Co-Operative Societies liable to deduct TDS on Interest Payments: Kerala HC [Read Order]

Several Co-operative Societies across Kerala had approached the High Court challenging the orders of the Income Tax Department mandating deduction of TDS on interest paid to members.

The petitioners contended that such deduction was not required under Section 194A(3)(v) of the Act, which grants exemption to interest paid by Co-operative Societies (other than Co-operative Banks) to their members. They argued that the Central Board of Direct Taxes (CBDT) and the Department’s insistence on compliance effectively negated this statutory exemption.

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The petitioners maintained that their societies were primarily engaged in welfare and agricultural credit operations and did not qualify as “Co-operative Banks.” They contended that the Income Tax Department had wrongly equated them with banking institutions solely because they accepted deposits and disbursed loans to members.

The Counsel for the petitioners also cited prior Kerala High Court and ITAT decisions that had exempted similar societies from TDS obligations.

On the other hand, the Income Tax Department, represented by the Central Government Counsel, argued that the petitioners’ operations were banking in nature and that the statutory exemption under Section 194A(3)(v) applied only to non-banking societies. The Department relied on CBDT Circulars and judicial precedents, including the Supreme Court’s decision in Mavilayi Service Co-operative Bank Ltd. v. CIT (2021), to assert that functional classification determines tax liability, not registration status.

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The Single Bench of Justice Ziyad Rahman held that the decisive factor was whether the Co-operative Societies were carrying on “banking business” within the meaning of the Banking Regulation Act, 1949. After examining their functions and membership structures, the Court found that most petitioners operated as banks and thus were not entitled to the exemption under Section 194A(3)(v). The Court observed that “the petitioners cannot be treated as the institutions that fall within Section 194A(3 (iii) of the Income tax Act as well.”

The Kerala High Court further noted that the legislative intent behind the 2020 amendment to Section 194A was to ensure parity and to plug revenue leakages arising from large deposits mobilized by Co-operative Banks. Consequently, Co-operative Societies engaged in similar financial activities could not claim blanket exemption.

The High Court dismissed the petitions, upholding the Department’s view that Co-operative Societies functioning as banks must comply with Income Tax TDS provisions on interest payments.

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