2012 (7) TMI 732 - HC - Income Tax

Validity of circular dated 11.9.2002 issued by the Central Board of Direct Taxes in purported exercise of powers under section 119 of the Income Tax Act,1961 - TDS u/s 194A - It is the case of the petitioners that such exemption or exclusion provided in clause (v) of sub-section (3) of section 194A in case of a member of cooperative society would include all members and is not confined to only certain class of members of a cooperative society. Held that - The contention with respect to locus standi needs to be noted only for rejection. The petitioners are cooperative banks. If exemption under clause (v) of sub-section (3) of section 194A with respect to some of its members is withdrawn, the banks would have to follow the entire procedure of deducting tax at source at the time of paying or crediting such interest in favour of such a member. The member in turn is also be subject to tax deduction regime and all the procedure and procedural requirements would have to be followed by the Banks and the member would suffer the tax deduction at source. It, therefore, cannot be stated that the petitioners which are cooperative banks are not prejudicially affected by the impugned circular. Circular holding that powers under section 119 of the Act would not empower the Board to issue clarification which would take away the exemption which has been granted by the statute. - the circular dated 11.9.2002 as at Annexure A to the petition is, therefore, not effective. - Decided in favor of assessee.

Summary

Issues:
Challenge to the validity of circular dated 11.9.2002 issued by the Central Board of Direct Taxes under section 119 of the Income Tax Act, 1961 by Cooperative Banks in Gujarat.

Analysis:
1. The petitions filed by Cooperative Banks in Gujarat challenged the circular dated 11.9.2002 issued by the Central Board of Direct Taxes under section 119 of the Income Tax Act, 1961. The circular clarified the exemption under section 194A(3)(v) of the Act, specifically regarding the eligibility of members of a cooperative society for tax deduction at source. The petitioners contended that the circular exceeded the Board's power and made distinctions between different classes of members not envisaged by the statute.

2. The petitioners argued that the circular contradicted the exemption clause under section 194A(3)(v) and deprived cooperative societies of their statutory rights. They relied on a previous decision of the Bombay High Court which had quashed a similar circular, a decision upheld by the Supreme Court. The petitioners maintained that the circular in question should also be declared ultra vires.

3. On the other hand, the Revenue contended that the Board had the authority under section 119 of the Act to issue clarifications. They argued that the distinction made in the circular regarding different classes of members was justified, especially concerning nominal members who lack certain rights within a cooperative society. The Revenue also raised the issue of locus standi, questioning the petitioners' standing to challenge the circular.

4. The High Court examined the validity of the impugned circular in light of the Bombay High Court's decision and held that the Board had overstepped its authority in issuing the clarification. The Court emphasized that the Board cannot override or detract from the provisions of the Income Tax Act, and the circular in question was deemed invalid. The Court also rejected the argument regarding locus standi, stating that the petitioners, being cooperative banks, were indeed prejudicially affected by the circular's implications on tax deduction procedures for members.

5. Consequently, the High Court allowed the petitions, quashing the circular dated 11.9.2002 and upholding the rights of cooperative banks and their members under section 194A(3)(v) of the Income Tax Act, 1961. The decision was based on the principle that the Board cannot exceed its authority granted by the Act and cannot introduce substantial changes or alterations through administrative circulars.