The court upheld the constitutional validity of the amended proviso to Section 194A(3) of the Income Tax Act, finding the turnover-based TDS classification reasonable and within legislative competence.

Headnote:(A) Income Tax Act, 1961 - Section 194A(3) - Constitutional validity - Petitioners, as Co-operative Societies registered under the Kerala Co-operative Societies Act, challenge the validity of the proviso to Section 194A(3), which imposes TDS obligations based on turnover exceeding Rs. 50 crores on interest income, undermining their prior exemptions under said section. (Paras 1, 3, 7, 19, 34)

(B) Article 14 of the Constitution of India - Right to equality - Petitioners argue the proviso creates an unreasonable classification amongst societies based on turnover, thus violating their equality rights. The court finds the classification justifiable based on income sources and societal roles in taxation. (Paras 4, 18, 30)

Facts of the case:
Petitioners allege constitutional infringement due to the imposition of TDS under the amended provisions of Section 194A(3), arguing that it affects their financial operations and goes against the exempt status granted prior under the same section. They contend the amendment introduced arbitrary discrimination based on turnover. (Paras 4, 5, 6)

Findings of Court:
The Court holds that the classification based on turnover serves a rational purpose and respects legislative judgment in taxation, affirming the legality of the amendment without infringing petitioners' rights. (Paras 28, 34)

Issues: The primary issue is whether the amendment causing TDS obligations based on turnover violations constitutional equality principles and previously granted exemptions. (Paras 7, 18)

Ratio Decidendi: The Court reinforces that the legislative power to impose taxation can create classifications that reflect income realities and does not violate equality norms in taxing statutes. Thus, the imposition is lawful as it fulfills legitimate legislative objectives. (Paras 5, 30)

Result: Writ Petitions dismissed.

Table of Content
1. constitutional challenge to tds on cooperative societies. (Para 1 , 2 , 3)
2. arguments raised by petitioners regarding impact of tds. (Para 4)
3. income tax department's defenses against petitioners’ claims. (Para 5)
4. legal representation and proceedings overview. (Para 6 , 7 , 8 , 9)
5. examination of statutory provisions. (Para 10 , 11 , 12 , 13)
6. criteria for legislative competence in taxation statutes. (Para 14 , 15 , 16 , 17)
7. challenges concerning unreasonable classification. (Para 18 , 19 , 20)
8. interpretation of legislative provisions and statements. (Para 21 , 22 , 23 , 24)
9. purpose and implications of the highlighted proviso. (Para 25 , 26 , 27)
10. constitutional protection for cooperative movements. (Para 28 , 29 , 30 , 31 , 32 , 33)
11. final decision overview and outcomes. (Para 34)

JUDGMENT :

ZIYAD RAHMAN A.A., J.

In all these cases, the petitioners are Co-operative Societies registered under the provisions of the Kerala Co-operative Societies Act, 1969 and are classified as Primary Agricultural Credit Societies under the said Act and the Rules. In all these cases, the challenge is raised against the Constitutional validity of the proviso to section 194A(3) of the INCOME TAX ACT , 1961 (hereinafter referred to as the Act), by which, a restriction was imposed, based on the gross receipts or turnover of the Societies, in the matter of exemption from the obligation to make TDS from the income as the interests on deposits.

2. The brief facts which are required to examine the issues involved in these writ petitions are as follows: As mentioned above, 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. Section 194A deals with the liability to make deduction of tax at source (TDS) in respect of certain transactions and sub-section (1) thereof imposes a liability upon any person not being an individual or a Hindu undivided family, to deduct such amount as may be prescribed, from the income paid to any person by way of interest, other than the income by way of interest on securities. Subsection (3) of the aforesaid provision contemplates certain exceptional circumstances under which, the parties shall be exempted from making TDS. 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 sub-section (1) of Section 194A. Similarly, clause (viia) of section 194A(3) provides for a similar exemption in the case of deposits with a primary credit society or a co-operative Land Mortgage Bank or a Co-operative Land Development Bank.

3. 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 Finance Act, 2020, an amendment was brought in, to the aforesaid 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 turn over 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. The petitioners are aggrieved by the introduction of the said proviso, as according to them, the impact of the same is to the effect that, the exemption which was otherwise available to them by virtue of section 194A(3), has been taken away.

4. According to the petitioners, the introduction of the proviso as referred to above, affects the

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2025 Supreme(Ker) 3052

The court upheld the constitutional validity of the amended proviso to Section 194A(3) of the Income Tax Act, finding the turnover-based TDS classification reasonable and within legislative competence.

Cases Referred (10)

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