Cooperative society engaged in banking business exempt from TDS under section 194A(3)(v) on member deposit interest

ITAT Bangalore held that a cooperative society engaged in banking business is exempt from TDS obligations under section 194A(3)(v) when paying interest to members on deposits, reversing the disallowance under section 40(a)(ia). The tribunal followed its earlier precedent for the same assessee covering assessment years 2010-11 and 2011-12. Additionally, the tribunal allowed amortization of premium on government securities held to maturity as allowable expenditure, following the precedent in Sir M. Visweswaraya Co-operative Bank Ltd case. Both issues were decided in favor of the assessee.

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Issues Involved:
1. Deletion of disallowance under Section 40(a)(ia) for non-deduction of tax on interest paid.
2. Addition of amortization of premium/depreciation on investment in Government securities.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 40(a)(ia) for Non-Deduction of Tax on Interest Paid:

The primary issue revolves around the disallowance made under Section 40(a)(ia) of the Income Tax Act, 1961, due to the non-deduction of tax at source on interest paid by the assessee, a co-operative bank. The Assessing Officer disallowed the interest paid on deposits, invoking Section 40(a)(ia) for the non-deduction of tax at source. The assessee contended that as a co-operative society involved in banking, it is exempt from TDS on interest payments to its members, supported by various judicial decisions.

The CIT (Appeals) deleted the disallowance, referencing the Tribunal's decision in the assessee's own case for Assessment Years 2010-11 and 2011-12. The Tribunal had previously held that co-operative societies carrying on banking business need not deduct tax at source when paying interest to members, based on Section 194A(3)(v) of the Act.

The learned CIT, DR argued that the Tribunal's decision should not apply to interest paid to non-members. However, the assessee's representative submitted that all interest payments were made to members, supported by statements filed before the authorities, which were undisputed by the Assessing Officer.

The Tribunal, after considering rival submissions and relevant material, upheld the CIT (Appeals) decision. It reiterated that co-operative societies engaged in banking are exempt from TDS on interest payments to members, as per Section 194A(3)(v), supported by the Tribunal's previous rulings and the jurisdictional High Court's decision in CIT Vs. M/s. Basaveshwara Sahakari Bank.

2. Addition of Amortization of Premium/Depreciation on Investment in Government Securities:

The second issue concerns the addition made due to the amortization of premium/depreciation on investments in Government securities. The CIT (Appeals) allowed the assessee's claim, following multiple decisions favoring the assessee. The Tribunal noted that this issue had been consistently decided in favor of the assessee in various cases, including the Tribunal's decision in ACIT Vs. Sri Gokarnath Co-operative Bank Ltd.

The Tribunal referenced the case of Sir M. Visweswaraya Co-operative Bank Ltd., where it was held that amortization of premium on Government securities is an allowable expenditure. This decision was supported by other judicial pronouncements, such as the Catholic Syrian Bank Ltd. case and the Khanapur Co-op Bank Ltd. case, which recognized the amortization of premium on Government securities as per prudential norms of the RBI and CBDT Circular No.17.

Following these precedents, the Tribunal found no error in the CIT (Appeals) order allowing the amortization of premium on Government securities as a revenue expenditure.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT (Appeals) decisions on both issues. It affirmed that co-operative societies engaged in banking are exempt from TDS on interest payments to members and that amortization of premium on Government securities is an allowable expenditure. The judgment was pronounced in the open court on 27th September 2017.

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