Co-op bank not liable for TDS on member interest payments under Income Tax Act Section 194A(3)(v)

The Tribunal held that the co-operative bank was not obligated to deduct tax at source on interest payments to its members under Section 194A(3)(v) of the Income Tax Act. The Tribunal emphasized a harmonious interpretation of the relevant provisions and clarified that the CBDT Circular exempting co-operative banks from TDS on interest payments remained valid. The Tribunal set aside the lower authorities' orders, allowed the assessee's appeals, and dismissed the stay petitions as infructuous.

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Issues Involved:
1. Obligation to deduct tax at source on interest payments by a co-operative bank to its members under Section 194A of the Income Tax Act, 1961.
2. Interpretation of Section 194A(3)(v) and Section 194A(3)(i)(b) of the Income Tax Act.
3. Applicability of CBDT Circular No. 9 of 2002.

Issue-wise Detailed Analysis:

1. Obligation to Deduct Tax at Source on Interest Payments by a Co-operative Bank to Its Members:
The primary issue was whether the assessee, a co-operative bank, was required to deduct tax at source on interest payments exceeding Rs. 10,000 per annum to its members under Section 194A of the Income Tax Act, 1961. The Assessing Officer (AO) initiated proceedings against the assessee for not deducting tax at source, treating the assessee as an "assessee in default" under Section 201(1) and levying interest under Section 201(1A) of the Act.

2. Interpretation of Section 194A(3)(v) and Section 194A(3)(i)(b) of the Income Tax Act:
The assessee argued that as a co-operative society, it was exempt from deducting tax at source on interest payments to its members under Section 194A(3)(v) of the Act. The AO, however, contended that Section 194A(3)(i)(b) specifically required co-operative societies engaged in banking to deduct tax at source on interest payments exceeding Rs. 10,000. The AO relied on the decision in Bhagani Nivedita Sah Bank Ltd. vs. ACIT, which held that the term "co-operative society" in Section 194A(3)(v) does not include co-operative banks, and thus, co-operative banks must deduct tax at source as per Section 194A(3)(i)(b).

3. Applicability of CBDT Circular No. 9 of 2002:
The assessee also referenced CBDT Circular No. 9 of 2002, which clarified that co-operative societies carrying on banking business need not deduct tax at source on interest payments to their members. The AO distinguished this by arguing that the circular was quashed by the Bombay High Court in the case of Jalgaon District Central Co-operative Bank Ltd. vs. Union of India, which dealt with the definition of "member" under Section 194A(3)(v).

Tribunal's Findings:

1. Precedent and Judicial Interpretation:
The Tribunal referred to the decision in Bagalkot District Central Co-op Bank vs. JCIT, where it was held that co-operative societies engaged in banking need not deduct tax at source on interest payments to members by virtue of Section 194A(3)(v) of the Act. This decision was found to be directly applicable to the present case.

2. Harmonious Construction of Provisions:
The Tribunal emphasized a harmonious interpretation of Sections 194A(3)(v) and 194A(3)(i)(b). It concluded that Section 194A(3)(v) provides a general exemption for interest payments by co-operative societies to their members, which includes co-operative banks. Section 194A(3)(i)(b) applies to non-member interest payments exceeding Rs. 10,000.

3. Validity of CBDT Circular No. 9 of 2002:
The Tribunal clarified that only part of the CBDT Circular No. 9 of 2002, specifically paragraph 3, was quashed by the Bombay High Court, which dealt with the definition of "member." The rest of the circular, particularly paragraph 2, which exempts co-operative banks from TDS on interest payments to members, remains valid and binding.

Conclusion:
The Tribunal set aside the orders of the lower authorities, holding that the assessee, being a co-operative society carrying on banking business, was not obligated to deduct tax at source on interest payments to its members under Section 194A(3)(v). The appeals by the assessee were allowed, and the stay petitions were dismissed as infructuous.

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