Kerala High Court Upholds Applicability Of TDS On Interest Paid By Primary Co-operative Societies To Members

The Kerala High Court has recently upheld the applicability of Tax Deducted at Source (TDS) on interest payments made by primary co-operative societies to their members.Justice Ziyad Rahman A A, dismissed a batch of writ petitions filed by several co-operative banks and credit societies challenging the proviso to Section 194A (3) of the Income Tax Act 1961. For context, Section 194A deals with the liability to make deduction of tax at source (TDS) in respect of certain transactions. An amendment was brought in, as per Finance Act, 2020, to the aforesaid stipulation, by adding a proviso in respect of the co-operative societies which stated that if the total sales, gross receipts or turn over of the co-operative societies exceed 50 crores rupees, during the financial year immediately preceding to the financial year referred to 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 petitioners submitted that the Co-operative societies are bound to keep their cash balance with the account operated in the Kerala State Co-operative Bank (Kerala Bank) as per the directions of the Registrar under Section 57 of the Co-operative Societies Act. They further added that the deposits are made in Kerala Bank since the petitioners do not have the required infrastructure to meet the safety requirements for keeping huge amounts of cash. The amendment, they argued, had compelled the petitioner to deduct the amounts towards TDS despite the fact that there is no tax liability upon them with regard to the income from deposits as the same are exempted under Section 80P (2)(d) of the Act. The petitioners, contended that the introduction of criterion of Rs. 50 crores practically takes away the benefit originally granted to them since their deposits are to be made compulsorily to Kerala Bank. Since the gross turnover of Kerala Bank exceeds Rs 50 crores, all the income received by the petitioners by way of income from the deposits with the Kerala Bank, are subjected to TDS.The petitioners submitted that they would have to deduct the interest credited in the accounts of the members of the Society towards TDS, since the petitioners have a turnover of above Rs. 50 crores and this would in turn affect their business as persons who are interested in making deposits with the petitioners would likely opt for other Societies whose turnover is less than Rs. 50 crores, to avoid liability to subject their income to TDS.The Respondent, Income Tax Department, contended that even though the section 80 P of the Income Tax Act provides some benefits to the petitioners, the same is not an exemption from payment of tax with regard to the interest from deposits received by the petitioner. The Department argued that the proviso introduced as per Finance Act 2020 is within the legislative competence of the Central Government and does not violate any fundamental rights of the petitioners. The Department further submitted that deduction contemplated under Section 80 P is only for making assessment and is subject to conditions stipulated in the Act. It was further submitted that the proviso does not impose any new liability upon the petitioner and it is lawful for the Central Government to incorporate appropriate conditions in the statute to ensure the amount receivable to the Department is collected, and no evasion of tax occurs. FindingsThe Court concurred with the submission of the respondents and observed: “Since the benefit under Section 80P is not an exemption from paying tax, but a benefit of deduction subject to the compliance of the terms and conditions including filing of return, it cannot be held that there is no tax liability at all, for the petitioners under the Act.” The petitioners relied on The Commission of Income Tax, New Delhi v Eli Lilly and Company (India) Pvt. Ltd [(2009) 15 SCC 1], to substantiate that imposing a condition to collect TDS is unconstitutional. The Court observed that the circumstances in the present case was different from that of Eli Lilly's case. “The observations made Eli Lilly's case (supra) is concerned, the same was in respect of an income which was not taxable under Section 4(1) of the Income Tax Act 1961, the charging provision. In this case, it cannot be held that the income is not subjected to tax at all, in the light of the aforesaid statutory provisions and the benefit is confined to getting the said amount deducted from the taxable income. This makes a crucial distinction and therefore, the principles laid down by the Hon'ble Supreme Court in the above decision, cannot be made applicable to these cases.” the bench observed. The Court further noted that criteria of Rs. 50 crore, cannot be treated as an unreasonable classification since the liability to pay income tax itself is based on the income received by the assessee and the scheme of the Act itself is to apply different rates of tax to different groups. “The...

Kerala High Court Upholds Applicability Of TDS On Interest Paid By Primary Co-operative Societies To Members

Anamika MJ

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