Co-operative Society Registered Under Karnataka Souharda Sahakari Act is Exempt from TDS Under Section 194A

By | June 3, 2025
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Co-operative Society Registered Under Karnataka Souharda Sahakari Act is Exempt from TDS Under Section 194A(3)(v)

Issue:

Whether a society registered under the Karnataka Souharda Sahakari Act, 1997, is considered a “co-operative society” within the meaning of Section 2(19) of the Income-tax Act, 1961, and is therefore entitled to exemption from TDS on interest payments under Section 194A(3)(v) of the Act.

Facts:

For assessment years 2015-16 to 2018-19, the assessee society was registered under the Karnataka Souharda Sahakari Act, 1997. The Assessing Officer (AO) issued a show-cause notice to the assessee, contending that the provisions of Section 194A(3)(v) (which exempts interest paid by a co-operative society to its members or other co-operative societies) were not applicable to the assessee. The AO’s basis was that the assessee was not a “co-operative society” within the meaning of Section 2(19) of the Income-tax Act.

Decision:

Yes, the assessee society was entitled to exemption under Section 194A(3)(v), and therefore, the impugned show-cause notice issued to the assessee was without jurisdiction or authority of law.

Key Takeaways:

  • Definition of “Co-operative Society” under Section 2(19): Section 2(19) of the Income-tax Act defines “co-operative society” as a society registered or deemed to be registered under the Co-operative Societies Act, 1912, or any other law for the time being in force1 in any State for the registration of co-operative societies.2
  • Karnataka Souharda Sahakari Act, 1997: The Karnataka Souharda Sahakari Act, 1997, is a specific state law for the registration of co-operative societies in Karnataka. Therefore, societies registered under this Act fall squarely within the definition of “co-operative society” as per Section 2(19) of the Income-tax Act.
  • Exemption under Section 194A(3)(v): This section specifically exempts interest income from TDS when paid by a co-operative society (not a co-operative bank) to its members or to any other co-operative society.
  • Lack of Jurisdiction for Show-Cause Notice: Since the assessee met the criteria for being a co-operative society and was entitled to the exemption, the AO’s show-cause notice, questioning this status for the purpose of Section 194A(3)(v), was deemed to be without proper legal basis or jurisdiction.
  • Clarity on Legal Status: This case clarifies that registration under state-specific co-operative laws, such as the Karnataka Souharda Sahakari Act, is sufficient to qualify an entity as a “co-operative society” for the purposes of the Income-tax Act, particularly concerning TDS provisions.
HIGH COURT OF KARNATAKA
Udaya Souhardha Credit Co-Operative Society Ltd.
v.
Income-tax Officer, TDS
S.R. Krishna Kumar, J.
WRIT PETITION NO. 24591 OF 2022 (T-IT)
APRIL  1, 2025
Annamalai S., Adv. for the Petitioner. E.I. Sanmathi, Adv. for the Respondent.
ORDER
1. In this petition, the petitioner seeks for the following reliefs:
(i)Issue a writ of Certiorari or direction in the nature of a writ of certiorari quashing the show cause issued under section 201(1) and 201(1A) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) dated 14.03.2022 for the financial years 2015-16, 2016-17, 2017-18 and 2018-19 by the Respondent bearing DIN No.KAR/WT/185/3/ 14032022/00431 herein marked as Annexure-A.
(ii)Issue a writ of Mandamus or direction in the nature of a writ of mandamus directing the Respondent to drop the present proceedings in the light of the decision of this Hon’ble Court in the petitioner’s own case in ITA No.869/2018 and ITA No.330/2019 along with other connected matters dated 20.12.2021.
(iii)Declare that the petitioner is a co-operative society as per the provisions of the Act and consequently it is not required to deduct tax at source on the interest payments made to its member as per the provisions of section 194A(3)(v) of the Income Tax Act, 1961.
(iv)And pass such other orders as this Hon’ble Court deems fit and proper in the interest of justice and equity.”
2. A perusal of the material on record would indicate that the present petition relates to the financial years 2015-16, 2016-17, 2017-18 and 2018-19. Further, in relation to the very same petitioner herein and in response to the financial year 2014-15 under identical circumstances, this Court, in W.P.No.6660/2022 disposed of on 19.03.2024 held as under:
“ORDER
In this petition, petitioner seeks quashing of the impugned show cause notice at Annexure – A dated 11.02.2022 issued by the respondent to the petitioner for the FY 2014-15 and for other reliefs.
2. Heard learned counsel for the petitioner and learned counsel for the respondent and perused the material on record.
3. In addition to re-iterating the various contentions urged in the petition and referring to the material on record, learned counsel for the petitioner invited my attention to the impugned show cause notice issued by the respondent under Section 201(1) and 201(1A) in order to point out that the respondent has come to the erroneous conclusion that since the petitioner is a Co-operative Society registered under The Karnataka Souharda Sahakari Act, 1997, which was not a society as envisaged under Karnataka Cooperative Societies Act, 1959, the exemption available in terms of Section 2(19) of the Income Tax Act exemption available under 194 A(3)(V) of the Income Tax was not admissible for non deductible TDS of the petitioner society. In this context, learned counsel for the petitioner points out that definition clause contained in Section 219 of the IT Act is wide enough to encompass a Co operative Society including societies registered under Karnataka Cooperative Societies Act, 1959 as well as The Karnataka Souharda Sahakari Act, 1997, as held by the Hon’ble Division Bench in the case of Govt. of India, Ministry of Finance v. Karnataka State Souharda Federal Cooperative Ltd  (Kar)/ WA.No. 378/2020 and connected matters dated 20.12.2021 which includes the case of petitioner also in the different Assessment Year. It is therefore submitted that the impugned show cause notice issued by the respondent apart from being illegal and arbitrary was also without jurisdiction or authority of law and contrary to the provisions of the Act as well as the dictum of the Hon’ble Division Bench and the same deserves to be quashed.
4. Per contra, learned counsel for the respondent submits that the petitioner would be entitled to raise all such contentions by submitting suitable reply to the show cause notice and the respondent may be directed to consider all the contentions and pass appropriate orders in accordance with law.
5. It is therefore submitted that there is no merit in the present petition which is premature and the same is liable to be dismissed.
6. I have given my anxious consideration and rival submissions and perused the material on record.
7. Before adverting the claim of the petitioner society in the present petition, it is pertinent to note that Hon’ble Division Bench in Govt. of India’s case supra which included case of the petitioner all being for the different Assessment Year and in the context of examining is to whether Section 219 was wide enough to include the petitioner society which would register under The Karnataka Souharda Sahakari Act, 1997, held as under:
“19. Statement of objects and reasons to Karnataka Act No.17/2000 [Souharda Act] reads thus:
“The Karnataka Souhardha Sahakari Bill, 1997 among other things provide for.-
(1) the recognition, encouragement and voluntary formation of co-operatives based on self help, mutual aid, wholly owned, managed and controlled by members as accountable, competitive, self-reliant and economic enterprises guided by co-operative principles specified therein;
(2) removing all kinds of restrictions that have come to clog the free functioning of the cooperatives and the controls and interference by the Government except registration and cancellation;
(3) promotion of subsidiary organisation, partnership between co-operatives and also collaboration between co-operatives and other institutions;
(4) registration of co-operatives, union cooperatives and Federal Co-operative in furtherance of the objectives specified above;
(5) conversion of co-operative societies registered under the Karnataka Co-operative Societies Act, 1959 as a co-operative under the proposed legislation. Hence, the Bill.”
20. The objects and reasons for the amended Act No.21/2004 [Souharda Act] reads as under:
“An Act to provide for recognition, encouragement and voluntary formation of co-operatives based on self-help, mutual aid, wholly owned, managed and controlled by members as accountable, competitive, self-reliant and economic enterprises guided by co-operative principles and matters connected therewith;
Whereas it is expedient to provide for recognition, encouragement and voluntary formation of cooperatives based on self-help, mutual aid, wholly owned, managed and controlled by members as accountable, competitive, self-reliant and economic enterprises guided by co-operative principles and for matters connected therewith.”
21. Preamble to the Souharda Act reads thus:
“Whereas it is expedient to provide for recognition, encouragement and voluntary formation of cooperatives based on self-help, mutual aid, wholly owned, managed and controlled by members as accountable, competitive, self-reliant and economic enterprises guided by co-operative principles and for matters connected therewith;
Be it enacted by the Karnataka State Legislature in the Forty-eighth Year of Republic of India as follows-“
22. Preamble to the Co-operative Societies Act, 1959 reads thus:
“Whereas it is expedient [to promote voluntary formation, autonomous functioning, democratic control and professional management of cooperative societies in the State of Karnataka;
Be it enacted by the Karnataka State Legislature in the Tenth Year of the Republic of India as follows-“
23. A comprehensive reading of the Preambles of the aforesaid Acts vis-a-vis objects and reasons would indicate that both the Statutes support and promote Co-operative movement. No hyper technical view can be taken to exclude the entities registered under the Souharda Act as not falling under the definition of ‘Co-operative Society’ as defined in Section 2[19] of the Act. Now, it is further clarified by the Amendment Act No.35/2021 brought out to Section 2[e] of the Souharda Act by substitution whereby ‘Co-operative’ means a Souharda Co-operative Society including a Co-operative bank during the business of banking registered or deemed to be registered under Section 5 and which has the words ‘Souharda Co-operative Society’ in its name and for the purposes of the Income Tax Act, 1961 also amongst other enactment specified therein. By substituting amongst the others “The Income Tax Act, 1961” it has been clarified that for the purpose of the Income Tax Act, Co-operative under Souharda Act is a Co-operative Society as such, the assesses are entitled for the benefit of Section 80P of the Income Tax Act, 1961. It cannot be gainsaid that the amendment by substitution relates back to the date of original enactment unless specified from a particular date. In the absence of any specified date mentioned, the Amended Act certainly relates back to the date of enactment.
24. In the case of Mavilayi Service Co-operative Bank Ltd., V/s. Commissioner of Income Tax, Calicut  the Hon’ble Apex Court has held thus:
“11. Having heard learned counsel for the assessees as well as for the Revenue, it is first important to set out sections 2(19) and 80P of the Income Tax Act, which read as follows:
“2. In this Act, unless the context otherwise requires,-
xxx xxx xxx
(19). “co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any law for the time being in force in any State for the registration of cooperative societies.”
“80P. Deduction in respect of income of cooperative societies.—(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in subsection (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely:—
……………..
We now turn to the proper interpretation of Section 80P of the IT Act. Firstly, the marginal note to Section 80P which reads “Deduction in respect of income of co-operative societies” is important, in that it indicates the general “drift” of the provision. This was so held by this Court in K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. (1981) 4 SCC 173 as follows:
“9. This interpretation of sub-section (2) is strongly supported by the marginal note to Section 52 which reads “Consideration for transfer in cases of understatement”. It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section or, to use the words of Collins, M.R. in Bushel v. Hammond [(1904) 2 KB 563] to show what the section is dealing with. It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section (vide Bengal Immunity Company Limited v. State of Bihar [(1955) 2 SCR 603]).”
28. Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”. A cooperative society is defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y.
29. Thirdly, the gross total income must include income that is referred to in sub-section (2).
30. Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being “engaged in” carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co-operative society must be “engaged in” the providing credit facilities to its members. As has been rightly pointed out by the learned Additional Solicitor General, the expression “engaged in”, as has been held in Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Ltd. (2008) 9 SCC 337, would necessarily entail an examination of all the facts of the case. This Court in Ponni Sugars and Chemicals Ltd. (supra) held:
“20. In order to earn exemption under Section 80-P(2) a cooperative society must prove that it had engaged itself in carrying on any of the several businesses referred to in sub- section (2). In that connection, it is important to note that under subsection (2), in the context of cooperative society, Parliament has stipulated that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. Therefore, in each case, the Tribunal was required to examine the memorandum of association, the articles of association, the returns of income filed with the Department, the status of business indicated in such returns, etc. This exercise had not been undertaken at all.”
In terms of this recent judgment of the Hon’ble Apex Court, it is unnecessary to probe as to whether the Co-operative Society is classified further. In this recent judgment, the Hon’ble Apex Court has observed that the provision is introduced with a view to encourage and promote the growth of Cooperative Society in the economic life of Country and in pursuance of the declared policy of the Government. The factum of a Co-operative Society being registered under the 1912 Act or under the State law is the test. Co-operatives being registered under the Souharda Act, a State law, certainly comes within the ambit of Co-operative Society.
25. The Constitution of India has been amended by incorporation of Part-IX-B. On 15.02.2012 vide S.O.265[E], dated 08.02.2012 under the heading “The Co-operative Societies”, Article 243-ZH[c] of the Constitution of India defines “Co-operative Societies” as under:-
“[c] “Co-operative Society” means a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State”,
Article 243-ZI of the Constitution of India authorizes formation of co-operative societies by the State Legislature. Article 243-ZI of the Constitution of India reads as under:-
“243-ZI. Incorporation of co-operative societies. Subject to the provisions of this Part, the Legislature of a State may, by law, make provisions with respect to the incorporation, regulation and winding up of co-operative societies based on the principles of voluntary formation, democratic member-control, member-economic participation and autonomous functioning.”
It appears, it was thought fit to encourage cooperative movement by formation of co-operative societies by incorporating the same in Part-IV i.e., directive principles of State policy in the Constitution of India. The amendment incorporated as Article -43-B by the Constitution [ninety seventh amendment] Act, 2011, S-3 with effect from 15.02.2012 reads as under:-
“43.B. Promotion of co-operative societies, – The State shall Endeavour to promote voluntary formation, autonomous functioning, democratic control and professional management of cooperative societies.”
26. The fallout of the object and reasons and the subsequent amendment which takes the forefront by this 97th Constitution Amendment is appreciating “Co-operative movement.” By incorporating part IX-B in the Constitution under the head “The Cooperative Society” and making it part of directive principles of the state policy, it becomes explicit that the co-operative movement is top priority of the Central Government’s Policy and its implementation.
27. Merely, because separate definitions are provided for the words “Co-operative” and “Cooperative Society” under Section 2[e] and [g] respectively of Sec.2 of Souharda Act, it cannot be construed as their characteristic is different, since their nomenclature is different. Importance has to be given to the word “Co-operative” which is found in both the enactments i.e., Act No.11 of 1959 and Act No.17 of 1997, as adjective pre-fixed to the noun that means the characteristic of the organization/institution while applying the principle of hormonial construction and interpretation of the laws, especially the laws which are intended to promote the organization of that character.
28. The Souharda Act and the Karnataka Cooperative Societies Act, 1959 are both in force in the State of Karnataka and are regulated by the State Registrar of Co-operatives Karnataka. Registrar of Cooperative Societies governs all Co-operatives while being formed, alteration of bylaws and closure of the Co-operative Societies. Though the aforesaid two Acts are parallel but are in respect of Cooperatives in the State as the name suggests.
29. It could be inferred that once the entities are governed by the Co-operative Principles under the law in force and registered under the State enactment, which by implication or otherwise shall only have a same meaning of Co-operative Society.
30. Both these Acts [Souharda Act and Cooperative Societies Act, 1959] would come within the ambit of Article 246[3] read with Entry 32 of the List-II of Schedule – VII of the Constitution of India.
31. The provisions of Section 47 of the Co-operative Societies Act, 1912 imposes a bar on the use of the Co-operative, which is extracted hereunder:
“47. Prohibition of the use of the word “cooperative”.—
(1) No person other than a registered society shall trade or carry on business under any name or title of which the word “co-operative” is part without the sanction of the State Government:
Provided that nothing in this section shall apply to the use by any person or his successor-in-interest of any name or title under which he traded or carried on business at the date on which this Act comes into operation.
(2) Whoever contravenes the provisions of this section shall be punishable with fine which may extend to fifty rupees, and in the case of a continuing offence with further fine of five rupees for each day on which the offence is continued after conviction therefor.”
32. At this juncture, the arguments advanced by the learned counsel for the Revenue that the Karnataka Act No.35/2021 – the State Amendment Act runs contrary to the Central enactment of Co-operative Societies Act, 1912 resulting in repugnancy with the Central enactment cannot be countenanced for the reason that we are not adjudicating upon the Constitutional validity of the Karnataka Act No.35/2021, Amended Souharda Act. Hence, the amended Section 2[e] of the Souharda Act is applicable to the facts of the case. The judgments cited by the learned counsel for the Revenue inasmuch as Articles 246 and 254 would be of no assistance in adjudicating the dispute in the case on hand. If a strict literal interpretation is given to the word ‘Co-operative’ as canvassed by the learned counsel for the Revenue, in the absence of rate of tax fixed for such ‘Co-operative’, no tax liability would arise in the light of the judgment of the Hon’ble Apex Court in the case of Govind Saran Ganga Saran supra. Hence, the said arguments are negated.
33. The provisions of Section 80P offers tax deduction in respect of income of Co-operative Societies which is enacted with a laudable object of promoting Co-operating moment. Such benefit cannot be denied to the so called Co-operatives under the Souharda Act merely on hyper technicalities. The interpretation given by the Revenue to Section 2[19] of the Act is untenable. A harmonious reading of the said provisions would indicate that Co-operative Society registered under the Co-operative Societies Act, 1959 alone is not the Co-operative Society for the purposes of the Income Tax Act, as the phrase ‘or’ employed with the following words ‘under any other law for the time being in force in any State for the registration of Cooperative Society’ if read, Co-operative Societies registered under the Souharda Act which is a State enactment would certainly be construed as Cooperative Society coming within the ambit of Section 2[19].
34. Thus, for the reasons aforesaid, we find no jurisdictional error in the order passed by the learned Single Judge in extending the benefit of Section 80P to the entities registered under the Souharda Act.”
8. As can be seen from the statutory provisions and the judgment of the Hon’ble Division Bench referred to supra, the petitioner society being undisputedly Cooperative Society registered under The Karnataka Souharda Sahakari Act, 1997, the exemption for TDS under Section 194 A (3) V of the IT Act, is clearly admissible in so far as the petitioner society is concerned and consequently the impugned show cause notice is clearly without jurisdiction or authority of law and the same is being illegal and arbitrary, no useful purpose would be served by continuing the service pursuant to the impugned show cause notice. To reiterate, the entire claim of the respondent in the show cause notice is to the effect that the provisions of Section 194 A (3)(V) were not applicable to the petitioner since the same was not a Cooperative Society within the meaning of the Section 2(19) of the IT Act. However, in the light of the judgment of the Hon’ble Division Bench and the wide and expansive definition contained in Section 2(19) which includes the petitioner society which has been registered under the provisions of The Karnataka Souharda Sahakari Act, 1997, I am of the view that the impugned show cause notice deserves to be quashed.
9. In so far as the contention urged by the respondent that the petitioner would be entitled to raise all contentions by submitting a suitable reply is concerned, in the light of the finding recorded by me above that the impugned show cause notice is without jurisdiction or authority of law and that the petitioner was entitled to exemption under Section 194 A (3)(V), the question of continuing further proceedings pursuant to the impugned show cause notice would not arise in the facts and circumstances of the instant case.
10. In the result, I pass the following:
ORDER
(i)The petition is hereby allowed.
(ii)The impugned show cause notice at Annexure – A dated 11.02.2022, is hereby quashed.”
3. In view of the aforesaid facts and circumstances and order of this Court in relation to the very same petitioner for the previous financial year 2014-15 and applying the doctrine of parity, I am of the view that the present petition also deserved to be allowed and disposed of in terms of the aforesaid judgment. Accordingly, the writ petition is allowed. The impugned show-cause notice dated 14.03.2022 is hereby quashed.