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2015 (4) TMI 329 - AT - Income TaxTDS liability on Interest - disallowance u/s 40(a)(ia) - Exemption on interest paid on deposit to members u/s 194A(3)(v) denied - assessee is a cooperative society engaged in carrying on the business of banking - Held that - if the amount more than ₹ 10,000/- is credited as an interest on time deposits, then the urban cooperative Bank is liable to deduct the TDS as is laid down in the said provisions of section 194A and that urban co-operative Bank is not liable to deduct TDS if the interest accrued on time deposits is less than ₹ 10,000/-. Therefore, we reverse the finding of Ld. CIT(A) and restore this issue back to the file of Assessing Officer to verify this fact as per the decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages P. Ltd. (2007 (8) TMI 12 - SUPREME COURT OF INDIA) and also the decision of CIT Vs. Eli Lilly & Co. 2009 (3) TMI 33 - SUPREME COURT whether payee has paid tax on the interest income received from the assessee society and shown the same in his income tax return. - matter remanded back.
Issues Involved:
1. Denial of exemption on interest paid on deposits to members under Section 194A(3)(v) of the Income Tax Act, 1961. 2. Application of provisions of Section 194A(3)(i)(b) and disallowance under Section 40(a)(ia) of the Income Tax Act, 1961. 3. Requirement of verifying whether the interest income is shown by the member depositor in their return of income. 4. Interpretation of the term "co-operative society" and its applicability to co-operative banks. Detailed Analysis: 1. Denial of Exemption on Interest Paid on Deposits to Members under Section 194A(3)(v): The assessee, a co-operative society engaged in banking, contested the denial of exemption on interest paid to members under Section 194A(3)(v). The Assessing Officer (AO) argued that the specific provisions under Section 194A(3)(i) and (viia) take precedence over the general provisions of Section 194A(3)(v). The AO relied on the decision of ITAT, Pune Bench in the case of Bhagini Nivedita Sahakara Bank Ltd. vs. ACIT, which held that the term "co-operative society" in Section 194A(3)(v) should be interpreted as excluding co-operative banks. The CIT(A) upheld the AO's decision, emphasizing that specific provisions override general provisions and that the assessee's case is covered by the specific clauses of Section 194A(3)(i) and (viia). 2. Application of Provisions of Section 194A(3)(i)(b) and Disallowance under Section 40(a)(ia): The AO disallowed the interest payments exceeding Rs. 10,000 made to depositors without TDS under Section 40(a)(ia), amounting to Rs. 70,52,023. The CIT(A) supported this disallowance, stating that the assessee failed to deduct TDS as required under Section 194A(3)(i)(b), which applies to co-operative societies engaged in banking. The CIT(A) distinguished between ordinary co-operative societies and those engaged in banking, referencing various judicial pronouncements that specific provisions override general ones. 3. Requirement of Verifying Whether the Interest Income is Shown by the Member Depositor in Their Return of Income: The assessee argued that the AO should verify if the interest income was declared by the member depositor in their return of income. If the depositor paid taxes on this income, the assessee should not be deemed in default for not deducting TDS. The AR cited Sections 190 and 191, which state that the primary liability to pay tax rests on the assessee if the deductor fails to deduct TDS. The AR also referenced Section 201(1), which provides that a deductor is not deemed in default if the payee has included the income in their return and paid the due tax. The tribunal agreed that the AO must verify whether the payee has declared the interest income in their return and paid the taxes, as per the proviso to Section 201(1). 4. Interpretation of the Term "Co-operative Society" and Its Applicability to Co-operative Banks: The tribunal referred to various judicial interpretations distinguishing between co-operative societies and co-operative banks. It cited the Karnataka High Court's decision in CIT vs. Yeshwanthpur Credit Co-operative Society Limited, which clarified that a co-operative bank carrying on banking business exclusively is not the same as a co-operative society. The tribunal also referenced the Kerala High Court's decision in Moolamattom Electricity Board Employees Co-operative Bank Ltd., which made a clear distinction between primary credit societies and co-operative societies engaged in banking. The tribunal concluded that the specific provisions under Section 194A(3)(viia) apply to co-operative banks, requiring them to deduct TDS on interest payments exceeding Rs. 10,000. Conclusion: The tribunal upheld the AO's and CIT(A)'s decisions, confirming that the assessee is liable to deduct TDS on interest payments exceeding Rs. 10,000 to depositors under Section 194A(3)(viia). The tribunal directed the AO to verify if the payees had declared the interest income in their returns and paid the taxes, as per the proviso to Section 201(1). The appeal was allowed for statistical purposes, with instructions for the AO to pass the order in accordance with the law.
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