Section 204 — Tax on income of certain new manufacturing co-operative societies. Successor to s.115BAE of the 1961 Act.
Section 204 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
Sub-section (1) offers a resident co-operative society engaged in the business of manufacture or production of any article or thing an optional rate regime, overriding the rest of the Act but subject to Parts A, B, E and the rest of this Part of the Chapter other than section 203. If the conditions in column B of the Table are fulfilled, income-tax on total income is computed at the rates in column A: entry (a), 15% on total income other than the income in entries (b), (c) and (d); entry (b), 22%, without any deduction or allowance in respect of any expenditure or allowance, on income which has neither been derived from nor is incidental to manufacturing or production of an article or thing and for which no specific rate is provided separately under this Part; entry (c), 22% on short-term capital gains from transfer of a capital asset on which no depreciation is allowable; and entry (d), 30% on income deemed to be so under section 205(4). The column B conditions are that the society exercises the option in the manner provided in sub-section (2), has been set up and registered on or after the 1st April, 2023, has commenced manufacturing or production on or before the 31st March, 2024, computes total income as per sub-section (3), and fulfils all the conditions in section 205(2).
Sub-section (2) governs the option: it is exercised in the prescribed manner on or before the due date specified under section 263(1) for furnishing the first of the returns of income for any tax year; once exercised it applies to subsequent tax years; it cannot be withdrawn for the same or any other tax year; and if the society fails to fulfil the column B conditions in any tax year, the option becomes invalid for that and subsequent tax years and the other provisions of the Act apply as if it had never been exercised for those years.
Sub-section (3) requires total income to be computed without any deduction under Chapter VIII other than section 146 or 150, and without the sections specified in section 205(1)(a) to (g), and without set off of any carried forward loss or depreciation from an earlier tax year attributable to those deductions. Sub-section (4) deems that loss and depreciation to have been given full effect to, so no further deduction for them is allowed in any subsequent year. Sub-section (5), inserted by Act No. 4 of 2026 with effect from 1 April 2026, modifies sub-section (3) for a society that has exercised the option, making the deduction under section 149(2)(d)(ii) available to it to the extent it does not exceed the amount of dividend distributed to its members at least one month before the due date for filing the return of income under section 263(1).
A low flat rate is offered to draw new manufacturing capacity into the co-operative form, and the price of the low rate is that the society gives up the deduction and loss set-off machinery of the Act. The narrow window in the conditions — registration on or after 1 April 2023 and commencement of manufacture on or before 31 March 2024 — confines the concession to genuinely new units set up in that period. The higher 22% and 30% entries stop the 15% rate being used to shelter income that has nothing to do with manufacturing, or income the Act deems to arise under section 205(4).
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Rate on manufacturing and related income | 15% | On total income other than the income mentioned in entries (b), (c) and (d) of column A, where all the column B conditions are fulfilled | Sub-section (1), Table column A entry (a) |
| Rate on income neither derived from nor incidental to manufacturing | 22% | Without any deduction or allowance in respect of any expenditure or allowance, and only where no specific rate of tax has been provided separately under this Part | Sub-section (1), Table column A entry (b) |
| Rate on short-term capital gains | 22% | On gains from transfer of a capital asset on which no depreciation is allowable under the Act | Sub-section (1), Table column A entry (c) |
| Rate on income deemed under section 205(4) | 30% | On income deemed to be so under section 205(4) | Sub-section (1), Table column A entry (d) |
| Earliest date of set up and registration | On or after the 1st April, 2023 | A society set up or registered before that date cannot fulfil the column B conditions | Sub-section (1), Table column B entry (b) |
| Latest date for commencing manufacture or production | On or before the 31st March, 2024 | Commencement after that date takes the society outside the column B conditions | Sub-section (1), Table column B entry (c) |
| Last date for exercising the option | The due date specified under section 263(1) for furnishing the first of the returns of income for any tax year | The option must be exercised in the prescribed manner on or before that date | Sub-section (2)(a) |
| Timing of dividend distribution for the section 149(2)(d)(ii) deduction | At least one month before the due date for filing the return of income under section 263(1) | The deduction is available only to the extent it does not exceed the dividend so distributed; sub-section (5) inserted by Act No. 4 of 2026 w.e.f. 1-4-2026 | Sub-section (5) |
The 15% is not a rate for the society but for a part of its income: anything that has neither been derived from nor is incidental to manufacture or production goes to 22% under entry (b), and is taxed there without any deduction or allowance for expenditure at all, so the cost of earning it is lost. Two dates decide eligibility outright and neither can be cured — registration on or after 1 April 2023 and commencement of manufacture on or before 31 March 2024 — which makes this a closed class rather than a standing option. The option itself is a one-way door: sub-section (2)(b) carries it into subsequent years and (2)(c) forbids withdrawal, while (2)(d) makes it fall away automatically, for that year and every year after, the moment a column B condition fails. Losses and depreciation attributable to the surrendered deductions are not merely denied but extinguished, because sub-section (4) deems them to have been given full effect to. The one relaxation added in 2026 is sub-section (5), and it is conditional on timing: the section 149(2)(d)(ii) deduction is available only up to the dividend actually distributed to members at least one month before the section 263(1) return due date.
A co-operative society registered in June 2023 begins manufacturing in January 2024 and exercises the option on or before the section 263(1) due date for its first return. In a tax year it earns four crore rupees from manufacture, forty lakh rupees of rental income unconnected with and not incidental to manufacture, and twenty lakh rupees of short-term capital gains on land on which no depreciation is allowable. The four crore is taxed at 15%, the forty lakh at 22% with no deduction for the expenditure incurred to earn it, and the twenty lakh at 22%. If in a later year the society fails a column B condition, clause (2)(d) makes the option invalid for that year and every year after it, and the ordinary provisions apply as though it had never been exercised.
You meet this at the point of exercising the option in the prescribed manner on or before the section 263(1) due date for the first return, and thereafter in every return of the society, which is computed at these rates. It comes back in an assessment order that treats the option as invalid under clause (2)(d) for failure of a column B condition, or that reallocates income from the 15% entry to the 22% entry as not derived from or incidental to manufacture.
22% (without any deduction or allowance in respect of any expenditure or allowance) on such income,—
has been set-up and registered on or after the 1st April, 2023
once the option has been exercised for any tax year, it shall not be subsequently withdrawn for the same or any other tax year
the deduction under section 149(2)(d)(ii) shall be available to such assessee as does not exceed the amount of dividend distributed by it to its members at least one month before the due date for filing the return of income under section 263(1)
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
