Chirayinkeezhu Service Co-operative Bank Ltd. v. Central Board of Direct Taxes –

[2019] 112 taxmann.com 272 (Kerala)

The assessee was primary agricultural credit society registered under the provisions of the Kerala Co-operative Societies Act 1969.

 In the instant writ petition, it sought the benefit of exemption from the provisions of Section 194A of the Income-tax Act.

The section 194A mandates a deduction of tax at source, whenever any person, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, in cash or by issue of cheque or Bank draft or by any other mode.

However, it exempts certain class of taxpayers from the provision of this section. Any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank) is mentioned in the list of exemptions.

The Kerala High Court held that in the absence of definition of “banking” under the Income Tax Act, it would be safe to adopt the definition of “banking” 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.

On such an interpretation, the benefit of exemption under section 194A(3)(iii)(a) would apply only when the interest income in respect of deposit made with the treasury accrues/arises to a co-operative society engaged in carrying on the business of banking, which, in turn, involves acceptance of deposits from the public.

Thus, society accepting deposits only from its members couldn’t be held to be engaged in ‘banking business’ so as to allow it benefit of exemption from TDS under section 194A.