While declaring that the Proviso to Section 194A(3) of the Income Tax Act is not unconstitutional, as far as claims under Section 80P(2)(d) are concerned, the Kerala High Court (Ernakulam Bench) clarified that introducing a ceiling limit of Rs. 50 crores of turnover, as a sub-classification among the cooperative societies, which are otherwise equally placed, cannot be treated as an unreasonable classification, because the liability to pay income tax itself is based on the income received by the taxpayer, and the scheme of Income Tax Act itself is to apply different rates of tax upon different groups, which are created based on the income they receive.
Thus, the Court ruled that the classification based on the total income or the taxable income forms the basic structure of the Income Tax Act. Even with respect to the provision that contemplates TDS, several exemptions are provided based on the income criteria, and various ceiling limits are prescribed in respect of various categories, based on the income or the amount included in the transaction. Thus, this being in tune with the statutory structure of the Act, unless it is shown that the classification referred to in the proviso is indeed creating separate classes among the persons having equal status, no interference could be made.
The Court explained that 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 faulted with, by treating it as an unreasonable classification.
The Court also pointed out that the tax liability of each Society depends upon the income that they receive, as well as its source, nature, etc, and it is not merely because of their status as a Society. As far as the petitioner society is concerned, different rates of tax are applicable depending upon the income they earn. Therefore, when it comes to the question of TDS and the exemption from making a deduction towards TDS, there is no illegality in creating a classification based on the income they receive, and hence, such intelligible differentia does not amount to a violation of Article 14 of the Constitution of India.
A Single Judge Bench of Justice Ziyad Rahman A.A. observed that the benefit under Section 80P of the Income Tax Act is not an exemption from paying tax, but a benefit of deduction subject to the compliance of the terms and conditions, including filing of the ITR. As far as the tax liability on income from interest is concerned, for a Co-operative society, it is not an absolute exemption, but is subject to submission of the ITR.
The Single Judge explained that in the absence of any prohibition upon the legislature, a proviso that was intentionally brought by the legislature to make substantial changes in the main section, cannot be interfered with, merely because of the reason that, it is a proviso. To be precise, in such circumstances, it has to be treated as part of the main provision, and the interference could be made only if the other tests to determine the Constitutionality, viz, lack of legislative competence, violation of Part III of the Constitution, manifest arbitrariness, etc, are satisfied.
Upon examination of the proviso to section 194A(3), the Bench pointed out that the said proviso was subsequently introduced by way of an amendment as per the Finance Act, 2020, bringing in some conditions restricting the operation of the main provision. Thus, it is evident that it was intended to alter the scope of the main provision, i.e., subsection (3) of Section 194A, and hence, the same cannot be interfered with, merely because it is a proviso.
The Single Judge went on to explain that 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. The Bench noted that the higher the turnover, the higher the number of transactions, and this could be a reasonable ground to make such a classification.
Also, reference was made to section 194A(3)(iii)(a) of the Income Tax Act, to observe that what is contemplated therein is with respect to the banking companies to which the Banking Regulation Act, 1949, applies or any co-operative society engaged in the business of banking, including a co-operative land mortgage bank. Evidently, the petitioners are not engaged in the business of banking, and their operation is mainly confined to providing financial assistance to their members for agricultural purposes, where the concept of mutuality exists.
Lastly, pointing out that since the petitioners are not coming within the definition of ‘banking’ as per Section 5(b) of the Banking Regulation Act, 1949, they cannot be treated as the institutions that fall within Section 194A(3)(iii) of the Income Tax Act, as well, added the Bench while dismissing the petitions in favour of the Revenue Department.
Briefly, all these petitioners are Primary Agricultural Credit Societies, which are mainly engaged in the business of providing financial assistance to their members for agricultural purposes. They pleaded that, as per clause (v) of subsection (3) of Section 194A, the income credited or paid by a Co-operative society other than a co-operative bank to a member thereof or the income credited or paid by a co-operative society to any other co-operative society, shall be excluded from the operation of subsection (1) of Section 194A.
Thus, in the light of the statutory stipulations contained in clauses (v) and (viia) of section 194A(3) of the Act, all the petitioners were under no obligation to deduct any TDS in respect of the income received or credited to, as interest on deposits. However, as per the Finance Act, 2020, an amendment was brought in to the said stipulation, by adding a proviso in respect of the co-operative societies referred to in clause (v)and (viia), which was to the effect that, in case, the total sales, gross receipts, or turnover 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.
Challenging the introduction of the said proviso as unconstitutional, the petitioner societies approached the High Court alleging that the impact of the same is to the effect that the otherwise available exemption to them by virtue of section 194A(3) has been taken away.
Appearances:
Advocates C.A. Jojo and Swathy S., for the Petitioner/ Taxpayer
Advocates Christopher Abraham, Gilbert George Correya, and P.R. Ajith Kumar, for the Respondent/ Revenue
