TMI Blog2022 (7) TMI 1048X X X X Extracts X X X X X X X X Extracts X X X X ..... (3)(v) to cooperative banks. As rightly held in the impugned order, this issue has been held in assessee's favor by Hon'ble High Court of Madras in the case of Coimbatore District Central Cooperative Bank Ltd.[ 2016 (1) TMI 370 - MADRAS HIGH COURT] 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. However, the amendment as brought in by Finance Act, 2015 was prospective in nature and applicable only from 01.06.2015. It is only on and from 01.06.2015, the assessee could be held liable for such TDS but not before that date. On the basis of this decision, it could be concluded that the co-operative banks have thus been taken out of the purview of beneficial exception only from 01.06.2015 and not before that. We order so. In the result, the impugned order could not be faulted with. - Decided against revenue. - ITA No. 1111/C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quences of non-deduction of tax and, therefore, has to be interpreted in the light of mandatory provisions contained under Chapter XVII-B. 8. The CIT(A) failed to consider the fact that the decision of the Madras High Court relied on by the CIT(A) has not been accepted by the Department and a proposal for filing SLP has already been sent to Board. 9. For these and such other grounds that may be urged at the time of hearing it is prayed that the order of the CIT(A) may be quashed and that of the Assessing Officer may be restored. As evident, the sole subject matter of appeal is disallowance u/s. 40(a)(ia) for want of Tax deduction at source (TDS) on interest payment. 2. The Ld. Sr. DR, drawing attention to the grounds of appeal as well as the orders of lower authorities justified the disallowance as made by Ld. AO u/s. 40(a)(ia). The Ld. AR, on the other hand, controverted the arguments and submitted that the issue stood covered in assessee's favor by the decision of Hon'ble High Court of Madras. Having heard rival submissions and after going the order of lower authorities, our adjudication to the subject matter of appeal would be as under. Assessment P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is that the assessee is registered under Tamilnadu Cooperative Societies Act, 1983 and it has obtained license from RBI to carry out banking activities u/s. 22(1) read with Section 56(6) of Banking Regulation Act, 1949. It has paid interest and submits that there is no requirement of deduction of tax at source in this year. On the other hand, the case of Ld. AO is that 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. 6. As rightly held in the impugned order, this issue has been held in assessee's favor by Hon'ble High Court of Madras in the case of Coimbatore District Central Cooperative Bank Ltd. Vs. ITO (supra) as under:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid, no liability arises. Exclusions to the exclusions under clause (i) of sub-section (3): 11. To the exclusions provided under sub-clauses (a) to (d) of clause (i) of Sub-Section (3), certain restrictions 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 business of providing long term finance, for construction or purchase of houses in India for residential purposes and which is eligible for deduction under Section 36 are to be computed with reference to the income credited or paid by a branch of a banking company or a co-operative society or a public company. 12. By the second proviso, the time deposits made with a banking company or with a co-operative society or deposits with a public company covered by the first proviso are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 time deposits is defined in Explanation-1 to mean deposits including recurring deposits repayable on the expiry of fixed periods; and (b) that the expression co-operative bank is defined in the explanation under clause (v) to have the same meaning as assigned to it in Part-V of the Banking Regulation Act, 1949. These two expressions assume significance, in the light of the questions that have arisen for consideration and hence we have taken note of the same. 17. For the purpose of easy reference, we extract hereinbelow 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 sub-section (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 the Banking Regulation A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this 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 cooperative bank) to a member thereof or to such income credited or paid by a cooperative 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);] (vi) to such income credited or paid in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf in the Official Gazette; (vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) 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); (viia) to such income credited or paid in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Banking Regulation Act, 1949. But the explanation makes it clear that it is applicable only for the purpose of that clause viz., clause (v). Therefore we do not know whether the meaning assigned to the expression co-operative bank in Part-V of the Banking Regulation Act, 1949 could be borrowed for the purpose of understanding the meaning of the same expression found in the clauses other than clause (v) of sub-section (3). 20. Section 2(19) of the Income-tax Act defines a co-operative society to mean a cooperative 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 co-operative societies which function only within the geographical limits of the State of Tamil Nadu are registered under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression co-operative society is defined in Section 3(h) of the Multi-State Co-operative Societies Act, 2002 to mean a society registered or deemed to be registered under any law relating to co-operative 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 cooperative 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 sub-section (3) between a co-operative bank on the one hand and a cooperative society carrying on the business of banking on the other hand, is not clearly decipherable from the scheme of Section 194A. Even if we take external aid to construction, by borrowing from the provisions of the Tamil Nadu Co-operative Societies Act, 1983 and the Multi-State Co-operative Societies Act, 2002, no such distinction between a co-operative bank and a co-operative society carrying on the business of banking could be made out. 27. Since the Tamil Nadu Co-operative Socie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 clause (viia) of sub-section (3). Otherwise the expression co-operative bank which is neither defined in the Income-tax Act nor in the Tamil Nadu Societies Registration Act would naturally cover a credit society as well as a financing bank at least insofar as the Tamil Nadu Act is concerned. 31. Interestingly, the Multi-State Co-operative Societies Act, 2002 does not deal with the expression credit society at all. It deals only with two expressions, namely, co-operative bank and co-operative society . 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 cooperative bank and a primary co-operative bank. Interestingly, Section 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Banking Regulation Act, 1949. As a matter of fact, the answer to the questions of law raised in these appeals could be found in Section 56 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), Section 56 incorporates the amendments, the substantive provisions of the Act as well as the schedules thereto, insofar as their application to co-operative societies are concerned. One of the provisions of the Banking Regulation Act, 1949 relates to the entitlement or obligation of companies carrying on the business of banking, to the use of the words bank, banker, banking or banking company. This is covered by Section 7 of the Banking Regulation Act, 1949. 39. Insofar as the application of Section 7 of the Act to co-operative societies is concerned, clause (f) of Section 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inction between a co-operative bank and a co-operative society carrying on the business of banking. If a co-operative society carries on the business of banking, it should necessarily have the adjunct bank. Additionally, if a co-operative society does not carry on the business of banking, it should not use the adjunct bank. 42. Therefore there appears to be no distinction between a co-operative bank and a cooperative society engaged in the business of banking, at least for the purpose of the Banking Regulation Act, 1949. We have already seen from the provisions of the Tamil Nadu Co-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, 1934. In clauses (h) and (i) of Section 2, the Reserve Bank of India Act, 1934 states that the expressions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1912. It was a central legislation 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. Narayanasamy, learned senior standing counsel for the department, submitted a note to us indicating the manner in which Section 194A underwent a change right from the Finance Act No. 2 of 1967 upto date. The history of the amendments that Section 194A had undergone in the past nearly about 48 years indicate that the pendulum has swung from one extreme to the other insofar as the co-operative societies are concerned, indicating the mindset of the law makers at different points of time. The changes that were 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or not. In other words, by the amendment that came with effect from 1.4.71, two sets of exemptions were granted, one was in respect of income credited or paid in respect of deposits made with a co-operative society carrying on the business of banking and the other was the income credited or paid by a co-operative society to a member or to any other society. To put it differently, one more category which was excluded from the application of Section 194A was inserted with 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 bank deposits, etc. 55. Section 194A of the IT Act provides that the provisions regarding deduction of income-tax at source shall not apply to the income credited or paid in respect of deposits wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 cooperative land mortgage bank or a co-operative land development bank), and (b) section 194H of the Income-tax Act, to provide that the deduction of income-tax at source from income by way of commission or brokerage will not be required to be made on or after 1st June, 1992. 49. After about three years, the next amendment came under the Finance Act, 1995. The object of this Act was indicated to be to bring about an effective method of widening the tax base by enlarging the scope of deduction of income-tax at source. By this amendment, sub-clauses (a) and (d) of clause (viia) were reintroduced with effect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding that unaccounted monies were deposited in co-operative societies, the benefit was withdrawn. Therefore it is contended by Mr. J. Narayanasamy, learned senior standing counsel that any interpretation to sub-clauses (a) and (b) of clause (viia) and clause (v) of sub-section (3) of Section 194A should be in tune with the legislative intent in including certain things at times and excluding some 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 sub-section (3) are naturally to be construed stric to sensu. 53. But unfortunately, if a taxing statute and an exclusion clause contained in the taxing statute are to be construed strictly, the provisions themselves should make it clear as to who are the persons who are to be charged or exempted and what are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 [2004] 265 ITR 423/134 Taxman 1 (Bom.), 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 are not concerned in this batch about the categorization of members. We are concerned about the distinction made between sub-clauses (a) and (b) of clause (viia) of sub-section (3). 58. The Revenue places reliance upon the decision of the Division Bench of the Kerala High Court in ITO v. Thodupuzha Urban Co-operative Bank Ltd. [2003] 264 ITR 36/132 Taxman 284 (Ker.). But in the said case, there was no issue as to whether the assessee fell under one or two of the types of co-operative societies mentioned in sub-clause (a) of clause (viia) or not. It was admittedly a co-operative 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. ITO [2011] 196 Taxman 418 (Ker.), the assessee claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation 1 below clause (xi), for the word excluding , the word including shall be substituted. 62. The relevant portion of the memorandum explaining the clauses in the Finance Bill reads as follows:-- Section 194A(1) read with section 194A(3)(i) of the Act provide for deduction of tax on interest (other than interest on securities) over a specified threshold, i.e. Rs. 10,000/- for interest payment by banks, co-operative society engaged in banking business (cooperative bank) and post office and Rs. 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 interest payments by co-operative 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 Act] (ii) Interest payments on deposits by a primary agricultural credit society or primary credit society or co-operative land mortgage bank or co-operative land development bank. [Section 194A(3)(viia)(a) of the Act] (iii) Interest payment on deposits other than time deposit by a co-operative society engaged in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umber 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 co-operative banks to its members by claiming that general exemption provided is also applicable for payment of interest to member depositors. In view of this, it is proposed to amend the provisions of the section 194A of the Act to expressly provide from the prospective date of 1st June, 2015 that the exemption provided from deduction of tax from payment of interest to members by a co-operative society under section 194A(3)(v) of the Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members. 63. It can be seen from the last part of the portion extracted above that 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. 64. Once an amendment is introduced, for the purpose of removing the anomalous situa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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