2015 (7) TMI 245 - AT - Income Tax

Non deduction of TDS - interest paid to members - assessee is a co-operative society - Held that - Following the decision of the co-ordinate bench of this Tribunal in the case of The Bagalkot District Central Co-operative Bank (2015 (1) TMI 1005 - ITAT BANGALORE), we hold that the assessee, which is a co-operative society carrying on the business of banking, need not deduct tax at source under Section 194A of the Act when it pays interest to a member both on time deposits and deposits other than time deposits kept with such co-operative society, by virtue of the exemption granted vide clause (v) of sub-section (3) of Section 194A of the Act. As submitted by the learned Departmental Representative and observed by the learned CIT (Appeals), it is not clear whether the entire interest in question relates to interest paid to members or whether a part of the interest is also paid to non-members. In this view of the matter, we uphold the decision of the learned CIT (Appeals) in directing the Assessing Officer to verify whether any portion of the interest in question relates to payments to non-members and to restrict the disallowance only to the extent of payment of interest to non-members without deduction of tax at source. -Decided against revenue.

Summary

Issues Involved:
1. Applicability of Section 194A(3)(v) of the Income Tax Act, 1961 to a co-operative society carrying on the business of banking.
2. Distinction between Section 194A(3)(v) and Section 194A(3)(viia) of the Income Tax Act, 1961.
3. Requirement to deduct tax at source (TDS) on interest paid to members and non-members by a co-operative society.
4. Reliance on judicial precedents and CBDT Circulars in interpreting the provisions of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Applicability of Section 194A(3)(v) of the Income Tax Act, 1961 to a co-operative society carrying on the business of banking:
The primary issue in this case was whether a co-operative society engaged in banking is required to deduct TDS on interest paid to its members under Section 194A(3)(v) of the Act. The assessee, a co-operative society, argued that it was exempt from deducting TDS on interest paid to its members by virtue of Section 194A(3)(v). The Assessing Officer, however, held that Section 194A(3)(v) was not applicable to co-operative societies engaged in banking and that Section 194A(3)(viia) should apply instead.

2. Distinction between Section 194A(3)(v) and Section 194A(3)(viia) of the Income Tax Act, 1961:
The Tribunal examined the distinction between Section 194A(3)(v) and Section 194A(3)(viia). It noted that Section 194A(3)(v) exempts co-operative societies from deducting TDS on interest paid to members, while Section 194A(3)(viia) provides specific exemptions for certain types of co-operative societies, including primary agricultural credit societies and co-operative land mortgage banks. The Tribunal held that these provisions operate in different fields and do not conflict with each other. It concluded that Section 194A(3)(v) applies to all co-operative societies, including those engaged in banking, when paying interest to their members.

3. Requirement to deduct tax at source (TDS) on interest paid to members and non-members by a co-operative society:
The Tribunal clarified that a co-operative society engaged in banking need not deduct TDS on interest paid to its members, whether on time deposits or other deposits, under Section 194A(3)(v). However, interest paid to non-members would still be subject to TDS under Section 194A(3)(i)(b) and Section 194A(3)(viia)(b). The Tribunal directed the Assessing Officer to verify whether the interest in question was paid to members or non-members and to restrict the disallowance to interest paid to non-members without TDS.

4. Reliance on judicial precedents and CBDT Circulars in interpreting the provisions of the Income Tax Act:
The Tribunal relied on the decision of a co-ordinate bench in the case of Bagalkot District Central Co-operative Bank, which held that co-operative societies engaged in banking are exempt from deducting TDS on interest paid to members under Section 194A(3)(v). It also referred to CBDT Circular No. 9/2002, which clarified that a member of a co-operative bank shall receive interest without TDS under Section 194A(3)(v). The Tribunal dismissed the Revenue's reliance on contrary decisions from other benches, noting that the preponderance of judicial opinion supported the assessee's position.

Conclusion:
The Tribunal held that the assessee, a co-operative society engaged in banking, was not required to deduct TDS on interest paid to its members under Section 194A(3)(v). It directed the Assessing Officer to verify whether any portion of the interest was paid to non-members and to restrict the disallowance accordingly. The appeals by the Revenue for Assessment Years 2011-12 and 2012-13 were dismissed.