2015 (4) TMI 802 - AT - Income Tax

Dis-allowance of expenses u/s 40(a)(ia) of the Income Tax Act, 1961 - TDS u/s 194A not deducted on interest paid on deposits - Special provision for deduction of TDS in case of Co-operative bank - Payee shown interest in return of income and paid tax - Held that - The assessee is liable to deduct the tax at source on the term deposit of members and cooperative societies as per the provisions of sec. 194A(3)(vii)(b) of the Act. Section 194A(3)(vii)(b) deals with cooperative societies engaged in the business of banking. If the amount paid or credited to any depositor during the year exceeds ₹ 10,000/-, the provisions of sec. 194A(1) of the Act shall apply to the cooperative society engaged in the banking business shall have to deduct tax on such payment. From the facts of the case, it is seen that the ITO has categorically brought out the material on record to prove that the assessee bank is covered by the provisions of sub-clause (b) of clause (viia) of sec. 194A(3) of the Act. We have taken the consistent view taken by the ITAT, Panaji Bench in the case of Saraswat Co-operative Bank Ltd. 2015 (1) TMI 743 - ITAT PANAJI .Following the this decision, we hold that the assessee in these assessment years has paid interest above ₹ 10,000/-, to each of the depositors, therefore it is liable to deduct tax at source and the assessee is deemed to be default. Our view was confirmed by the Hon'ble Bombay High Court vide decision in the case of The Marathawada Urban Bank Co-op Association Ltd. 2015 (4) TMI 374 - BOMBAY HIGH COURT . We dismiss the ground that assessee is not liable to deduct tax at source. We hold that if the amount more than ₹ 10,000/- is credited as an interest on time deposits, then the urban cooperative Bank is liable to deduct the TDS as is laid down in the said provisions of section 194A and that urban co-operative Bank is not liable to deduct TDS if the interest accrued on time deposits is less than ₹ 10,000/-. Therefore, we reverse the finding of Ld. CIT(A) and restore this issue back to the file of Assessing Officer to verify this fact as per the decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages P. Ltd. 2004 (3) TMI 333 - ITAT DELHI and also the decision of CIT Vs. Eli Lilly & Co. reported in 2009 (3) TMI 33 - SUPREME COURT whether payee has paid tax on the interest income received from the assessee society and shown the same in his income tax return. The Assessing Officer is directed to verify the same and pass the order in accordance with law. - Accordingly disposed off.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on interest paid on term deposits.
2. Applicability of Section 194A(3)(v) exemption for cooperative societies.
3. Interpretation of specific vs. general provisions in tax law.
4. Verification of tax payment by payees to determine default status of deductor.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on interest paid on term deposits:
The primary issue in the appeals was whether the assessee, a cooperative society engaged in banking, was required to deduct tax at source (TDS) on interest paid on term deposits exceeding Rs. 10,000. The Assessing Officer (AO) disallowed Rs. 2,11,39,621 under Section 40(a)(ia) due to non-deduction of TDS. The AO held that the assessee was liable to deduct TDS under Section 194A(3)(i) and (viia), which are specific provisions applicable to cooperative societies engaged in banking, overriding the general exemption under Section 194A(3)(v).

2. Applicability of Section 194A(3)(v) exemption for cooperative societies:
The assessee argued that as a cooperative society, it was exempt from TDS under Section 194A(3)(v) for interest paid to its members. However, the AO and CIT(A) held that this exemption did not apply to cooperative societies engaged in banking, as specific provisions under Section 194A(3)(i) and (viia) required TDS for interest payments exceeding Rs. 10,000. The CIT(A) emphasized that the specific provisions for cooperative banks override the general exemption for cooperative societies.

3. Interpretation of specific vs. general provisions in tax law:
The judgment highlighted the principle that specific provisions override general provisions. The AO and CIT(A) relied on judicial precedents, including decisions from the ITAT Pune Bench and the Kerala High Court, which supported the view that cooperative banks are subject to specific TDS provisions under Section 194A(3)(i) and (viia). The CIT(A) also referred to explanatory notes to the Finance Act and CBDT circulars to support this interpretation.

4. Verification of tax payment by payees to determine default status of deductor:
The assessee contended that the AO should verify whether the interest income was declared by the payees in their returns and if taxes were paid, the assessee should not be deemed in default. The Tribunal acknowledged this argument, referring to Section 201(1) and the proviso, which states that a deductor is not in default if the payee has declared the income and paid taxes. The Tribunal directed the AO to verify whether the payees had declared the interest income and paid taxes, and if so, the assessee should not be held liable for TDS default.

Conclusion:
The Tribunal upheld the requirement for the assessee to deduct TDS on interest payments exceeding Rs. 10,000 under Section 194A(3)(i) and (viia), rejecting the general exemption under Section 194A(3)(v) for cooperative societies. However, it directed the AO to verify if the payees had declared the interest income and paid taxes, which could absolve the assessee from being deemed in default. The appeals were allowed for statistical purposes, pending this verification.