AI Drafter 
TaxTMI 
TaxTMI 
2022 (7) TMI 1048
X X X X Extracts X X X X
X X X X Extracts X X X X
....d to note that the Dharmapuri District Central Co-operative Bank (DCC Bank) is registered under the Tamil Nadu Co-operative Societies Act, 1983 and obtained license from the RBI to carry on banking activities under the Banking Regulation Act, 1949 and as such is like any other Schedule Bank. 4. The CIT(A) should have noted that for Co-operative Societies, Banking Regulation Act, 1949 does not apply. Only Central Co-operative society Act, 1912 or the particular State Government Act applies. The CIT(A) failed to appreciate the fact that the DCC Bank though registered as a Co-operative society but is engaged in the commercial activities viz. "business of banking", like any other Nationalized Banks. 5. The CIT(A) ought to have considered the fact that the State Government and the Registrar of Co-operative Societies appointed by the State are the main regulatory authorities for the "Co-operative Societies". 6. The CIT(A) ought to have considered the fact that the Tamil Nadu State Government and Reserve Bank of India controls the affairs of the "Co-operative Bank", namely the Dharmapuri District Central Co-operative Bank and not the Registrar of Co-operative So....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee was registered under Tamilnadu Cooperative Societies Act, 1983 and it had obtained license from RBI to carry out banking activities u/s. 22(1) read with Section 56(6) of Banking Regulation Act, 1949. The statutory provisions provide for different effect to co-operative society and central district co-operative society engaged in the business of banking. Therefore, the assessee was obligated to deduct TDS on Time/Term deposits and the failure to do so would attract disallowance u/s. 40(a)(ia). The amendment brought in by Finance Act, 2015 was only to clear the doubt regarding the applicability of provisions of Sec. 194A(3)(v) to cooperative banks. Finally, disallowance of Rs. 3712.66 Lacs was made u/s. 40(a)(ia). Appellate Proceedings 4. Upon further appeal, Ld. CIT, relying upon the decision of Hon'ble High Court of Madras in the case of Coimbatore District central Cooperative Bank Ltd. Vs. ITO (65 Taxmann.com 1) as well as rationale behind bringing amendment w.e.f. 01.06.2015, directed Ld. AO to delete the said disallowance. Aggrieved, the revenue is in further appeal before us. Our findings and Adjudication 5. From the fact, it emerges is that the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s that are excluded from the application of Sub-Section (1) are listed. In simple terms, such exclusions under sub-section (3) of Section 194A could be understood as follows:-- Exclusions under clause (i) of sub-section (3): 10. (i) Where the amount of income credited or paid or likely to be credited or paid during the financial year, by a banking company to which the Banking Regulation Act, 1949 applies, does not exceed Rs. 10,000/-, no liability under sub-section (1) arises. (ii) Where the amount of such income credited or paid or likely to be credited or paid during the financial year, by a co-operative society engaged in the business of banking does not exceed Rs. 10,000/-, there is no liability. (iii) Where the amount of income credited or paid or likely to be credited or paid during the financial year, on a deposit with the post office under any scheme framed by the Central Government and notified in this behalf exceeds Rs. 10,000/-, there is no liability under sub-section (1). (iv) Where the amount credited or paid or likely to be credited or paid during a financial year does not exceed Rs. 5,000/-, irrespective of who pays it, or....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any scheme framed by the Central Government and notified in this behalf. Exclusions under clauses (v), (vii) and (viia): 15. The obligation imposed under sub-section (1) will also not arise in respect of the following:-- (i) 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 cooperative society to any other co-operative society; (ii) to the income credited or paid in respect of deposits other than time deposits with a banking company to which the Banking Regulation Act, 1949 applies; (iii) to the income credited or paid in respect of deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank; (iv) to the income credited or paid in respect of deposits other than time deposits with a co-operative society other than a co-operative society or bank, namely, primary agricultural credit society, primary credit society, cooperative land mortgage bank and co-operative land development bank engaged in carrying on the business of banking. 16. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ii) of sub-section (1) of section 36 [***],[***] the aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the cooperative society or the public company, as the case may be; [Provided further that the amount referred to in the first proviso shall be computed with reference to the income credited or paid by the banking company or the co-operative society or the public company, as the case may be, where such banking company or the co-operative society or the public company has adopted core banking solutions;] (ii)** ** ** (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 (b) any financial corporation established by or under a Central, State or Provincial Act, or (c) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or (d) the Unit Trust of India established under the Unit Trust of India Act, 19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....est on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees;] [(x) to such income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company [or scheduled bank] in relation to a zero coupon bond issued on or after the 1st day of June, 2005 by such company or fund or public sector company [or scheduled bank]. [(xi) to any income by way of interest referred to in clause (23FC) of section 10.] [Explanation 1: For the purposes of clauses (i), (vii) and (viia), "time deposits" means deposits ([including] recurring deposits) repayable on the expiry of fixed periods. Explanation 2:[***]" 18. What is important for our discussion is to focus on certain expressions used in the various clauses and sub-clauses of sub-section (3) of Section 194A. The expressions that require our attention are (a) co-operative society; (b) co-operative bank; (c) co-operative society engaged in carrying on the business of ban....
X X X X Extracts X X X X
X X X X Extracts X X X X
....". The Tamil Nadu Cooperative Societies Act, 1983 under which the appellant/assessee has been incorporated defines the following expressions:-- (a) agricultural producers marketing society; (b) agricultural services co-operative society; (c) apex society; (d) central society; (e) consumer society; (f) co-operative union; (g) credit society; (h) financing bank; (i) milk producers society; (j) oil-seeds growers society; (k) primary society; (l) registered society; (m) self relying society; (n) scheduled co-operative society; (o) society with limited liability; (p) society with unlimited liability; and (q) weaver's society. 24. If for a moment, we get back to the provisions of the Income-tax Act, 1961, we would find that Section 194A deals with the following types of co-operative institutions:-- (a) co-operative society; (b) co-operative bank; (c) co-operative society engaged in carrying on the business of banking; (d) primary agricultural credit society; (e) primary credit soc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es including farm based industries, purchase of implements or raw materials, construction, purchase or repair of dwelling houses, discharge of prior debts, meeting ceremonial or educational expenses, purchase of domestic and other requirements or for such other purposes as the Government may, by notification specify in this behalf.' 28. The expression "financing bank" is defined in Section 2(14) of the Tamil Nadu Cooperative Societies Act, 1983 as follows:-- "financing bank" means a registered society which has as its principal objects the lending of money to other registered societies." 29. A careful look at the above definitions would show that there is a very thin line of demarcation between the two. A credit society is one which has as its principal object the raising of funds to be lent to its members for the purposes indicated in the definition. A financing bank is one which has as its principal object the lending of money to other registered societies. 30. What distinguishes a credit society from a financing bank as could be seen from the definitions of these expressions is that the distinction lies in the purpose for which the money i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for Agriculture and Rural Development Act, 1981 to mean the principal co-operative society in a district, the primary object of which is to finance all other co-operative societies in that district. Therefore the geographical limitations are imposed upon a co-operative society which comes within the meaning of the expression "central co-operative bank" by virtue of the definition found in Section 2(d) of the National Bank for Agriculture and Rural Development Act, 1981 to which a reference and reliance is made in Section 56(ccvii) of the Banking Regulation Act, 1949. 35. Section 2(n) of the National Bank for Agriculture and Rural Development Act, 1981 defines a primary rural credit society also. Since we are not concerned with such a society in this batch, we shall skip the same. 36. The expression "State land development bank", which is not defined either in the Tamil Nadu Act or in the Multi-State Co-operative Societies Act or even in the Banking Regulation Act, 1949 is defined in Section 2 of the National Bank for Agriculture and Rural Development Act, 1981. In simple terms, a State land development bank is one which has as its principal object, the providing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (b) a co-operative society formed for the protection of the mutual interest of cooperative banks or co-operative land mortgage banks, or (c) any co-operative society, not being a primary credit society, formed by the employees of-- (i) a banking company or the State Bank of India or a corresponding new bank or a subsidiary bank of such banking company, State Bank of India or a corresponding new bank, or (ii) a co-operative bank or a primary credit society or a co-operative land mortgage bank, insofar as the words "bank", "banker" or "banking" appears as part of the name of the employer bank, or as the case may be, of the bank whose subsidiary the employer bank is.]" 40. Therefore Section 7 of the Banking Regulation Act, 1949 in its application to the cooperative societies, as per Section 56(f), makes it obligatory for a co-operative society carrying on the business of banking in India, to use the adjunct "bank". Interestingly, Sub-Section (1) of Section 7 of the Banking Regulation Act, 1949 (as amended in relation to cooperative society) comprises of two parts. The first part of Section 7(1) states that no cooperative society other than a co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e bank other than those credit societies and land development or land mortgage banks. Questions raised in this batch: 44. Having considered the various statutory provisions, if we get back to the case on hand, it is seen that we are called upon to answer two substantial questions of law. We shall take up the second one first. 45. The second substantial question of law that we have framed for consideration is as to whether there exists a substantial or marked difference between a co-operative society engaged in carrying on banking business and a co-operative bank and if so, under which category the appellant would fall. The answer is too obvious in view of the foregoing discussion. Except the provisions of sub-clause (b) of clause (i), sub-clause (a) of clause (iii) and sub-clauses (a) and (b) of clause (viia) of sub-section (3) of Section 194A, we do not find anywhere a dichotomy created between a co-operative bank and a co-operative society engaged in carrying on banking businesses. Therefore our answer to the second substantial question of law would be that none of the State or Central enactments such as the Tamil Nadu Co-operative Societies Act, 1983, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iability to deduct tax at source was not there in respect of co-operative societies, if the income referred to therein had been paid or credited to other co-operative societies. The payment of interest to members was not covered even at that time. (iii) By the next amendment, which came into effect from 1.4.70, the income credited or paid in respect of deposits made with a co-operative society engaged in carrying on the business of banking including a co-operative land mortgage bank or co-operative land development bank was excluded from the liability to deduct tax at source. Therefore we can take it that it was only from 1.4.70 that the income credited or paid in respect of deposits made with co-operative societies engaged in banking business, became exempt from liability to deduct tax at source. (iv) The reason perhaps as to why the benefit was sought to be extended to the deposits made in co-operative societies carrying on the business of banking was that the colonial Acts, namely, the Co-operative Societies Act, 1912 and the Multi-unit Co-operative Societies Act, 1942 were debated after India attained independence and a co-operative movement was already at the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....banking companies and co-operative societies engaged in carrying on the business of banking. However, the requirement of deduction of tax at source will not apply in the case of interest on time deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank. Further, there will be no requirement of deduction of tax at source if the amount of interest does not exceed two thousand five hundred rupees in a financial year. The "term of time deposits" has been defined to mean deposits, excluding recurring deposits, repayable on the expiry of fixed periods. Thus, interest on savings bank account and recurring deposit accounts is not subject to deduction of tax at source." 48. The amendment inserted with effect from 1.10.91 appears to have drawn a flak within a few months. It appears that representations poured in from several quarters, forcing the Government to come up with yet another amendment with effect from 1.6.92. By this amendment, the position that prevailed prior to 1.10.91 was restored. In fact, the next circular bearing No. 636 dated 31.8.92 explained the rationale for the re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rsons and 20 per cent plus surcharge thereon in the case of domestic companies) from payment of interest exceeding ten thousand rupees in a financial year on time deposits made on or after 1st July, 1995 with a banking company or with a co-operative society engaged in carrying on the business of banking. The aforesaid limit of ten thousand rupees shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society, as the case may be. The interest on time deposits made with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank, will not be subject to the requirement of deduction of income-tax at source. The expression "time deposits" is defined to mean deposits, excluding recurring deposits, repayable on the expiry of fixed period. 46.3 The amendment will take effect from 1st July, 1995." 50. Fortunately, the next amendment came only after 20 years in the Finance Act 2015 with effect from 1.6.2015. We will take up the changes brought forth by Finance Act 2015 later, so that we could deal with the effect of these amendme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d co-operative land development bank. 54. While there is no difficulty in clearly identifying three out of those four categories, by at least taking external aid to construction, by referring to the enactments such as the Tamil Nadu Co-operative Societies Act, 1983, the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934 and National Bank for Agriculture and Rural Development Act, 1981, there is some difficulty in identifying the co-operative societies that fall under the category of "co-operative societies engaged in carrying on the business of banking". Such a category is not identified in any of these enactments which we have referred to above. This confusion has actually given rise to different Tribunals and different Courts coming to different conclusions. 55. In the Bagalkot District Central Co-op. Bank v. Jt. CIT [2014] 48 taxmann.com 117 (Bang.), the Bangalore Bench of the Tribunal came to the conclusion that the district central co-operative bank in question was a co-operative society carrying on banking business and that therefore when it pays interest income to a member, both on time deposits and on deposits other than time deposits, the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fect from 1.6.2015 and the memorandum explaining the clauses. 61. With effect from 1.6.2015, sub-section (3) of Section 194A stands amended. Clause 42 of Finance Bill, 2015 reads as follows:-- '42. In section 194A of the Income-tax Act, in sub-section (3), with effect from the 1st day of June, 2015,-- (a) in clause (i), after the proviso, the following proviso shall be inserted, namely:- "Provided further that the amount referred to in the first proviso shall be computed with reference to the income credited or paid by the banking company or the co-operative society or the public company, as the case may be, where such banking company or the co-operative society or the public company has adopted core banking solutions." (b) in clause (v), for the words "paid by a co-operative society to a member thereof or", the words and brackets "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" shall be substituted; (c) after clause (v), the following Explanation shall be inserted, namely:-- 'Explanation.--For the purposes of this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....interest by all co-operative societies to its members, the co-operative banks tried to avail this exemption by making their depositors as members of different categories. This has led to dispute as to whether the co-operative banks, for which the specific provisions of tax deduction exist in the form of section 194A(1), section 194A(3)(i)(b) and section 194A(3)(viia)(b) of the Act, can take the benefit of general exemption provided to all co-operative societies from deduction of tax on payment of interest to members. The matter has been carried to judicial forums and in some cases a view has been taken that the provisions of section 194A(3)(viia)(b) of the Act makes no distinction between members and non-members of co-operative banks for the purposes of deduction of tax, hence, the co-operative banks are required to deduct tax on payment of interest on time deposit and cannot avoid the same by taking the plea of the general exemption provided under section 194A(3)(v) of the Act. This is because the specific provision of tax deduction provided under section 194A(3)(i)(b) and 194A(3)(viia)(b) of the Act for co-operative banks override the general exemption provided to all co-operativ....