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TMI Blog2016 (1) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a co-operative society, in terms of the provisions of the Tamil Nadu co-operative Societies Act, 1983. The appellant is carrying on the business of banking with 30 branches including the head office in the district of Coimbatore. (b) A survey was conducted in the business premises of the appellant on 14.11.2013, followed by a hearing in which the Deputy Commissioner of 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). Orders in respect of each assessment year were passed on the same date, but individually. By the said orders, the Income Tax Officer directed the appellant to pay the amount quantified in each of those years. (d) The appellant filed statutory appeals before the Commissioner of Income Tax (Appeals-II), Coimbatore. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exclusions or exceptions under sub-section (3). Subsection (3) contains about eleven clauses, under which the items that are excluded from the application of sub-section (1) are listed. In simple terms, such exclusions under sub-section (3) of Section 194A could be understood as follows:- Exclusions under clause (i) of sub-section (3): 10. (i) Where the amount of income credited or paid or likely to be credited or paid during the financial year, by a banking company to which the Banking Regulation Act, 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such other institution which the Central Government may by notification indicate. Exclusions under clauses (iv) and (vi): 14. The liability to deduct tax at source will not arise in respect of an income 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 society to any other co-operative society; (ii) to the income credited or paid in respect of deposits other than time deposits with a banking company to which the Banking Regulation Act, 1949 applies; (iii) to the income credited or paid in respect of 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; (iv) to the income credited or paid in respect of deposits other than tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clause (viii) of sub-section (1) of section 36 [***],[***] the aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society or the public company, as the case may be; [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 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 Provincial Act, or (c) the Life Insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 such company or fund or public sector company [or scheduled bank]. [(xi) to any income by way of interest referred to in clause (23FC) of section 10.] [Explanation 1: For the purposes of clauses (i), (vii) and (viia), "time deposits" means deposits ([including] recurring deposits) repayable on the expiry of fixed periods. Explanation 2:[***]" 18. What is important for our discussion is to focus on certain expressions used in the various clauses and sub-clauses of sub-section (3) of Section 194A. The expressions that require our attention are (a) co-operative society; (b) coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot define the expression "co-operative bank". The Tamil Nadu Co-operative Societies Act, 1983 under which the appellant/assessee has been incorporated defines the following expressions:- (a) agricultural producers marketing society; (b) agricultural services co-operative society; (c) apex society; (d) central society; (e) consumer society; (f) co-operative union; (g) credit society; (h) financing bank; (i) milk producers society; (j) oil-seeds growers society; (k) primary society; (l) registered society; (m) self relying society; (n) 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 society; (f) co-operative land mortgage bank; and (g) co-operative land development bank. 25. But the expression "co-ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or 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 of demarcation between the two. A credit society is one which has as its principal object the raising of funds to be lent to its members for the purposes indicated in the definition. A financing bank is one which has as its principal object the lending of money to other registered societies. 30. What distinguishes a credit society from a financing bank as could be seen from the definitions of these expressions is that the distinction lies in the purpose for which the money is lent by them. The distinction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are imposed upon a co-operative society which comes within the meaning of the expression "central co-operative bank" by virtue of the definition found in Section 2(d) of the National Bank for Agriculture and Rural Development Act, 1981 to which a reference and reliance is made in Section 56(ccvii) of the Banking Regulation Act, 1949. 35. Section 2(n) of the National Bank for Agriculture and Rural Development Act, 1981 defines a primary 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 providing of long term advances for agricultural development. 37. The reason as to why we have been compelled to go after these definitions is the fact that the appellant/assessee happens to be the District Central Co-operative Bank. No co-operative society i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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.]" 40. Therefore Section 7 of the Banking Regulation Act, 1949 in its application to the co-operative societies, as per Section 56(f), makes it obligatory for a co-operative society carrying on the business of banking in India, to use the adjunct "bank". Interestingly, sub-section (1) of Section 7 of the Banking Regulation Act, 1949 (as amended in relation to co-operative society) comprises of two parts. The first part of Section 7(1) states that no co-operative society other than a co-operative bank 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion of law that we have framed for consideration is as to 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. 46. Since there is a reference to the Co-operative Societies Act, 1912 in Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income credited or paid in respect of deposits made with co-operative societies engaged in banking business, became exempt from liability to deduct tax at source. (iv)The reason perhaps as to why the benefit was sought to be extended to the deposits made in co-operative societies carrying on the business of banking was that the colonial acts, namely, the Co-operative Societies Act, 1912 and the Multi-unit Co-operative Societies Act, 1942 were debated after India attained independence and a co-operative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a financial year. The "term of time deposits" has been defined to mean deposits, excluding recurring deposits, repayable on the expiry 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 No.636 dated 31.8.92 explained the rationale for the restoration of the position on the following lines:- "Modification of the provisions regarding deduction of tax at source: 49.1. A large number of representations had been received from members of public representative bodies and banks pointing out various difficulties which had arisen on account of the operation of these provisions. Keeping in view these difficulties, the Act amends-- (a) section 194A of the income-tax Act, to restore the position as before 1st October, 1991 in relation to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank, will not be subject to the requirement of deduction of income-tax at source. The expression "time deposits" is defined to mean deposits, excluding recurring deposits, repayable on the expiry of fixed period. 46.3 The amendment will take effect from 1st July, 1995." 50. Fortunately, the next amendment came only after 20 years in the Finance Act 2015 with effect from 1.6.2015. We will take up the changes brought forth by Finance Act 2015 later, so that 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 to the deposits made with co-operative societies engaged in the business of banking. Subsequently, upon finding that unaccounted monies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese 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 business and that therefore when it pays interest income to a member, both on time deposits and on deposits other than time deposits, the society need not deduct tax at source. 56. Similar views were taken by the Vishakapatnam Bench of the Tribunal in the Vishakapatnam Co-operative Bank in I.T.A.Nos.5 and 19 of 2011 decided on 29.8.2011 and the Pune Bench of the Tribunal in Ozer Merchant Co-operative Bank in I.T.A.No.1588/PN/2012 decided on 30.10.2013. 57. However, a contra view was expressed by 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 Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lutions." (b) in clause (v), for the words "paid by a co-operative society to a member thereof or", the words and brackets "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" shall be substituted; (c) after clause (v), the following Explanation shall be inserted, namely:--'Explanation.--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 the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees;" (e) in Explanation 1 below clause (xi), for the word "excluding", the word "including" shall be substituted." 62. The relevant portion of the memorandum explaining the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct 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 override the general exemption provided to all co-operative societies for nondeduction of tax from interest payment to members under section 194A(3)(v) of the Act. As there is no difference in the functioning of the co-operative banks and other commercial banks, the Finance Act, 2006 and Finance Act, 2007 amended the provisions of the Act to provide for cooperative banks a taxation regime which is similar to that for the other commercial banks. Therefore, there is no rationale for treating the co-operative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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