2015 (12) TMI 1812 - HC - Income Tax

TDS provisions of section 194A(3)(v) - application to all co-operative societies including co-operative society engaged in the business of banking? - HELD THAT - It is brought to the notice of this Court by the learned counsel appearing for the Assessee that vide Circular No.19/2015 in F.No.142/14/2015-TPL, the Ministry of Finance, Government of India, has clarified as under 42.5 In view of this, the provisions of the section 194A(3)(v) of the Income-tax Act have been amended so as to expressly provide that the exemption provided from deduction of tax from payment of interest to members by a co-operative society under section 194A(3)(v) of the Income-tax Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members. As this amendment is effective from the prospective date of 1st June, 2015, the co-operative bank shall be required to deduct tax from the payment of interest on time deposits of its members, on or after the 1st June, 2015. Hence, a cooperative bank was not required to deduct tax from the payment of interest on time deposits of its members paid or credited before 1st June, 2015. Consequently, the finding of the Tribunal that the Cooperative banks were required to deduct tax at source is unsustainable. Accordingly, this appeal filed by the revenue stands dismissed.

Summary

Issues:
1. Interpretation of section 194A(3)(v) of the Income Tax Act, 1961 for co-operative societies, including those engaged in banking.
2. Application of provisions of section 43D of the I.T. Act, 1961 on accrued interest on loans classified as Nonperforming Assets.

Analysis:

Issue 1 - Interpretation of section 194A(3)(v):
The appeal raised the question of whether the Tribunal was correct in applying the provisions of section 194A(3)(v) of the Income Tax Act, 1961 to all co-operative societies, including those engaged in banking activities. The Assessee cited Circular No.19/2015, where it was clarified that the exemption under section 194A(3)(v) does not apply to payment of interest on time deposits by cooperative banks to members. This amendment, effective from 1st June 2015, required cooperative banks to deduct tax from interest payments on time deposits. Consequently, the Tribunal's decision that cooperative banks were obligated to deduct tax at source was deemed unsustainable, leading to the dismissal of the revenue's appeal.

Issue 2 - Application of section 43D on accrued interest:
The second substantial question of law involved the application of section 43D of the I.T. Act, 1961 on accrued interest on loans classified as Nonperforming Assets. The Tribunal had deleted the additions on account of accrued interest, relying on a Karnataka High Court decision in Canfin Homes Ltd. The Assessee's counsel highlighted a Division Bench judgment in favor of the Assessee, following the Canfin Homes Ltd. case. Both parties agreed that the issues in this appeal were the same as in a previous case, ITA No.471/2013, which was disposed of in similar terms. As a result, the appeal was disposed of in favor of the Assessee, in line with the earlier judgments.

In conclusion, the High Court upheld the decisions in favor of the Assessee on both issues, emphasizing the implications of the relevant provisions of the Income Tax Act, 1961 and the clarifications provided by the Ministry of Finance.