TDS On Interest Paid/ Received By Co-operative Societies

CA Vinay V. Kawdia has explained in a systematic manner the TDS provisions as applicable to Co-operative societies/Banks (as a payer/payee of interest other than interest on securities) after considering the related amendments by Finance Act 2020. He has cited the relevant judgements to support his propositions

Introduction:

Section 194A of the Income-tax Act, 1961 ["The Act"] mandates that any person other than an individual or a HUF responsible for paying any income by way of interest other than interest on securities at the time of payment/credit of such income to the account of the payee, has to deduct income-tax thereon at the rates in force. Sub-section (3) of the said section provides for circumstances in which the provisions of sub-section (1) shall not apply. Clause (i) to clause (xi) of section 194A(3) list the circumstances under which payment/credit of interest shall not be liable to TDS as required u/s 194A(1).

The author has endeavored to summarize the TDS provisions as applicable to Co-operative societies/Banks (as a payer/payee of interest other than interest on securities) after considering related amendments by Finance Act 2020.

TDS on interest paid/received by Co-operative Societies-A Birds’ eye view:

Sr.	Payer	Payee	Threshold (Rs.) / TDS rate	Nature of deposit	Other Conditions
1	Co-operative Society (other than Co-operative Bank)	Members	40000+/ 10% 50000+/10% for senior citizen	Any (Time/ Recurring/ Saving, etc.)	Only if Gross receipts/ Turnover of payer society exceeds 50 Crores during FY immediately preceding FY in which interest is paid/credited
2	Co-operative Bank	Members	As above	Time & Recurring deposits	Threshold shall be calculated for bank as a whole in case of Core Banking in place
3	Co-operative Society engaged in carrying on business of banking (including Co-operative Bank)	Non-members	As above	Time & Recurring deposits	Threshold shall be calculated for bank as a whole in case of Core Banking in place
4	Co-operative societies (other than (3) above)	Non-members	5000+ / 10%	Any	NIL
5	Co-operative Society (including Co-operative Bank)	Any other Co-operative society [Except Co-op. Soc. engaged in business of Banking due to specific exemption provided u/s 194A(3)(iii) ]	40000+ / 10% 50000+ / 10% for senior citizen	Any	Only if Gross receipts/ Turnover of payer society exceeds 50 Crores during FY immediately preceding FY in which interest is paid/credited
6	primary agricultural credit society / primary credit society / co-operative land mortgage bank/ co-operative land development bank	Any	As above	Any	Only if Gross receipts/ Turnover of payer society exceeds 50 Crores during FY immediately preceding FY in which interest is paid/credited
7	Co-operative society engaged in carrying on business of banking [other than (6) above]	Any	As above	Other than time/recurring deposits	Only if Gross receipts/ Turnover of payer society exceeds 50 Crores during FY immediately preceding FY in which interest is paid/credited
8	Any person	Co-operative society engaged in carrying on business of banking*(including co-operative bank&Co-operative land mortgage Bank)	Not Applicable	Any	Not Applicable
9	Any person (IND, HUF, Firm, Company, Co-op. Society, Bank, etc.)	co-operative societies [other than (8) above]	As applicable, depending upon status of payer assessee	As applicable, depending upon status of payer	As applicable, depending upon status of payer assessee

Terms defined:

– S. 194A(3)(v) of I.T. Act: "Co-operative bank" shall have the same meaning assigned to it in Part V of the Banking Regulation Act, 1949.[BRA 1949]. It includes a state co-operative bank, a central co-operative bank and a primary co-operative bank.

– Section 2(19) of the I.T Act: "Co-operative society" means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies.

– S. 5(ccii) of BRA 1949: “Co-operative Credit Society” means a co-operative society, the primary object of which is to provide financial accommodation to its members and includes a co-operative land mortgage bank.

– Terms primary agricultural credit society / primary credit society / co-operative land mortgage bank/ co-operative land development bank are also defined in Part V of Banking Regulations Act, 1949. (All are basically co-operative societies as defined in part V of BRA 1949]

– Co-op. Society includes Co-op Bank[Refer:Sindhudurg Zilla Rajya Sarkari Karmachari Sahakari Patsanstha Maryadit vs. ITO (ITA No. 1677/PN/2014), CIT vs. Totagars Co-operative Sale Society (2017) 78 taxmann.com 169 (Karnataka), Etc.]
– Term Banking is not defined under the Income Tax Act, 1961. Section 5(b) of the Banking Regulation Act defines the term Banking.

– Section 5(b)of BRA 1949:"Banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheques, draft, order or otherwise.

– If the definition of banking is further analyzed, the co-operative credit society can never issue cheques or drafts and cannot form part of any payment and settlement system in form of a Clearing House. Participation in Clearing House system is an important requisite to term itself as bank.

Controversy:

– Whether a Co-operative Credit society can be said to be a co-operative society engaged in carrying on the business of banking for the purpose Income Tax Act, 1961?

Apparently, the term ‘co-operative society engaged in carrying on the business of banking’ is used at following places in the I.T. Act:

Section/Sub-Section	Brief description of context in which term is used
Section 11(5)(iii)	Permissible modes of investments by charitable trusts
Section 80P(2)(a)(i)	Deduction in respect of income of certain Co-op. Societies
Section 80TTA/80TTB	Deduction in respect of interest on saving deposits
Section 194A(3)(i)(b)	Exception to the applicability of TDS provisions u/s 194A i.e. TDS on payment of interest (qua payer)
Section 194A(3)(iii)(a)	Exception to the applicability of TDS provisions u/s 194A i.e. TDS on payment of interest (qua receiver)
Section 194A(3)(viia)(b)	Exception to the applicability of TDS provisions u/s 194A i.e. TDS on payment of interest (qua nature of interest bearing deposits)
Section 194N	TDS on cash withdrawals w.e.f. 01.09.19 (qua payer as well as receiver)
Section 2(24) (viia)	Income includes the profits and gains of business of banking (including providing credit facilities) carried on by a co-operative society with its members.

ANALYSIS:

Let’s deal with the controversy in the context of some of the other sections where the identical term is used:

Section 11(5)(iii): Permissible modes of investments by charitable trusts

Hon’ble Madras High Court in SBI Staff Credit Cooperative Society[(1998) 234 ITR 104 (Mad)]while adjudicating the issue whether a credit co-operative society (Patsanstha) is covered by the expression "co-operative society engaged in carrying on the business of banking" appearing in Section 11(5)(iii), held in favour of assessee. 

In the case of SBI Staff Credit Cooperative Society [supra], it was note-worthy that in the relevant definition clause i.e. definition of "credit institution" under  Section 2(5A), the expression ‘co-operative society engaged in carrying on the business of banking’ appeared along with the expression ‘a banking company to which the  Banking Regulation Act, 1949 applies. Yet their Lordships came to the conclusion that a credit society dealing with members only can be said to be in the business of banking. These two expressions are two distinct limbs of the definition and must be given meaning accordingly. The common thread, if at all be necessary, between the two expressions is the business of banking, which, in the esteemed opinion of the Hon’ble Madras High Court, includes business of giving loans to members only. [Followed by ITAT Pune in Maharashtra Arogya Mandal vs. ITO (2008) 117 TTJ 631 (Pune)]

Section 80P(2)(a)(i): Deduction in respect of income of certain Co-op. Societies

It is important to note that, Sec. 80P(2)(a)(i) is worded as "……..in the case of a co-operative society engaged- in carrying on the business of banking OR providing credit facilities to its members…….."

This clearly brings out the two limbs wherein the enactment itself has distinguished the words business of banking with that of providing credit facilities. One may argue that, if the intention was not to grant deduction to all co-operatives then the section would not have been worded with these two limbs.

Section 2(24)(viia): Inclusive definition of income:

Alternatively, if we look at definition of income under clause (viia) to section 2(24), for the purposes of Income Tax Act, income includes the profits and gains of business of banking (including providing credit facilities) carried on by a co-operative society with its members; meaning thereby, banking business is inclusive of business of providing credit facilities to its members by co-operative societies! To put it otherwise, credit co-operative societies may be said to be engaged in the business of banking.

Section 194A(3)(iii)(a): Exception to the applicability of TDS provisions u/s 194A i.e. TDS on payment of interest (qua receiver)

In case of interest paid to Co-operative credit societies by its borrowers or by other society/bank on deposits, the only possible exception to the general applicability of TDS on interest is provided in Section 194A(3)(iii)(a) to the effect that, TDS provisions u/s 194A(1) are not applicable to interest paid/credited to any co-operative society engaged in carrying on the business of banking (including co-operative land mortgage bank).

Here, again one can argue that, the Co-operative credit societies render services which are similar to services usually rendered by co-operative banks, in the sense they accept deposits from the members and give loan to members. Though the said societies are not banks working under banking regulations Act, but undoubtedly there is fair degree of similarity in the services rendered by these credit co-operative societies and co-operative banks. Accordingly, such credit societies may be said to be engaged in the business of banking.

Contrary view:

Alternatively, It can be said that, If by-laws of the co-op. credit society do not permit accepting deposits from non-members (i.e. public at large) it cannot be said to be engaged in Business of Banking.

– It was held that, From the definition of banking u/s 5(b) of the Banking Regulation Act it is clear that the banking means accepting the deposits of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft or otherwise and these deposits are accepted for the purpose of lending or investment. This clearly states that the deposits must be accepted from the public for the purpose of lending or investment. These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise. For deciding whether the assessee is carrying on the banking business as defined above, one has to refer to the aims and objects of the assessee as well as the profit and loss account. [ACIT v. Buldana Urban Co-operative Society Ltd. (2013) 32 taxmann.com 69 (Nagpur)]

– In my view, in the absence of a definition of "banking" under the Income Tax Act, it would be safe for this Court to adopt the definition of "banking" as contained in the statute that regulates the business of banking in our Country, for the purpose of interpreting the word "banking" and the phrase "business of banking" under the Income Tax Act.

In view of definition of “Banking”and “Co-operative Credit Society” in Banking Regulations Act, 1949, the benefit of exemption under Section 194A(3)(iii)(a) would apply only to a co-operative society engaged in carrying on the business of banking, which in turn involves acceptance of deposits from the public, and not merely from its own members. It was further held that, in as much as the provisions of Section 194A(3)(iii)(a) provide for an exemption from a procedural requirement under the Income Tax, the interpretation to be placed on the said provision has necessarily to be a strict one that leans in favour of the revenue and against the assessee. – Chirayinkeezhu Service Co-operative Bank Ltd. vs. CBDT [2019] 112 taxmann.com 272 (Kerala)]

(In Vyavasaya Seva Sahakara Sangh vs. State of Karnataka and Ors., (ILR 1990 KAR 2080) their lordships, though in difference context, have held that activities of co-operative credit societies can never become banking business as contemplated under the Banking Regulation Act, 1949, inasmuch as these co-operative societies are not established for the purpose of doing "banking" as defined in section 5(b) of the Banking Regulation Act, 1949.)

Conclusion (or confusion?):

The above chaos, though not intentional, is a result of frequent amendments by government. Recent amendments by Finance Act 2020 by way of insertion of proviso below clause (xi) of Section 194A(3) [points No. 1,5,6 and 7 above) made the things further complicated.  Though the intention was to extend the scope of section 194A to interest paid by large co-operative societies of the nature specified in S. 194A(3)(v) / (Viia), due to pre-existing complications in  clause (v) or clause (viia) of sub-section (3) section 194A, provisions have become more confusing and prone to litigation!!

In the above scenario, the Mischief Rule of Interpretation can be a guiding force. The Mischief Rule requires that the statute be interpreted keeping in mind the mischief that it aims at punishing. This Rule of Interpretation would be employed when the provision in question is introduced to address what the laws already enacted on similar subjects failed to achieve.

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