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TMI Blog2015 (4) TMI 1250X X X X Extracts X X X X X X X X Extracts X X X X ..... However, in view of Section 194A (3)(viia)(b) in respect of other deposits, such as Savings Bank deposit, Recurring Deposit, other than time deposit, the assessee are not liable to deduct tax. Since the assessee's are co-operative societies engaged in banking business, they cannot have any transaction with non-members. Therefore, the question of payment of any interest to non-members does not arise for consideration. In the case before us, no details are available with regard to nature of deposit on which interest was paid. It is not clear whether the interest was paid on the time deposit or in respect of other deposits, such as Savings Bank deposit, Recurring Deposit, etc. Therefore, the matter needs to be verified. Accordingly, orders of the lower authorities are set aside and the issue of deduction of tax is remitted back to the file of the Assessing Officer for a limited purpose of verifying the nature of deposits on which the interest was paid. It is made clear that the assessees are liable to deduct tax on the interest paid to their members on the time deposit. However, the assessees are not liable to deduct tax on the interest paid on Savings Bank account and Recurring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee, submitted that the assessees are co-operative societies registered under the provisions of Co-Operative Societies Act. The Ld. counsel further submitted that the assessees are engaged themselves in the business of banking. The assessees have also obtained banking licence from Reserve Bank of India under Section 22 of the Banking Regulation Act. According to Ld. counsel, the assessees being cooperative societies carrying on the business of banking, are subject to dual control of Reserve Bank of India and Registrar of Cooperative Societies. In the course of banking business, the assessees received various deposits like Recurring Deposit, Savings Bank Deposit, Time Deposit, etc. from their members. The assessees have also paid/credited interest on such deposits. However, the assessees have not deducted tax at the time of payment or crediting the interest to the respective member s account. 3. Referring to Section 194A(3)(v) of the Income-tax Act, 1961 (in short the Act ), the Ld. counsel submitted that when the income is credited by a co-operative society to a member or any other co8 operative society, it is exempted from deduction of tax as required und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the circular issued by CBDT in circular No.9 of 2002 dated 11.9.2002 and the judgement of Kerala High Court in Moolamattom Electricity Board Employees Cooperative Bank Ltd. (1999) 238 ITR 630. The Ld. counsel has also placed reliance on the judgement of Bombay High Court in The Jalgaon District Central Co-operative Bank Ltd. Anr. v. Union of India Ors. (2004) 265 ITR 423 and submitted that The Bombay High Court struck down the circular issued by the CBDT in No.9 of 2002 in respect of para 3 and the exemption was granted to the assessee-co-operative societies. 6. The Ld. counsel has also placed reliance on the decision of Amritsar Bench of this Tribunal in Rurkee Co-operative Agri Multipurpose Society Ltd. v. JCIT (OSD) in I.T.A. No.459(Asr)/2012 dated 24.02.2014. The Ld. counsel placed reliance in another decision of Bangalore Bench of this Tribunal in I.T.A. No.1254 1775/Bang/2013 dated 30.05.2014 and in ITO v. Divyajyothi Credit Co-operative Society Ltd. in I.T.A. No.72/Bang/2013 dated 07.02.2014. Referring to the decision of Lucknow Bench of this Tribunal in Northern Railway Primary Cooperative Bank Ltd. v. ACIT in I.T.A. No.763/LKW/2011 dated 21.08.2014, the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parliament is with regard to co-operative society engaged in the business of banking and other co-operative society. It does not refer to member or non-member. Referring to Section 194A(3)(viia) of the Act, the Ld. D.R. submitted that when an income credited or paid in respect of deposit other than the time-deposit by a co-operative society engaged in carrying on the business of banking, also exempted from deduction of tax. However, a harmonious reading of Section 194A(3)(i)(b), 194A(3)(v) and 194A(3)(viia) of the Act shows that when the payment exceeds ₹ 10,000/-, irrespective of the nature of deposit the co-operative society carrying on the business of banking, has to deduct tax. In this case, admittedly, the tax was not deducted. Therefore, the Assessing Officer has rightly treated the assessees as assessee in default. 10. Referring to the judgment of Bombay High Court in the case of The Jalgaon District Central Co-operative Bank Ltd. (supra), the Ld. D.R. submitted that the Bombay High Court struck down the entire circular of CBDT in Circular No.9 of 2002 dated 11.09.2002. Therefore, it may not be correct to say that the Bombay High Court has struck down only paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its members, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities: Provided that in the case of a co-operative society falling under sub-clause (vi) or sub-clause (vii) the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:-- (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment. (3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I 1or section 80-IA or section 80J or section 80JJ the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of subsection (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, 1section 80-IA, section 80J and section 80JJ. (4) The provisions of this section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation,-For the purposes of this sub-section,-- (a) co-operative bank and primary agricultural credit society shall have the meanings respectively assigned to them in Part V of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section. Explanation - For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (3) The provisions of sub-section (1) shall not apply-- (i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, 5does not exceed (a) ten thousand rupees, where the payer is a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution, referred to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Central Government and notified by it in this behalf in the Official Gazette ; (vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) ; (viia) to such income credited or paid in respect of,-- (a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a cooperative land development bank ; (b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co22 operative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking ; (viii) to such income credited or paid by the Central Government under any provision of this Act or the Indian Income-tax Act, 1922 (11 of 1922), or the Estate Duty Act, 1953 (34 of 1953), or the Wealth-tax Act, 1957 (27 of 1957), or the Gift-tax Act, 1958 (18 of 1958), or the Super Profits Tax Act, 1963 (14 of 1963), or the Companies (Prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anks in one s own name or benami. Interest on such deposits is not likely to be declared in the income-tax returns. 55.2 With a view to improving tax compliance, section 194A of the Income-tax Act has been amended to secure deduction of tax at source from interest on time deposits with the aforesaid banking companies and co-operative societies engaged in carrying on the business of banking. However, the requirement of deduction of tax at source will not apply in the case of interest on time deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank. Further, there will be no requirement of deduction of tax at source if the amount of interest does not exceed two thousand five hundred rupees in financial year. The term of time deposits has been defined to mean deposits, excluding recurring deposits , repayable on the expiry of fixed periods. Thus, interest on savings bank accounts and recurring deposit accounts is not subject to deduction of tax at source. 55.3 For the purpose of computing the threshold limit of rupees two thousand and five hundred below which there is no requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en thousand rupees in a financial year on time deposits made on or after 1st July, 1995, with a banking company or with a co-operative society engaged in carrying on the business of banking. The aforesaid limit of ten thousand rupees shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society, as the case may be. The interest on time deposits made with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a cooperative land development bank, will not be subject to the requirement of deduction of income-tax at source. The expression time deposits is defined to mean deposits, excluding recurring deposits, repayable on the expiry of fixed period. 46.3 The amendment will take effect from 1st July, 1995. 15. By this circular also it is clarified that a banking company or a co-operative society engaged in carrying on the business of banking has to deduct tax on interest paid on time deposit exceeding ₹ 10,000/-. The above said limit of ₹ 10,000/- shall be computed with reference to income credited or paid by a branch of a banking company or the co-op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, the co-operative society engaged in carrying on the business of banking need not deduct tax at all. 17. Now the controversy is whether assessees become eligible under Section 194A(3)(v) of the Act which provides for nondeduction of tax when the income is credited by a co-operative society to a member or to other co-operative society. Primarily, the assessees are co-operative societies. However, they are engaged in carrying on the business of banking. The Bangalore Bench of this Tribunal in the case of The Bagalkot District Central Co-op. Bank (supra) examined this issue and found that in view of Circular No.9 of 2002, when a co-operative society engaged in carrying on the business of banking pays interest to the members, tax need not be deducted at source in view of Section 194A(3)(v) of the Act. For the purpose of convenience, we are reproducing hereunder the circular issued by CBDT in Circular No.9 of 2002 dated 11.9.2002:- Circular No.9 of 2002 Sub: Tax deduction at source under Section 194A of the Income-tax Act, 1961 Applicability of the provisions in respect of income paid or credited to a member of co-operative bank Reg. 11/09/2002 TDS 194A Und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and deposits other than time deposits with such co-operative bank without TDS under Section 194A by virtue of the exemption granted under clause (v) of sub-section (3) of Section 194A of the Act. The Board further clarified that provisions of clause (viia) of sub-section (3) of Section 194A of the Act is effective only in case of a non-member depositor of the co-operative bank. This circular was challenged before the Aurangabad Bench of the Bombay High Court in a Writ Petition in The Jalgaon District Central Co-operative Bank Ltd. (supra). The Bombay High Court found that the Central Board of Direct Taxes has no power to introduce a substantial change or alteration in the provisions of the Income-tax Act, 1961, by importing the ideas unknown to the Income-tax Act, 1961. The High Court found that the impugned circular has no stand to the legal test. In the result, the Bombay High Court quashed the Circular No.9 of 2002 dated 11.09.2002 and set aside. 18. For the purpose of clarity, we are reproducing certain paragraphs of the judgment of Aurangabad Bench of the Bombay High Court in The Jalgaon District Central Co-operative Bank Ltd. (supra), hereunder:- .. .. .. .. .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less the High Court of other State takes a contrary view. In this case, there is no judgment of Madras High Court. Therefore, this Tribunal is of the considered opinion that the judgment of Bombay High Court is squarely applicable to the facts of the case. Even otherwise the CBDT circular in Circular No.9 of 2002 dated 11.9.2002 is contrary to its own circular in Circular No.621 dated 19.12.1991 and Circular No.717 dated 14.8.1995. In fact, the scope and effect of Section 194A(3)(i)(b) and 194A(3)(viia)(b) were explained by Circular No.621 dated 19.12.1991 and Circular No.717 dated 14.8.1995. The Circular No.9 of 2002 was issued without any reference to its two earlier circulars, which in fact explain the scope and effect of provisions of Section 194A as amended. Therefore, the CBDT issued Circular No.9 of 2002 without any application of mind, ignoring the scope and effect of provisions of Section 194A of the Act as amended. Hence, the said Circular No.9 of 2002 is not applicable at all. 20. We have also carefully gone through the judgment of Apex Court in the case of Gammon India Limited v. Commissioner of Customs (supra) and in the case of S. Sundaram Pillai And Others (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act and not otherwise. The contention that sub-section (3)(i) exemption limit has been increased to ₹ 10,000 to time deposits with co-operative societies engaged in carrying on business of banking, would have to be reconciled and if so done, then all co-operative societies who have credited or paid exceeding ₹ 10,000 are liable for deduction cannot be accepted. Firstly, the proviso deals only with the time deposit and secondly the expression used is the co-operative society engaged in carrying on business of banking . There may be many co-operative societies that may come under sub-section (3)(viia)(b). The proviso could be referable only to those co-operative societies and cannot be to primary credit societies to which class the petitioners belong. In the case before the Kerala High Court, the society was not carrying on banking business and it was not under the control of the Reserve Bank of India. Therefore, the Kerala High Court concluded that the assessee before the Kerala High Court was a co-operative society and not liable for deduction of tax. In the case before us, it is an admitted case of the assessees that the co-operative societies are ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this case also, the provisions of Section 194A was amended with an intention to prevent the practice of depositing unaccounted money with co-operative society carrying on the business of banking. However, Section 194A(3)(viia)(b) gives an exemption in respect of deposits other than time deposit. Therefore, the classification made under the Income-tax Act between co-operative society and co-operative society carrying on banking deposit in respect of payment of interest on time deposit cannot be ignored. As observed by Apex Court, State does not have to tax everything in order to tax something. In the same logic, State does not have to exempt everything in order to exempt something from taxation. 23. In view of the above discussion, this Tribunal is of the considered opinion that the assessees, being co-operative societies engaged in carrying on the business of banking, are liable to deduct tax in respect of interest on time deposit to the members when it exceeds ₹ 10,000/-. However, in view of Section 194A (3)(viia)(b) of the Act, in respect of other deposits, such as Savings Bank deposit, Recurring Deposit, other than time deposit, the assessees are not liable to de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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