Income Tax Act | Co-operative Societies Not Engaged In Banking Not Entitled To TDS Exemption U/S 194A(3)(iii): Kerala High Court

Section 194A(3) of the Income Tax Act, 1961 provides exemptions from TDS on interest for certain persons or institutions.

Justice Ziyad Rahman A.A. was dealing with a petition challenging the Constitutional validity of the proviso to section 194A(3) of the Income Tax Act, 1961, which imposed a restriction, based on the gross receipts or turnover of the Societies, in the matter of exemption from the obligation to make TDS from the income as the interest on deposits.

In this case, the assessees/petitioners are Co-operative Societies registered under the provisions of the Kerala Co-operative Societies Act, 1969 and are classified as Primary Agricultural Credit Societies under the said Act.

In light of the statutory stipulations contained in clauses (v) and (viia) of section 194A(3) of the Income Tax Act, 1961, all the assessees were under no obligation to deduct any TDS in respect of the income received or credited to, as interest on deposits.

However, the Finance Act, 2020, added a proviso in respect of the co-operative societies referred to in clause (v) and (viia).

The change says that in case the total sales, gross receipts or turnover of the co-operative societies exceed 50 crores rupees, during the financial year immediately preceding the financial year referred to in sub-section (1) of Section 194A, such interest amount shall be subjected to TDS, when the same is being paid or credited to the payee.

The assessees were aggrieved by the introduction of the said proviso, as according to them, the impact of the same is to the effect that the exemption which was otherwise available to them by virtue of section 194A(3) has been taken away.

The assessees argued that the proviso to Section 194A(3) is liable to be struck down as it is violative of the principles of equality as contemplated under Article 14 of the Constitution of India, since the same is creating an unreasonable classification among the Co-operative Societies, based on the total turnover of the Society.

The bench noted that a statutory provision can be interfered with only when there is a lack of legislative competence, when it violates the provisions of Part III of the Constitution, or when there is manifest arbitrariness in the enactment.

The bench agreed with the department that the provision under section 80P(1) and (2)(d) does not contemplate an absolute exemption from the liability to pay the tax in respect of the said income, but instead, what it provides is that, the said income could be deducted from the taxable income of the assessee, subject to the terms and conditions in the statute.

The bench opined that the assessees are not eligible for the benefits contemplated under section 194A(3)(iii)(a) of the Income Tax Act.

It can be seen that what is contemplated therein is with respect to the banking companies to which the Banking Regulation Act, 1949, applies or any co-operative society engaged in the business of banking, including a co-operative land mortgage bank. Evidently, the petitioners are not engaged in the business of banking and their operation is mainly confined to providing financial assistance to its members for agricultural purposes, where the concept of mutuality exists, stated the bench.

The bench opined that the assessee (Co-operative Societies) cannot be treated as the institutions that fall within Section 194A(3)(iii) of the Income Tax Act as well.

In view of the above, the bench dismissed the petition.

Case Title: Vellangallur Peoples Welfare Co-Operative Society Ltd. v. Union of India

Case Number: WP(C) NO. 7053 OF 2023

Counsel for Petitioner/Assessee: C.A. Jojo and S. Jiji

Counsel for Respondent/Department: Christopher Abraham

Citation: 2025 LiveLaw (Ker) 746