High Court Upholds TDS Obligation for Co-ops with Turnover Over ₹50 Cr; Proviso to Section 194A(3) is Valid

By | November 22, 2025
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High Court Upholds TDS Obligation for Co-ops with Turnover Over ₹50 Cr; Proviso to Section 194A(3) is Valid

Issue

Whether the proviso to Section 194A(3) of the Income-tax Act (inserted by Finance Act, 2020), which mandates large co-operative societies (turnover exceeding ₹50 crores) to deduct TDS on interest payments, is unconstitutional and violative of Article 14 by creating an unreasonable sub-classification among societies.

Facts

  • The Petitioners: Primary Agricultural Credit Societies (PACS) registered under the Kerala Co-operative Societies Act, 1969.

  • The Amendment: The Finance Act, 2020 inserted a proviso to Section 194A(3). This amendment removed the exemption from deducting TDS for co-operative societies if their total turnover exceeded ₹50 crores in the preceding financial year.

  • The Challenge: The petitioners challenged the constitutional validity of this proviso on two main grounds:

    1. Article 14 Violation: They argued that creating a sub-classification among societies based on a ₹50 crore threshold is discriminatory and unreasonable.

    2. Hardship: They contended that under State law, they are legally bound to deposit cash balances with the Kerala Bank. Since Kerala Bank’s turnover exceeds ₹50 crores, it deducts TDS on their interest income. This, they argued, practically negates their exemption under Section 80P.

Decision

  • The Kerala High Court dismissed the writ petitions and ruled in favour of the Revenue.

  • Validity Upheld: The Court held that the proviso to Section 194A(3) is constitutionally valid.

  • Reasonable Classification: The Court ruled that tax liability depends on income, source, and nature, not just status. Creating a classification based on economic capacity (turnover of ₹50 crores) is a reasonable classification and does not violate Article 14.

  • 80P is a Deduction, Not Immunity: The Court clarified that Section 80P provides a deduction from total income, subject to filing returns and complying with conditions. It is not a blanket exemption from tax liability or TDS compliance.

  • State vs. Central Law: Regarding the hardship caused by compulsory deposits with Kerala Bank, the Court held that this difficulty arises from the State Act (Kerala Co-operative Societies Act), not the Income-tax Act. Consequences of State regulations cannot render a Central Parliamentary enactment “manifestly arbitrary.”

Key Takeaways

  • Economic Thresholds are Valid: The Parliament has the power to classify taxpayers based on turnover limits (e.g., ₹50 Crores). Such economic classification is generally upheld as reasonable for tax administration.

  • TDS vs. Exemption: Being eligible for a deduction under Section 80P does not automatically exempt an entity from the procedural obligations of the Income Tax Act, such as deducting TDS (Section 194A) or filing returns.

  • Source of Hardship Matters: A tax law cannot be struck down as arbitrary simply because a separate State law forces the taxpayer into a transaction pattern that triggers tax consequences.

  • Impact: Large cooperative societies must strictly comply with TDS provisions if their turnover crosses the statutory threshold, regardless of their status as credit societies.

HIGH COURT OF KERALA
VELLANGALLUR PEOPLES WELFARE CO-OPERATIVE SOCIETY LTD.
v.
UNION OF INDIA*
ZIYAD RAHMAN A.A., J.
WP(C) NOS. 30686 of 2021, 213, 378 and 31176, 37399 of 2024 and others
OCTOBER  25, 2025
C.A. Jojo, S. Jiji, Mathews Joseph, Smt. Swathy S., O.D. Sivadas, K.J. Manu Raj, Ravi Krishnan, Smt. K. Vinaya, Remya Murali, Hareesh M.R., Rasmi Nair T., T.T. Biju, Smt. T. Thasmi, Smt. M. J. Anoopa, Dr. K.P. Pradeep, Sanand Ramakrishnan, Sanu S Malakeel, M.M. Monaye, M. Paul Varghese, K.S. Hariharan Nair, Rajath R Nath, Smt. G. Remadevi, Smt. Harima Hariharan, A. Chandra Babu, Avijith A. V, Smt. Prejitha S. Salim and Smt. Aparna Saraswati, Advs. for the Petitioner. Vishnu Pradeep, ESM. Kabeer, K. Vidyasagar, Gilbert George Correya, P.R. Ajith Kumar, Praveen K. V., D. Somasundaram, Smt. Jayasree K.P., Devaprasanth P.J., John Joseph, Christopher Abraham, Shoby K. Francis, A.K. Haridas, K.M. Sathyanatha Menon, Smt. Kavery S. Thampi, Navaneeth.N. Nath, Thomas Abraham, M. Sasindran, Smt. Stinnie John and R. Muraleekrishnan (Malakkara), Advs. for the Respondent.
JUDGMENT
1. 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 subsection (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 them in two ways, which are as follows:
4.1. Firstly, as per Section 57 of the Kerala Co-operative Societies Act, the funds of the Co-operative Society have to be invested as per the directions of the Registrar. As per various directions issued in this regard, the Co-operative Societies are bound to keep their cash balance with the account operated in the Kerala State Co-operative Bank (Kerala Bank), which is the Apex Co-operative Society of all the Co-operative Societies. Moreover, the petitioners do not have the necessary infrastructure to meet the safety requirements for keeping huge amounts of cash and hence, on that reason also, the deposits will have to be with the Kerala State Co-operative Bank. The petitioner is receiving interest for such deposits from the Kerala Bank and it also amounts to income by way of interest, which is liable to be deducted from the income while assessing tax for the respective Societies, in the light of Section 80P(2)(d) of the Income Tax Act. Thus, there is no tax liability upon such income as per the above provision.
4.2. Moreover, as per clauses (v) and (viia) of Section 194A(3) and, it is stipulated that the obligation to deduct any amount as TDS in respect of the income received or credited as interest shall not be applicable to the petitioners. However, the newly introduced proviso to sub section 194A(3), imposes a condition that, in respect of a Society, whose total sales or gross receipts or turn over exceeds Rs.50 Crores. Due to the same, the exemption from making deduction is made not applicable to the petitioner and hence, the petitioners are compelled to deduct amounts towards TDS, despite the fact that, there is no tax liability upon them, as far as the income from the deposits are concerned, as the same is already exempted under Section 80P(2)(d) of the Act. According to the petitioners, the introduction of a criterion of Rs 50 Crores as referred to above, practically takes away the benefit, which was originally granted to them. This is because, since all their deposits are to be compulsorily made to the Kerala Bank being the Apex Society, and the gross turnover of the Kerala Bank exceeds Rs.50 crores, all the income received by the petitioners by way of income from the deposits with the Kerala Bank, are subjected to TDS.
4.3. Secondly, most of the petitioners are having the turnover of above Rs.50 crores and on account of the same, the petitioners will have to deduct the amount towards TDS, when the interest is being credited to the accounts of the members, for the deposits made by such members of the Society. This is affecting their business, as according to them, the persons who are interested in making deposits with the petitioners are likely to opt for other Societies whose turnover is less than Rs.50 Crores, so as to avoid the liability to subject their income to TDS. According to the petitioners, thus, the said proviso introduces, an unreasonable classification, that violates the principles enshrined under Art.14 of the Constitution of India. These writ petitions are submitted in such circumstances, challenging the validity of the aforesaid statutory provisions.
5. A detailed statement has been filed by the Income Tax Department, opposing the reliefs sought and denying the contentions raised in these writ petitions. According to the Department, the proviso introduced as per Finance Act 2020, is within the legislative competence of the Central Government and the stipulations contained in the proviso to Section 194A(3) do not violate any of the fundamental rights of the petitioners. It was contended that, even though section 80P of the Income Tax Act provides some benefits to the petitioners, the same is not an exemption from payment of tax, as far as the income received by the petitioners as interest from deposits is concerned. According to the Department, what is contemplated under Section 80P, is only a deduction of such income while making the assessment, which is subject to the other conditions stipulated in the Act. Section 80AC provides that such deductions shall be allowed only if the return is furnished for the relevant year. Therefore, in order to ensure that, the amount receivable to the Department is collected, and there is no evasion of tax, it is lawful for the Central Government to incorporate appropriate conditions in the statute and the proviso referred to above, was as part of the same. According to the Department, the said proviso does not impose any new liability upon the petitioners and the parties can get the refund of the amount, upon filing returns with the necessary documents. In such circumstances, they sought dismissal of these writ petitions.
6. Heard Sri. A. Kumar, the learned Senior Counsel, Dr. K.P. Pradeep, Sri.M.M.Monaye, Sri. K.S. Hariharan Nair, and Sri. Jojo C.A, the learned counsel appearing for the petitioners, Sri.B.G. Hareendranath and Sri. Thomas Abraham appearing for the Kerala Bank, Sri. Mohammed Rafiq, the learned Special Government Pleader (Taxes) for the State of Kerala and Sri. Christopher Abraham, the learned Standing Counsel for the Income Tax Department.
7. The main contention raised by the petitioners against the validity of the proviso to Section 194A(3) is that, the same is liable to be struck down as it is violative of the principles of the equality as contemplated under Art. 14 of the Constitution of India, since the same is creating an unreasonable classification among the Co-operative Societies, based on the total turnover of the Society. It is also their case that, by virtue of introduction of proviso, a liability has been imposed to deduct the amounts as TDS in respect of an income, which is not otherwise taxable under the provisions of the Income Tax Act. Besides, the proviso referred to above, takes away the exemption, otherwise granted to the petitioners, from making any deduction towards TDS in respect of such income. The petitioners have also highlighted the serious impact that would result from the said proviso, upon the interests and prospects of the petitioner-Societies. As mentioned above, by virtue of the introduction of a ceiling in turnover, the receipts of the Societies by way of income of interest on the deposits made by them with the Kerala Bank, the Apex Society, and the amount to be paid by the petitioner -Societies to its Members as interests for the deposits made by such members were subjected to TDS, which were not otherwise applicable. The petitioners have pointed out that, as far as the income received by the petitioner-Societies as interests is concerned, the same is not liable to be taxed by virtue of section 80P of the Act, which right was upheld by the Hon’ble Supreme Court in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, Calicut  (SC)/[2021 (1) KHC 303]. Apart from the above, large number of decisions were cited by the petitioners in support of their contentions with regard to the Constitutional validity of the statutory provisions, which shall be dealt with in this judgment, as and when necessary.
8. On the other hand, the learned Standing Counsel reiterated the contentions raised by him in the statement and he also relied on large number of decisions.
9. The learned Special Government Pleader supported the contentions raised by the petitioners, by pointing out that, the proviso introduced as per Finance Act, 2020, practically takes away the benefits granted to the societies as per the main provision viz. 194A(3), and thus it had gone beyond the scope of a proviso and hence requires interference.
10. Before going to the contentions raised from either side, it is necessary to examine the relevant statutory provisions which are as follows:
(a) Section 80P(1) and 2(d) of the Income Tax Act contemplates as follows:
“80P. Deduction in respect of income of co-operative societies
(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in subsection (2), in computing the total income of the assessee.
80P2(d):The sums referred to in sub-section(1) shall be the following, namely:-
in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income”
“b)Section 80AC. Deduction not to be allowed unless return furnished
Where in computing the total income of an assessee of any previous year relevant to the assessment year commencing on or after-
(i) the 1st day of April, 2006 but before the 1st day of April, 2018, any deduction is admissible under section 80-1A or section 80-1AB or section 80-1B or section 80-1C or section 80-1D or section 80-1E;
(ii) the 1st day of April,2018, any deduction is admissible under any provision of this Chapter under the heading “C.- Deductions in respect of certain incomes”.
no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under sub-section(1) of section 139.”
“c) 194A. Interest other than “interest on securities”
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income [by way of interest on securities], shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

[Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed [one crore rupees in case of business or fifty lakh rupees in case of profession]during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.]

[Explanation.- For the purposes of this section where any income by way of interest as aforesaid is credited to my account whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly]

(d) 194A(3): The provisions of sub-section (1) shall not apply—
……………
………..
(v) to such income credited or [paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a cooperative society] to any other co-operative society;
Explanation.- For the purpose of this clause, “cooperative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949), (vii) 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 banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act.
(viia). to such income credited or paid in respect of,-
(a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank;
(b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co-operative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking;]
[Provided that a co-operative society referred to in clause (v) or clause (viia) shall be liable to deduct income-tax in accordance with the provisions of sub-section(1), if –
(a) the total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the financial year immediately preceding the financial year in which the interest referred to in subsection (1) is credited or paid; and
(b) the amount of interest, or the aggregate of the amounts of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than[one lakh] rupees in case of payee being a senior citizen and [fifty thousand] rupees in any other case.]
[Explanation 1.- For the purpose of clauses (i)(vii) and (viia), “time deposits” means deposits [(including) recurring deposits] repayable on the expiry of fixed periods.
[Explanation 2.- For the purposes of this sub-section, “senior citizen” means an individual resident in India who is of the age of sixty years or more at any time during the relevant previous year.]
11. The circumstances under which a provision can be declared as ultra vires of the Constitution, are laid down by the Hon’ble Supreme Court in several decisions. In Government of Andhra Pradesh v. Smt. P. Laxmi Devi AIR 2008 SC 1640, this question was discussed in detail, after referring to a large number of decisions, and it was observed that, while judges should practice great restraint in dealing with economic statutes, they should be activists in defending the civil liberty and fundamental rights of the citizens. In Union of India v. Elphinstone Spinning and Weaving Co. AIR 2001 SC 724, it was observed as follows:
“9…. There is always a presumption that the legislature does not exceed its jurisdiction and the burden of establishing that the legislature has transgressed constitutional mandates, such as those relating to fundamental rights, is always on the person who challenges its vires. Unless it becomes clear beyond reasonable doubt that the legislation in question transgresses the limits laid down by the organic law of the Constitution it must be allowed to stand as the true expression of the national will — Shell Co. of Australia v. Federal Commr. of Taxation [1931 AC 275 : 1930 All ER Rep 671 : 100 LJPC 55 : 144 LT 421 (PC)]. The aforesaid principle, however, is subject to one exception that if a citizen is able to establish that the legislation has invaded its fundamental rights then the State must justify that the law is saved. It is also a cardinal rule of construction that if on one construction being given the statute will become ultra vires the powers of the legislature whereas on another construction which may be open, the statute remains effective and operative, then the court will prefer the latter, on the ground that the legislature is presumed not to have intended an excess of jurisdiction.
12. The Privy Council in Shell Company of Australia v. Federal Commissioner of Taxation 1931 AC 275 (298), it was observed that, “unless it becomes clear beyond reasonable doubt that, the legislation in question transgresses the limits laid down by the organic law of the Constitution, it must be allowed to stand as the true expression of national will”. After referring to the aforesaid observations of the Privy Council, it was observed by the Hon’ble Supreme Court Smt. P. Laxmi Devi’s case (supra) that, if two views are possible, one making the provision in the statute constitutional, and the other making it as unconstitutional, the former should be preferred. It was further observed therein that, the court must therefore make every effort to uphold the Constitutional validity of a statute, even if that requires the statutory provisions a strained meaning, or narrower or wider meaning than what appears on the face of it. It is only when all efforts to do so fail, should the court declare the same as unconstitutional.
13. As far as the petitioners are concerned, they mainly rely on the decisions in K.T. Moopil Nair v. State of Kerala AIR 1961 SC 552, M. R. F. LTD. v. INSPECTOR, KERALA GOVERNMENT (SC)/(1998) 8 SCC 227, Shayara Bano v. Union of India (2017) 9 SCC 1, Ashirvad Films v. Union of India (2007) 6 SCC 624, Union of India v. Ganpati Dealcom (P.) Ltd.  (SC)/(2023) 3 SCC 315, Union of India v. N.S. Rathnam & Sons  (SC)/(2015)10 SCC 681, Commissioner of Income tax, New Delhi v. Eli Lilly & Co. (India) (P.) Ltd.  (SC)/(2009) 15 SCC 1, etc. to substantiate their contentions to the Constitutional validity of the statutory provisions.
14. The circumstances under which a statutory provision can be interfered with, are enumerated in the decisions referred to above, which are mainly, the lack of legislative competence, violative of the provisions of Part III of the Constitution or when there is manifest arbitrariness in the enactment. In this case, apart from the above, it is also the contention of the petitioners that, the amendment was given effect to, by way of bringing in a proviso to the main section, and the effect the said proviso is such that, the purpose for which the original provision was created, is defeated as it takes away the entire rights of the parties as per the main provision. Therefore, the same is not sustainable.
15. The questions involved in these writ petitions are to be considered by keeping the aforesaid principles in mind. It is also to be noted that, as far as a taxing statute is concerned, the same stands in a high pedestal and it was held in R.K. Garg v. Union of India and ors [R.K. Garg/R.K. Karanjia/Madhu Mehta/P.K. Soi/S.S. Bedi v. Union of India  (SC)/(1981) 4 SCC 675, in the manner as follows:
“8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicit ously expressed than in Morey v. Doud [354 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style:”
16. One of the main contentions raised by the petitioners is that, as far as the income received by them by way of interest on deposits is concerned, the same is not taxable as there is an exemption contemplated under section 80P(2)(d) of the Act. According to the petitioners, since the income, which is the subject matter of these litigations, is not at all taxable, imposing a condition to collect TDS in respect of such income, is illegal and it amounts to an arbitrary action on the part of the State. To substantiate these contentions, the petitioners are relying upon the observations made by the Hon’ble Supreme Court in Eli Lilly’s case (supra) where it was observed by the Hon’ble Supreme Court as follows:
“75. To answer the contention herein we need to examine briefly the scheme of the 1961 Act. Section 4 is the charging section. Under Section 4(1), total income for the previous year is chargeable to tax. Section 4(2) inter alia provides that in respect of income chargeable under sub-section (1), income tax shall be deducted at source whether it is so deductible under any provision of the 1961 Act which inter alia brings in the TDS provisions contained in Chapter XVII-B. *In fact, if a particular income falls outside Section 4(1) then TDS provisions cannot come in.”
(*highlighted for emphasis)
17. Thus, the specific case of the petitioners is that, since there is no tax liability, no TDS could be collected. However, the crucial aspect to be noticed in this regard is that, the exemption from payment of tax claimed by the petitioners, is by placing reliance upon section 80P(1) and (2)(d) of the Income Tax Act. As rightly pointed out by the learned Standing Counsel for the Income Tax, the said provision does not contemplate an absolute exemption from the liability to pay the tax in respect of the said income, but instead, what it provides is that, the said income could be deducted from the taxable income of the assessee, subject to the terms and conditions in the statute. It is to be noted in this regard that as per Section 80AC of the Act, no such deduction could be allowed unless the return is furnished. In Section 80AC (ii), there is a specific reference to the deduction under the heading “C-deductions in respect of certain incomes in Chapter VIA of the Income Tax Act”, and Section 80P comes under the same. Therefore, it is discernible therefrom that, as far as the tax liability on income from interest is concerned, for a Co-operative society, it is not an absolute exemption, but it is a deduction permissible for such a Society, on submitting the returns. Therefore, as pointed out by the learned Standing Counsel for the Department, since the benefit under Section 80P is not an exemption from paying tax, but a benefit of deduction subject to the compliance of the terms and conditions including filing of return, it cannot be held that, there is no tax liability at all, for the petitioners under the Act. As far as the observations made Eli Lilly’s case (supra) is concerned, the same was in respect of an income which was not taxable under Section 4(1) of the Income Tax Act 1961, the charging provision. In this case, it cannot be held that the income is not subjected to tax at all, in the light of the aforesaid statutory provisions and the benefit is confined to getting the said amount deducted from the taxable income. This makes a crucial distinction and therefore, the principles laid down by the Hon’ble Supreme Court in the above decision, cannot be made applicable to these cases.
18. Yet another contention raised by the petitioners regarding the unreasonable classification, is that, by introducing a ceiling of Rs 50 crores of turnover, a sub-classification was created among the Societies, which are otherwise equally placed. Therefore, it amounts to violation of Art.14 of the Constitution of India, it was contended. However, while considering the aforesaid question, the crucial aspect to be noticed is that, as far as the criteria of Rs.50 crores is concerned, the same cannot be treated as an unreasonable classification. This is particularly because, the liability to pay income tax itself is based on the income received by the assessee and the scheme of Act itself is to apply different rates of tax upon different groups, which are created based on the income they receive. Thus, the classification based on the total income or the taxable income, forms the basic structure of the Income Tax Act. Even in respect of the provision that contemplates TDS, several exemptions are provided based on the income criteria and various ceiling limits are prescribed in respect of various categories, based on the income or the amount included in the transaction. Thus, this being in tune with the statutory structure of the Act, unless it is shown that, the classification referred to in the proviso is indeed creating separate classes among the persons having equal status, no interference could be made. In other words, the difference in the income or the quantum of the amount involved, itself is the classification that determines the liability of tax or the amount to be paid as tax, and the classifications based on the income, form the basic structure of the Income Tax Act. Since the very concept involved is, “the liability is higher when the income is higher”, fixing a criterion in similar lines, in the matter of TDS, cannot be found fault with, by treating it as an unreasonable classification. Of course, it is true that, as far as the provisions which are the subject matter of these writ petitions are concerned, those are in respect of Co-operative Societies, but, the fact remains that, the tax liability of each Societies is depending upon the income that they receive, as well as its source, nature etc, and it is not merely because of their status as a Society. As mentioned above, as far as an assessee is concerned, different rates of tax are applicable depending upon the income they earn. Therefore, when it comes to the question of TDS and the exemption from making deduction towards TDS, I do not find any illegality in creating a classification based on the income they receive.
19. The above view is supported by the observations made by a five judges bench decision of the Honourable Supreme Court in K.T Moopil Nair’s case (supra), where, while considering the challenge against a taxing statute, namely, the Travencore-Cochin Land Tax Act, certain observations were made, with regard to the circumstances under which such a challenge can be entertained, based on classification. In paragraph 7 thereof, after referring to Art. 265 of the Constitution of India, and while upholding the contention that, even a taxing statute can be subjected to challenge on the basis of unreasonable classification, the following observations were made :
“7. It cannot be disputed that if the Act infringes the provisions of Article 14 of the Constitution, it must be struck down as unconstitutional. For the purpose of these cases, we shall assume that the State Legislature had the necessary competence to enact the law, though the petitioners have seriously challenged such a competence. The guarantee of equal protection of the laws must extend even to taxing statutes. It has not been contended otherwise. It does not mean that every person should be taxed equally. But it does mean that if property of the same character has to be taxed, the taxation must be by the same standard, so that the burden of taxation may fall equally on all persons holding that kind and extent of property. If the taxation, generally speaking, imposes a similar burden on everyone with reference to that particular kind and extent of property, on the same basis of taxation, the law shall not be open to attack on the ground of inequality, even though the result of the taxation may be that the total burden on different persons may be unequal.
*Hence, if the legislature has classified persons or properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal. Similarly, different kinds of property may be subjected to different rates of taxation, but so long as there is a rational basis for the classification, Article 14 will not be in the way of such a classification resulting in unequal burdens on different classes of properties. But if the same class of property similarly situated is subjected to an incidence of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property. It must, therefore, be held that a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in Article 14, though the courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in a way that the Court might think more just and equitable. The Act has, therefore, to be examined with reference to the attack based on Article 14 of the Constitution. “
(*Highlighted for emphasis)
20. The learned Special Govt. Pleader raised another contention to the effect that, Section 194A(3) clause (v) specifically deals with the income credited or paid by a Co-operative Society to a member or such income credited or paid by the Co-operative Society to any other Co-operative Society. It is pointed out that, even in the case of payment made by a Co-operative Society to any other Co-operative Society, such payment is made in view of the fact that the payee society is a member of the payer society. Therefore, the benefit contemplated under Clause (v) of 194A(3) is in respect of the payment received by the member of a Society whereas, the proviso to section 194A(3) takes away the right of the payee to get the income without being subject to TDS, based on a criterion, which is applicable to the payer alone. This is because, the ceiling contemplated in the said proviso is that of the income of the payer society, which has nothing to do with the payee. Thus, according to the learned Special Government Pleader, the stipulations in the proviso had gone beyond the scope of the main provision and therefore, the same is to be interfered with. Infact, the petitioners have also raised a contention with regard to the limited scope of the proviso, when it comes to the question of real purpose and scope of the main provision.
21. To consider the said question, it is necessary to examine the principles that relate to the interpretation of a proviso and its applicability to the main provision. The petitioners brought the attention of this court to the observations in foreign decisions such as, West Derby Union v. Metropolitan Life Assurance Company 1897 AC 647 (HL) and Jennings v. Kelly 1940 AC 206, where it was observed that, a proviso to a section cannot be used to import into the enacting part, something which is not there, but where the enacting part is susceptible to several possible meanings, it may be controlled by proviso. Thus, it was contended that, the real purpose of the proviso is to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision, as held in Swedish Match AB v. Securities and Exchange Board (2004) 11 SCC 641.
22. The aforesaid question was elaborately considered by a three judges bench of the Honourable Supreme Court in S. Sundaram Pillai v. V. R. Pattabhiraman (1985) 1 SCC 591. The decisions in West Derby Union (supra) and Jennings (supra), relied on by the petitioners, were also referred to by the Honourable Supreme Court in the said decision. In paragraph 30 of the said decision, Sarathi in Interpretation of Statutes was quoted, which reads as follows:
“30. Sarathi in Interpretation of Statutes at pages 294-295 has collected the following principles in regard to a proviso:
(a) When one finds a proviso to a section the natural presumption is that, but for the proviso, the enacting part of the section would have included the subject-matter of the proviso.
(b) A proviso must be construed with reference to the preceding parts of the clause to which it is appended.
(c) Where the proviso is directly repugnant to a section, the proviso shall stand and be held a repeal of the section as the proviso speaks the latter intention of the makers.
(d) Where the section is doubtful, a proviso may be used as a guide to its interpretation: but when it is clear, a proviso cannot imply the existence of words of which there is no trace in the section.
(e) The proviso is subordinate to the main section.
(f) A proviso does not enlarge an enactment except for compelling reasons.
(g) Sometimes an unnecessary proviso is inserted by way of abundant caution.
(h) A construction placed upon a proviso which brings it into general harmony with the terms of section should prevail.
(i) When a proviso is repugnant to the enacting part, the proviso will not prevail over the absolute terms of a later Act directed to be read as supplemental to the earlier one.
(j) A proviso may sometimes contain a substantive provision.”
23. In paragraph 37 of the said decision, it was observed that, a proviso is intended to limit the enacted provision so as to except something which would have otherwise been within it or in some measure to modify the enacting clause. It was further observed that, sometimes, a proviso may be embedded in the main provision and becomes an integral part of it so as to amount to a substantive provision itself. In the said decision, the following observation made by the Honourable Supreme Court in Dwaraka Prasad v. Dwaraka Das Saraf (1976) 1 SCC 128, was also referred to:
“. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction.”
24. Similarly, in the said decision, the following observations in Hiralal Rattanlal v. State of U.P (1973) 1 SCC 216, were also referred to:
“Ordinarily a proviso to a section is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section. But cases have arisen in which this Court has held that despite the fact that a provision is called proviso, it is really a separate provision and the so-called proviso has substantially altered the main section.”
25. Thus, after referring to a number of precedents and principles, the purposes of a proviso were summed up in paragraph 43 of S.Sundaram Pillai’s case (supra), in the manner as follows:
“43. We need not multiply authorities after authorities on this point because the legal position seems to be clearly and manifestly well established. To sum up, a proviso may serve four different purposes:
(1) qualifying or excepting certain provisions from the main enactment:
(2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable:
(3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and
(4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.”
26. In this regard, the observations made by the Honourable Supreme Court in Commissioner of Income Taxes v. Ramkishan Shrikishan Jhaver AIR 1968 SC 59, are relevant. It was observed in the said decision, after referring to some other decision of the Honourable Supreme Court that, in exceptional circumstances, a proviso may not be really a proviso in accepted sense, but may be a substantive provision itself.
27. Thus, when we are attempting to deduce the principles from the decisions referred to above, what could be gathered is that, there is no hard and fast rule that, a proviso to a main section in all cases, should be subject to the confines of the enacted provision, but instead, in some cases it by itself could be a substantive provision, that could alter the main provision itself, substantially. On careful examination of decisions where such an extreme interpretation giving substantive status to the proviso is given, it can be seen that, those were made after going through the circumstances under which the said proviso was introduced, the object behind the same etc, which would ultimately lead to the purpose for which such a proviso was brought in by the legislature. Thus, while considering the aforesaid question, the paramount consideration should be the intention of the legislature while bringing in such legislation. It is to be noted in this regard that, despite carefully scanning through the decisions referred to above, nothing could be found, that restricts the power of the legislature to introduce a statutory stipulation in the form of a proviso, but on the other hand, there are decisions, where it was observed that, in certain circumstances, the proviso could be treated as substantive provision that alters the main provision. Therefore, in the absence of any such prohibition upon the legislature, a proviso that was intentionally brought by the legislature to make substantial changes in the main section, cannot be interfered with, merely because of the reason that, it is a proviso. To be precise, in such circumstances, it has to be treated as part of the main provision, and the interference could be made only if the other tests to determine the Constitutionality viz, lack of legislative competence, violative of Part III of the Constitution, manifest arbitrariness etc, are satisfied.
28. When the proviso to section 194A(3) is examined in that perspective, it can be seen that, the said proviso was subsequently introduced by way of an amendment as per Finance Act, 2020, bringing in, some conditions restricting the operation of the main provision. Thus, it is evident that it was intended to alter the scope of the main provision i.e subsection (3) of the Section 194A, and in the light of the principles referred to above, the same cannot be interfered with, merely because it is a proviso.
29. Of course, as pointed by the learned Special Government Pleader, the clause (v) of subsection (3) of Section 194A of the Act, deals with the exemption from the point of view of the payee, whereas, the proviso deals with the non-applicability of the said provision depending upon the total turnover or total sales or gross receipts of the payer. However, I am of the view that, the same by itself would not be a ground to interfere with the said provision. This is mainly because, the stipulation in Section 194(3) relates to the inapplicability of Section 194A(1) in the matter of TDS, where, the liability to deduct the amount as TDS is imposed upon the payer. Therefore, by virtue of the proviso, the ultimate result is the change in restrictions on the applicability of section 194A(1), which deals with the obligation of the payer, and hence there is nothing wrong therein, as the basis is the total turnover or gross receipts or total sales of the payer. It is to be noted that the higher the turnover, higher the number of transactions and this could be a reasonable ground to make such a classification.
30. Another contention raised by the petitioners is that, while fixing the criteria as the turnover or gross receipt or total sales exceeding Rs 50 Crores, the classification was made by the respondents without any intelligible differentia and hence the same cannot be considered as reasonable. Reliance was placed on Asianet Satellite Communication v. State of Kerala 2012 (4) KLT 431, where it was held that the classification of cable TV operators having more than 7500 subscribers for the purpose of subjecting them to tax is violative of Article 14. However, it is to be noted that, in this case, as mentioned above, what is taxable, is the income of the assessee, and for that purpose the tax payers with different income, cannot be treated as equals, even if such tax payers are having the same status as far as their occupation/professions/trade is concerned. In Murthy Match Works v. CCE (1974) 4 SCC 428, it was held that;
“15. Certain principles which bear upon classification may be mentioned here. It is true that a State may classify persons and objects for the purpose of legislation and pass laws for the purpose of obtaining revenue or other objects. Every differentiation is not a discrimination. But classification can be sustained only it (sic) it is founded on pertinent and real differences as distinguished from irrelevant and artificial ones. The constitutional standard by which the sufficiency of the differentia which form a valid basis for classification may be measured, has been repeatedly stated by the Courts. If it rests on a difference which bears a fair and just relation to the object for which it is proposed, it is constitutional. To put it differently, the means must have nexus with the ends. Even so, a large latitude is allowed to the State for classification upon a reasonable basis and what is reasonable is a question of practical details and a variety of factors which the Court will be reluctant and perhaps ill-equipped to investigate. In this imperfect world perfection even in grouping is an ambition hardly ever accomplished. In this context, we have to remember the relationship between the legislative and judicial departments of Government in the determination of the validity of classification. Of course, in the last analysis Courts possess the power to pronounce on the constitutionality of the acts of the other branches whether a classification is based upon substantial differences or is arbitrary, fanciful and consequently illegal. At the same time, the question of classification is primarily for legislative judgment and ordinarily does not become a judicial question. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the Judicature cannot rush in where even the Legislature warily treads. All these operational restraints on judicial power must weigh more emphatically where the subject is taxation”.
In Union of India v. Nitdip Textile Processors (P.) Ltd. (SC)/[(2012) 1 SCC 226], it was observed as follows;
“67. It has been laid down in a large number of decisions of this Court that a taxation statute, for the reasons of functional expediency and even otherwise, can pick and choose to tax some. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the judicature cannot rush in where even the legislature warily treads. All these operational restraints on judicial power must weigh more emphatically where the subject is taxation. Discrimination resulting from fortuitous circumstances arising out of particular situations, in which some of the tax-payers find themselves, is not hit by Article 14 if the legislation, as such, is of general application and does not single them out for harsh treatment. Advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxing statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line. “
Therefore, merely because, a different yardstick was adopted for the assessment or TDS, based on the income, in respect of the Co-operative Societies, it cannot be treated as unreasonable.
31. Yet another contention raised by the petitioners is that, the impact of the introduction of the proviso is that, the income of the petitioners by way of interest for their deposits with the Kerala Bank, the Apex Society, would be subjected to TDS in its entirety. This is because, as far as the petitioners are concerned, in the light of the provisions in the Kerala Co-operative Societies Act, the Rules framed thereunder, and the Government orders and circulars issued in this regard, the petitioners are bound to deposit the cash balance with the Kerala Bank. In view of the fact that, total turnover of the Kerala Bank being in excess of Rs 50 Crores, all their income from that source is subjected to TDS and thus the exemption that is granted as per Section 194A (3) is taken away as per the proviso. According to the petitioners, such a stipulation is arbitrary and amounts to manifest arbitrariness and hence interference is required. It was also pointed out that, as far as Cooperative sector is concerned, it is entitled to the Constitutional protection as per the various provisions in the Constitution of India. It was pointed out that such special protection was extended to the said sector, considering the huge economic impact that can be created by the Cooperative movement to the economy as a whole and the rural economy in particular. The observations of the Honourable Supreme Court in Shayara Bano (supra) were also relied on, in which the manifest arbitrariness was accepted as a valid ground for the challenge against a statutory provision.
32. However, the crucial aspect to be noticed in this regard is that, the difficulties highlighted by the petitioners, in the matter of compulsory nature of the deposits and matters incidental thereto, are not on account of any stipulations in the Income Tax Act itself, but those are due to the consequences of the provisions in the Kerala Co-operative Societies Act, and the orders issued by the statutory authorities under the said Act. Such consequences cannot be a reason for the manifest arbitrariness on the part of the Central legislature when terms and conditions in an enactment are brought into force by the said legislature. In other words, when the major contributory factor for the denial of the benefit is on account of a different statute than the one under challenge, that too being a State subject, the same cannot be taken as a valid ground to attribute manifest arbitrariness in the Central Statute.
33. Yet another aspect to be noticed in this regard is that, the hardships or inconvenience of the party subjected to a law, by itself cannot be a good reason for judicial interference in a statute as laid down in Ajmera Housing Corpn. v. CIT  (SC)/[2010] 326 ITR 642 (SC). In Union of India v. M.V. Valliappan  (SC)/(1999) 6 SCC 259, it was observed that, the consideration of hardship is totally irrelevant for deciding the question of legislative competence. In the case of taxation, it is settled law that hardship or equity has no role to play in determining eligibility (sic exigibility) to tax and it is for the legislature to determine the same. In ROHITASH KUMAR v. OM PRAKASH SHARMA  FLR 92 (SC)/(2013) 11 SCC 451, it was held that, there may be a statutory provision, which causes great hardship or inconvenience to either the party concerned, or to an individual, but the court has no choice but to enforce it in full rigour.In Bengal Immunity Co. Ltd. v. State of Bihar AIR 1955 SC 661 (SCC p. 685, para 43) it was observed by a Constitution Bench of the Supreme Court that, if there is any hardship, it is for the legislature to amend the law, and that the court cannot be called upon to discard the cardinal rule of interpretation for the purpose of mitigating such hardship. If the language of an Act is sufficiently clear, the court has to give effect to it, however inequitable or unjust the result may be. The words, “dura lex sed lex” which mean “the law is hard but it is the law” may be used to sum up the situation. Therefore, even if a statutory provision causes hardship to some people, it is not for the court to amend the law. A legal enactment must be interpreted in its plain and literal sense, as that is the first principle of interpretation. This is because, the legislature, being the reflection of the will of the people, is supposed to have the knowledge and expertise in the matters of consequence of each provision in every statute and when they are making a law with particular stipulations, they deemed to have taken note of such difficulties.
34. It was also contended by the petitioners that, the petitioners are eligible to be provided with the benefits that are contemplated under section 194A (3) (iii) (a) of the Income Tax Act. The said provision reads as follows:
“194A(3)(iii)(a)”: The provision of sub-section (1) shall not apply-
xxx xxx xxx xxx xxx xxx
(iii) to such income credited or paid to-
(a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies or any co-operative society engaged in carrying on the business of banking (including a co-operative and mortgage bank)”
However, I am not inclined to accept the said contention as well. This is because, going by the said provision, it can be seen that, what is contemplated therein, is with respect to the banking companies to which the Banking Regulation Act, 1949 applies or any co-operative society engaged in the business of banking, including a co-operative land mortgage bank. Evidently, the petitioners are not engaged in the business of banking and their operation is mainly confined to providing financial assistance to its members for agricultural purposes, where the concept of mutuality exists. In this regard, it is profitable to examine the definition of banking, as defined section 5(b) of the Banking Regulation Act, 1949, which reads as follows:
“”banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft or otherwise.”
Evidently, the petitioners are not coming within the said definition. Therefore, the petitioners cannot be treated as the institutions that fall within Section 194A(3 (iii) of the Income tax Act as well.
Thus, on the overall consideration of the contentions raised by the petitioners, this Court is of the view that the petitioners could not establish any of the grounds that are required to exercise any judicial intervention in the provisions contained in the proviso to section 194A(3) of the Income Tax Act, 1961. Accordingly, these Writ Petitions are dismissed.
ORDER
Spoke.
2. Immediately upon pronouncement of the judgment, learned counsel for the petitioners brought to the notice of this Court, certain practical difficulties arising from the operation of the interim order. Accordingly, the matter was listed today for addressing those concerns. After hearing the parties, the following clarification is issued:
3. In these cases, though the question of law has been decided in favour of the Revenue, certain practical issues arise concerning the interim orders passed during the pendency of the writ petitions. In all matters, interim orders were in force, staying deduction of amounts towards TDS, and such orders were duly acted upon by all concerned. Reversing the consequences of non-deduction of TDS, which occurred pursuant to the interim orders, would be practically difficult and likely to cause serious legal and procedural complications. Hence, it is only just and proper that the interim orders are made absolute in respect of all transactions up to the date of pronouncement of the judgment., and it is ordered accordingly.
This would mean that, in respect of all transactions effected, pursuant to the interim orders passed by this Court in these writ petitions, no adverse consequences shall follow, from the judgment now rendered. This order shall form part of the judgment pronounced by this Court on 25.10.2025.