2015 (4) TMI 1250 - AT - Income Tax

TDS u/s 194A - cooperative society engaged itself in the business of banking liability to deduct tax on the income/interest paid to depositors/ members - Held that - Section 194A(3)(v) of the Act says that when the interest is credited or paid by a co-operative society to a member or any other co-operative society, tax need not be deducted. Section 194A(3)(v) of the Act does not refer to a cooperative society carrying on the business of banking. It simply says that income paid or credited by a co-operative society . Therefore, the provisions of Section 194A(3)(v) may not be applicable to a co-operative society which carries on the banking business, since the co-operative society which carries on banking business is differently treated by the Parliament in Section 194A(3)(i)(b) of the Act. Assessee s being co-operative societies engaged in carrying on the business of banking, are liable to deduct tax in respect of interest on time deposit to the members when it exceeds ₹ 10,000/-. However, in view of Section 194A (3)(viia)(b) in respect of other deposits, such as Savings Bank deposit, Recurring Deposit, other than time deposit, the assessee are not liable to deduct tax. Since the assessee s are co-operative societies engaged in banking business, they cannot have any transaction with non-members. Therefore, the question of payment of any interest to non-members does not arise for consideration. In the case before us, no details are available with regard to nature of deposit on which interest was paid. It is not clear whether the interest was paid on the time deposit or in respect of other deposits, such as Savings Bank deposit, Recurring Deposit, etc. Therefore, the matter needs to be verified. Accordingly, orders of the lower authorities are set aside and the issue of deduction of tax is remitted back to the file of the Assessing Officer for a limited purpose of verifying the nature of deposits on which the interest was paid. It is made clear that the assessees are liable to deduct tax on the interest paid to their members on the time deposit. However, the assessees are not liable to deduct tax on the interest paid on Savings Bank account and Recurring deposit account. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Whether co-operative societies engaged in the business of banking are liable to deduct tax on interest paid to members under Section 194A of the Income-tax Act, 1961.
2. Applicability of Section 194A(3)(v) and Section 194A(3)(viia) concerning tax deduction at source (TDS) on interest payments by co-operative societies.
3. Impact of judicial precedents and CBDT circulars on the interpretation of TDS provisions for co-operative societies.

Detailed Analysis:

1. Liability to Deduct Tax on Interest Paid by Co-operative Societies Engaged in Banking:
The core issue was whether co-operative societies engaged in banking must deduct tax on interest paid to their members. The assessees, being co-operative societies registered under the Co-Operative Societies Act and engaged in banking, argued they were exempt from TDS obligations under Section 194A(3)(v), which exempts co-operative societies from deducting tax when paying interest to members.

2. Applicability of Section 194A(3)(v) and Section 194A(3)(viia):
The assessees contended that Section 194A(3)(v) exempts them from TDS obligations. They referred to various judicial precedents and CBDT circulars, including the Bangalore Bench decision in The Bagalkot District Central Co-op. Bank v. JCIT, which supported their view. However, the Department argued that Section 194A(3)(i)(b) specifically mandates TDS for co-operative societies engaged in banking when interest payments exceed Rs. 10,000. The Department emphasized that the legislative intent was to differentiate between co-operative societies engaged in banking and other co-operative societies, thus requiring the former to deduct tax on interest payments exceeding Rs. 10,000.

3. Judicial Precedents and CBDT Circulars:
The Tribunal examined several judicial precedents and CBDT circulars. The assessees cited the Bangalore Bench's decision and other Tribunal decisions supporting their interpretation. They also referenced a CBDT circular (No. 9 of 2002) which was quashed by the Bombay High Court in The Jalgaon District Central Co-operative Bank Ltd. case. The Tribunal noted that the Bombay High Court's decision quashing the CBDT circular applies nationwide unless contradicted by another High Court. The Tribunal also reviewed the legislative history of Section 194A and related provisions, noting that the Parliament intended to treat co-operative societies engaged in banking differently from other co-operative societies.

Conclusion:
The Tribunal concluded that co-operative societies engaged in banking must deduct tax on interest payments exceeding Rs. 10,000 on time deposits under Section 194A(3)(i)(b). However, for other deposits like Savings Bank and Recurring Deposits, no TDS is required under Section 194A(3)(viia)(b). The Tribunal remitted the matter back to the Assessing Officer to verify the nature of deposits on which interest was paid, clarifying that TDS is mandatory on time deposits but not on Savings Bank and Recurring Deposits.

Order:
The appeals were partly allowed, and the Stay Petitions were dismissed as infructuous. The Tribunal directed the Assessing Officer to verify the nature of deposits and apply TDS provisions accordingly. The order was pronounced on 30th April 2015 at Chennai.