State co-operative law defines "member" for TDS exemption on interest paid to associate members under the Income-tax Act.

For section 194A(3)(v) of the Income-tax Act, the term "member" is to be read in light of the governing State co-operative law where the Act itself does not define it. Under the Karnataka Co-operative Societies Act, a nominal or associate member is included within the statutory concept of "member", and therefore interest paid to associate members falls within the phrase "to a member thereof". The attempt to equate section 194A with section 80P was treated as inapposite, and the CBDT circular relied on for a narrower view was stated to have been quashed. Accordingly, such interest was exempt from tax deduction at source.

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Issues: Whether interest paid by a co-operative society to its associate members is covered by the exemption from tax deduction at source under section 194A(3)(v) of the Income-tax Act, 1961.

Analysis: The expression "member" in section 194A(3)(v) was construed in the context of the governing State co-operative law. Under section 2(f) of the Karnataka Co-operative Societies Act, 1959, the term "member" includes a nominal and an associate member, while section 18 recognises an associate member as a member with limited rights. The reasoning adopted by the tax authorities by equating section 194A with section 80P was found to be inapposite, and the CBDT circular relied upon was treated as having been quashed. On that construction, the payment of interest to associate members fell within the statutory expression "to a member thereof".

Conclusion: Interest paid to associate members was exempt under section 194A(3)(v), and the assessee was not liable to deduct tax at source on such payments.

Ratio Decidendi: Where the Income-tax Act does not define "member" for purposes of section 194A(3)(v), the term must be read according to the relevant State co-operative statute, and an associate member included within that statutory definition is entitled to the TDS exemption.

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