This brief article seeks to discuss about the liability of cooperative societies to deduct income tax (Tax Deduction at Source or TDS) at the time of paying or crediting of interest on deposits. A current controversy is going on in cooperative circles as to its exact liability to deduct tax on interest. There seems to be confusion among the banks in the cooperative sector and the depositors. The objective of this article is to discuss the issues in some detail and make a legal analysis of the issues. The discussion assumes importance in view of the changes brought about by the 2015 budget in the TDS provisions relating to interest effective from 01-06-2015.
2. THE LEGAL PROVISIONS:
Section 194A of the Income Tax Act 1961 (ACT) contains the legal provisions in this regard. The said section was introduced in the ACT with effect from 01-04-1967. The liability is clear and applies to all except certain Individuals and specified entities like a cooperative society/ certain specified deposits etc. But exemption from TDS in respect of interest paid by or credited by a cooperative society to its members or other cooperative societies was provided u/s 194A (3)(v) effective from 01-04-1968. There was no change in clause (v) till 31-05-2015.
In addition to the clause (v) referred above Clause (viia) of Sec 194A(3) grants total exemption to Primary Agricultural Credit Societies (PACS) in respect of all deposits including time deposits. But Clause (viib) grants exemption in respect of interest paid on deposits other than time deposits with a cooperative society carrying on banking business. “Time deposits” means deposits including recurring deposits repayable on the expiry of fixed periods. Thus while PACS are exempt from all the provisions of TDS on interest, other cooperative societies carrying on banking business enjoy partial exemption and they are required to deduct tax only in respect of time deposits.
The above exemption under clause (v) has been withdrawn and is not applicable to a “CO-OPERATIVE BANK” from 01-06-2015. The District Cooperative Banks (DCB), Urban banks (UB) shall fall under the term “Co-operative Bank” and hence they will be hit by the new provision withdrawing the exemption. This created panic amongst the cooperative banks and is the immediate provocation for the author to write an article discussing the issues. Let us see the meaning of “Cooperative Bank” for which there is now a liability to deduct tax at source.
3.0 COPERATIVE BANK:
“Cooperative bank” means a “cooperative bank” as defined under the Banking regulations Act 1949. As per section 5(cci) of the BR Act "co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank. A central cooperative bank means cooperative bank like a District Cooperative Bank for eg Palakkad District Cooperative Bank. “Primary Cooperative Bank” would cover service cooperative banks in our villages but it is specifically excluded from the definition. In other words, “primary cooperative bank” excludes a Primary Agricultural Credit Society (PACS) with the principal object or principal business consists of giving financial accommodation for agriculture.
4.0 POSITION OF DEPOSITS BY PACS ETC WITH DISTRICT AND URBAN BANKS:
Thus District Cooperative banks and Urban Banks shall not enjoy exemption from TDS with effect from 01-06-2015 in respect of interest paid on deposits to its members. But please note that interest paid by such banks to cooperative societies on all deposits including deposits of PACS etc whether members or not shall continue to enjoy exemption. The exemption has not been withdrawn in respect of interest paid on deposits by cooperative societies. Thus it is very clear that there will not be any TDS on interest paid by District and Urban banks to Service cooperative banks (PACS) and other cooperative societies.
4. PACS ENJOY SEPARATE EXEMPTION FROM TDS:
Be that as it may, PACS enjoy complete exemption as per clause (viia) of subsection (3) of Section 194A as already noted above. It provides that any interest paid or credited in respect of deposits with PACS or Primary credit society or Land Mortgage bank or a Cooperative land development bank shall be outside the perview of TDS provisions. But it is pregnant with difficulties because the Income Tax Department is taking the view especially in Kerala state that in order to enjoy the above exemption the PACS should satisfy that they lend money primarily for agricultural purposes and their principal business should be related to agricultural credit.
The author gathered the information that some of the Service Cooperative Banks (SCB) lends less than 15-20% for agricultural purposes. The classification by the Registrar as PACS is not acceptable to IT Department and they look into the loan portfolio independently to see whether more than 50% of the loan is given for agricultural purposes (Since according to IT department more than 50% loan should be agricultural in order to satisfy the requirement that the principal business is that of agriculture). The above blanket exemption under Clause (viia) will have to be viewed in this scenario in Kerala.
The author is of the view that PACS are eligible for exemption and the IT department has no authority to sit in judgment over the classification made by the Registrar as PACS under the Kerala Cooperative Societies Act 1969. According to section 2(19) of the Income Tax Act 1961 the term “cooperative society” means a society registered under the Cooperative societies Act 1912 or under various state laws in force. Thus if a cooperative society is registered under the Kerala cooperative societies Act 1969 it should be recognized as such by the Income Tax Department.
There are certain court decisions laying down the rule that when a competent authority issues a certificate the same shall be binding on all other authorities. Registrar is an authority under the Kerala cooperative societies Act to classify and certify societies and hence binding on the IT department. The author is also of the view that if the principal object as per the byelaw of a PACS is giving agricultural credit facilities then it is to be classified as PACS notwithstanding the fact that the actual percentage of agricultural credit fell below 50% in a particular year. A detailed legal analysis of this aspect is outside the scope of this article and hence no attempt is made.
5. WHO IS A MEMBER?
A circular No 9/2002 dated 11-09-2002 issued by the Highest body of the Income Tax Department ie Central Board of Direct Taxes (CBDT) has created a confusion. It clarified that the exemption is available only to such members who have joined in application for the registration of the co-operative society and those who are admitted to the membership after registration in accordance with the bye-laws and rules ; that the members eligible for exemption under section 194A(3)(v) must have subscribed to and fully paid for at least one share of the co-operative bank, must be entitled to participate and vote in general body meetings or special general body meetings of the co-operative bank and must be entitled to receive share from the profits of the co-operative bank.
The legal validity of the circular was challenged before the Hon Bombay court in Jalgaon District central co-operative bank Ltd v union of india and others ltd v Union of India and others reported in 265 ITR 463 (Bom) and the Hon court had no hesitation to strike down the circular as wholly illegal. There is no definition of “member” under the Income Tax Act and if that be so the circular cannot have its own definition. The Hon court took the view that there cannot be any restriction on the basis of different kinds of members and all members are eligible for exemption. The above discussion has relevance only till 31-5-2015 when interest paid by cooperative societies to its members enjoyed exemption from TDS.
In conclusion and to sum up it may be noted that PACS enjoy blanket exemption from TDS provisions in respect of all kinds of deposits be it Time deposit or otherwise. Regarding cooperative societies other than PACS they enjoy partial exemption in respect of interest related to deposits (other than time deposits) with a cooperative society engaged in the business of banking. Regarding cooperative banks like District and Urban banks they are liable to deduct tax in respect of interest on time deposits of its individual members but not on interest paid to other cooperative societies and PACS. The monetary limit is Rs 10000 per person and for this purpose interest paid or credited from all the core banking branches should be clubbed together.
The provisions relating to TDS have really become tedious!! And therefore it is advisable to obtain appropriate advise by individual societies and banks in this respect. It may be noted that when tax is deducted quarterly returns will have to be filed and non compliance attracts stringent penalties and even prosecution. The interest for delay in remittance of tax deducted also attracts heavy interest and penalty.
BY: SIVADAS CHETTOOR
B COM FCA LLM- PALAKKAD