2020 (9) TMI 461 - AT - Income Tax

TDS u/s 194A - Disallowance u/s.40(a)(ia) - non-deduction of tax at source on interest paid to some of the members, which were held to be not legal members - whether nominal members, associate members and sympathizer members were also covered by the exemption under section 194A(3)(v)? - HELD THAT - We are primarily concerned with clause (v) of sub-section (3) of section 194A which provides that sub-section (1) shall not apply to such income credited or paid by a co- operative society to a member thereof or to any other co-operative society . On a harmonious reading of sub-sections (3) and (1) of section 194A, it becomes apparent that a co-operative society is required to deduct tax at source from any interest paid by it except where the interest is paid to its Member or to any other Cooperative society. In other words, if interest is paid by it to its Members, the same does not require any deduction of tax at source. It is manifest that the question of deduction of tax at source u/s 194A was nowhere before the Hon ble Supreme Court in THE CITIZEN CO-OPERATIVE SOCIETY LIMITED, THROUGH ITS MANAGING DIRECTOR, HYDERABAD VERSUS ASSISTANT COMMISSIONER OF INCOME TAX 2017 (8) TMI 536 - SUPREME COURT which is currently under consideration. In view of the categorical judgment of Hon ble jurisdictional High Court in Jalgaon District Central Cooperative Bank Ltd. 2003 (9) TMI 56 - BOMBAY HIGH COURT setting aside circular No.9/2002, which, in turn, made a distinction between various classes of members and entitled only some classes to the benefit of section 194A(3)(v) of the Act, there remains no doubt whatsoever that payment of interest by a cooperative bank to its Members, whether admitted in accordance with the bye-laws or otherwise, does not require deduction of tax at source. So long as any person is a Member , payment of interest to him has to be covered within the mandate of clause (v) of section 194A(3) requiring no deduction of tax at source. Since the assessee made payment of interest amounting to HUF and unregistered firms, which happened to be its Members , we hold that the authorities below were not justified in making and confirming disallowance u/s.40(a)(ia). - Decided in favour of assessee.

Summary

Issues:
Confirmation of disallowance of &8377; 4,20,773/- under section 40(a)(ia) of the Income-tax Act, 1961 for non-deduction of tax at source on interest paid to certain members.

Analysis:
The appeal before the Appellate Tribunal ITAT Pune concerned the confirmation of a disallowance of &8377; 4,20,773/- by the Assessing Officer under section 40(a)(ia) of the Income-tax Act, 1961. The disallowance was related to interest payments made by a Co-operative Bank to members without deduction of tax at source. The Assessing Officer held that certain members, including Hindu Undivided Family (HUF) and unregistered firms, did not qualify as legal members based on the bank's bye-laws, leading to the disallowance. The CIT(A) upheld this decision, prompting the appeal to the Tribunal.

During the proceedings, the key issue was whether the disallowance under section 40(a)(ia) was justified for interest payments made to members without tax deduction under section 194A. Section 194A mandates tax deduction at source on interest payments, except in specific circumstances. The Tribunal analyzed the provisions of section 194A, particularly clause (v) of sub-section (3), which exempts tax deduction on interest paid by a co-operative society to its members. The Tribunal referred to a CBDT Circular clarifying that the exemption under section 194A(3)(v) applies to members who are part of the registration process or admitted as per bye-laws.

The Tribunal further discussed a relevant judgment of the High Court regarding the circular, emphasizing that all types of members of co-operative banks, regardless of admission procedures, are covered by the exemption under section 194A(3)(v). The Tribunal highlighted that the legislative text does not limit the application of the exemption to specific types of members. Therefore, as long as a depositor is enrolled as a member of a co-operative bank, interest payments to such members do not require tax deduction at source.

In the present case, the Tribunal found that the disallowance was made solely on the basis that HUF and unregistered firms were not considered legal members as per the bank's bye-laws. However, the Tribunal noted that these entities were indeed members of the bank, admitted through proper procedures. Citing a Supreme Court case related to a different deduction provision, the Tribunal clarified that the issue of tax deduction at source under section 194A was not addressed in that judgment.

Ultimately, the Tribunal held that the disallowance under section 40(a)(ia) was unwarranted as the interest payments to HUF and unregistered firms, recognized as members of the bank, fell within the exemption of section 194A(3)(v). Relying on the High Court's decision regarding the circular, the Tribunal allowed the appeal, setting aside the disallowance.

In conclusion, the Tribunal ruled in favor of the assessee, emphasizing that interest payments made to members of a co-operative bank, irrespective of admission procedures, do not require tax deduction at source under section 194A. The impugned order confirming the disallowance was overturned, and the appeal was allowed.