2019 (12) TMI 775 - HC - Income Tax

Benefit of exemption u/s 194A(3)(iii)(a) on interest by the CO-OPERATIVE BANK to the Primary Agricultural Credit Societies - HELD THAT - Requirement of deduction of tax at source does not prejudice the writ petitioner assessee, since the tax amounts deducted at source from the payments effected to the petitioner societies would be credited to their account with the Income Tax Department, and adjusted towards any tax liability determined against them in their assessment for the respective years. In the event the petitioner societies succeed in establishing before the Income Tax authorities that they do not have any income liable to tax under the Act, then they would be entitled to a refund of the tax amounts so deducted pursuant to a finalization of their assessments under the Income Tax Act. Alternatively, the petitioners societies also have the option of approaching the Income Tax Department for a certificate u/s 197. Stating that, in view of their non-liability to tax under the Act, there need be no deduction of tax effected at the time of making payments to them. This aspect has been made clear in the circular of the Treasury department impugned in these writ petitions. In the result, these writ petitions are disposed by declaring that, in the case of deposits made by the petitioner societies with the Co-operative Banks, they would be entitled to the benefit of exemption under Section 194A(3)(iii)(v) and, in respect of the deposits made by the petitioner societies with the Treasury, they will not be entitled to the benefit of exemption under Section 194A(3)(iii)(a)

Summary

Issues:
Entitlement of Primary Agricultural Credit Societies to exemption under Section 194A of the Income Tax Act.

Analysis:
The judgment deals with the entitlement of Primary Agricultural Credit Societies to exemption under Section 194A of the Income Tax Act. The primary issue is the interpretation of Sections 194A(3)(iii)(a) and 194A(3)(iii)(v) of the Act regarding the exemption from tax deduction at source for interest income. The petitioners, being Primary Agricultural Credit Societies, claimed exemption from tax deduction on interest amounts earned from deposits made with State Treasuries and District Co-operative Banks. The Revenue conceded to the exemption under Section 194A(3)(iii)(v) for deposits with Co-operative Banks, but contested the exemption under Section 194A(3)(iii)(a) for deposits with State Treasuries.

The Court analyzed the definition of "Co-operative Society engaged in carrying on the business of banking" under Section 194A(3)(iii)(a) in comparison with the Banking Regulation Act. It highlighted the distinction between societies primarily providing financial accommodation to members and those engaged in banking business, which involves accepting deposits from the public. The Court emphasized that the definition of "banking" under the Banking Regulation Act should guide the interpretation of the term under the Income Tax Act. It concluded that the benefit of exemption under Section 194A(3)(iii)(a) applies only when interest income accrues to a Co-operative Society engaged in banking, accepting deposits from the public, not just members.

Regarding the exemption under Section 194A(3)(iii)(v) for deposits with Co-operative Banks, the Court upheld the petitioners' entitlement to the exemption, quashing circulars issued by District Co-operative Banks for tax deduction at source. The judgment clarified that the strict interpretation of tax provisions leans in favor of the revenue. It also outlined the process for refund of tax amounts if the petitioners establish non-tax liability or obtain a certificate under Section 197 of the Income Tax Act. The judgment declared that the petitioners are entitled to exemption under Section 194A(3)(iii)(v) for deposits with Co-operative Banks but not under Section 194A(3)(iii)(a) for deposits with State Treasuries.

In conclusion, the judgment provides a detailed analysis of the entitlement of Primary Agricultural Credit Societies to exemption under specific sections of the Income Tax Act, emphasizing the importance of statutory definitions and strict interpretation of tax provisions in favor of revenue.