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TMI Blog2018 (10) TMI 1170X X X X Extracts X X X X X X X X Extracts X X X X ..... . - I.T.A. Nos.2055 And 2056/CHNY/2014 - - - Dated:- 9-10-2018 - SHRI N.R.S. GANESAN, JUDICIAL MEMBER, SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER For The Appellant : Shri. C. Maruthappan, C.A. For The Respondent : Shri. Sailendra Mamidi, PCIT ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER Hon ble President has constituted this Special Bench for deciding on the following issue, arising out of the impugned appeals filed by the assessee against an order dated 30.06.2014 of ld. Commissioner of Income Tax (Appeals)-1, Madurai. Whether a Co-operative Society, carrying on banking business with approval of the Reserve Bank of India, is liable to deduct tax under Section 194A, on interest paid to its members. . 2. Assessee is a co-operative society carrying on the business of banking. On interest paid to its members, assessee had not deducted tax at source. Assessee had claimed that it was saved by clauses (v) of Sub Section(3) to Section 194A of the Income Tax Act, 1961 (in short the Act ). This claim was not allowed by the lower authorities, giving rise to a demand of F1,81,15,612/- for ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ji Bench of the Tribunal in the case of Saraswat Co-operative Bank Ltd vs. ITO (2015) 54 taxmann.com 297. As per the ld. Departmental Representative, clause (viia) of Section 194A(3) and not clause (v) applied to co-operative banks. Ld. Departmental Representative sought to make a fine distinction with the issues considered by the Hon ble Jurisdictional High Court in the case of The Coimbatore District Central Co-operative Bank Ltd (supra). According to him, Hon ble Jurisdictional High Court had not considered the effect of sub clauses (a) and (d) introduced in sub section clause (viia) by Finance Act, 1995. As per the ld. Departmental Representative , the effect of these clauses was duly considered by the Panaji Bench of the Tribunal, in the case of Saraswat Co-operative Bank Ltd (supra) while holding in favour of the Revenue. 5. We have considered the rival contentions. What we find is that the question referred by the Special Bench reproduced by us at para 1 above is very same as the question of law, answered by the Hon ble Jurisdictional High Court in the case of The Coimbatore District Central Co-operative Bank Ltd (supra). Para 2 of the judgment is reproduced hereunder:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cre dited or paid during the financial year, by a banking company to which the Banking Regulation Act, 1949 applies, does not exceed ₹ 10,000, no lia bility 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 cre dited or paid during the financial year, on a deposit with the Post Office under any scheme framed by the Central Government and notified in this behalf exceeds ₹ 10,000, there is no liability under sub-section (1). ( iv) Where the amount credited or paid or likely to be credited or paid during a financial year does not exceed ₹ 5,000, irrespective of who pays it, or to whom it is 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive society other than a co- operative bank to a member thereof or to such income credited or paid by a co-operative 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 pri mary 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 time deposits with a co-operative society other than a co-operative society or bank, namely, primary agricultural credit society, primary credit society, cooperative land mortgage bank and co-operative land development bank engaged in carrying on the business of banking. 16. There are also exclusions under clauses (viii), (ix), (x) and (xi), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be computed with reference to the income credited or paid by the banking company or the cooperative society or the public com pany, as the case may be, where such banking company or the co- operative society or the public company has adopted core banking solutions ; . . . ( 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 cooperative land mortgage bank), or ( b) any financial corporation established by or under a Central, State or Provincial Act, or ( c) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or ( d) the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or ( e) any company or co-operative society carrying on the busi ness of insurance, or ( f) such other institution, association or body or class of insti tutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Offi cial Gazette ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any or infrastructure capital fund or a public sector com pany 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) repay able on the expiry of fixed periods. 18. What is important for our discussion is to focus on certain expressions used in the various clauses and subclauses of sub-section (3) of section 194A. The expressions that require our attention are (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) cooperative land development bank. 19. As we have stated earlier, the expression co-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 Regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 ; Page No : 0276 (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 co- operative institutions : ( a) co-operative society ; ( b) co-operative bank ; ( c) co-operative society engaged in carrying on the business of bank ing ; ( 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-operative bank is defined in the Multi-State Co- operative Societies Act, 2002, under clause (f) of section 3 to mean a multi- State co-operative society which undertakes banking business. The expression co-operative society is defined in section 3(h) of the Multi-State Co-operative Societies Act, 2002, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1983, as follows : 'financing bank' means a registered society which has as its prin cipal 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 to the depositors. Therefore, for the purpose of section 194A, a credit society under the Tamil Nadu Co-operative Societies Act and the financing bank under the same Act stand on the same footing. They can be treated differently only in terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... griculture 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 longterm 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 Cooperative Bank. No co-operative society is entitled to use the word bank , unless it happens to be a co-operative bank. This is made clear by clause (f) of section 56 of the Banking Regulation Act, 1949. As a matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( ii) a co-operative bank or a primary credit society or a cooper ative land mortgage bank, in so far 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 cooperative 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, 1949, settles at least one issue, namely, that in so far as that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration is as to whether there exists a substantial or marked difference between a co-operative society engaged in carrying on banking business and a cooperative 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 subclause (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 section 2(19) of the Act, we have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th a co- operative society engaged in carrying on the business of banking including a cooperative 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 April 1, 1970, 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 cooperative move ment was already at the dawn in the State of Maharashtra where sugar cane 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 co-operative societies carrying on the business of banking, the Government came up with the next amendment with effect from April 1, 1971, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety or a primary credit society or a co- operative land mortgage bank or a cooperative land development bank. Further, there will be no requirement of deduction of tax at source if the amount of interest does not exceed two thousand five hundred rupees in a financial year. The term of time deposits has been defined to mean deposits, excluding recurring deposits, repay able 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 October 1, 1991, 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 June 1, 1992. By this amendment, the position that prevailed prior to October 1, 1991, was restored. In fact, the next Circular bearing No. 636 dated August 31, 1992* 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 have been received from membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial year on time deposits made on or after July 1, 1995, with a banking company or with a co-operative society engaged in carrying on the business of banking. The aforesaid limit of ten thousand rupees shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society, as the case may be. The interest on time deposits made with a pri mary agricultural credit society 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 July 1, 1995. 50. Fortunately, the next amendment came only after 20 years in the Finance Act, 2015, with effect from June 1, 2015. We will take up the changes brought forth by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking external aid to construction, by referring to the enactments such as the Tamil Nadu Co-operative Societies Act, 1983, the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934, and National Bank for Agriculture and Rural Development Act, 1981, there is some difficulty in identifying the cooperative societies that fall under the category of cooperative societies engaged in carrying on the business of banking . Such a category is not identified in any of these 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 CIT in I. T. A. No. 1572/Bang/2013 decided on May 30, 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 Vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads as follows : 42. In section 194A of the Income-tax Act, in sub-section (3), with effect from the 1st day of June, 2015,- ( a) in clause (i), after the proviso, the following proviso shall be inserted, namely :- '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 cooperative society or the public com pany, as the case may be, where such banking company or the co- operative society or the public company has adopted core banking solutions.' ( 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 sub stituted ; ( c) after clause (v), the following Explanation shall be inserted, namely :- 'Explanation.-For the purposes of this clause, cooperative bank shall have the same meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949) ; ( d) for clause (ix), the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o avail this exemption by making their depositors as members of different categories. This has led to dispute as to whether the co-operative banks, for which the specific provi sions of tax deduction exist in the form of section 194A(1), section 194A(3)(i)(b) and section 194A(3)(viia)(b) of the Act, can take the benefit of general exemption provided to all co-operative societies from deduction of tax on payment of interest to members. The matter has been carried to judicial forums and in some cases a view has been taken that the provisions of section 194A(3)(viia)(b) of the Act makes no distinction between members and non-members of co-operative banks for the purposes of deduction of tax, hence, the co-operative banks are required to deduct 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 non-deduction of tax from interest payment to members under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goes one step further in making it clear that it was intended to have prospective effect from June 1, 2015. 65. Therefore our answer to the first substantial question of law would be in favour of the assessee . 6. Above judgment by Hon ble Jurisdictional High Court had come after the reference was made to this Special Bench. We find that their lordships had duly considered a decision of Panaji Bench of the Tribunal in the case of The Bailhogal Urban Co-operative Bank Ltd (supra) at para 57 of the judgment. Panaji Bench in the case of Saraswat Co-operative Bank Ltd (supra) relied on by the ld. Departmental Representative, had strongly relied on its earlier decision in the case of The Bailhogal Urban Co-operative Bank Ltd (supra). This is clear from the following para in the order of the Tribunal in the case of Saraswat Co-operative Bank Ltd (supra). The Bailhongal Urban Co-op Bank Ltd v JCIT Range-1(ITA No.85/PNJ/2013,ITAT, Panaji Bench) dated 28-08-2013 In this case the appellant, a co-operative society engaged in business of the banking had paid interest on time deposits to its members without deducting tax u/s 194A. The AO applied the provisions of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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