HIGH COURT OF GUJARAT
Gujarat Urban Co-operative Bank Federation
Union of India
Special Civil Application Nos. 11209 of 2002 & 1465 of 2003
June 12, 2012
Akil Kureshi, J.
These petitions have been filed by Cooperative Banks having their operations in the State of Gujarat challenging the validity of circular dated 11.9.2002 issued by the Central Board of Direct Taxes in purported exercise of powers under section 119 of the Income Tax Act,1961 (‘the Act’ for short).
2. Facts may be noticed as emerging from Special Civil Application No.11209 of 2002, wherein petitioner No.1 is the Federation of Urban Cooperative Banks having various cooperative banks as its members. Petitioner No.2 is a Cooperative Bank registered under the Gujarat Cooperative Societies Act, 1961. Section 194A of the Act requires every person not being an individual or Hindu Undivided Family who is responsible for paying to a resident any income by way of interest to deduct tax at the prescribed rate at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier. Sub-section (3) of section 194A, however, provides for exemption from such requirement in specified cases. Clause (v) thereof provides that the provisions of sub-section (1) shall not apply “to such income credited for paid by a cooperative society to a member thereof or to any other cooperative society”.
3. It is the case of the petitioners that such exemption or exclusion provided in clause (v) of sub-section (3) of section 194A in case of a member of cooperative society would include all members and is not confined to only certain class of members of a cooperative society. CBDT, however, issued the impugned circular dated 11th September 2002, and clarified as under:
“3. A question has also been raised as to whether nominal members, associate members and sympathizer members are also covered by the exemption under section 194A(3)(v). It is hereby clarified that the exemption is available only to such members who have joined in application for the registration of the co-operative society and those who are admitted to membership after registration in accordance with the bye-laws and rules. 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 be entitled to participate and vote in the General Body Meeting and/or Special General Body Meetings of the co-operative bank and must be entitled to receive share from the profits of the cooperative bank.”
It is this clarification which the petitioners have challenged in these petitions mainly contending that the same is ultra vires the Board’s power to issue clarification under section 119 of the Act. It is the case of the petitioners that clause (v) of sub-section (3) of section 194A provides for exemption from deduction of tax at source under sub-section (1) of section 194A in case of a member of a cooperative society and no further distinction can, therefore, be made by way of circular by the CBDT between different classes of members.
4. Learned counsel for the petitioners pointed out that the very same circular came up for consideration before the Bombay High Court and the same came to be quashed by the Bombay High Court in the case of Jalgaon District Central Co-operative Bank Ltd. v. Union of India  265 ITR 423/134 Taxman 1. Counsel further pointed out that the said decision of the Bombay High Court was carried in appeal by the Revenue. The Apex Court, however, dismissed the appeal by an order dated 7.7.2004. Counsel, therefore, submitted that in the present case also, the circular be declared ultra vires.
5. On the other hand, learned counsel for the Revenue opposed the petitions contending that the Board has power under section 119 of the Act to issue clarification. Such a clarificatory circular draws a distinction between different kinds of members of cooperative society. A nominal member has no right to vote or participate in any of the meeting of a cooperative society. Clarifying that such nominal member would not fall within clause (v) of sub-section (3) of section 194A of the Act and therefore, was within the power of the Board.
5.1 Counsel further submitted that the petitioners have no locus standi to file these petitions. Relying on the affidavit filed by the Department, it was contended that the petitioners Banks not being prejudicially affected by such circular or legal provisions contained in section 193A(3)(v) of the Act, the present petitions at the hands of such Banks is not maintainable.
6. Having thus heard the learned counsel for the parties and having perused the material on record, it clearly emerges that the impugned circular issued by the Board came up for consideration before the Bombay High Court and it has struck down the circular holding that powers under section 119 of the Act would not empower the Board to issue clarification which would take away the exemption which has been granted by the statute. The Bombay High Court held and observed as under:
“The impugned Notification issued by CBDT, which is in the form of clarification with regard to rights and privileges of a duly registered member and nominal member is outside the scope of Section 119 of the Income Tax Act, 1961. No doubt, Section 119 of the Income Tax Act, 1961 generates some power in CBDT. But the power so generated by virtue of Section 119 is required to be utilized in a prescribed manner. CBDT is empowered to issue only administrative instructions to the subordinate authorities for the purpose of proper administration and enforcement of the provisions of the Income Tax Act, 1961. Under the garb of Section 119 of the Income Tax Act, 1961, CBDT has crossed its authority. What is not contemplated in exemption clause under Section 194-A(3)(v) of the Income Tax Act, 1961 cannot be imported to deprive the exemption granted to co-operative society by issuing the impugned circular. By impugned circular, the co-operative society cannot be deprived of its right of exemption given under Income Tax Act, 1961. The CBDT has over-stepped its authority and has issued the impugned circular directly in conflict with the provisions contained in Section 194-A(3)(v) of the Income Tax Act, 1961. Section 119 of the Income Tax Act, 1961 does not at all support the action of CBDT.
The Division Bench of this Court, in the case of Banque Nationale De Paris  237 ITR 158, has ruled out that CBDT cannot issue a circular under Section 119 of the Act, which would override or detract from the provisions of the Income Tax Act, 1961. CBDT can legitimately issue administrative instructions or orders by exercising powers under Section 119 of the Income Tax Act, 1961. However, by virtue of Section 119 of the Act, the CBDT is not at all permitted to override or withdraw the exemption clause under Section 194-A(3)(v) of the Income Tax Act, 1961. Assumption of such powers in CBDT by virtue of Section 119 of the Income Tax Act, 1961 would really amount to bestowing powers on delegated authority even to amend the provisions of the Income Tax Act, 1961 enacted by the Parliament.
Having examined the validity of the impugned circular from all angles, we are of the clear opinion that CBDT has no authority to make a crack in the exemption clause contained in Section 194-A(3)(v) of the Income Tax Act, 1961 by issuing the impugned circular. The CBDT cannot usurp the powers of Parliament by virtue of Section 119 of the Income Tax Act, 1961. The CBDT, under the garb of Section 119 of the Income Tax Act, 1961, cannot exercise wider powers than the powers bestowed on it. The CBDT has no power to introduce a substantial change or alteration in the provisions of the Income Tax Act, 1961 by importing the ideas unknown to the Income Tax Act, 1961. The impugned circular, therefore, does not stand to the legal test.
In the result, both the writ petitions are allowed. The impugned circular No. 9 of 2002 dated 11-9-2002 (F. No. 275/106/2000/IT (B) Annexure-A) is quashed and set aside. Similarly, the letter issued by the Income Tax Officer, Jalgaon, Ward No. 2(3) (No. JAL/ITO/2(3)/TDS/194/2000-03 dated 9-10-2002 Annexure B) is also quashed and set aside. Rule made absolute in the above terms.”
We wee no reason to take a different view particularly when the decision of the Bombay High Court was challenged before the Apex Court, the SLP came to be dismissed and thus the decision of the Bombay High Court attained finality. We may notice that the provisions which the Bombay High Court referred to and relied upon from the Maharashtra Cooperative Societies Act are very similar in nature and almost pari materia with those provisions contained in the Gujarat Cooperative Societies Act with respect to different classes of members specified. Respectfully following the same, we hold that the circular dated 11.9.2002 as at Annexure A to the petition is, therefore, not effective.
7. The contention with respect to locus standi needs to be noted only for rejection. The petitioners are cooperative banks. If exemption under clause (v) of sub-section (3) of section 194A with respect to some of its members is withdrawn, the banks would have to follow the entire procedure of deducting tax at source at the time of paying or crediting such interest in favour of such a member. The member in turn is also be subject to tax deduction regime and all the procedure and procedural requirements would have to be followed by the Banks and the member would suffer the tax deduction at source. It, therefore, cannot be stated that the petitioners which are cooperative banks are not prejudicially affected by the impugned circular.
8. In the result, the petitions are allowed as aforesaid. Rule is made absolute accordingly.