TDS Liability of Co-Operative Bank On Interest Paid To A Co-Operative Society

A question of law whether a Co-operative Bank is liable to deduct tax at source under the provisions of Section 194A (1) r.w.s. 194A (3) (v) of the Income Tax Act, 1961 (as amended), from the interest paid by it to the co-operative societies, is still remaining unanswered. The provisions of the said Section have undergone several amendments since its inception and were subjected to several litigations. One such classical example is the case of Moolamattom Electricity Board Employees Co-operative Bank Ltd., in [1999] 238 ITR 630/106 Taxman I.T.A. Nos. 588- 591/Coch/2018 242 (Ker) which was since been quoted by the appellate authorities all over India in the disputes related to Section 194 A(3) of the Act.

What the Act stipulates in respect of TDS from interest is clear from the Section 194A (1) of the Act itself which is reproduced below:

Interest other than "Interest on securities"

194A. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cherub or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

Exemption for Co-operative Societies

Section 194A(3)(v) of the Act provides certain relief for the co-operative societies from the provision of Section 194A (1) which still continues to be the bone of contention. The same is reproduced below:

194A(3) The provisions of sub-section (1) shall not apply -

(v) to such income credited or paid by a co-operative society to a member thereof or to any other co-operative society;

Amended w.e.f. 01/06/2015

A major amendment was brought into the exemption clause by the Finance Act, 1915, according to which Co-operative Banks were deprived of the exemption benefit sans the interest paid to other co-operative societies. In other words, Co-operative banks (State Co-operative banks, Central Co-operative Banks and Urban Co-operative Banks) were made liable to deduct tax at source from the interest paid to its depositors other than co-operative societies. The amendment was as follows:

194A (3) The provisions of sub-section (1) shall not apply -

(v) to such income credited or 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 to any other co-operative society;

The Central Board of Direct Taxes has explained this position of law in the Circular 19/2015 dated 27/11/2015 as given below:

42.7 Further, the existing exemption provided under section 194A(3)(v) of the Income-tax Act from deduction of tax from interest paid by a co-operative society to another cooperative society shall continue to apply to the co-operative bank and, therefore, a cooperative bank shall not be required to deduct tax from the payment of interest on time deposit to a depositor, being a co-operative society. [CBDT Circular: 19/2015 dated 27/11/2015 – Explanatory notes to the provisions of the FA- 2015].

For convenience of understanding both the un-amended and amended clauses are juxtaposed in a table below:

Thus, according to the amendment of 2015 a Co-operative Bank is bound to deduct tax at source from the interest paid to its depositors whether they are members or not. But, what is important is that a Co-operative Bank being a co-operative society need not comply with the provisions of TDS in respect of interest paid to another co-operative society by virtue of the last limb of the amended clause which read as “to such income credited or paid by a co-operative society to any other co-operative society”. Resultantly, TDS provision under Section 194A(1) is not applicable for the interest paid by a Co-operative bank viz. State Co-operative bank, Central Co-operative bank and Urban Co-operative Bank, to any Co-operative Society.

Insertion of proviso by FA-2020 and subsequent amendment

Now, the new proviso inserted in the Section by the amendment of 2020 has changed the position of law. The proviso is 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 sub-section (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 sub-section (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."

The insertion of this proviso takes away the exemption provided under clause (v) of sub section 3 of Section 194, from the mischief of TDS under Section 194A(1) of the Act in respect of interest paid to a co-operative Society by a Co-operative Bank. In simple words, Co-operative banks having total sales, gross receipts or turnover exceeds fifty crore rupees are bound to deduct tax at source from the interest paid to other co-operative societies.

The way out

Section 194A(3)(iii) shows the way out for the co-operative societies engaged in carrying on the business of banking from the menace of TDS from interest received . The safe guard is given in the Act to such co-operative societies as follows:

(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).

But, which co-operative societies can be considered as co-operative societies engaged in carrying on the business of banking is another question for debate.