Court Clarifies Tax Exemption for Co-operative Societies in Banking Business

Get the full picture - access the original judgement of the court order here

Case Name: 

Chirayinkeezuh Service Co-operative Bank Limited & Ors. Vs Central Board f Direct Taxes & Ors. (High Court of Kerala)

WP(C).No.7795 of 2019(Y)

Date: 3rd December 2019

Key Takeaways:

1. Co-operative societies are exempt from TDS on interest income from deposits with other co-operative societies under Section 194A(3)(iii)(v) (of Income Tax Act, 1961).

2. For exemption under Section 194A(3)(iii)(a) (of Income Tax Act, 1961), a co-operative society must be engaged in banking business as defined by the Banking Regulation Act, which includes accepting deposits from the public, not just members.

3. Primary Agricultural Credit Societies don't qualify for exemption on interest from State Treasury deposits as they don't accept deposits from the public.

Issue: 

Are Primary Agricultural Credit Societies entitled to exemption from tax deduction at source on interest income from deposits with State Treasuries and District Co-operative Banks under Sections 194A(3)(iii)(a) (of Income Tax Act, 1961) and 194A(3)(iii)(v) of the Income Tax Act?

Facts:

1. The petitioners are Primary Agricultural Credit Societies registered under the Kerala Co-operative Societies Act 1969.

2. They made deposits with State Treasuries and District Co-operative Banks.

3. The petitioners sought exemption from TDS on the interest income from these deposits.

4. The Income Tax Department issued circulars directing TDS on interest payments from State Treasuries.

5. The petitioners challenged these circulars in court.

Arguments:

Petitioners' Arguments:

1. They are co-operative societies engaged in banking business, accepting deposits and lending money to members.

2. The Banking Regulation Act 1949 doesn't apply to them, so its definition of banking shouldn't be used to interpret the Income Tax Act.

3. They should be exempt under both Section 194A(3)(iii)(a) (of Income Tax Act, 1961) and (v) of the Income Tax Act.

Respondents' Arguments:

1. The term "banking" in Section 194A(3)(iii)(a) (of Income Tax Act, 1961) should be interpreted in line with the Banking Regulation Act's definition.

2. The petitioners don't carry on banking business as defined by the Act as they don't accept deposits from the public.

3. The exemption under Section 194A(3)(iii)(a) (of Income Tax Act, 1961) doesn't apply to the petitioners.

Key Legal Precedents:

1. The Hooseini co-operative credit.. v. Assessee [(2015) 377 ITR 272]: This case suggested that even if a society's bye-laws permit accepting deposits from non-members, it can't be categorized as engaged in banking business unless banking is its primary object .

Judgement:

1. The court partially allowed the petitions.

2. It declared that for deposits with Co-operative Banks, the petitioners are entitled to exemption under Section 194A(3)(iii)(v) (of Income Tax Act, 1961) .

3. For deposits with State Treasuries, the petitioners are not entitled to exemption under Section 194A(3)(iii)(a) (of Income Tax Act, 1961) .

4. The court upheld the circulars issued by the Treasury department directing TDS on interest income payments from State Treasury deposits .

FAQs:

1. Q: Why did the court allow exemption for deposits with Co-operative Banks but not State Treasuries?

  A: The exemption for Co-operative Banks falls under Section 194A(3)(iii)(v) (of Income Tax Act, 1961), which applies to all co-operative societies. The exemption for State Treasuries under Section 194A(3)(iii)(a) (of Income Tax Act, 1961) requires the society to be engaged in banking business, which these societies weren't as per the court's interpretation.

2. Q: How did the court define "banking business"?

  A: The court relied on the definition in the Banking Regulation Act, which includes accepting deposits from the public, not just members, for lending or investment purposes .

3. Q: Does this decision mean the petitioners will have to pay more tax?

  A: Not necessarily. The TDS is just a method of collecting tax. If the societies prove they don't have taxable income, they can claim a refund of the deducted tax .

4. Q: Can the petitioners avoid TDS on State Treasury deposits in the future?

  A: Yes, they can approach the Income Tax Department for a certificate under Section 197 (of Income Tax Act, 1961) stating that no deduction is necessary .

5. Q: Why did the court interpret the exemption provision strictly?

  A: The court noted that since it's an exemption from a procedural requirement, it should be interpreted strictly in favor of the revenue and against the assessee.

The issue that arises for consideration in these writ petitions is the entitlement of the petitioners, who are Primary Agricultural Credit Societies registered under the provisions of the Kerala Co-operative Societies Act 1969,to the benefit of an exemption from the provisions of Section 194A (of Income Tax Act, 1961) (‘the Act’ for short). The said provision mandates a deduction of tax at source, whenever any person, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, effects payment thereof in cash or by issue of cheque or draft or by any other mode. The provisions of Section 194A (of Income Tax Act, 1961) do not apply in cases specified under Section 194A(3)(iii) (of Income Tax Act, 1961). In these writ petitions, we are concerned with the exemptions provided under Sections 194A(3)(iii)(a) (of Income Tax Act, 1961) and 194A(3)(iii)(v) of the Act. The said provisions read as under;

194A. Interest other than “ Interest on securities” (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income [ by way of interest on securities], shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

[provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB (of Income Tax Act, 1961) during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this Section]

(3)The provisions of Sub-section (1) shall not apply-

Where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section(1) to the account of, or to, the payee, [does not exceed------

(iii) to such income credited or paid to-

(a) Any banking company to which the Banking Regulation Act,1949(10 of 1949), applies,or any Co-operative Society engaged in carrying on the business of banking (including a co-operative land mortgage, bank), or

(v) to such income credited or[paid by a co-operative society(other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society] to any other co-operative society;]

2. It is the case of the petitioners herein that as Primary Agricultural Credit Societies, they are co-operative societies inter alia engaged in carrying on the business of banking and they are therefore entitled to receive the interest amounts earned by them from deposits made with the State Treasuries and the District Co-operative Banks respectively without deduction of tax at source. They contend that in respect of the amounts deposited with the State Treasury, they would be exempted from the requirement of suffering tax deduction at source on an account of the provisions of Section 194A(3)(iii)(a) (of Income Tax Act, 1961),and in respect of the interest earned from deposits with the District Co-operative Banks, they would be entitled to a similar exemption on account of Section 194A(3)(iii)(v) (of Income Tax Act, 1961).

3. At the very outset, it might be noticed that in respect of the claim for exemption under Section 194A(3)(iii)(v) (of Income Tax Act, 1961), the revenue has fairly conceded that in as much as the Primary Agricultural Credit Societies are also Co-operative Societies, they would be entitled to the exemption under Section 194A(3)(iii)(v) (of Income Tax Act, 1961), whenever the income credited to their account is the interest income that arises from the deposits made by them with another Co-operative Society such as the District Co-operative Bank. In view of the said stand taken by the revenue in these writ petitions, the entitlement of the petitioners to the benefit of the exemption under 194A(3)(iii)(v) is found in their favour and the writ petitions that impugn the circulars issued by the various District Co-operative Banks based on the instructions of the Income Tax Department are hereby quashed.

4. As regards the contention of the petitioners with regard to the entitlement to the exemption under 194A(3)(iii)(a), I find that the exemption from the requirement of deducting tax at source is available inter alia only to income credited or paid to any banking company to which the Bank Regulation Act 1949 applies, or to income credited or paid to any co-operative Society engaged in carrying on the business of banking (including a co-operative land mortgage bank). It is the contention of the learned counsel for the petitioners that the phrase 'any co-operative society engaged in carrying on the business of banking’ should be interpreted by considering the normal commercial meaning of the words “business of banking” and when so considered, it would refer to the activities of accepting deposits, lending money and providing the facilities of withdrawing money using Cheques,Demand Drafts etc, that the petitioner societies are offering to their members. It is in particular pointed out that the statutory provisions make a conscious distinction between a banking company to which the Banking Regulation Act 1949 applies, and a Co-operative Society engaged in the business of banking,and that while dealing with the latter, there is no reference to the Banking Regulation Act 1949. It is the further contention of learned counsel for the petitioners that, at any rate, the provisions of the Banking Regulation Act do not apply to Primary Agricultural Credit Societies by virtue of Section 3 of the Banking Regulation Act 1949, and hence, the definition of banking under the said Act cannot be of any relevance to decide the entitlement of the petitioner societies to the benefit of exemption under section 194A(3)(iii)(a) (of Income Tax Act, 1961).

5. Per contra, it is the submission of the learned Standing Counsel for the respondent Income Tax Department that the meaning to be given to the term banking under Section 194A(3)(iii)(a) (of Income Tax Act, 1961) has necessarily to be in line with the definition of banking under the Banking Regulation Act, since the said definition is the one that is contained in a statute that regulates the business of banking in the country. It is stated that when there is no definition of the word banking under the Income Tax Act, one has to rely either on the dictionary meaning of the term or on the definition of the term as contained in the relevant regulatory statutes and on such interpretation, the petitioner societies cannot be seen as carrying on the business of banking. Reference is also made to the decision of the Bombay High Court in The Hooseini co-operative credit.. v. Assessee [(2015) 377 ITR 272] to suggest that even if the bye-laws of the petitioner societies permit them to accept deposits from persons other than members, the society cannot be categorized as a society engaged in carrying on the business of banking so long as the bye laws of the society do not provide for banking business as the primary object to be pursued by the society.

6. I have heard the learned counsel Dr. K.P. Pradeep, Sri.T.R. Harikumar, Sri. C.A Jojo, Sri. B. Suresh Kumar, Sri. Jayapradeep V, Sri.Shaji Thomas, Smt. S.K Devi, Sri. V.P Narayanan, Sri. M.Sasindran, Sri. P.C. Sasidharan, Sri. C.S Sumesh, Sri. G.Biju, Sri. G.Rajeev, Sri.Vinod Kumar. C, Sri. Harishankar V. Menon, Sri. O.D Sivadas, Sri. A.Kumar, Sri. Anil.D.Nair, Sri. S.Arun Raj,Sri. S. Abhilash Vishnu and Sri.Nikhil Sunny Mooken appearing for the petitioners and also Sri. Christopher Abraham, the learned Standing Counsel appearing for the respondents.

7. On a consideration of the facts and circumstances of the case as also the submissions made across the Bar, I find that Section 194A(3)(iii)(a) (of Income Tax Act, 1961),uses the phrase “Co-operative Society engaged in carrying on the business of banking (including a co-operative land mortgage bank)” to qualify a Co-operative Society that is entitled for the benefit of exemption from the requirement of tax deduction at source, when it receives income by way of interest income on deposits made by them with the State Treasury. Under the Banking Regulation Act, the word banking is defined as the meaning the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawn by cheque, draft, order or otherwise. Section 3 of the said Act which deals with “The application of the Act to Co-operative Societies in certain cases” indicates that the Act will not apply to;

(a) a primary agricultural credit society;

(b) a co-operative land mortgage bank;

(c) any other co-operative society except in the manner and the extent specified in part V.

8. Part V of the Banking Regulation Act comprises of Section 56 (of Income Tax Act, 1961) which deals with the circumstances, when the Act will apply to Co-operative Societies subject to modifications. The said Part also defines the terms “Co-operative Credit Society,” “Primary Agricultural Credit Society”, “Primary Credit Society” and “Primary Co-operative Bank”. It can be seen from a comparison of the definitions referred above that there is a distinction made between societies, the primary object and principal business of which is to provide financial accommodation to its members in connection with various activities, and those societies, the primary object and principal business of which, is the transaction of banking business. When viewed against the back drop of the definition of banking noticed above, it is apparent that it is the criteria of accepting deposits of money from the public, as opposed to members of the society, that serves to categorize a Co-operative Society as one engaged in the business of banking. In my view, in the absence of a definition of “banking” under the Income Tax Act, it would be safe for this Court to adopt the definition of “banking” as contained in the statute that regulates the business of banking in our Country, for the purpose of interpreting the word “banking” and the phrase “business of banking” under the Income Tax Act. On such an interpretation, the benefit of exemption under Section 194A(3)(iii)(a) (of Income Tax Act, 1961) would apply only when the interest income in respect of deposit made with the treasury accrues/arises to a co-operative society engaged in carrying on the business of banking, which in turn involves acceptance of deposits from the public, and not merely from its own members. In the instant writ petitions, there is no material that would suggest that the writ petitioner societies are engaged in carrying on a business that involves accepting deposits, for the purposes of investment or lending, from public as opposed to their own members. I therefore, find that in respect of the interest income earned on deposits made by the petitioners societies with the Treasury, the circulars issued by the Treasury department,based on like instructions received from the Income Tax Department,directing the deduction of tax at source on such interest income payments, cannot be legally faulted. The challenge in the writ petitions to the said circular issued by the Treasury Department is therefore rejected.

Before parting with these cases, it must be pointed out that, in as much as the provisions of Section 194A(3)(iii)(a) (of Income Tax Act, 1961) provide for an exemption from a procedural requirement under the Income Tax, the interpretation to be placed on the said provision has necessarily to be a strict one that leans in favour of the revenue and against the assessee. At any rate, the requirement of deduction of tax at source does not prejudice the writ petitioner assessees,since the tax amounts deducted at source from the payments effected to the petitioner societies would be credited to their account with the Income Tax Department, and adjusted towards any tax liability determined against them in their assessment for the respective years. In the event the petitioner societies succeed in establishing before the Income Tax authorities that they do not have any income liable to tax under the Act, then they would be entitled to a refund of the tax amounts so deducted pursuant to a finalization of their assessments under the Income Tax Act. Alternatively, the petitioners societies also have the option of approaching the Income Tax Department for a certificate under Section 197 (of Income Tax Act, 1961). Stating that, in view of their non-liability to tax under the Act, there need be no deduction of tax effected at the time of making payments to them. This aspect has been made clear in the circular of the Treasury department impugned in these writ petitions.

In the result, these writ petitions are disposed by declaring that, in the case of deposits made by the petitioner societies with the Co-operative Banks, they would be entitled to the benefit of exemption under Section 194A(3)(iii)(v) (of Income Tax Act, 1961) and, in respect of the deposits made by the petitioner societies with the Treasury, they will not be entitled to the benefit of exemption under Section 194A(3)(iii)(a) (of Income Tax Act, 1961). The legality of the circulars and notices impugned in these writ petitions shall stand determined on the basis of the above declarations.

Sd/-

A.K.JAYASANKARAN NAMBIAR

JUDGE