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

Findings

The 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 difference in the income or the quantum of the amount involved, itself is the classification that determines the liability of tax or the amount to be paid as tax, and the classifications based on the income, form the basic structure of the Income Tax Act. Since the very concept involved is, “the liability is higher when the income is higher”, fixing a criterion in similar lines, in the matter of TDS, cannot be found fault with, by treating it as an unreasonable classification.” the Court observed.

The Court examined the principles relating to interpretation of a proviso, and stated that the intention of the legislature for bringing the proviso must be considered while interpreting a proviso and observed that the proviso in section 194A(3) was introduced to bring in conditions restricting the operation of the main provision.

“The stipulation in Section 194(3) relates to the inapplicability of Section 194A(1) in the matter of TDS, where, the liability to deduct the amount as TDS is imposed upon the payer. Therefore, by virtue of the proviso, the ultimate result is the change in restrictions on the applicability of section 194A(1), which deals with the obligation of the payer, and hence there is nothing wrong therein, as the basis is the total turnover or gross receipts or total sales of the payer. It is to be noted that the higher the turnover, higher the number of transactions and this could be a reasonable ground to make such a classification.” the Court observed.

The bench further observed that the compulsory nature of deposits as submitted by the petitioner are not on account of any stipulation in the Income tax Act, but due to the consequences of the provisions in the Kerala Co-operative Societies Act, and the orders issued by the statutory authorities.

“When the major contributory factor for the denial of the benefit is on account of a different statute than the one under challenge, that too being a State subject, the same cannot be taken as a valid ground to attribute manifest arbitrariness in the Central Statute.” the bench noted.

Referring to Ajmera housing Corporation and Another v CIT [(2010), 326 ITR 642 (SC)], the bench added: “The hardships or inconvenience of the party subjected to a law, by itself cannot be a good reason for judicial interference in a statute”

The Court thus, dismissed writ petitions observing that the petitioners could not establish any of the grounds that required to exercise any judicial intervention in the provisions contained in the proviso to section 194A(3) of the Income Tax Act, 1961.

Rejecting the petitioners' contentions, the Court held that the Finance Act, 2020, which amended the proviso to Section 194A(3)(v), validly withdrew the blanket exemption previously enjoyed by co-operative societies on interest payments exceeding ₹40,000 (₹50,000 in the case of senior citizens).

The petitioners contended that they were entitled to exemption from TDS on interest paid to members, invoking the principles of mutuality and Section 194A(3)(iii)(a) of the Act. They argued that since they function primarily for the benefit of their members and are not engaged in banking business with the general public, the obligation to deduct TDS should not apply.

In a subsequent clarification order dated October 29, 2025, the Court addressed practical issues arising from the interim stay orders that had been in force during the pendency of the cases; the Court directed that the interim orders shall be made absolute with respect to all transactions up to the date of the judgment, ensuring that no adverse consequences would follow from non-deduction of TDS during that period.

Case Title: Vellangallur Peoples Welfare Co-operative Society Ltd. and Anr v Union of India and Ors. and connected case

Case No: WP(C) 7053/ 2023 and connected cases

Citation: 2025 LiveLaw (Ker) 700

Counsel for Petitioners: A Kumar (Sr.), Dr. K P Pradeep, M M Monaye, K S Hariharan Nair, Jojo C A

Counsel for Respondents: B G Hareendranath, Thomas Abraham. Mohammed Rafiq (Spl. GP - Taxes), Christopher Abraham, PR Ajith Kumar (SC - Income Tax)