Case Title: The Chennimalai Siragiri Murugan Primary Handloom Weaver’s Cooperative Society Ltd v Income Tax Officer
Case No: W.P.Nos.3919 of 2022
Decided on: 18th December, 2023
CORAM: THE HON’BLE Mr. JUSTICE KRISHNAN RAMASAMY
Facts of the Case
Cooperative societies filed a number of appeals contesting letters under Sections 194A and 194N of the Income Tax Act that were sent by the Managing Director of the Tamil Nadu State Apex Cooperative Bank Ltd. With respect to interest income above Rs. 40,000, these notices required Cooperative Societies to deduct Tax Deducted at Source (TDS). The cooperative societies contended that these clauses did not apply to cash withdrawals they made from cooperative banks to disburse to their members, but rather only to cash withdrawals made during commercial operations. They argued that because the societies served as cash transferring business correspondents, they were free from such deductions under the mandate of the State Government.
Authorities claimed that the cooperative societies were actively involved in lending money to their members and obtaining raw materials on their behalf, in opposition to their request for a similar exemption. They argued that the applicable clauses’ exemption from these activities did not apply to them. Authority further noted that, notwithstanding the societies’ claims of exemption under Section 80P of the Income Tax Act, the provision only spared them from income tax on their income and did not shield them from having to deduct TDS from payments given to their members. Considering TDS duties, the debate consequently centers on how these laws should be interpreted as well as the scope of exemptions that apply to cooperative groups.
Legal Provisions
The primary legal sections involved in the case are Section 194A and Section 194N of the Income Tax Act. Section 194A pertains to the deduction of tax at source on interest other than interest on securities. Section 194N deals with the deduction of tax at source on certain cash withdrawals exceeding specified limits.
Issues
Whether Cooperative Societies are exempt from Tax Deducted at Source (TDS) on interest income exceeding Rs. 40,000 when withdrawing from Cooperative banks for cash distribution to members, given their role as business correspondents mandated by the State Government?
Courts analysis and decision
The High Court stated that benefits like flood assistance and Pongal presents should be paid directly into beneficiaries’ bank accounts, stressing that this would reduce the possibility of fund theft by those in authority. In addition to preventing financial mismanagement, the court emphasized that members of cooperative societies will save a great deal of time by not having to visit societies or ration stores for registration and money collection. The court ruled that governments and societies should take steps to prevent corruption and financial mismanagement where a workable alternative is available. This would eventually remove the necessity for Tax Deducted at Source (TDS) in certain transactions.
The State Government’s use of cooperative societies as business correspondents to distribute monetary rewards to its members was observed by the court to be a non-banking activity rather than a banking transaction. The court rejected the petition contesting the circular, arguing that eligibility for deductions ought to be ascertained at the time of assessment and that any over-deduction ought to be reimbursed, if qualified.
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Written by- Rupika Goundla
