2015 (11) TMI 1542 - AT - Income Tax

TDS u/s 194A - non deduction of tds on payment of interest to its members on time deposits by bank - assessee in default - Held that - Jurisdictional High Court in the case of CIT v. The Rajajinagar Co-operative Bank Ltd (2011 (7) TMI 666 - KARNATAKA HIGH COURT) though it was in relation to a levy of penalty u/s.271C of the Act had held at para 10 of its judgment that by virtue of clause (v) of sub-section (3) of Section 194A of the Act a cooperative bank was exempt from deducting tax at source on interest payable by it to its members. We are therefore of the opinion that assesses could not have been treated as one in default u/s.201 (1) nor was it liable for of interest u/s.201(1A) of the Act. Ld. CIT (A) was justified in taking a view in favour of the assessee.

Summary

Issues:
- Whether the assesses are liable for deducting tax at source for interest paid to members on their time deposits.
- Applicability of Section 194A(1)(vii) and (viia) of the Income-tax Act, 1961.
- Interpretation of provisions regarding tax deduction at source by cooperative societies engaged in banking business.
- Impact of circulars issued by the CBDT on the tax liability of cooperative societies.

Analysis:
1. The primary issue in this case was whether the assesses, branches of a cooperative bank, were liable for deducting tax at source on interest payments to members on their time deposits. The Assessing Officer (AO) contended that once the interest payment exceeded Rs. 10,000 per member, Section 194A(1)(vii) and (viia) of the Income-tax Act applied, making the assesses defaulters for non-deduction of tax at source. The CIT (A) ruled in favor of the assesses, stating they were not in default under Section 201(1) and not liable for interest under Section 201(1A) of the Act.

2. The Tribunal analyzed the applicability of Section 194A(3)(v) of the Act concerning interest paid by a cooperative bank to its members. Referring to the decision in a similar case, the Tribunal held that cooperative societies engaged in banking business were exempt from deducting tax at source on interest paid to members. The Tribunal emphasized that the CBDT circular clarified that such cooperative societies need not deduct tax at source on interest payments to members, aligning with the provisions of Section 194A(3)(v) of the Act.

3. The Tribunal also discussed the interpretation of the CBDT circular and its impact on the tax liability of cooperative societies. It highlighted that the circular clearly exempted cooperative societies engaged in banking business from deducting tax at source on interest payments to members. The Tribunal rejected the argument that the circular had been entirely quashed by a High Court, emphasizing that the specific provisions of the circular were still valid and binding on tax authorities.

4. Furthermore, the Tribunal referred to decisions by other benches supporting the exemption of cooperative societies engaged in banking from deducting tax at source on interest payments to members. The Tribunal concluded that the preponderance of judicial opinion favored the view that such cooperative societies were not required to deduct tax at source under Section 194A(3)(v) of the Act. The Tribunal upheld the CIT (A)'s decision in favor of the assesses based on the provisions and interpretations discussed.

5. Finally, the Tribunal noted a judgment by the jurisdictional High Court, which held that cooperative banks were exempt from deducting tax at source on interest payments to members under Section 194A(3)(v) of the Act. Based on this precedent and the interpretations of relevant provisions and circulars, the Tribunal dismissed the Revenue's appeals for the assessed year, affirming the decision in favor of the assesses.