Co-operative banks may come under the tax deducted at source net. The I-T department is examining a proposal to bring interest payments by co-operative banks to their members under the TDS.
While such a move had been spiked by the Supreme Court earlier, the department now wants to explore the proposal in greater depth before taking the final plunge.
The proposal was discussed at length at the last months annual conference of the chief commissioners and director generals of income tax. There is a strong feeling in the department that these banks may be used for parking black money and with banking cash transaction tax not applying on them, TDS was a good alternative which should be looked at, sources told ET.
However, the department wants to tread cautiously on this as its earlier circular clarifying that exemption from TDS was available only to members who have joined the co-operative in application for registration of society and those admitted to membership after registration in accordance with bye-laws and rules had got challenged in Supreme Court, where government lost.
As per the circular, issued in 02,a member eligible for exemption under Section 194A(3)(v) must have subscribed to and fully paid for at least one share of the co-operative bank, must by entitled to participate and vote in the general body meetings and or special general body meetings and must be entitled to receive share from the profits of the co-operative banks.
However, the court felt otherwise and had ruled that central board of direct taxes was empowered to issue only administrative instructions to the subordinate authorities for the purpose of proper administration and enforcement of the provisions of the Act and had crossed its authority under the garb of Section 119 of the Income Tax Act.
By the impugned circular, the co-operative society cannot be deprived of its right of exemption given under the Act. The CBDT has overstepped its authority and has issued the impugned circular directly in conflict with the provisions contained in 194A(3)(v) of the Act. Section 119 of the Act does not at all support the action of the CBDT, it had said.
Co-operatives have 3 types of memberships- one can be an approved member, nominal or sympathiser member. One can become a sympathiser member by depositing certain amount of money and then park his funds there and earn interest without being in the loop of income tax department. In fact this is the only edge that these banks enjoy over commercial banks.