2016 (1) TMI 370 - HC - Income Tax

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 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 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 reference to the Co-operative Societies Act 1912 in Section 2(19) of the Act we have also gone to the Co-operative Societies 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. 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 stood and the manner in which they were understood the same could be taken only to have prospective effect. It must be pointed out that the Parliament did not choose to answer a question. Rather it chose to amend the provisions. It is now well settled that an amendment can only be prospective unless it is made retrospective by express language or necessary implication. Apart from the fact that the express language of Section 194A after amendment does not indicate any retrospectivity the note explaining 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.

Issues Involved:
1. 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.
2. Whether there is any distinction between a co-operative bank and a co-operative society carrying on banking business and under which category the appellant would fall.

Issue-Wise Detailed Analysis:

Issue 1: Liability to Deduct Tax Under Section 194A
The court examined whether a co-operative society engaged in banking is obligated to deduct tax on interest paid to its members under Section 194A of the Income Tax Act, 1961. The relevant statutory provisions were analyzed, particularly Section 194A, which mandates tax deduction at source for interest payments exceeding certain thresholds. The court noted various exclusions under sub-section (3) of Section 194A, including those applicable to co-operative societies and banks.

The court observed that the legislative history of Section 194A showed fluctuating policies regarding tax deduction at source for co-operative societies. Initially, co-operative societies engaged in banking were exempted from this obligation, but amendments over time introduced and then removed such exemptions based on concerns about unaccounted deposits.

The court referred to the Finance Act, 2015, which clarified that the exemption under Section 194A(3)(v) does not apply to co-operative banks for interest on time deposits, effective from 1.6.2015. The memorandum explaining the amendment indicated that the change was intended to address ambiguities and ensure that co-operative banks are treated similarly to commercial banks regarding tax deduction at source.

Given the prospective nature of the 2015 amendment, the court concluded that for the relevant assessment years before 1.6.2015, the appellant, a co-operative society engaged in banking, was not obligated to deduct tax on interest paid to its members under Section 194A.

Issue 2: Distinction Between Co-operative Bank and Co-operative Society Carrying on Banking Business
The court explored whether there is a distinction between a co-operative bank and a co-operative society engaged in banking, and under which category the appellant falls. The court examined definitions and provisions from various statutes, including the Income Tax Act, 1961, the Tamil Nadu Co-operative Societies Act, 1983, the Multi-State Co-operative Societies Act, 2002, the Banking Regulation Act, 1949, and the National Bank for Agriculture and Rural Development Act, 1981.

The court noted that the term "co-operative bank" is defined in the Banking Regulation Act, 1949, but this definition is limited to specific clauses and does not universally apply to all provisions of Section 194A. The Tamil Nadu Co-operative Societies Act, 1983, and the Multi-State Co-operative Societies Act, 2002, do not clearly distinguish between a co-operative bank and a co-operative society engaged in banking.

The court found that the statutory framework does not consistently differentiate between these entities. The Banking Regulation Act, 1949, mandates that co-operative societies engaged in banking must use the term "bank" in their name, indicating no substantial distinction between a co-operative bank and a co-operative society engaged in banking for regulatory purposes.

The court concluded that the appellant, being a District Central Co-operative Bank, falls under the category of a co-operative society engaged in banking. This classification aligns with the statutory provisions and the regulatory framework governing co-operative societies and banks.

Conclusion:
The court answered both substantial questions of law in favor of the appellant. It held that for the relevant assessment years, the appellant was not required to deduct tax on interest paid to its members under Section 194A. Additionally, it determined that there is no significant distinction between a co-operative bank and a co-operative society engaged in banking, and the appellant falls under the latter category. The appeals were allowed, and the court ordered no costs.

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