2015 (1) TMI 743 - AT - Income Tax

TDS u/s 194A - Interest paid on term deposits to its members by the Co-op bank - whether the assessee co-operative bank engaged in the banking business is liable for TDS or not? - Held that - Wherever, the reference is made to any co-operative society, the Income tax Act, 1961 has clearly distinguished and specified the type of co-operative society based on the type of activity carried out. Such a distinction was required as the legislation intends to extend different benefits to different types of co-operative societies through the Income tax Act. The assessee claimed the benefit of sections 36(1)(viia), 269 SS and 269T on the ground that it is a co-operative bank but for availing exemption from TDS under section 194A, it is claiming itself as an ordinary co-operative society within the meaning of section 194A(3)(v) of the Act. We find that this distinguishes the co-operative society and the cooperative society carrying on business of banking. The Hon ble Kerala High Court in the case of Moolamatom Electricity Board Employees Co-operative Bank Ltd., 1998 (7) TMI 53 - KERALA High Court has distinguished this. The decision of Hon ble Kerala High Court in the case of ITO & Ors. vs. Thodupuzha Urban Co-operative Bank, wherein they have clearly defined and interpreted the Section it appears that the bank did not consider the provision of section 194A(viia). Therefore, when there is a specific provision, general provision cannot be applied in the case of the assessee otherwise the provision of section 194A (viia) will become redundant. Interest paid on time deposits by 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 will be covered by sub-section (1), and therefore, will be liable to deduct income-tax. - Decided against assessee. Dividend income disallowed though the same is claimed as exempt u/s.80P(2)(d) - Held that - We are of the view that both the revenue authorities are justified in holding that provisions of section 80-P(4) is not applicable to co-operative bank. Addition of ₹ 27,58,64,367/- deleted on account of accrued interest on loans by CIT(A) - Held that - Interest accrued on sticky advances which was not brought in profit and loss account but taken to separate suspense account should be added as income only when actually received, which is in the case of the assessee. Thus we uphold the order of ld CIT(A) in deleting the addition of Rs. ₹ 27,58,64,357/-. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of interest on term deposits exceeding Rs. 10,000 without TDS under Section 40(a)(ia).
2. Disallowance of dividend income claimed as exempt under Section 80P(2)(d).
3. Addition of accrued interest on loans not credited to the profit and loss account.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Term Deposits Exceeding Rs. 10,000 Without TDS:

The primary issue revolves around whether the assessee, a co-operative bank, is liable to deduct TDS on interest paid on term deposits exceeding Rs. 10,000. The Assessing Officer (AO) disallowed Rs. 22,65,75,356/- under Section 40(a)(ia) for not deducting TDS, asserting that the exemption under Section 194A(3)(v) applies to co-operative societies other than co-operative banks. The AO relied on the ITAT Pune judgment in Bhagini Nivedita Sahakara Bank Ltd vs. ACI, which held that co-operative banks must deduct TDS on interest exceeding Rs. 10,000 as per Section 194A(3)(i) & (viia).

The CIT(A) upheld the AO's decision, emphasizing that the specific provisions of Section 194A(3)(i) & (viia) override the general provisions of Section 194A(3)(v). The CIT(A) also noted that the CBDT Circular No. 9 of 2002, which the assessee relied upon, was quashed by the Bombay High Court in Jalgaon District Central Co-op Bank Ltd & Anr v. Union of India. The Tribunal agreed with the lower authorities, citing the legislative intent to improve tax compliance by mandating TDS on interest from co-operative banks. The Tribunal also referenced the Karnataka High Court's distinction between co-operative banks and other co-operative societies, affirming that the specific provisions of Section 194A(3)(i) & (viia) apply to the assessee.

2. Disallowance of Dividend Income Claimed as Exempt Under Section 80P(2)(d):

The second issue concerns the assessee's claim for exemption of Rs. 60,12,920/- as dividend income under Section 80P(2)(d). The AO disallowed this claim, citing Section 80P(4), which excludes co-operative banks from availing deductions under Section 80P. The CIT(A) upheld this disallowance, and the Tribunal agreed, emphasizing that the provisions of Section 80P(4) explicitly deny deductions to co-operative banks, thus validating the AO's addition of Rs. 60,12,920/- to the assessee's income.

3. Addition of Accrued Interest on Loans Not Credited to the Profit and Loss Account:

The third issue pertains to the AO's addition of Rs. 27,58,64,367/- as accrued interest on loans, which the assessee did not credit to the profit and loss account, citing RBI guidelines. The AO contended that the assessee was following a hybrid system of accounting, contrary to the mercantile system reported in the audit. The CIT(A) deleted the addition, relying on the Supreme Court's decision in UCO Bank vs CIT, which held that interest on sticky advances should be recognized as income only when actually received.

The Tribunal upheld the CIT(A)'s decision, reiterating the principle established in UCO Bank that interest on non-performing assets should not be taxed until received, aligning with the RBI guidelines followed by the assessee.

Conclusion:

The Tribunal dismissed both the assessee's and the revenue's appeals, as well as the assessee's cross-objection, affirming the lower authorities' decisions on all issues. The judgment underscores the specific provisions of tax law applicable to co-operative banks, the exclusion of such banks from certain deductions, and the appropriate recognition of interest income on non-performing assets.