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TDS not to be deducted from interest paid to members of co-oprative banks

Subject : Income Tax Law
Month-Year : Oct 2002
Author/s : M. V. Purandare
Chartered Accountant
Topic : TDS not to be deducted from interest paid to members of co-oprative banks
Article Details :



Introduction :
As per recent circular No. 9/2002 dated 11-9-2002, issued by CBDT (Central Board of Direct Taxes) it has been clarified amply clearly that a member (i.e. shareholder) of a co-operative bank shall receive interest on deposits (fixed and recurring) with bank without deduction of tax (TDS) u/s.194A by virtue of the exemption granted vide clause (v) of Ss.(3) of the said Section.
To analyse the implication of the said clarification, first let us try to understand the relevant provision of S. 194A of the Income-tax Act, 1961. The Section deals with interest other than ‘Interest on securities’


Interest received on fixed deposits from companies/banks is exempt to the extent of Rs.5000 (Rupees five thousand only). It means that income credited or paid by a branch of the company or the co-operative society or public company upto Rs.5000 is without deduction of tax at source.


The Section casts the responsibility on some specified persons who have to deduct the tax from the payee’s interest and pay it to the government.


The Section also lists down the exemption criteria for certain entities for which the provisions of this Section shall not apply.

The above issued circular is based on one such exemption criteria which Ss.(3) talks about. Ss.3(v) provides :
The provision of Ss.(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.

Ss.(viia)(b) : to such income credited or paid in respect of — deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society engaged in carrying on the business of banking.
The Section explains that time deposits means deposit (excluding recurring deposits) repayable on the expiry of fixed periods. Let us try to interpret the circular in plain language and understand its implication.

Criteria for becoming a member :

The principal issue to be considered in this background is who can be called a member of a bank.
The circular gives us some insight in cracking the above; it says : A member eligible for exemption u/s.194A(3)(v) must have subscribed to and fully paid for at least one share of the co-operative bank, must be entitled to participate and vote in the General Body Meetings and/or Special General Body Meetings of the Co-operative bank and must be entitled to receive share from the profits of the co-operative bank.

As usual, the explanation is long and cumbersome; let’s dissect it for ease of our understanding. There are three aspects in the above explanation :

1. A person should have subscribed to at least one share of the bank. But one must not rush to infer that mere application for subscription will be qualifying factor, as the word ‘fully paid for’ is important. Hence, the person should hold at least one fully paid share in the issued capital of the bank. It means mere application or subscription is not enough. Minimum face value of the share is immaterial. There are some cases in co-operative sector which are in litigation over the issue of membership, i.e. Subscription form has been received but issue of shares has not been made. Considering the explanation we can say that such cases will not be covered in the above ambit of the circular and hence such persons will not be qualified for the exemption.

2. It’s not over by the fact that person is holding one fully paid share out of the issued capital. The shareholder should have the right to participate and vote in the General Body Meetings and/or Special General Body Meetings of the co-operative bank. Thus, mere holding of share is not enough. The important part to understand is the circular does not differentiate in some types of shares, or does not spell out the nomenclature about the kind of share capital. All it says is that the share should bestow the right on its holder to participate and vote in the general body meeting. Hence voting right is the important criteria to be considered.

3. The other condition, which has been imposed, is that such holder must be entitled to receive share from the profits of the co-operative bank. In simple language, right to receive dividend or other benefits distributed from profits of the bank.

One may conclude that in order to be a member (shareholder) the holder should have clean title to its holding, it must not be loaded with any charge which goes against the spirit of above explanation nor should it have some restrictions put over it which are in conflict with the terms mentioned under the circular

Issue about other form of members :

A question has also been raised as to whether nominal members, associate members and sympathiser members are also covered by the exemption. It has been clarified that the exemption is available only to such members who have joined in application for the registration of the co-operative society and those who are admitted to membership after registration in accordance with the bye-laws and rules. To put it simply, one has to consider the above 3 points we have dis-cussed, only persons managing to fulfil all the above conditions are entitled to enjoy the benefits. There is normal practice in these banks to make guarantors of loan or loan applicants as nominal members. It must be understood that such members are not eligible for such exemption.

Implication/benefits :

1. After we have considered about the issue of member, one should understand the benefits that a person will enjoy for being a member of a co-operative bank. Till date members were required to submit Form No. 15H to the banks beforehand if they want that Interest on Fixed deposits should be received without tax being deducted on the same or in other cases claim refund from the Department (if applicable) after tax being deducted. Hence, unnecessary procedures were required to be followed. Now with issuance of this circular, member is entitled to receive interest on all deposits i.e. fixed deposits and deposits other than fixed deposits (like recurring deposits) upto any amount with-out TDS. This will particularly help the senior citizens who have invested large amount of their retirement benefits in such bank. Now they do not have to undergo any administrative procedure and can claim full interest with-out tax being deducted at source. Thus in this falling interest scenario they do not have to suffer more.

2. Another benefit to any member now accrues is that the member need not have to split the FDs in various branches just to avoid the tax being deducted at source. In doing so, he in turn creates himself a job to manage and track all those receipts. The amended section stipulates the upper threshold for non-deduction of tax as Rs.5000 (Rs.10,000 before). As the Section says that the limit has to be considered branchwise, many depositors employ this ploy of splitting the principal amount among various branches of the banks so as to manage the escape route. All this can end now, and a member can safely keep the deposits in one branch, and hence need not do the jugglery act of shifting between the branches.

3. The banks in turn are also relieved from the job of managing the Form 15H and also to handle the hot queries if tax is being deducted and what not. Hence, these co-operative banks can heave a little sigh of relief. Also another angle to this issue is, in the present economic scenario, lot of dust has been raised over the credibility of the co-operative banks, and common public in large is now looking at these banks with some dark glasses; this circular may come as a welcome relief to these banks as well. In the recent past common man was in the mood of pooling some of the deposits to nationalised banks accepting the low interest rates but was somewhat thinking from security angle. The co-operative banks were also forced to keep the deposit rates much lower compared to past to stay in present intense competition and hence the rate difference between the nationalised and co-operative banks was not much. Now, these banks can have another edge over their big brother. For other new banks, it will be easy to raise further share capital and strengthen the balance sheet and also to comply with Reserve Bank capital adequacy norms as well.

Thus the long-standing legal battle will now hopefully come to rest with release of this particular circular. It has been an unexpected gain to lot of depositors (i.e. members/share-holders) who were burdened with budget provisions and falling interest rate regime. One can conclude by saying that they have got what was their right. Hence, smile now, CBDT has said cheese . . . . . . .

Ref. :
1. [2002] 124 Taxmann 38.
2. Income-tax Act, 1961 — Relevant Sections.

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