Long-awaited verdict is now out from the Hon. High Court of Kerala on the issue of TDS (deduction of tax at source) from the interest paid or credited by the co-operative societies for the deposits. The Court held that after the insertion of proviso to the Section 194A(3) of the Income Tax Act, 1961 by the Finance Act 2020 effective from 01/04/2020 it is mandatory to deduct tax at source from the interest paid or credited to the depositors of a co-operative society of which total sales, gross receipts or turnover exceeds 50 crore rupees during the preceding financial year if the amount of interest, or the aggregate of the amounts of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than fifty thousand rupees in case of payee being a senior citizen and forty thousand rupees in any other case. [Later, the threshold limits of interest have been substituted as one lakh rupees and fifty thousand rupees respectively, by Finance Act, 2025, effective from 01/04/2025].
Before the amendment of 2020, interest income credited or paid to a co-operative society and interest paid by a co-operative society were exempted from TDS as specified below:
1. Section 194A (3) (iii) - No TDS was required from the interest credited or paid to a co-operative Society carrying on the business of banking.
2. Section 194A (3) (v) - a co-operative Society (other than a co-operative bank) need not deduct tax at source from the interest credited or paid to the members or to any other co-operative society.
3. Section 194A(3)(viia) - a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank need not deduct tax at source from the interest credited or paid to any depositor whether member or not.
Proviso to the Section 194A (3) inserted by the Finance Act, 2020 restricts these exemptions as follows:
Provided that a co-operative society referred to in clause (v) or clause (viia) shall be liable to deduct income-tax in accordance with the provisions of subsection (1), if -
(a) the total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the financial year immediately preceding the financial year in which the interest referred to in subsection (1) is credited or paid; and
(b) The amount of interest, or the aggregate of the amounts of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than one lakh rupees in case of payee being a senior citizen and fifty thousand rupees in any other case.
Accordingly, all co-operative societies and co-operative banks having a total sales, gross receipts or turnover exceeding 50 crore rupees during the preceding financial year is liable to deduct tax at source from the interest credited or paid to the members and non-members if the amount of interest, during the financial year is more than fifty thousand rupees in case of payee being a senior citizen and forty thousand rupees in any other case with effect from 01/04/2020 [one lakh rupees and fifty thousand rupees respectively with effect from 01/04/2025].
Judgment of Hon. Kerala High Court
Being aggrieved by the insertion of proviso to Section 194A (3) of the Income Tax Act, several Co-operative societies in Kerala approached the Hon. High Court of Kerala. The Hon. High Court of Kerala in the judgment dated 25/10/2023 in WP(C) No. 7053 of 2023 and connected cases viewed that the petitioners could not establish any of the grounds that are required to exercise any judicial intervention in the provisions contained in the proviso to section 194A (3) of the Income Tax Act, 1961. The Court declined to accept the contention of the petitioners that, by introducing a ceiling of Rs 50 crores of turnover, a sub-classification was created among the Societies, which are otherwise equally placed and therefore, it amounts to violation of Art.14 of the Constitution of India. The Court held that even if a statutory provision causes hardship to some people, it is not for the court to amend the law.
The Court further observed that the petitioners are not engaged in the business of banking in view of the definition of Banking provided in Section 5(b) of the Banking Regulation Act, 1949 and therefore, the petitioners cannot be treated as the institutions that fall within Section 194A(3 (iii) of the Income Tax Act.
As a measure of relief to the Co-operative Societies, the court was pleased to allow only prospective effect to the judgment, as reversing the consequences of non-deduction of TDS which occurred pursuant to the interim stay orders granted earlier, would be practically difficult and likely to cause serious legal and procedural complications. The court made the interim orders absolute in respect of all transactions up to the date of pronouncement of the judgment.
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