Employee Welfare Society - Accounts, Audit, Tax & Case Laws

An Employee Welfare Society / Employees Co-operative Thrift & Credit Society / Staff Mutual Benefit Society is not a commercial entity. It is formed for mutual help - loans, medical aid, death relief, recreation, canteen.

Legal forms in India:

• Under Societies Registration Act, 1860 - Registered with Registrar of Societies
• Under State Co-operative Societies Act - e.g. Maharashtra Co-op Societies Act 1960, Delhi Co-op Societies Act 2003 - as Thrift & Credit Society
• Under Indian Trust Act, 1882 - as Employees Welfare Trust

This decides accounting and tax.

1. Accounting System - Fund Based Accounting

You do not maintain Profit & Loss. You maintain:

A. Receipts & Payments Account - Cash basis, summary of cash book.
B. Income & Expenditure Account - Like P&L on accrual basis. Surplus is not profit, it is excess of income over expenditure carried to General Fund.
C. Balance Sheet - Liabilities = Corpus Fund + General Fund + Earmarked Funds [Building Fund, Medical Fund, Benevolent Fund] + Members Deposits. Assets = Loans to members + Investments + Bank.

Accounting Standards:
AS 1, AS 12 for govt grants, and Technical Guide on Accounting for NPOs by ICAI apply. If society is funded by employer, then AS 15 / Ind AS 19 disclosure in employer's books is required - contribution to welfare society is employee benefit expense.

Key heads:

• Income: Members monthly contribution / subscription, Entry fee, Interest on loans to members, Interest on FD with banks, Donation from employer u/s 37(1), Canteen receipts
• Expenditure: Welfare - Medical aid, Education scholarship to children, Death relief, Sports, Festival advance, Interest on members deposits, Admin - audit fee, meeting expense
• Funds must be kept separate. You cannot utilize Members Thrift Deposits for general welfare without approval. Maintain separate ledger for each fund.

Books required by law:
As per Section 15 of Societies Act and Rule 84 of DCS Rules - Cash Book, Member Ledger, Loan Ledger, Minutes Book, Stock Register, Investment Register. Audit beyond 3 years cannot be done by same auditor if Registrar orders special audit.

2. Audit & Compliance

Statutory Audit: Every society needs audit by Chartered Accountant. For co-operative society - by auditor from panel of Registrar.

Section 24 Audit - Special Audit: Assistant Registrar can appoint new CA if financial irregularities alleged. High Court in ABCAUS 4668 (2025) HC - upheld Registrar's power to order independent CA audit of functioning and income-expenditure u/s 24 of Societies Act. Members can demand comprehensive audit into liabilities and expenditure.

ICAI Disciplinary Case 2024: Auditor of a society charged Rs 3,000 audit fee, issued audit reports for FY 2012-13, 2013-14 without proper verification. ICAI held guilty under Clause (7) Part I Second Schedule - gross negligence - removed for 3 months + Rs 1 lakh fine. Lesson: Even for small society, audit standards SA 250, SA 500 apply.

3. Taxation - The Most Litigated Area

A. Principle of Mutuality:

CIT vs Bangalore Club (2013) 350 ITR 509 SC - Landmark.
Supreme Court held:

There must be complete identity between contributors and participators. Interest earned from member banks is NOT covered by mutuality because bank as a company is a third party, not the same as club in its capacity as member.

Application to Employee Welfare Society:

• Monthly contributions from members + loans given to members = Mutual - Exempt u/s 2(24) definition of income does not include mutual receipts.
• BUT interest on surplus funds parked in FD with bank, NSC, etc. = Taxable as Income from Other Sources. Bank is not member in same capacity.

Reaffirmed in State of West Bengal vs Calcutta Club Ltd (2019) SC and Bangalore Club vs CIT (Wealth Tax) (2020) SC - mutuality is constitutional doctrine, but does not extend to transactions with third parties.

ITAT case - All India Oriental Bank of Employees Welfare Society AY 2015-16: Department relied on Bangalore Club. Tribunal held interest on FD with banks is taxable even though society exists only for members, because interest is from bank.

So your accounts must bifurcate: Mutual Income vs Taxable Income. File ITR-5 or ITR-7 if claiming 12A.

B. Employer Contribution is Allowable:

High Court - Any expenditure for welfare and benefit of employees allowable u/s 37(1) - 2015 case of Jaipur ITAT 893/JP/2012 - Assessee claimed accounts audited. Court held: It is for assessee to decide whether welfare expenditure is needed. If employer gives donation/contribution to Employees Welfare Society for staff welfare - canteen, medical, recreation - it is fully allowable u/s 37(1), even if society is separate entity, provided it is not personal or capital.

C. PF/ESI Collected by Society:

If your society collects PF/ESI as thrift? Actually many societies collect EPF contribution from members. Supreme Court in Checkmate Services Pvt Ltd vs CIT (2022) 143 Taxman 178 SC - Overruled all favourable HC orders.

Held: Employees contribution u/s 36(1)(va) is deemed income. If not deposited within due date under PF/ESI Act (15th), it is disallowable even if deposited before ITR filing u/s 139(1). Only employers contribution gets benefit of 43B.

Therefore, Society's Receipts & Payments must show PF deposited on time. CPC adjustment u/s 143(1)(a)(iv) for late deposit is valid - confirmed in (2022) 10 TMI 974 and (2023) 6 TMI 1207.

D. GST:

After 47th GST Amendment inserting Section 7(1)(aa) to override mutuality, CBIC tried to tax club membership fees. But Kerala HC in IMA Kerala and recent Supreme Court observations: For welfare societies providing no commercial supply, contribution is not supply if mutuality principles met. However, if society provides canteen sales to members at profit, catering, renting hall to outsiders - that is taxable as supply.

4. Model Compliance Checklist for You

1. Pass Resolution for creation of funds - Corpus cannot be spent.
2. Maintain Member wise ledger - Opening, contribution, interest credited, loan given, closing.
3. Interest rate on loans - Should be as per bye-laws. Excessive interest is not welfare.
4. Investments: Only in co-op banks, nationalized banks, as per bye-laws. Interest accrual must be shown.
5. TDS: If society pays interest to members > Rs 40,000, deduct TDS u/s 194A? Co-op society may be exempt but welfare society under Societies Act is not exempt automatically. Check.
6. 12A & 80G: If you want exemption, register as charitable institution doing relief of poor. Mere employee welfare is not charitable under 2(15) - CIT often denies. You will still be taxed on non-mutual income.
7. Annual Filing: File return with Registrar + AGM minutes + audited accounts within 6 months of year end.