2015 (3) TMI 882 - AT - Income Tax

Co-op banks exempt from TDS on interest to members under IT Act

The Tribunal upheld the CIT(A)'s order, ruling that co-operative banks are not obligated to deduct tax at source on interest paid to members under Section ... Non deduction of tax at source on the payment of interest on the deposits to members of cooperative society - AO initiated proceedings against the Assessee u/s. 201(1) & u/s.201(1A) - Held that:- The Bangalore Bench of ITAT in the case of Bagalkot District Central Co-op Bank, Vs. JCIT (2015 (1) TMI 1005 - ITAT BANGALORE] held that cooperative societies carrying on banking business while paying interest to members on time deposits and deposits other than time deposits need not deduct tax at source u/s.194-A of the Act by virtue of exemption granted u/s.194A(3)(v) of the Act. Also in the case of The Visakhapatnam Cooperative Bank [2011 (8) TMI 319 - ITAT VISAKHAPATNAM ] has held that co-operative societies carrying on banking business when it pays interest to its members on deposits it need not deduct tax at source in view of the provisions of Sec.194A(3)(v) of the Act. Similar view has also been expressed by the Pune Bench of the ITAT in the case of Ozer Merchant Co-operative Bank [2015 (3) TMI 919 - ITAT PUNE]. We may add that in both these decisions the discussion did not turn on the interpretation of Sec.194A(3)(i)(b) of the Act vis-a-vis Sec.194A(3)(v) of the Act. It is thus clear that the preponderance of judicial opinion on this issue is that co-operative societies carrying on banking business when it pays interest to its members on deposits need not deduct tax at source in view of the provisions of Sec.194A(3)(v) of the Act For the reasons given above, we hold that the Assessee which is a co-operative society carrying on banking business when it pays interest income to a member both on time deposits and on deposits other than time deposits with such co-operative society need not deduct tax at source under section 194A by virtue of the exemption granted vide clause (v) of sub-section (3) of the said section - Decided in favour of assessee. Issues Involved:1. Obligation of a co-operative bank to deduct tax at source on interest paid to its members.2. Interpretation of Section 194A(3)(v) and Section 194A(3)(i)(b) of the Income Tax Act, 1961.3. Validity and interpretation of CBDT Circular No. 9 of 2002.4. Applicability of judicial precedents and tribunal decisions on the matter.Issue-wise Detailed Analysis:1. Obligation of a Co-operative Bank to Deduct Tax at Source on Interest Paid to its Members:The primary issue in the appeals was whether the co-operative bank was required to deduct tax at source on interest paid to its members, as per Section 194A(1) of the Income Tax Act, 1961. The Assessing Officer (AO) initiated proceedings against the Assessee under Sections 201(1) and 201(1A) for failing to deduct tax at source on interest payments exceeding Rs. 10,000 to its members. The AO's stance was that the Assessee, being a co-operative bank, was obligated to deduct tax on such interest payments.2. Interpretation of Section 194A(3)(v) and Section 194A(3)(i)(b) of the Income Tax Act, 1961:The Assessee argued that it was exempt from deducting tax under Section 194A(3)(v), which exempts co-operative societies from deducting tax on interest paid to their members. The AO, however, contended that Section 194A(3)(i)(b), which specifically mentions co-operative societies engaged in banking, overrides the general exemption provided in Section 194A(3)(v). The AO relied on the decision in Bhagani Nivedita Sah Bank Ltd. Vs. ACIT, where it was held that the term 'co-operative society' in Section 194A(3)(v) does not include co-operative banks.3. Validity and Interpretation of CBDT Circular No. 9 of 2002:The Assessee cited the Bombay High Court's decision in The Jalgaon District Central Co-operative Bank Ltd. Vs. Union of India, which quashed the CBDT Circular No. 9 of 2002 that attempted to limit the definition of 'member' for the purposes of Section 194A(3)(v). The court held that the circular could not override the statutory provisions and that the term 'member' includes nominal, associate, or sympathizer members. The AO distinguished this case, arguing that it did not address the specific issue of co-operative banks' obligation under Section 194A(3)(i)(b).4. Applicability of Judicial Precedents and Tribunal Decisions:The Tribunal considered the decision of the Bangalore Bench of ITAT in Bagalkot District Central Co-op Bank Vs. JCIT, which held that co-operative societies engaged in banking need not deduct tax on interest paid to members by virtue of Section 194A(3)(v). The Tribunal also referenced the CBDT Circular No. 9 of 2002, which clarified that co-operative banks need not deduct tax on interest paid to members. The Tribunal found that the preponderance of judicial opinion supported the Assessee's position.Conclusion:The Tribunal upheld the CIT(A)'s order, which canceled the AO's decision, ruling that co-operative societies engaged in banking are not required to deduct tax at source on interest paid to members under Section 194A(3)(v). The Tribunal dismissed the Revenue's appeals and the Assessee's cross-objections, noting that the latter were purely supportive and not maintainable. The decision was pronounced in the open court on 20th March, 2015.