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2016 (1) TMI 370 - MADRAS HIGH COURT

2016 (1) TMI 370 - MADRAS HIGH COURT - [2016] 382 ITR 266 - TDS u/s 194A - Whether a co-operative society, carrying on banking business with the approval of the Reserve Bank of India, is liable to deduct tax under Section 194A of the Income Tax Act, 1961 on the interest paid to its members? - distinction between a cooperative bank and a co-operative society carrying on banking business - Held that:- Whether there exists a substantial or marked difference between a co-operative society engaged in .....

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swer 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, the Multi- State Co-operative Societies Act, 2002, the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949 and the National Bank for Agriculture and Rural Development Act, 1981 make any distinction between a co-operative society engaged in carrying on banking business and a co-operative bank.

Since there is a refere .....

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d in terms of the State enactments.

The very note explaining the clause was specific to the effect that the proposal was to bring forth an amendment with prospective effect from 1.6.2015. There is no dispute now that on and from 1.6.2015 the appellant cannot escape the liability from deduction of tax at source.Once an amendment is introduced, for the purpose of removing the anomalous situation or for the purpose of removing the confusions both in the manner in which the provisions sto .....

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aining the clauses goes one step further in making it clear that it was intended to have prospective effect from 1.6.2015. - Decided in favour of the assessee. - Tax Case (Appeal) Nos.588 to 643, 647 to 688, 744 to 750, 942 to 948, 969 to 982 of 2015 - Dated:- 15-10-2015 - MR. V.RAMASUBRAMANIAN AND MR. T.MATHIVANAN, JJ. For The Appellants : Mr.K.Ravi For The Respondent : Mr.J.Narayanasamy Senior Standing Counsel JUDGMENT (Judgment of the Court was delivered by V.RAMASUBRAMANIAN, J.) All these ap .....

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?'' 3. We are of the considered view that in addition to the above substantial question of law, one more substantial question of law also arises for consideration, namely, ''Whether there is any distinction between a cooperative bank and a co-operative society carrying on banking business and if so, under which category the appellant would fall?'' 4. Heard Mr.K.Ravi, learned counsel for the appellants and Mr.J.Narayanasamy, learned senior standing counsel for the responde .....

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Income Tax, TDS Circle, Coimbatore called for branch-wise details of deposits attracting TDS provisions for the financial years 2007-08 to 2013-14. The appellant/assessee was asked to submit the details by 16.12.2013. (c) Since the appellant did not furnish the details, the assessing officer, TDS circle issued summons under Section 131(1A) of the Act. It was followed by separate pro-rata demands. Thereafter the Income Tax Officer, TDS, Coimbatore passed orders under Section 201(1) and 201(1A). .....

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did not exceed ₹ 10,000/- was not proper. (e) Aggrieved by the disallowed portion of their appeals, the appellant filed second appeals before the Income Tax Appellate Tribunal. The Tribunal, by common orders passed in a batch of cases, partly allowed the appeals, setting aside the orders of the lower authorities, remanding the matter back to the assessing officer for the limited purpose of verifying the nature of the deposits on which interest was paid. In other words, the Tribunal found .....

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up with these appeals contending that even in respect of time deposits, irrespective of the quantum of interest paid, the co-operative societies like the appellant are not obliged to deduct tax at source for the assessment years in question. Relevant Statutory provisions:- 6. In order to examine the substantial questions of law that have arisen for our consideration, it may be necessary to take note of the relevant statutory provisions at first. 7. Sub-section (1) of Section 194A makes it obliga .....

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obligatory for even individuals and Hindu Undivided Family members to deduct tax at source, if the contingencies stated in the proviso arise. Since we are not concerned in this batch with such contingencies, we do not deal with the proviso. 9. Having indicated in sub-section (1), persons who are responsible to deduct tax at source, the circumstances under which tax is to be deducted at source and the taxable events in sub-section (1), the provisions of Section 194A proceed to list out the exclu .....

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t, 1949 applies, does not exceed ₹ 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 ₹ 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 .....

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s are imposed by two provisos. The first proviso was inserted by Finance (No.2) Act, 1996 with effect from 1.10.1996 and the second proviso was inserted with effect from 1.6.2015. By the first proviso, time deposits (i) either with a banking company to which the Banking Regulation Act, 1949 applies; (ii) or to a co-operative society engaged in the business of banking; (iii) or to deposits with a public company which is formed and registered in India with the main object of carrying on the busine .....

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with reference to the income credited or paid by all branches in favour of the assessee, if such banking company or co-operative society or the public company had adopted core banking solutions. Exclusions under clause (iii) of sub-section (3): 13. The liability to deduct tax at source imposed under sub-section (1) will not apply to the incomes credited or paid (i) to a banking company to which the Banking Regulation Act, 1949 applies; (ii) to a co-operative society engaged in the business of b .....

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credited or paid by a firm to a partner. It will also not apply to such income credited or paid in respect of deposits under 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 cooperative bank to a member thereof or to such income credited or paid by a cooperative .....

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a co-operative society other than a co-operative society or bank, namely, primary agricultural credit society, primary credit society, co-operative land mortgage bank and co-operative land development bank engaged in carrying on the business of banking. 16. There are also exclusions under clauses (viii), (ix), (x) and (xi), with which we are not fortunately concerned in this batch. But before parting with Section 194A, we should take note of two important things, namely, (a) that the expression .....

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se of easy reference, we extract herein below sub-section (3) of Section 194A in entirety. (3) The provisions of sub-section (1) shall not apply - (i) 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 subsection (1) to the account of, or to, the payee, [does not exceed - (a) ten thousand rupees, where the payer is a banking company to which th .....

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respect of - (a) time deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or (b) time deposits with a co-operative society engaged in carrying on the business of banking; (c) deposits with a public company which is formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India .....

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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 P .....

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s behalf in the Official Gazette; (iv) to such income credited or paid by a firm to a partner of the firm; (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; [Explanation.-For the purposes of this clause, "co-operative bank" shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949 .....

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ted or paid in respect of, - (a) 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; (b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a cooperative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking;] (viii) to such income credited or paid by the Central Government under any p .....

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of interest 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 .....

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e expressions that require our attention are (a) co-operative society; (b) cooperative bank; (c) co-operative society engaged in carrying on the business of banking; (d) primary agricultural credit society; (e) primary credit society; (f) cooperative land mortgage bank; and (g) co-operative land development bank. 19. As we have stated earlier, the expression co-operative bank is defined in the explanation under clause (v) of sub-section (3) to have the same meaning as assigned to it in Part-V of .....

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y to mean a co-operative society registered under the co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. The expression co-operative bank is not defined in the Income Tax Act, 1961. 21. Insofar as the State of Tamil Nadu is concerned, there are at least two enactments that govern the functioning of co-operative societies. The cooperative societies which function only within the geographical limits of th .....

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go to the definition of the same expression either in the Tamil Nadu Co-operative Societies Act, 1983 or in the Multi-State Co-operative Societies Act, 2002. On the contrary, we may have to refer to these enactments to see what a co-operative bank is, in view of the limitation imposed in the explanation under clause (v) of sub-section (3) of Section 194A. 23. Our tale of woes is compounded by the fact that even the Tamil Nadu Co-operative Societies Act does not define the expression co-operative .....

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) scheduled co-operative society; (o) society with limited liability; (p) society with un-limited 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 cooperative 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 societ .....

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ive societies for the time being in force in any State. 26. While the distinction sought to be made in clause (viia) of sub-section (3) of Section 194A between (i) a primary agricultural credit society, a primary credit society, a co-operative land mortgage bank and a co-operative land development bank and (ii) other types of co-operative societies is understandable, the distinction sought to be made in the various clauses of sub16 section (3) between a co-operative bank on the one hand and a co .....

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does not define a cooperative bank, though it defines the expression credit society and financing bank , a co-operative society carrying on the business of banking registered in terms of the Tamil Nadu Act could fall naturally only under any of these categories, namely, credit society or financing bank. Therefore it is necessary to take note of the definition of the expressions credit society and financing bank . The expression credit society is defined in Section 2(13) of the Tamil Nadu Co-ope .....

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r 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 Co-operative 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 o .....

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stinction does not lie in the manner in which they invite or accept deposits. What is important for the purpose of Section 194A is the acceptance of deposits and the payment of interest to the depositors. Therefore, for the purpose of Section 194A, a credit society under the Tamil Nadu Co-operative Societies Act and the financing bank under the same Act stand on the same footing. They can be treated differently only in terms of the express provisions such as the one found in sub-clause (a) of cl .....

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ty . 32. Though the explanation under clause (v) of sub-section (3) limits the meaning of the expression co-operative bank borrowed from Part-V of the Banking Regulation Act, 1949 to clause (v) alone, we would nevertheless take note of the said definition to see if the same could be of any assistance. The expression co-operative bank is defined in Section 56(c) of the Banking Regulation Act, 1949 to mean a state co-operative bank, a central co-operative bank and a primary co-operative bank. Inte .....

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rural credit society and State co-operative bank, as found in National Bank for Agriculture and Rural Development Act, 1981. 33. Therefore in our trail we will now have to go to the National Bank for Agriculture and Rural Development Act. 34. The expression central co-operative bank is defined in Section 2(d) of National Bank 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 s .....

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ary 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(v) 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 p .....

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could be found in Section 56(f) of the Banking Regulation Act, 1949. Before we advert to clause (f) of Section 56, we should bring on record one fact. 38. Section 56 of the Banking Regulation Act is actually a complete code in itself. Section 56 makes the provisions of the Banking Regulation Act, 1949 applicable to co-operative societies, just as they apply to banking companies, subject to certain modifications indicated in clauses (a) to (zl). By the provisions contained in clauses (a) to (zl) .....

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ection 7 of the Act to co-operative societies is concerned, clause (f) of Section 56 provides the method and form in which Section 7 will apply to co-operative societies. Section 56(f) which substitutes Section 7 of the Banking Regulation Act, 1949, for the purpose of its application to co-operative societies, is extracted as follows:- [(f) for section 7, the following section shall be substituted, namely:- 7. Use of words bank , banker or banking .-(1) No co-operative society other than a co-op .....

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ot 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 word 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.] 4 .....

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shall use the word bank as part of its name. The second part of Section 7(1) states that no co-operative society shall carry on the business of banking in India unless it uses as part of its name at least one of the words, namely, bank, banker or banking. 41. Therefore Section 7(1) of the Banking Regulation Act, 1949 settles at least one issue, namely, that insofar as that Act is concerned, there is no distinction between a co-operative bank and a co-operative society carrying on the business o .....

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operative Societies Act, 1983 that the said Act also does not distinguish between a co-operative society carrying on the banking business and a co-operative bank, though it distinguishes between a credit society and a financing bank. The fact that we have no alternative except to look into the provisions of the Banking Regulation Act, 1949 and the National Bank for Agriculture and Rural Development Act, 1981 is also fortified by two clauses in sub-section (2) of the Reserve Bank of India Act, 19 .....

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-operative bank would have the same meaning as assigned to them in Part-V of the Banking Regulation Act, 1949. 43. Therefore the conclusion that is irresistible is that none of these enactments either Central or State, make a clear distinction between a cooperative society engaged in carrying on banking business and a co-operative bank other than those credit societies and land development or land mortgage banks. Questions raised in this batch: 44. Having considered the various statutory provisi .....

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oregoing 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, 19 .....

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of the colonial past, which also does not define a co-operative bank. It only deals with co-operative societies registered under the Act. Therefore our answer to the second question may not undergo a change even if we make a reference to the Co-operative Societies Act, 1912, which in any case has no application to the societies registered in terms of the State enactments. Substantial question of law No.1: 47. Coming to the first substantial question that arises for consideration, Mr.J.Narayanasa .....

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made to Section 194A right from 1.4.67 upto 1.6.2015 could be summarized, without enlarging the scope of the discussion, as follows:- (i) Under Finance Act No.2 of 1967, Section 194A was amended with retrospective effect from 1.4.67 to exclude any income credited or paid to a banking company to which the Banking Regulation Act, 1949 apply, including a co-operative society engaged in carrying on the business of banking as well as co-operative land mortgage bank. In other words, income tax was no .....

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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 .....

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perative movement was already at the dawn in the State of Maharashtra where sugarcane was grown to a large extent. (v) Finding that the benefit granted by the 1970 amendment was applicable only to the incomes credited or paid in respect of deposits made with cooperative societies carrying on the business of banking, the Government came up with the next amendment with effect from 1.4.71 to enlarge the scope of the benefit to members of co-operative societies irrespective of whether the society ca .....

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effect from 1.4.71. (vi)After nearly 20 years, the Government came up with an amendment with effect from 1.10.91. By this amendment inserted with effect from 1.10.91, sub-clauses (a) & (b) were inserted under the existing clause (vii) after splitting (vii) into two parts, namely, (vii) and (viia). (vii)The rationale for the amendment with effect from 1.10.91 was explained in the Circular No.621 dated 15.12.1991, as follows:- Provision for deduction of tax at source on interest income from b .....

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nk). 55.1. Instances have come to notice of the unaccounted incomes being deposited in banks in one's own name or benami. Interest on such deposits is not likely to be declared in IT returns. 55.2. With a view to improving tax compliance, s.194A of the IT Act has been amended to secure deduction of tax at source from interest on time deposits with the aforesaid banking companies and co-operative societies engaged in carrying on the business of banking. However, the requirement of deduction o .....

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of fixed periods. Thus, interest on savings bank accounts 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 .....

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tion as before 1st October, 1991 in relation to deduction of income-tax at source in the case of income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act) or with a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank), and (b) section 194H of the Income-t .....

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ect from 1.7.95. The rationale for such amendment was indicated in Circular No.717 dated 14.8.95 as follows:- Deduction of tax at source from interest on time deposits with banks. 46.1. On account of the provisions contained in clause (vii) of sub-section (3) of section 194A, income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949 applies or with a co-operative society engaged in carrying on the business of banking is exempt from the requir .....

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ees 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 cooperative 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 mortga .....

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we could deal with the effect of these amendments and the contentions of the Revenue on the basis of these amendments. 51. Relying upon the various amendments that were introduced right from 1967 at least upto 1995, it is contended by the Revenue that the original intention of excluding the income credited or paid from the purview of the liability to deduct tax at source, was only to benefit the income credited or paid by a cooperative society to another society. The benefit was later extended .....

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ome of those things at other points of time and what is ultimately left at the crucial point of time with reference to the law that was in force in the relevant assessment year. 52. We have no difficulty in accepting the said submission. As we have indicated earlier, sub-section (1) of Section 194A imposes an obligation upon every person. Even individuals and Hindu Undivided Families are covered by the proviso subject to certain conditions. Therefore the exclusions found in subsection (3) are na .....

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the various sub-sections and clauses of Section 194A without defining each one of those categories. The four categories of co-operative societies sought to be dealt with under Section 194A are (a) co-operative societies; (b) co-operative societies carrying on the business of banking; (c) co-operative banks; and (d) primary agricultural credit society, primary credit society, co-operative land mortgage bank and co-operative land development bank. 54. While there is no difficulty in clearly identi .....

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ry 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-operative Bank v. Joint Commissioner of Income Tax in I.T.A.No.1572/Bang/2013 decided on 30.5.2014, 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 b .....

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the Panaji Bench in I.T.A.No.85/PN/2013 in the case of Bailhongal Urban Co-operative Bank Ltd., v. Joint Commissioner of Income Tax, decided on 28.8.2013. But the decision of the Panaji Bench was based upon the decision of the Bombay High Court in Jalgaon District Central Co-operative Bank Ltd. v. Union of India, 265 ITR 423, wherein the Bombay High Court was concerned with Circular No.9 of 2002, which made a distinction between the nominal members, associate members and sympathizer members. We .....

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d in sub-clause (a) of clause (viia) or not. It was admittedly a cooperative society and hence the Kerala High Court came to the conclusion that sub-clause (a) of clause (viia) was applicable. 59. In Kadirur Vanitha Co-operative Society Ltd. v. Income Tax Officer (2011) 196 Taxman 0418, the assessee claimed that it was a primary credit cooperative society. Since it was a question of fact, the Kerala High Court relegated the parties for appropriate adjudication before the departmental authorities .....

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-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 subsection (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 th .....

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For the purposes of this clause, co-operative bank shall have the same as meaning assigned to it in Part V of the Banking Regulation Act, 1949; (d) for clause (ix), the following clauses shall be substituted, namely:- (ix) to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal; (ixa) to such income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as t .....

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, i.e. ₹ 10,000/- for interest payment by banks, co-operative society engaged in banking business (co-operative bank) and post office and ₹ 5,000/- for payment of interest by other persons. Further, sub-section (3) of section 194A inter alia also provides for exemption from deduction of tax in respect of following interset payments by cooperative society: (i) Interest payment by a co-operative society to a member thereof or any other co-operative society. [Section 194A(3)(v) of the A .....

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with provisions of sections 194A(3)(i)(b) and 194A(3)(viia)(b), co-operative bank is required to deduct tax from interest payment on time deposits if the amount of such payment exceeds specified threshold of ₹ 10,000/-. However, as the provisions of section 194A(3)(v) of the Act provide a general exemption from making tax deduction from payment of interest by all co-operative societies to its members, the co-operative banks tried to avail this exemption by making their depositors as member .....

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A(3)(viia)(b) of the Act makes no distinction between members and nonmembers 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 cooperative banks over .....

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erative banks differently from other commercial banks in the matter of deduction of tax and allowing them to avail the exemption meant for smaller credit co-operative societies formed for the benefit of small number of members. However, as mentioned earlier, a doubt has been created regarding the applicability of the specific provisions mandating deduction of tax from the payment of interest on time deposits by the cooperative banks to its members by claiming that general exemption provided is a .....

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