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TMI Blog2014 (9) TMI 1168X X X X Extracts X X X X X X X X Extracts X X X X ..... at the specific gene i.e cooperative society engaged in carrying on the business of banking. The stand of appellant is that, even after insertion of specific clause(vii), the general clause(v) will continue to apply to the cooperative banks. If that stand is accepted, the cooperative banks were required to deduct tax from interest paid to depositors who are not its members, rendering clause (vii) redundant. The by Finance Act 1991, for the first time introduced TDS on time deposits by substituting above mentioned clause (vii) with two separate clauses (vii) & (viia). While clause (vii) applied to banking companies, clause (viia) applied to specially created category of cooperative societies. This reaffirms the decision of legislature to apply a specific clause to the specific genre cooperative societies, which were earlier carved out of the genus as envisaged in general clause(v). The effect of above amendment was explained by the CBDT in Circular no 617 dated 22-11-1991 where in it is clarified that: The effect of the aforesaid change is that income-tax shall now be deductible at source from the interest income on the deposits with. (i) a banking company, or cii) a co-opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egularly assessed in Mumbai. He failed to appreciate that s.292BB of the Income Tax Act, 1961 (which is relied upon by him) does not at all purport to validate orders passed in the absence of territorial jurisdiction. Further, he failed to appreciate that order passed despite absence of jurisdiction resulted in grave prejudice to the appellant. 2. The Ld CIT(A) erred in holding that appellant was liable to deduct tax at source u/s.194A of the Act in respect of interest paid on term deposits to members, without properly appreciating and interpreting (inter alia) s. 194A(3) of the Act which specifically provides that the appellant is not required to deduct tax at source on such payments. 3. The Ld CIT(A) failed to appreciate that the issue was decided in favour of appellant by several judgments of the Hon‟ble High Courts, and by the ITAT also. He erred in not following the ratio of the judgments of the High Court; and failed to appreciate that even where two views are possible, view in favour of the assessee is to be preferred. 4. Without prejudice to the above, the Id. CIT(A) erred in holding that the appellant is in default and in confirming orders/directions u/s.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of TDS are not attracted in view of clause-(v) of sub-section (3) of section 194A as the interest payments to the extent of ₹ 1,83,90.031/- have been made to the members of the bank which is Co-operative society.‟ In this regard, the ITO, TDS ward, Belgaum has interpreted the word co-operative society as employed in Sec.194A(3)(v) to mean co-operative society other than co-operative bank as decided by the ITAT, Pune Bench, in Bhagani Nivedita Sahakari bank Ltd v ACIT 87 ITD 569 wherein, the Hon‟ble ITAT has held that the term co-operative society‟ mentioned in section 194A(3)(v) to be interpreted as co-operative society other than cooperative bank. Thus, the ITO passed an order u/s 201(1)/(1A) and calculated the amount payable at ₹ 27,03,333/; ₹ 18,39,003/- u/s 201(1) and ₹ 8,64,330/- u/s201(1A). 6.1 On going through the provisions of section 194A(3), it is seen that the ITO is justified in passing an order u/s 201(1)/(1A) and calculating the amount payable at ₹ 27,03,333/; ₹ 18,39,003/- u/s 201(1) and ₹ 8,64,330/- u/s201(1A). The submission of the appellant are not acceptable in view of the decision of Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circular No.9 of 2002 issued by the CBDT relied upon by the appellant, the Board vide said circular had sought to interpret the definition of word member‟ clarifying that the word member‟ does not include word nominal member‟. It was held by the Bombay High Court in the case of Jalgaon District Central Co-op Bank Ltd Anr v. Union of India 265 ErR 423 (Bom), that the Board has no power to interpret the provisions of law by way of circular. The issue at hand of the Bombay High court was the definition of the word member‟ as appearing in clause (v) of section 194(3) and the powers of the Central Board of Direct Taxes to issue circulars u/s 119 which would override or detract from the provisions of the Income Tax Act. The circular No.9 of 2002 dated 11-09-2002 issued by the CBDT has been quashed and set aside by the Hon‟ble High Court. Therefore, the circular No.9 of 2002 dated 11-09-2002 issued by the CBDT does not help the case of the appellant. The appellant‟s reliance on the said circular is found to be ill founded. Similarly, the appellant‟s reliance on the decisions of the High Court in the cases of Jalgaon District Co-op Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed itself to the jurisdiction of the ITO,TDS. ward, Belgaum. Apart from the merits of the case, the appellant‟s ground of appeal challenging the jurisdiction of the ITO, TDS Ward, Belgaum cannot be entertained as per provisions of section 292BB of the Income Tax Act. As per the said section, the assessee cannot challenge the issue of notice under any section if the assessee has appeared in any proceeding co-operated in any inquiry relating to an assessment or reassessment. The action of ITO is in conformity with the legal position on the issue. Therefore, the grounds of appeals pertaining the jurisdiction of the ITO are dismissed. 8. The appellant has also contended that when the recipients of interest amount in its case have paid the taxes on interest income, the appellant deductor can not be asked to pay the TOS amount u/s 201(1)(1A) and it has relied on some decided cases in this context. The contention of the appellant is not acceptable in as much as the appellant has not been able to furnish the proof of recipients of interest amount having paid the tax on interest amounts as was the case in the case of Hindustan Coca Cola 293 ITR 293. The appellant has also contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion at the threshold itself. However, the Court did not do so: in fact, the petition was allowed; and the Circular was struck down to the extent to which is narrowed the scope of the benefits which were available to the assessee (a cooperative bank) under s.194A(3)(v). Further, we seek to invite Your Honours‟ attention to the specific finding of the Hon‟ble Bombay High Court on page 425 of the report (265 ITR), where the Court notes: ... it is an accepted fact that the provisions of tax deducted at source are not enforceable in respect of interest paid by the cooperative society/bank to its members Hon‟ble High Court has expressly referred to bank in the above holding. 3. We further note that the Department preferred an appeal against this decision before the Hon‟ble Supreme Court. The Hon‟ble Supreme Court dismissed the Departments appeal by order dated 7.7.2004. Therefore, the above holding of the High Court has not been confirmed by Hon‟ble Supreme Court also. Based on the above decision, the Gujarat High Court has also decided the issue in favour of the assessee in Special Civil Application 1465/2003 decided in June 2012. In light of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying on the business of banking, there is no exemption for the interest payments in respect of time deposits made on or after 01-07-1995. Further,194A(3)(i) lays down monetary limits up to which is there is no requirement of TDS. The said monetary limits are different for different category of payers. The said clause is reproduced below for the sake of clarity: 194A(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, [does 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 in section 51 of that Act); (b) ten thousand rupees, where the payer is a co-operative society engaged in carrying on the business of banking [emphasized] (c) ten thousand rupees, on any deposit with post office under any scheme framed by the Central Government and notified by it in this beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 1 94A are not applicable to income by way of interest credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act), or with a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank). All such banking institutions are, therefore, no longer required to deduct tax from interest paid or credited to the accounts of a resident depositor. (emphasized) From the above circular it is very clear that, by virtue clause(vii), a co-op bank is exempted from making TDS. c. The Finance Act 1971, which inserted the words (to a member thereof or) in clause (v) and the said amendment was directed only at the general co-operative society and not at the specific gene i.e cooperative society engaged in carrying on the business of banking. d. The stand of appellant is that, even after insertion of specific clause(vii), the general clause(v) will continue to apply to the cooperative banks. If that stand is accepted, the cooperative banks were required to deduct tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of banking. (emphasized) The above explanatory note leaves no doubt, whatsoever, about the applicability of clause (viia) to a cooperative society engaged in the business of banking. 3.Principle of Generalia specialibus non derogant The Hon‟ble jurisdiction High court in M.L.Vasudeva Murthy Sons vs. Jt. Commissioner of Ag IT 65 Taxman 185(Kar) has observed that a special provision normally excludes the operation of a general provision . The Hon‟ble Supreme Court in the, case of South Indian Corpn. (P) Ltd. vs. Secretary, Board of Revenue AIR 1964 SC 207 has held that a special provision should be given to the extent of its scope leaving the general provision to control cases where the special provision does not apply 4. Judicial pronouncements The courts have examined the issue of applicability of TDS provisions to the interest paid by a cooperative society engaged in the business of banking. Moolamattom Electricity Board Employees‟ Co-op Bank Ltd. [1999] 106 TAXMAN 242(KER.) The Hon‟ble High court had concluded that the said TDS provisions do not apply to primary co-operative societies and they are specifically ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of co-operative societies which are specifically referred to in different other provisions are specific species. it is a settled principle of interpretation that when a conflict occurs between a specific provisions of the law, vis-a-vis, the general provisions of the law, then precedence will have to be given to the specific provisions of the law so as to override the effect of the general provision of the law. Therefore in interpreting particular provision, a co-operative society in clause (v), if it comes in conflict with the other provisions of the Act, then the interpretation of the term co-operative society would have to be suitably amended. Therefore, it is necessary that the term co-operative society in clause (v) be interpreted as co-operative society other than co-operative bank. d) Clause (viia)(b) was introduced with effect from 1-7-1995 whereas clause (v) was already in existence. The need for introduction of clause (viia) (b) was merely for the purpose of effecting the tax deduction at source from the interest on fixed deposits with the cooperative banks. e) Exemption as claimed by the assessee from TDS with respect to interest on time deposits paid/ credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assesse bank is covered by clauses 194A(3)(ib) as well as 194A(3) (viia)(b) which are specific in nature and the assessee cannot put forth its claim under 1 94A(3)(v) which is general in nature. b) As the assessee is cooperative society engaged in the business of banking, it is covered under specific clauses. As has been held by ITAT Pune bench in Bhagani Nivedita Sahakari Bank Ltd case, the term cooperative society in clause 194A(3)(v) is to be interpreted as cooperative society other than cooperative bank c) The argument that clause 194A(3)(v) may be taken as applying to members and other clauses applicable to non-members, is without any basis in as much as clauses 1 94A(3)(ib) as well as 1 94A(3) (viia)(b) apply to both members as well as non-members. d) Where ever the legislature intends to apply particular provision to member or to a non-member, it has done so expressly. The above categorical observations of Hon‟ble ITAT are squarely applicable to the case on hand. ACIT v Visakhapatnam Co-Operative Bank Ltd [2011] 47 SOT 295 (Vizag) Ozer Merchant Co-op Bank Ltd- ITA no 1588/PN/2012 In these cases the AOs had made disallowance under section 40( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-op bank can receive interest without TDS in view of clause(v). However the Hon‟ble Mumbai High Court, in the above case has quashed the entire circular. The operative part of the said order is reproduced below for the sake of clarity: In the result, both the writ petitions are allowed. The impugned Circular No. 9 of 2002, dated 11th September, 2002 [F. No. 275/106/ 2000/IT(B)- Annexure A] is quashed and set aside. Similarly, the letter issued by the ITO, Jalgaon, Ward No. 2(3) [No. Jal/ITO/2(3)/TDS/194 /2000-03, dated 9th October, 2002-Annexure B] is also quashed and set aside. Rule made absolute in the above terms. From the above it is dear that the Hon‟ble Court has set aside and quashed the CBDT Circular in its entirety and not read down or modified the circular. Therefore that circular is no longer in existence and hence no portion of it can be relied upon. 5. Conclusion In view of the above discussion, it is pleaded to dismiss the appeal on the point and declare that in respect of interest on time deposits by a co-operative bank clause (viia) is applicable and not the clause (v) and TDS was required to be done. 2.6. We have heard the rival content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt account, overdraft account, cash credit account, issue letter of credit, discounting bills.. of exchange, issue cheques, demand drafts (DD), Pay orders, Gift cheques, lockers, bank guarantees etc. 3. Co-operative Banks can act as clearing agent for cheques, DDs, pay -orders and other forms. 4. Banks are bound to follow the rules, regulations and directions issued by Reserve Bank of India (RBI) 1. As per the bye laws of the cooperative society. 2. Society cannot open savings bank account, current account, issue letter of credit, discounting bills of exchange, issue cheque, demand drafts, pay orders, gift cheques, lockers, bank guarantees etc. 3. Society cannot act clearing agent, for cheques, DDs, pay orders and other forms. 4. Society are bound by rules and regulations as specified by in the co-operative societies act. Filing of returns . Co-operative banks. have to submit annual return to RBI every year Society has to submit the annual return to Registrar of Societies. Inspection RBI has the power to inspect accounts and over all functioning of the Bank Regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT Pune Bench has interpreted the word Co-operative and Co-operative Society and further the Hon‟ble Kerala High Court in the case of Moolamattom Electricity Board Employees Co-operative Bank Ltd. 630 has made a clear distinction between primary credit society and a co-operative society engaged in banking business. Section 194A dealt with Co-operative Society engaged in business as banking. We find that the assessee bank is covered by the provisions of sub-clause (b) of clause (i) of Sec.194A(3) as well as the provisions of clause (viia) of Section 194(3)A which are specific in nature and 194(3)(v) which are general in nature. We find that the Hon‟ble Kerala High Court in the case of ITO Ors. vs. Thodupuzha Urban Co- operative Bank and others have filed the writ before the Hon‟ble Kerala High Court, wherein the Hon‟ble High Court has held as under: The Income Tax Department has come up with this appeal against the judgment in O.P. No. 17082/1997.(Thodupuzha Urban Co-operative Bank Ltd., In [1999]238 ITR630(Ker). That petition was filed by five co-operative Societies, when they were faced with a notice from the appellant to deduct the income-tax out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying on the business of banking will be covered by sub-section (1), and therefore, will be liable to deduct income-tax. The appellant does not have a case before us that the 4th petitioner, the first respondent herein, does not come within any of the types of co-operative societies made mention of in sub-clause (a) of clause (viia) of sub-section (3) of section 194A of the Act. Therefore, irrespective of Whether it is a time deposit or any other type of deposit, the 4th petitioner, first respondent will not be liable to deduct income-tax, as such society is under sub-section (3) taken out of the purview of section 194A(1) of the Act. Therefore, the writ appeal fails, dismissed. W.A. No. 2270 of 1998: A reading of the impugned judgment discloses that the writ petitioner, the first respondent, was concede to be an agricultural co-operative society. Consequently, it comes within the purview of clause (viia)(a) of sub-section (3) of section 194A of the Income-tax Act, 1961. Naturally, the first respondent-society will not be liable in terms of sub-section (1) of section 194A. The writ appeal fails, dismissed. From this above we are of the view that the Hon‟ble High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion at source is a useful tool and one of the well recognised methods of enforcing tax compliance in many countries. However, a harassed Finance Minister has to be sensitive to the opinions of Honourable Members of Parliament even when they differ from his own convictions. He accordingly withdrawn the provision relating to deduction at source in respect of interest on term deposit with the bank and commission w.e.f., June 1992. Accordingly, Finance Act 1992 substituted a new Clause (vii) w.e.f., 1st June, 1992, sub-section 3 of Section 194A for clause (vii) and someone as earlier introduced by Finance No.2 Act w.e.f., 1st October, 1991. This amendment was made to restore the position as was before 1st October, 1991 in relation to deduct tax at source in the case of income credited or paid in respect of deposit with a bank company to which banking regulation Act 1940 applies or with a co-operative society engaged in carrying on the business of banking, including co-operative land mortgage bank or co-operative land development bank This was brought into w.e.f., 1.4.1992. Finance Act 1995 w.e.f., 1st July 1995 again withdrawn the exemption for interest on time deposit payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8223;ble Kerala High Court in the case of ITO Ors. vs. Thodupuzha Urban Co-operative Bank, wherein they have clearly defined and interpreted the Section it appears that the bank did not consider the provision of section 194A(viia). Therefore, when there is a specific provision, general provision cannot be applied in the case of the assessee otherwise the provision of section 194A (viia) will become redundant. The section cannot be read in this manner. For the sake of clarity, we have analyse the Section 194A(3)(v) and (viia) which read as under: (3) The provisions of sub- section (1) shall not apply- (i) 5 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, does not exceed 6 ten thousand rupees................. (v) to such income credited or paid by a co- operative society to a member thereof or] to any other co- operative society; (viia) to such income credited or paid in respect of,- (a) deposit with a primary agricultural credit society or a primary credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution, referred to in section 51 of that Act); (b) ten thousand rupees, where the payer is a co-operative society engaged in carrying on the business of banking [emphasized] (c) ten thousand rupees, on any deposit with post office under any scheme framed by the Central Government and notified by it in this behalf; and (d) five thousand rupees in any other case]:] From the above it is clear that, in case of a payer which is a cooperative society engaged in the business of banking, the monetary limit prescribed is ₹ 10000/-. Once the interest payment exceeds that amount the TDS is to be made. Neither in clause (viia) nor in clause (i) there is anything to restrict their applicability only to non-members and therefore they apply to all depositors. Going by the above understanding, the co-op bank is required u/s 194A(1) to make TDS from the interest paid to all depositors. However co-op bank holds the view that clause (viia) applies only to non-members and not to the members. However, on perusal of clause (viia), nothing in it to restrict its application only to non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (v) and the said amendment was directed only at the general co-operative society and not at the specific gene i.e cooperative society engaged in carrying on the business of banking. d. The stand of appellant is that, even after insertion of specific clause(vii), the general clause(v) will continue to apply to the cooperative banks. If that stand is accepted, the cooperative banks were required to deduct tax from interest paid to depositors who are not its members, rendering clause (vii) redundant. e. The by Finance Act 1991, for the first time introduced TDS on time deposits by substituting above mentioned clause (vii) with two separate clauses (vii) (viia). While clause (vii) applied to banking companies, clause (viia) applied to specially created category of cooperative societies. This reaffirms the decision of legislature to apply a specific clause to the specific genre cooperative societies, which were earlier carved out of the genus as envisaged in general clause(v). The effect of above amendment was explained by the CBDT in Circular no 617 dated 22-11-1991 where in it is clarified that: The effect of the aforesaid change is that income-tax shall now be deductible ..... X X X X Extracts X X X X X X X X Extracts X X X X
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