2016 (2) TMI 736 - AT - Income Tax

TDS liability on cooperative society - Whether a co-operative society, carrying on banking business with the approval of the Reserve Bank of India, is liable to deduct tax U/s.194A on the interest paid to its members? - Held that - For the relevant assessment years 2008-09 to 2011-12 the assessee would not be liable to deduct tax U/s. 194 of the Act as the none of the State or Central enactments such as the Tamil Nadu Co-operative societies Act, 1983, the Multi-State Co-operative Societies Act, 2002, the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949 and the National Bank for Agriculture and Rural development Act, 1981 do not make any distinction between a co-operative society engaged in carrying on banking business and a co-operative bank. However, from 01.06.2015 onwards the appellant cannot escape from the liability for deducting tax at source. - Decided in favour of assessee

Summary

Issues Involved:
1. Eligibility for deduction under Section 80P of the Income Tax Act.
2. Classification of the assessee as a 'primary credit society' or a 'co-operative bank'.
3. Applicability of Section 194A of the Income Tax Act regarding tax deduction at source on interest paid to members.

Issue-Wise Detailed Analysis:

1. Eligibility for Deduction under Section 80P:
The core issue in the appeals was whether the assessee, a Credit Cooperative Society, was eligible for deduction under Section 80P of the Income Tax Act. The Assessing Officer had disallowed this claim, treating the society as a co-operative bank, thereby invoking Section 80P(4) which excludes co-operative banks from such deductions. The CIT(A) upheld this view, stating that the assessee fell under the category of 'primary credit society' as defined in Section 5(ccvi) of the Banking Regulation Act, and thus was ineligible for deductions under Section 80P(2)(a)(i), 80P(2)(c)(ii), and 80P(2)(d).

2. Classification of the Assessee:
The CIT(A) and the Assessing Officer classified the assessee as a co-operative bank based on its activities and the provisions of the Banking Regulation Act. The CIT(A) referenced the case of CIT Vs Jafari Momin Vikas Co-operative Credit Society Ltd., asserting that the nature of the assessee's activities aligned with those of a banking business. Consequently, the CIT(A) dismissed the appeals for the assessment years 2008-09 to 2011-12, holding that the assessee was a co-operative bank and not eligible for deductions under Section 80P.

3. Applicability of Section 194A:
The jurisdictional High Court had framed two substantial questions of law regarding the distinction between a co-operative society and a co-operative bank and the applicability of Section 194A. The High Court concluded that no distinction existed between a co-operative society engaged in banking business and a co-operative bank under various enactments, including the Tamil Nadu Co-operative Societies Act, the Multi-State Co-operative Societies Act, the Reserve Bank of India Act, the Banking Regulation Act, and the National Bank for Agriculture and Rural Development Act. Therefore, for the relevant assessment years, the assessee was not liable to deduct tax under Section 194A. However, an amendment effective from 1.6.2015 clarified that co-operative banks must deduct tax on interest paid to members, but this was prospective and not retrospective.

Conclusion:
The Tribunal, referencing the High Court's decision, ruled in favor of the assessee, allowing the appeals for the assessment years 2008-09 to 2011-12. The Tribunal held that the assessee was not liable for tax deduction under Section 194A for these years, as the distinction between a co-operative society and a co-operative bank was not recognized by the relevant enactments. However, the Tribunal acknowledged that from 1.6.2015 onwards, the assessee would be liable to deduct tax at source due to the legislative amendment.

Final Judgment:
The appeals filed by the assessee were allowed, and the order was pronounced on 20th January 2016 at Chennai.