P. Shanmugam, J. 1. The petitioners are primary credit societies registered under the Kerala Co-operative Societies Act. They have challenged the notices issued by the Income-tax Officer in reference to tax deduction on interest other than interest on securities required under Section 194A of the Income-tax Act, 1961 (hereinafter referred to as "the Act").
2. The impugned notices proceeded on the basis that the co-operative societies would be governed by Section 194A of the Act for the purpose of deduction of tax at source from the interest paid or credited on deposits and their failure to deduct tax at source amounts to violation of the provisions of the Income-tax Act. The co-operative societies have taken up the stand that they are exempted under Section 194A and they are not coming within the purview of the said section. Therefore, the question for consideration is whether the petitioner-co-operative societies are liable to deduct tax on interest paid or credited at source as required. Section 194A of the Act obliges any person who is responsible for paying any income by way of interest other than income by way of interest on securities, shall at the time of credit of such income or payment thereafter deduct income-tax thereon at the rates. Sub-section (3) of Section 194A sets out certain categories of persons who are exempted from Section 194A.
3. Income credited or paid to institutions like LIC, Unit Trust of India or co-operative society carrying on business of insurance are exempted. Subsection (3)(v) of Section 194A, which is relevant for the purpose, is extracted below :
"(3) The provisions of Sub-section (1) shall not apply-
(v) to such income credited or paid by a co-operative society to a member thereof or to any other co-operative society."
4. Sub-section (3)(viia) reads as follows :
"(viia) to such income credited or paid in respect of-
(a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank ;
(b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co-operative society or bank referred to in Sub-clause (a), engaged in carrying on the business of banking."
5. "Co-operative society" has been defined under Section 2(19) of the Income-tax Act, as follows :
" '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."
6. The case of the petitioners is that for the purpose of understanding the expression "co-operative society" one need not go beyond the definition given under the Income-tax Act. According to Section 2(19), it means a cooperative society registered under the Co-operative Societies Act. The petitioners satisfy this definition.
7. It is further submitted that Sub-section (3)(v) deals with such income credited or paid by a co-operative society to a member, whereas Sub-section (3)(viia)(a) provides a total exemption to deposits with the primary credit society. The petitioners are primary credit societies and, therefore, there is exemption towards deduction in respect of income credited or paid for the deposits. Their claim of exemption is reinforced and made clear by a reading of Sub-section (3)(viia)(b) wherein deposits with the primary credit society referred in Sub-clause (a) engaged in carrying on the business activity are exempted. It is their further submission that Sub-section (3)(viia) has been substituted by the Finance Act, 1995, with effect from July 1, 1995, which is as follows :
"(vii) to such income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in Section 51 of that Act), or with a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a cooperative land development bank)."
8. The petitioners who are co-operative societies engaged in carrying on banking business, were made liable for deduction and got such income credited or paid in respect of deposits. By the amendment, substituting in the present form, the primary co-operative societies are excluded and exempted from deduction and the intention of the Legislature is evident.
9. For these reasons, the petitioners seek for quashing of notices as one without jurisdiction. On behalf of the respondents, an additional statement has been filed. According to them, a co-operative society doing banking business is governed by the Banking Regulation Act which is a special enactment and, therefore, definition obtained in the Banking Regulation Act will govern the petitioners. As per the definition under the said Act, primary credit society whose paid up capital and reserve being more than Rs. 1,00,000 would cease to be a primary credit society and they would become primary co-operative bank. Therefore, they would not come within the saving Clause of Section 194A(3)(viia)(a) of the Income-tax Act. The provision under Sub-section (3)(i) of Section 194A is available only if the amount does not exceed Rs. 2,500 and under the proviso the figure is fixed at Rs. 10,000. So, if the amounts exceed the limit prescribed, co-operative societies are bound to deduct the tax at source.
10. In CIT v. Shaan Finance (P.) Ltd, [1998] 231 ITR 308, it was held by the Supreme Court that in interpreting a fiscal statute, the court cannot proceed to make good the deficiencies if there are any. The court must interpret the statute as it stands and in case of doubt, in a manner favourable to the taxpayer. The Supreme Court in Broach District Co-operative Cotton Sales Ginning and Pressing Society Ltd. v. C/T[1989] 177 ITR 418, held that the object of Section 81(i) (dealing with the income of co-operative societies) was to encourage and promote the growth of co-operative societies, and consequently a liberal construction must be given to the operation of that provision. A Division Bench of this court in P. Alikunju, M.A. Nazeer Cashew Industries v. CIT [1987] 166 ITR 804, held that a provision for exemption or relief in a fiscal statute should be construed liberally and in favour of the assessee.
11. If one were to go by the plain meaning of the co-operative society as defined under the Income-tax Act, the provisions of Sub-section (1) of Section 194A do not apply to a primary credit society. If the definition as set out in the Banking Regulation Act under Section 56 were to be applied, there should have to be a further investigation as to the eligibility within Section 56 (ccvi) wherein it is stated that for the purpose of primary credit society, three conditions are to be fulfilled. (1) The primary object or principal business of which is the transaction of banking business ; (2) The paid-up share capital and reserves of which are less than one lakh of rupees ; (3) The bye-laws of which do not permit admission of any other co-operative society as a member. In case of dispute as to the primary object of the society, it has to be determined by the Reserve Bank of India. Clause (ccvii) states that "co-operative society" shall have the meaning assigned to it in the National Bank for Agricultural and Rural Development Act, 1981. Section 3 of the Banking Regulation Act excludes the provisions of the said Act to a primary agricultural credit society, co-operative land mortgage bank and any other co-operative society except in the manner and to the extent specified in Part V. The position as it stood before the substitution of the clause by the Finance Act, 1996, was to the effect that all co-operative societies engaged in carrying on the business of banking were given the exemption. It is now confined to certain co-operative societies not engaged in carrying on the business of banking. On a plain reading of Sub-section (3)(viia) of the Act read with Section 2(19) of the Act, there is total exemption and that is fortified by Sub-section (3)(viia)(b). Hence, there is no scope for the argument that the primary cooperative societies are not exempted. That would be reading something not found in the Income-tax Act, but could only be stretching the definition found under the Banking Regulation Act. Resort to a different provision of another Act may be relevant in the absence of a definition or of a technical nature. For the purpose of understanding the "co-operative society" the meaning that can be given is only as per the definition under Section 2(19) of the Income-tax Act and not otherwise.
12. The contention that Sub-section (3)(i) exemption limit has been increased to Rs. 10,000 to time deposits with co-operative societies engaged in carrying on business of banking, would have to be reconciled and if so done, then all co-operative societies who have credited or paid exceeding Rs. 10,000 are liable for deduction cannot be accepted. Firstly, the proviso deals only with the time deposit and secondly the expression used is "the co-operative society engaged in carrying on business of banking". There may be many co-operative societies that may come under Sub-section (3)(viia)(b). The proviso could be referable only to those co-operative societies and cannot be to primary credit societies to which class the petitioners belong.
13. The contention of learned senior counsel for the Revenue referring to the Supreme Court decision in CIT v. Bagyalakshmi and Co. [1965] 55 ITR 660, to the effect that except where there is specific provision of the Income-tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. This judgment, in my view, may not apply to the facts of this case. Here there is a specific provision defining co-operative society. Secondly, in that case, the registration of a firm was cancelled on the ground the partnership deed did not specify the correct shares. The Supreme Court held that the partition did not affect in any way their relationship with the other partners, qua the partnership, or the validity or genuineness of the partnership and held that the Commissioner was wrong in cancelling the registration. The exemption clause in reference to the co-operative society, calls for a liberal interpretation. That apart, a plain interpretation of the relevant clauses would go to show that there is a clear exemption in favour of a primary credit society. It may not be possible or open for the Revenue to dissect and find out the object of the primary credit society and share limit of the primary credit society so as to classify them as co-operative bank and remove them out of the purview of the exemption clause. That is a matter to be decided under the Banking Regulation Act. As rightly contended by the petitioners, they are not controlled or governed by the Reserve Bank of India and they are registered and are bound by the provisions of the Co-operative Societies Act.
14. For all these reasons, I hold that the initiation of the notices on the premise that the co-operative societies cannot be exempted and are liable to make deductions are illegal and cannot be sustained, and the respondents have proceeded without authority or jurisdiction.
15. The original petitions are accordingly allowed.