2021 (1) TMI 831 - AT - Income Tax

TDS u/s 194A - Associate Members of Co-operative Society - assessee has not deducted tax at source from the payment of interest made on deposits - Demand u/s 201(1) 201(1A) - assessee submitted that it has paid interest to its members only and hence, as per the provisions of section 194A(3)(v) the assessee is not required to deduct TDS - AO noticed that the assessee is having two types of members, viz., Regular Members and Associate Members AND the associate members are not eligible for exemption u/s 194A(3)(v) as they are not entitled to voting rights in the general body meetings - HELD THAT - We are concerned with the liability of the assessee for deduction of tax at source u/s 194A of the Act from the interest paid by the assessee. The assessee herein has paid interest to its associate members without deduction of tax at source. As per the definition of the term member given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959, member includes an associate member. Hence the assessee is able to collect deposit from them and also lend the money to them. Hence, we are of the view that the associate members should be construed as members only for the purpose of sec.194A since the definition of the term member should be construed as given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959. In the case of M/s The Government Employees Co-Operative Bank Limited 2021 (1) TMI 748 - ITAT BANGALORE liability to deduct tax at source u/s 194A of the Act cannot be equated with the provisions of sec.80P of the Act. This view combined with the decision of Hon ble Supreme Court holding that the term members should be construed as defined in the respective co-operative societies Act would lead us to the conclusion that the associate members should be considered as included in the term members used in sec.194A(3)(v) of the Act. We notice that paragraph 3 of CBDT Circular No.9/2002 dated 11.9.2002 has been quashed by Hon ble Bombay High Court in the case of Jalagaon District Central Co-operative Bank Ltd. Vs. Union of India 2003 (9) TMI 56 - BOMBAY HIGH COURT . Accordingly, we hold that the assessee is not liable to deduct tax at source from the interest payments made to Associate members as per sec.194A(3)(v) of the Act - We set aside the orders passed by Ld CIT(A) and direct the AO to delete the demand raised u/s 201(1) and 201(1A) of the Act. - Decided in favour of assessee.

Summary

Issues:
Challenge to demand raised under section 201(1) & 201(1A) of the Income-tax Act, 1961 for non-deduction of tax at source from interest payments made to associate members of a Credit Co-operative Society.

Detailed Analysis:

1. Issue of Non-Deduction of TDS: The appellant, a Credit Co-operative Society, challenged the demand raised by the Assessing Officer (AO) under section 201(1) & 201(1A) of the Income-tax Act, 1961 for not deducting tax at source from interest payments made to associate members. The AO initiated proceedings as the society did not deduct TDS from interest payments to members. The AO relied on a CBDT Circular and a Supreme Court decision to hold that the exemption under section 194A(3)(v) does not apply to associate members. The society contended that as per section 194A(3)(v), TDS is not required on interest paid to members.

2. Interpretation of 'Member': The key issue revolved around whether 'associate members' should be considered 'members' for the purpose of section 194A(3)(v) of the Act. The AO and CIT(A) argued that associate members are not entitled to voting rights and hence do not qualify as members. The CIT(A) relied on the principles of mutuality to differentiate between regular and associate members. The appellant argued that as per the Karnataka Co-operative Societies Act, 'associate members' are included in the definition of 'members,' allowing them to receive interest without TDS deduction.

3. Judicial Precedents: The Tribunal referred to a recent Supreme Court decision in a similar context and emphasized that the term 'member' should be defined as per the respective Co-operative Societies Act. Another case involving a Co-Operative Bank highlighted the distinction between TDS provisions and deduction under section 80P of the Act. The Tribunal concluded that the liability to deduct TDS cannot be equated with other provisions, supporting the appellant's contention that 'associate members' should be considered 'members' under section 194A(3)(v).

4. Decision: Considering the legal interpretations and precedents, the Tribunal set aside the orders of the CIT(A) and directed the AO to delete the demand raised under section 201(1) and 201(1A) of the Act. The Tribunal held that the appellant was not liable to deduct TDS from interest payments made to associate members as per section 194A(3)(v) of the Act. Both appeals of the appellant were allowed based on the definition of 'member' in the Karnataka Co-operative Societies Act.

In conclusion, the Tribunal's judgment clarified the interpretation of 'member' in the context of TDS deductions for interest payments to associate members of a Co-operative Society, emphasizing the importance of legal definitions and precedents in determining tax liabilities.