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 :
1.1

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 Incometax Act, 1961. The Section deals with interest other than
Interest on securities
a 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.
b The Section casts the responsibility on some specified persons
who have to deduct the tax from the payees interest and pay it
to the government.
c 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 cooperative 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 cooperative 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; lets 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. Its 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 nondeduction 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 cooperative 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 cooperative 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/shareholders) 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.