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In the above case, the only possible exception to the general applicability of TDS on interest is provided in Section 194A(3)(iii)(a) to the effect that, TDS provisions are not applicable to interest paid/credited to any co-operative society engaged in carrying on the business of banking (including co-operative land motgage bank).
*Issue for consideration: Whether the Co-op. Credit societies are engaged in the business of banking so as to take benefit of the above exception?*
Section 2(19) of the I.T. Act: “Co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies.”
Banking is not defined under the Income Tax Act, 1961. Section 5(b) of the Banking Regulation Act defines the term Banking:
“Banking” means the accepting, for the purpose of lending or investment, of deposits of money *from the public*, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
It appears that, If by-laws of the co-op. credit society do not permit accepting deposits from non-members (i.e. public at large) it can not be termed as doing Business of Banking. [ACIT v. Buldana Urban Co-operative Society Ltd. (2013) 32 taxmann.com 69 (Nagpur)]
( In Vyavasaya Seva Sahakara Sangh vs State of Karnataka and Others, (ILR 1990 KAR 2080) their lordships have held that activities of co-operative credit societies can never become banking business as contemplated under the Banking Regulation Act, 1949.)
It is important to note that, Sec. 80P(2)(a)(i) is worded as *”……..in the case of a co-operative society engaged- in carrying on the business of banking or providing credit facilities to its members……..”*
This clearly brings out the two limbs wherein the enactment itself has distinguished the words business of banking with that of providing credit facilities. If the intention was not to grant deduction to all co-operatives then the section would not have been worded with these two limbs.
If the definition of banking is further analysed, the co-operative credit society can never issue cheques or drafts and cannot form part of any payment and settlement system in form of a Clearing House. Participation in Clearing House system is an important requisite to term itself as bank.
*Therefore, for deciding whether the assessee Patsanstha is carrying on the banking business as defined above, one has to refer to the aims and objects of the assessee as well as the profit and loss account.*
Alternate View- in favour of assessee:
[*Hon’ble Madras High Court in SBI Staff Credit Cooperative Society [(1998) 234 ITR 104 (Mad)] while adjudicating the issue whether a credit co-operative society (Patsanstha) is covered by the expression “co-operative society engaged in carrying on the business of banking” appearing inSection 11(5)(iii).*]
In the case of SBI Staff Credit Cooperative Society [supra], it was note-worthy that in the relevant definition clause i.e. definition of “credit institution” under Section 2(5A), the expression ‘co-operative society engaged in carrying on the business of banking’ appeared along with the expression ‘a banking company to which the Banking Regulation Act, 1949 applies. Yet their Lordships came to the conclusion that a credit society dealing with members only can be said to be in the business of banking. These two expressions are two distinct limbs of the definition and must be given meaning accordingly. The common thread, if at all be necessary, between the two expressions is the business of banking, which, in the esteemed opinion of the Hon’ble Madras High Court, includes business of giving loans to members only. *[Followed by ITAT Pune in Maharashtra Arogya Mandal vs. ITO on 14.02.2008]*