they do not carry on banking business for the purposes of section 80P, to avoid exclusion under section 80P(4). Such entities cannot, in the same breath, be treated as carrying on banking business for the purposes of section 11(5). Acceptance of such inconsistent positions would defeat legislative intent and violate settled principles of statutory interpretation.
Readers may also refer to an article presenting a contrary view, with which I respectfully disagree:
https://taxguru.in/income-tax/deposits-co-operative-society-charitable-trust-section-11-5.html
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