Credit cooperative society wins exemption from TDS obligations under Section 194A for interest payments to members

Karnataka HC quashed a show cause notice issued to a credit cooperative society regarding TDS obligations under Section 194A. The court held that the petitioner society, registered under The Karnataka Souharda Sahakari Act, 1997, qualified as a cooperative society under Section 2(19) of the IT Act and was entitled to exemption from TDS under Section 194A(3)(v) for interest payments to members. The show cause notice was deemed without jurisdiction and illegal, making further proceedings unnecessary.

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The core legal questions considered in this judgment are:

(1) Whether the petitioner society, registered under The Karnataka Souharda Sahakari Act, 1997, qualifies as a "co-operative society" within the meaning of Section 2(19) of the Income Tax Act, 1961;

(2) Whether the petitioner society is entitled to exemption from deduction of tax at source (TDS) under Section 194A(3)(v) of the Income Tax Act on interest payments made to its members;

(3) Whether the show cause notice issued under Sections 201(1) and 201(1A) of the Income Tax Act, 1961, dated 14.03.2022, for the financial years 2015-16 to 2018-19, demanding TDS from the petitioner society, is valid or liable to be quashed;

(4) Whether the petitioner is entitled to a writ of mandamus directing the respondent to drop the proceedings in view of the earlier decision of this Court for the financial year 2014-15.

Issue-wise detailed analysis:

Issue 1: Definition of "Co-operative Society" under Section 2(19) of the Income Tax Act

The legal framework revolves around Section 2(19) of the Income Tax Act, which defines "co-operative society" as a society registered under the Co-operative Societies Act, 1912, or under any law for the time being in force in any State for the registration of co-operative societies. The petitioner society is registered under The Karnataka Souharda Sahakari Act, 1997, a State law enacted to promote co-operative societies based on self-help, mutual aid, and democratic control.

The Court examined the objects and reasons of the Souharda Act, 1997, and its 2004 amendment, which emphasize recognition, encouragement, and voluntary formation of co-operatives governed by co-operative principles. The Court contrasted this with the Karnataka Co-operative Societies Act, 1959, which also promotes co-operative societies with autonomous functioning and democratic control.

The Court referred to the 97th Constitutional Amendment incorporating Part IX-B into the Constitution, which defines "co-operative societies" as societies registered under any law relating to co-operative societies for the time being in force in any State (Article 243-ZH[c]) and authorizes State Legislatures to regulate their incorporation and functioning (Article 243-ZI). The Court noted the directive principle under Article 43-B promoting co-operative societies.

Relying on the principle of harmonious construction, the Court held that both the Souharda Act and the Karnataka Co-operative Societies Act are valid State laws regulating co-operative societies and that entities registered under the Souharda Act fall within the definition of "co-operative society" under Section 2(19) of the Income Tax Act.

The Court rejected the Revenue's argument that the Souharda Act conflicts with the Central Co-operative Societies Act, 1912, and that such conflict creates repugnancy, holding that the Court was not adjudicating constitutional validity and that the amended Section 2(e) of the Souharda Act explicitly includes the Income Tax Act for its application.

In support, the Court relied on the Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, which emphasized that the definition of co-operative society under Section 2(19) is broad and includes societies registered under any State law for co-operative societies. The Apex Court held that the test for eligibility under Section 80P is registration under such law, without further classification.

Issue 2: Entitlement to exemption from TDS under Section 194A(3)(v)

Section 194A(3)(v) exempts co-operative societies from deducting tax at source on interest payments made to their members. The Revenue contended that the petitioner society is not a co-operative society within the meaning of Section 2(19) and therefore not entitled to this exemption. The petitioner relied on the broad definition and the Court's prior ruling to claim exemption.

The Court applied the legal framework and precedents, particularly the Division Bench decision in Govt. of India v. Karnataka State Souharda Federal Cooperative Ltd., which included the petitioner's case for earlier assessment years. That decision held that the petitioner society qualifies as a co-operative society under Section 2(19) and is entitled to the exemption under Section 194A(3)(v).

The Court emphasized that the exemption is intended to promote the co-operative movement and that denying it on hyper-technical grounds would frustrate legislative intent. The Court found the Revenue's restrictive interpretation untenable and held that the petitioner society is entitled to the exemption.

Issue 3: Validity of the show cause notice issued under Sections 201(1) and 201(1A)

The impugned show cause notice dated 14.03.2022 alleged failure to deduct TDS under Section 194A(3)(v) for the financial years 2015-16 to 2018-19. The petitioner challenged the notice as illegal, arbitrary, and without jurisdiction, relying on the earlier decision of this Court for the financial year 2014-15, which quashed a similar notice dated 11.02.2022.

The Court noted that the earlier decision had comprehensively examined the definition of co-operative society, the relevant statutes, constitutional provisions, and Supreme Court precedents, concluding that the petitioner society qualifies as a co-operative society and is exempt from TDS deduction under Section 194A(3)(v). Applying the doctrine of parity, the Court found no reason to take a different view for the subsequent financial years.

The Court rejected the Revenue's contention that the petitioner could raise its contentions only by replying to the show cause notice, holding that since the notice was without jurisdiction and contrary to law, continuing proceedings would serve no purpose.

The Court quashed the impugned show cause notice dated 14.03.2022.

Issue 4: Writ of Mandamus to drop proceedings

The petitioner sought a writ of mandamus directing the respondent to drop the proceedings in light of the earlier decision. The Court, having found the show cause notice invalid and quashed it, effectively granted the relief sought by directing cessation of the proceedings.

Significant holdings:

"No hyper technical view can be taken to exclude the entities registered under the Souharda Act as not falling under the definition of 'Co-operative Society' as defined in Section 2[19] of the Act."

"The amendment by substitution relates back to the date of original enactment unless specified from a particular date. In the absence of any specified date mentioned, the Amended Act certainly relates back to the date of enactment."

"The factum of a Co-operative Society being registered under the 1912 Act or under the State law is the test. Co-operatives being registered under the Souharda Act, a State law, certainly comes within the ambit of Co-operative Society."

"The provisions of Section 80P offers tax deduction in respect of income of Co-operative Societies which is enacted with a laudable object of promoting Co-operating movement. Such benefit cannot be denied to the so called Co-operatives under the Souharda Act merely on hyper technicalities."

"A harmonious reading of the said provisions would indicate that Co-operative Society registered under the Co-operative Societies Act, 1959 alone is not the Co-operative Society for the purposes of the Income Tax Act, as the phrase 'or' employed with the following words 'under any other law for the time being in force in any State for the registration of Cooperative Society' if read, Co-operative Societies registered under the Souharda Act which is a State enactment would certainly be construed as Cooperative Society coming within the ambit of Section 2[19]."

Final determinations:

(i) The petitioner society registered under The Karnataka Souharda Sahakari Act, 1997, qualifies as a co-operative society within the meaning of Section 2(19) of the Income Tax Act, 1961;

(ii) The petitioner society is entitled to exemption from deduction of tax at source under Section 194A(3)(v) of the Income Tax Act on interest payments made to its members;

(iii) The show cause notice issued under Sections 201(1) and 201(1A) for the financial years 2015-16 to 2018-19 is without jurisdiction, illegal, and arbitrary and is quashed;

(iv) The respondent is directed to drop the proceedings pursuant to the quashed show cause notice.

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