VIRUDHUNAGAR CENTRAL DISTRICT CO-OPERATIVE BANK,VIRUDHUNAGAR vs. ITO, VIRUDHUNAGAR

आदेश / O R D E R

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.

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‘’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.’’.

Assessee is a co-operative society carrying on the business of 2.

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 �1,81,15,612/- for assessment year 2012-13 and

�2,39,57,192/- for assessment year 2013-2014 u/s.201 and 201(1A) of

the Act. Ld. Assessing Officer and ld. Commissioner of Income Tax

(Appeals) took a view that tax should be deducted at source on

interest payment made by Co-operative Societies engaged in the

business of banking to its members, once the amount exceeded Rupees

ten thousand. For taking this view, reliance was placed on Sections

194A(3)(i) (b) and 194A(3) (viia) of the Act. Though the assessee

relied on a decision of Bangalore Bench of the Tribunal in the case of

the Bagalkot District Co-operative Bank vs. JCIT, (2014) Tax Corp (LJ)

3362, lower authorities chose to follow the decision of Panaji Bench of

the Tribunal in the case of the Bailhogal Urban Co-operative Bank Ltd.

vs. JCIT (ITA No.85/PN/2013). Reference to this Special Bench came

about due to the cleavage of opinions between Bangalore Bench and

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Panaji Bench. Even the Chennai Bench in the case of The Coimbatore

District Central Co-operative Bank Ltd vs. ITO, (ITA 2445 to

2451/Mds/2014, dated 30.04.2015) had taken a view that Co-operative

Societies which were engaged in the business of banking were liable to

deduct tax at source on interest on paid to its members on time

deposits, once the interest amount exceeded �10,000/-. It is to be

noted that Co-ordinate Bench while taking this view had considered

Section 194A(3) (viia) (b) of the Act and also various judgments and

orders of different authorities relatable to the said issue.

Now before us, ld. Authorised Representative submitted that 3.

the question whether a Co-operative Society carrying on the business of

banking with the approval of the Reserve Bank of India, was liable to

deduct tax at source u/s.194A of the Act stood answered by Hon’ble

Jurisdictional High Court through its judgment in the case of The

Coimbatore District Central Co-operative Bank Ltd vs. ITO, (2016) 382

ITR 266. As per the ld. Authorised Representative, the substantial

question of law which was decided by the Hon’ble Jurisdictional High

Court was the very same. Thus, according to him, matter stood covered

in favour of the assessee.

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the question whether tax had to be deducted at source by the assessee

which was a Co-operative bank on interest payment in excess of

�10,000/- was decided in favour of the Revenue by the Panaji 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.

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

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Central Co-operative Bank Ltd (supra). Para 2 of the judgment is

reproduced hereunder:-

In addition to the above, Hon’ble Jurisdictional High Court had framed

one more substantial question of law, which read as under:-

"Whether there is any distinction between a co- operative bank and a co-operative society carrying on banking business and if so, under which category the appellant would fall?’’

What was held by their lordships at para 6 to 65 is reproduced

hereunder:-

‘’6. In order to examine the substantial questions of law that have arisen for our consideration, it may be necessary to take note of the relevant statutory provisions at first. 7. Sub-section (1) of section 194A makes it obligatory for any person (except individuals and Hindu undivided family members) who is responsible for paying any income by way of interest (other than income by way of interest on securities) to a resident, to deduct Income-tax thereon at the rates in force. Such deduction should be made at the time of credit of such income to the account of the payee

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or at the time of payment in cash or by the issue of cheque or draft or by any other mode. 8. The proviso to sub-section (1) of section 194A makes it obligatory for even individuals and Hindu undivided family members to deduct tax at source, if the contingencies stated in the proviso arise. Since we are not concerned in this batch with such contingencies, we do not deal with the proviso. 9. Having indicated in sub-section (1), persons who are responsible to deduct tax at source, the circumstances under which tax is to be deducted at source and the taxable events in sub-section (1), the provisions of section 194A proceed to list out the exclusions or exceptions under sub-section (3). Sub-section (3) contains about eleven clauses, under which the items that are excluded from the application of sub-section (1) are listed. In simple terms, such exclusions under sub-section (3) of section 194A could be understood as follows : Exclusions under clause (i) of sub-section (3) : 10 (i) Where the amount of income credited or paid or likely to be cre dited or paid during the financial year, by a banking company to which the Banking Regulation Act, 1949 applies, does not exceed Rs. 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 Rs. 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 Rs. 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 Rs. 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) :

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paid in respect of deposits under any scheme framed by the Central Government and notified in this behalf. Exclusions under clauses (v), (vii) and (viia) : 15. The obligation imposed under sub-section (1) will also not arise in respect of the following : (i) 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 ; (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, co- operative 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 deposits including recurring deposits repayable on the expiry of fixed periods ; and (b) that the expression "co-operative bank" is defined in the Explanation under clause (v) to have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949. These two expressions assume significance, in the light of the questions that have arisen for consideration and hence we have taken note of the same. 17. For the purpose of easy reference, we extract herein below sub-section (3) of section 194A in entirety. "(3) The provisions of sub-section (1) shall not apply—

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(i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed—

(a) ten thousand rupees, where the payer is a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution, referred to in section 51 of that Act) ;

(b) ten thousand rupees, where the payer is a co-operative society engaged in carrying on the business of banking ;

(c) ten thousand rupees, on any deposit with post office under any scheme framed by the Central Government and notified by it in this behalf ; and

(d) five thousand rupees in any other case : Provided that in respect of the income credited or paid in respect of—

(a) time deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act) ; or

(b) time deposits with a co-operative society engaged in carrying on the business of banking ;

(c) deposits with a public company which is formed and regis tered in India with the main object of carrying on the business of pro viding long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub- section (1) of section 36, the aforesaid amount shall be computed with reference to the income credited or paid by

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a branch of the banking company or the co-operative society or the public company, as the case may be : 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 co- operative 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 co- operative 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 ;

(iv) to such income credited or paid by a firm to a partner of the firm ;

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(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 ; Explanation.—For the purposes of this clause, 'co- operative bank' shall have the same meaning as assigned to it in Part V of the Bank ing Regulation Act, 1949 (10 of 1949) ;

(vi) to such income credited or paid in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf in the Official Gazette ;

(vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949, applies (including any bank or banking institution referred to in section 51 of that Act) ;

(viia) to such income credited or paid in respect of,—

(a) deposits with a primary agricultural credit society or a pri mary credit society or a co-operative land mortgage bank or a co- operative land development bank ;

(b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co-oper ative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking ;

(viii) to such income credited or paid by the Central Government under any provision of this Act or the Indian Income-tax Act, 1922 (11 of 1922), or the Estate Duty Act, 1953 (34 of 1953), or the Wealth-tax Act, 1957 (27 of 1957), or the Gift-tax Act, 1958 (18 of 1958), or the Super Profits tax Act, 1963 (14 of 1963), or the Companies

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(Profits) Surtax Act, 1964 (7 of 1964), or the Interest-tax Act, 1974 (45 of 1974) ;

(ix) to such income credited by way of interest on the compen sation amount awarded by the Motor Accidents Claims Tribunal ;

(ixa) to such income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees ;

(x) to such income which is paid or payable by an infrastructure capital company 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 sub- clauses 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) co- operative 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 Regulation Act, 1949. But the Explanation makes it clear that it is applicable only for the

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purpose of that clause, viz., clause (v). Therefore, we do not know whether the meaning assigned to the expression "co-operative bank" in Part V of the Banking Regulation Act, 1949 could be borrowed for the purpose of understanding the meaning of the same expression found in the clauses other than clause (v) of sub-section (3). 20. Section 2(19) of the Income-tax Act defines a "co- operative society" to mean a co-operative society registered under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. The expression "co-operative bank" is not defined in the Income-tax Act, 1961. 21. In so far as the State of Tamil Nadu is concerned, there are at least two enactments that govern the functioning of co-operative societies. The co- operative societies which function only within the geographical limits of the State of Tamil Nadu are registered under the Tamil Nadu Co-operative Societies Act, 1983. But if there is a co- operative society which is federal in nature or which is national in character, it is called a multi-State co-operative society and the same is registered under the Central enactment, viz., Multi-State Co-operative Societies Act, 2002. 22. Since the expression "co-operative society" is defined in section 2(19) of the Income-tax Act, 1961, it is neither necessary nor warranting for us to go to the definition of the same expression either in the Tamil Nadu Co-operative Societies Act, 1983 or in the Multi-State Co-operative Societies Act, 2002. On the contrary, we may have to refer to these enactments to see what a co-operative bank is, in view of the limitation imposed in the Explanation under clause (v) of sub-section (3) of section 194A. 23. Our tale of woes is compounded by the fact that even the Tamil Nadu Co-operative Societies Act does not define the expression "co-operative bank". The Tamil Nadu Co- operative Societies Act, 1983, under which the appellant/assessee has been incorporated defines the following expressions : (a) agricultural producers marketing society ; (b) agricultural services co-operative society ;

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(c) apex society ; (d) central society ; (e) consumer society ; (f) co-operative union ; (g) credit society ; (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

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(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, to mean a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State. 26. While the distinction sought to be made in clause (viia) of sub-section (3) of section 194A between (i) a primary agricultural credit society, a primary credit society, a co- operative land mortgage bank and a co-operative land development bank and (ii) other types of co-operative societies is understandable, the distinction sought to be made in the various clauses of sub-section (3) between a co-operative bank on the one hand and a co- operative society carrying on the business of banking on the other hand, is not clearly decipherable from the scheme of section 194A. Even if we take external aid to construction, by borrowing from the provisions of the Tamil Nadu Co- operative Societies Act, 1983, and the Multi-State Co- operative Societies Act, 2002, no such distinction between a co-operative bank and a co-operative society carrying on the business of banking could be made out. 27. Since the Tamil Nadu Co-operative Societies Act does not define a co- operative bank, though it defines the expression "credit society" and "financing bank", a co- operative society carrying on the business of banking registered in terms of the Tamil Nadu Act could fall naturally only under any of these categories, namely, credit society or financing bank.Therefore it is necessary to take note of the definition of the expressions "credit society" and "financing bank". The expression "credit society" is defined in section 2(13) of the Tamil Nadu Co- operative Societies Act, 1983, as follows : "'credit society' means a registered society which has as its prin cipal object the raising of funds to be lent to its members for the pur poses of agriculture, animal husbandry, pisciculture (including fish catching), apiculture, sericulture, petty trade, cottage and small scale industries including farm based industries, purchase of

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implements or raw materials, construction, purchase or repair of dwelling houses, discharge of prior debts, meeting ceremonial or education expenses, purchase of domestic and other requirements or for such other pur poses as the Government may, by notification specify in this behalf." 28. The expression "financing bank" is defined in section 2(14) of the Tamil Nadu Co-operative Societies Act, 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 of the express provisions such as the one found in sub-clause (a) of clause (viia) of sub-section (3). Otherwise the expression "co-operative bank" which is neither defined in the Income-tax Act nor in the Tamil Nadu Societies Registration Act, 1975, would naturally cover a credit society as well as a financing bank at least insofar as the Tamil Nadu Act is concerned. 31. Interestingly, the Multi-State Co-operative Societies Act, 2002, does not deal with the expression "credit society" at all. It deals only with two expressions, namely, "co-operative bank" and "co-operative society".

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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 long- term 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 Co- operative 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 fact, the answer to the questions of law raised in these appeals could be found in section 56(f) of the Banking Regulation Act, 1949. Before we advert to clause (f) of section 56, we should bring on record one fact. 38. Section 56 of the Banking Regulation Act is actually a complete code in itself. Section 56 makes the provisions of the Banking Regulation Act, 1949, applicable to co- operative societies, just as they apply to banking companies, subject to certain modifications indicated in clauses (a) to (zl). By the provisions contained in clauses (a) to (zl), section 56 incorporates the amendments, the substantive provisions of the Act as well as the schedules thereto, in so far as their application to co-operative societies are concerned. One of the provisions of the Banking Regulation Act, 1949, relates to the entitlement or obligation of companies carrying on the business of banking, to the use of the words bank, banker, banking or banking company. This is covered by section 7 of the Banking Regulation Act, 1949. 39. In so far as the application of section 7 of the Act to co-operative societies is concerned, clause (f) of section 56 provides the method and form in which section 7 will apply to co-operative societies. Section 56(f) which substitutes section 7 of the Banking Regulation Act, 1949, for the purpose of its application to co-operative societies, is extracted as follows : "(f) for section 7, the following section shall be substituted, namely :—

'7. Use of words "bank", "banker" or "banking".—(1) No

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co- operative society other than a co-operative bank shall use as part of its name or in connection with its business any of the words "bank", "banker" or "banking", and 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 such words.' (2) Nothing in this section apply to—

(a) a primary credit society, or

(b) a co-operative society formed for the protection of the mutual interest of co-operative banks or co-operative land mortgage banks, or

(c) any co-operative society, not being a primary credit society, formed by the employees of—

(i) a banking company or the State Bank of India or a corre sponding new bank or a subsidiary bank of such banking company, State Bank of India or a corresponding new bank, or

(ii) a co-operative bank or a primary credit society or a co- oper 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 co- operative society other than a co-operative bank shall use the word "bank" as part of its name. The second part of

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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 Act is concerned, there is no distinction between a co- operative bank and a co-operative society carrying on the business of banking. If a co-operative society carries on the business of banking, it should necessarily have the adjunct bank. Additionally, if a co-operative society does not carry on the business of banking, it should not use the adjunct bank. 42. Therefore there appears to be no distinction between a co-operative bank and a co-operative society engaged in the business of banking, at least for the purpose of the Banking Regulation Act, 1949. We have already seen from the provisions of the Tamil Nadu Co-operative Societies Act, 1983 that the said Act also does not distinguish between a co-operative society carrying on the banking business and a co-operative bank, though it distinguishes between a credit society and a financing bank. The fact that we have no alternative except to look into the provisions of the Banking Regulation Act, 1949, and the National Bank for Agriculture and Rural Development Act, 1981, is also fortified by two clauses in sub-section (2) of the Reserve Bank of India Act, 1934. In clauses (h) and (i) of section 2, the Reserve Bank of India Act, 1934 states that the expressions "agricultural operations", "Central co- operative bank", "co-operative society" "crops, "marketing of crops", "pisciculture", "regional rural bank" and "State co- operative bank" shall have the meaning assigned to them by National Bank for Agriculture and Rural Development Act, 1981, and that the expressions "co- operative bank", "co-operative credit society", "primaryagricultural credit society" and "primary co- operative bank" would have the same meaning as assigned to them in Part V of the Banking Regulation Act, 1949. 43. Therefore the conclusion that is irresistible is that none of these enactments either Central or State, make a clear distinction between a co-operative society engaged in carrying on banking business and a co-operative bank

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other than those credit societies and land development or land mortgage banks. Questions raised in this batch : 44. Having considered the various statutory provisions, if we get back to the case on hand, it is seen that we are called upon to answer two substantial questions of law. We shall take up the second one first. 45. The second substantial question of law that we have framed for consideration is as to whether there exists a substantial or marked difference between a co-operative society engaged in carrying on banking business and a co- operative 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 sub- clause (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 also gone to the Co-operative Societies Act, 1912. It was a central legislation of the colonial past, which also does not define a co-operative bank. It only deals with co-operative societies registered under the Act. Therefore our answer to the second question may not undergo a change even if we make a reference to the Co-operative Societies Act, 1912, which in any case has no application to the societies registered in terms of the State enactments. Substantial question of law No. 1 : 47. Coming to the first substantial question that arises for consideration, Mr. J. Narayanasamy, learned senior

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standing counsel for the Department, submitted a note to us indicating the manner in which section 194A underwent a change right from the Finance (No. 2) Act of 1967, up to date. The history of the amendments that section 194A had undergone in the past nearly about 48 years indicate that the pendulum has swung from one extreme to the other in so far as the co-operative societies are concerned, indicating the mind-set of the law makers at different points of time. The changes that were made to section 194A right from April 1, 1967 up to June 1, 2015, could be summarised, without enlarging the scope of the discussion, as follows : (i) Under the Finance (No. 2) Act of 1967, section 194A was amended with retrospective effect from April 1, 1967, to exclude any income credited or paid to a banking company to which the Banking Regulation Act, 1949, apply, including a co-operative society engaged in carrying on the business of banking as well as co-operative land mortgage bank. In other words, Income-tax was not deductible at source if the recipient of such income was a bank or co-operative society engaged in banking. (ii) Under the Finance Act of 1968, which came into effect from 1st April, 1968, clause (v) was inserted, so as to exclude the income credited or paid by a co-operative society to any other co-operative society. In other words, by the 1968 amendment, the liability to deduct tax at source was not there in respect of co-operative societies, if the income referred to therein had been paid or credited to other co-operative societies. The payment of interest to members was not covered even at that time. (iii) By the next amendment, which came into effect from April 1, 1970, the income credited or paid in respect of deposits made with a co- operative society engaged in carrying on the business of banking including a co- operative 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

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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 co- operative 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, to enlarge the scope of the benefit to members of co-operative soci eties irrespective of whether the society carried on banking business or not. In other words, by the amendment that came with effect from April 1, 1971, two sets of exemptions were granted, one was in respect of income credited or paid in respect of deposits made with a co-operative society carrying on the business of banking and the other was the income credited or paid by a co-operative society to a member or to any other society. To put it differently, one more category which was excluded from the appli cation of section 194A was inserted with effect from April 1, 1971. (vi) After nearly 20 years, the Government came up with an amend ment with effect from October 1, 1991. By this amendment inserted with effect from October 1, 1991, sub-clauses (a) and (b) were inserted under the existing clause (vii) after splitting (vii) into two parts, namely, (vii) and (viia). (vii) The rationale for the amendment with effect from October 1, 1991 was explained in the Circular No. 621, dated December 19, 1991*, as follows : "Provision for deduction of tax at source on interest income from bank deposits, etc. 55. Section 194A of the Income-tax Act provides that the provi sions regarding deduction of Income-tax at source shall not apply to the income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949, applies (includ ing any bank or banking institution referred to in section 51 of that Act) or with co-operative society engaged in carrying on the

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business of banking (including a co-operative land mortgage bank or a co- operative land development bank).

55.1. Instances have come to notice of the unaccounted incomes being deposited in banks in one's own name or benami. Interest on such deposits is not likely to be declared in Income-tax returns.

55.2. With a view to improving tax compliance, section 194A of the Income-tax Act has been amended to secure deduction of tax at source from interest on time deposits with the aforesaid banking companies and co-operative societies engaged in carrying on the business of banking. However, the requirement of deduction of tax at source will not apply in the case of interest on time deposits with a * See [1992] 195 ITR (St.) 154, 196.

primary agricultural credit society or a primary credit society or a co- operative land mortgage bank or a co- operative 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 : . . .

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49.1. A large number of representations have been received from members of public, representative bodies and banks pointing out vari ous difficulties which had arisen on account of the operation of these provisions. Keeping in view these difficulties, the Act amends,—

(a) section 194A of the Income-tax Act, to restore the position as obtaining before October 1, 1991, in relation to deduction of income- tax at source in the case of income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act) or with a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank), and

(b) section 194H of the Income-tax Act, to provide that the deduction of Income-tax at source from income by way of commis sion or brokerage will not be required to be made on or after 1st June, 1992." 49. After about three years, the next amendment came under the Finance Act, 1995. The object of this Act was indicated to be to bring about an effective method of widening the tax base by enlarging the scope of deduction of Income-tax at source. By this amendment, sub-clauses (a) and (d) of * See [1992] 198 ITR (St.) 1, 45. clause (viia) were reintroduced with effect from July 1, 1995. The rationale for such amendment was indicated in Circular No. 717, dated August 14, 1995* as follows : "Deduction of tax at source from interest on time deposits with banks.

46.1. On account of the provisions contained in clause (vii) of sub-section (3) of section 194A, income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949, applies or with a co- operative society engaged in carrying on the business of

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banking is exempt from the requirement of deduc tion of Income-tax at source.

46.2. The Act amends section 194A of the Income-tax Act, relat ing to deduction of Income-tax at source from interest other than interest on securities in the case of residents. The amendment pro vides for deduction of Income-tax at source at the rates in force (at present, 10 per cent. in the case of resident non-corporate persons and 20 per cent. plus surcharge thereon in the case of domestic com panies) from payment of interest exceeding ten thousand rupees in a financial 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 right from 1967 at least up to 1995, it is contended by the Revenue that the original intention of excluding the income credited or paid from the purview of the liability to deduct tax at source, was only to benefit the income credited or paid by a co-operative society to another society. The benefit was later extended to the deposits made with co-operative societies engaged in the business of banking. Subsequently, upon finding that unaccounted monies were deposited in co-operative

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societies, the benefit was withdrawn. Therefore it is contended by Mr. J. Narayanasamy, learned senior standing counsel that any interpretation to sub-clauses (a) and (b) of clause (viia) and clause (v) of sub-section (3) of section 194A should be in tune with the legislative intent in including certain things at times and excluding some of those things at other points of time and what is ultimately left at the crucial point of time with reference to the law that was in force in the relevant assessment year. 52. We have no difficulty in accepting the said submission. As we have indicated earlier, sub-section (1) of section 194A imposes an obligation upon every person. Even individuals and Hindu undivided families are covered by the proviso subject to certain conditions. Therefore the exclusions found in sub-section (3) are naturally to be construed stricto sensu. 53. But unfortunately, if a taxing statute and an exclusion clause contained in the taxing statute are to be construed strictly, the provisions themselves should make it clear as to who are the persons who are to be charged or exempted and what are the circumstances under which they are charged or excluded. Though the legislative intent appears to be to deal with four different types of co- operative societies, the categorisation appears to have been made by the various sub-sections and clauses of section 194A without defining each one of those categories. The four categories of co-operative societies sought to be dealt with under section 194A are (a) co- operative societies ; (b) co-operative societies carrying on the business of banking ; (c) co-operative banks ; and (d) primary agricultural credit society, primary credit society, co-operative land mortgage bank and co-operative land development bank. 54. While there is no difficulty in clearly identifying three out of those four categories, by at least 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 co- operative societies that fall under the category of "co- operative 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

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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 Vishakapatnam Co-operative Bank in I. T. A. Nos. 5 and 19 of 2011 decided on August 29, 2011, and the Pune Bench of the Tribunal in Ozer Merchant Co-operative Bank in I. T. A. No. 1588/PN/2012, decided on October 30, 2013. 57. However, a contra view was expressed by the Panaji Bench in I. T. A. No. 85/PN/2013 in the case of Bailhongal Urban Co-operative Bank Ltd. v. Joint CIT decided on August 28, 2013. But the decision of the Panaji Bench was based upon the decision of the Bombay High Court in Jalgaon District Central Co-operative Bank Ltd. v. Union of India [2004] 265 ITR 423 (Bom), wherein the Bombay High Court was concerned with Circular No. 9 of 2002, dated September, 11, 2002*, which made a distinction between the nominal members, associate members and sympathizer members. We are not concerned in this batch about the categorization of members. We are concerned about the distinction made between sub-clauses (a) and (b) of clause (viia) of sub-section (3). 58. The Revenue places reliance upon the decision of the Division Bench of the Kerala High Court in ITO v. Thodupuzha Urban Co-operative Bank Ltd. [2003] 264 ITR 36 (Ker). But in the said case, there was no issue as to whether the assessee fell under one or two of the types of co-operative societies mentioned in sub-clause (a) of clause (viia) or not. It was admittedly a co-operative society and hence the Kerala High Court came to the conclusion that sub-clause (a) of clause (viia) was applicable.

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(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 co- operative 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 :—

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'Explanation.—For the purposes of this clause, "co- operative 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 following clauses shall be substituted, namely :

'(ix) to such income credited by way of interest on the compen sation amount awarded by the Motor Accidents Claims Tribunal ;

(ixa) to such income paid by way of interest on the compensa tion amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees ;'

(e) in Explanation 1 below clause (xi), for the word 'excluding', the word 'including' shall be substituted." 62. The relevant portion of the memorandum explaining the clauses in the Finance Bill reads as follows (see [2015] 371 ITR (St.) 292, 344) : "Section 194A(1) read with section 194A(3)(i) of the Act provide for deduction of tax on interest (other than interest on securities) over a specified threshold, i.e., Rs. 10,000 for interest payment by banks, co-operative society engaged in banking business (co-operative bank) and post office and Rs. 5,000 for payment of interest by other persons. Further, sub-section (3) of section 194A, inter alia, also provides for exemption from deduction of tax in respect of following interest pay ments by co- operative society :

(i) Interest payment by a co-operative society to a member thereof or any other co-operative society. [section 194A(3)(v) of the Act]

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(ii) Interest payments on deposits by a primary agricultural credit society or primary credit society or co- operative land mortgage bank or co-operative land development bank. [section 194A(3)(viia)(a) of the Act]

(iii) Interest payment on deposits other than time deposit by a co-operative society engaged in the business of banking other than those mentioned in section 194A(3)(viia)(a) of the Act. [section 194A(3)(viia)(b) of the Act] Therefore, as per the provisions of section 194A(1) read with pro visions of sections 194A(3)(i)(b) and 194A(3)(viia)(b), co-operative bank is required to deduct tax from interest payment on time deposits if the amount of such payment exceeds specified threshold of Rs. 10,000. However, as the provisions of section 194A(3)(v) of the Act provide a general exemption from making tax deduction from payment of interest by all co-operative societies to its members, the co-operative banks tried to 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 co- operative banks override the general exemption provided to all co-operative societies for non-deduction of tax from interest payment to members under section 194A(3)(v) of the Act.

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As there is no difference in the functioning of the co- operative banks and other commercial banks, the Finance Act, 2006, and Finance Act, 2007, amended the provisions of the Act to provide for co-operative banks a taxation regime which is similar to that for the other commercial banks. Therefore, there is no rationale for treating the co- operative banks differently from other commercial banks in the matter of deduction of tax and allowing them to avail the exemp tion meant for smaller credit co-operative societies formed for the benefit of small number of members. However, as mentioned earlier, a doubt has been created regarding the applicability of the specific provisions mandating deduction of tax from the payment of interest on time deposits by the co-operative banks to its members by claim ing that general exemption provided is also applicable for payment of interest to member depositors. In view of this, it is proposed to amen the provisions of the section 194A of the Act to expressly provide from the prospective date of June 1, 2015 that the exemption provided from deduction of tax from payment of interest to members by a co- operative society under section 194A(3)(v) of the Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members." 63. It can be seen from the last part of the portion extracted above that the very note explaining the clause was specific to the effect that the proposal was to bring forth an amendment with prospective effect from June 1, 2015. There is no dispute now that on and from June 1, 2015 the appellant cannot escape the liability from deduction of tax at source. 64. Once an amendment is introduced, for the purpose of removing the anomalous situation or for the purpose of removing the confusions both in the manner in which the provisions stood and the manner in which they were understood, the same could be taken only to have prospective effect. It must be pointed out that Parliament did not choose to answer a question. Rather it chose to amend the provisions. It is now well-settled that an amendment can only be prospective unless it is made retrospective by express language or necessary implication. Apart from the fact that the express language of section 194A after amendment does not indicate any retrospectivity, the note explaining the clauses goes one

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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’’.

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 section 40(a)(ia) and disallowed the corresponding expenditure with the finding that the assessee was liable to deduct tax in view of specific clause (viia) of 194A(3). This stand has been upheld by Hon‟ble ITAT with following observations:

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a) The AO categorically brought out material on record to prove that the assesse bank is covered by clauses 194A(3)(ib) as well as 194A(3) (viia)(b) which are specific in nature and the assessee cannot put forth its claim under 1 94A(3)(v) which is general in nature.

b) As the assessee is cooperative society engaged in the business of banking, it is covered under specific clauses. As has been held by ITAT Pune bench in Bhagani Nivedita Sahakari Bank Ltd case, the term “cooperative society” in clause 194A(3)(v) is to be interpreted as “cooperative society other than cooperative bank.

c) The argument that clause 194A(3)(v) may be taken as applying to members and other clauses applicable to non-members, is without any basis in as much as clauses 1 94A(3)(ib) as well as 1 94A(3) (viia)(b) apply to both members as well as non- members.

d) Where ever the legislature intends to apply particular provision to member or to a non-member, it has done so expressly.

The above categorical observations of Hon‟ble ITAT are squarely applicable to the case on hand’’.

Departmental Representative, was considered by their Lordships. Their

lordships had overruled the decision of this Tribunal in the case of The

Coimbatore District Central Co-operative Bank Ltd in ITA 2445 to

2451/Mds/2014. Thus the issue raised before us is the same as the

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substantial question of law considered by the Hon’ble Jurisdictional High

Court in the case of The Coimbatore District Central Co-operative Bank

Ltd (supra) and it stands answered in favour of the assessee. Having

answered the question raised, in the normal course the appeals should

have been reverted to the division Bench for disposal. However the only

issue raised by the assessee in the impugned appeals having been

answered, no useful purpose will be served in following such process.

We therefore hold that the assessee was not obliged to deduct tax at

source on the interest payments made to its members for the impugned

assessment years.

allowed. Order pronounced on Tuesday, the 9th day of October, 2018, at Chennai.

Sd/- Sd/- Sd/- (N.R.S. GANESAN) (A.MOHAN ALANKAMONY) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated: 9th October, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF