Cooperative bank not required to deduct TDS on interest paid to nominal members under section 194A(3)(v) exemption

ITAT Pune held that cooperative bank was not required to deduct TDS on interest paid to nominal members under section 194A(3)(v) exemption. The tribunal ruled that Maharashtra Cooperative Societies Act includes nominal members within the definition of members, making them eligible for TDS exemption. CIT(A)'s deletion of addition under section 40(a)(ia) was upheld. Additionally, the tribunal dismissed revenue's ground regarding mutuality principle, noting the assessing officer made no specific findings on mutuality and relied on a decision that was subsequently set aside by coordinate bench.

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The core legal questions considered in this appeal are:

1. Whether the exemption under section 194A(3)(v) of the Income Tax Act is available to the assessee cooperative bank for interest credited to nominal members who are not "actual members" as per the definition of "person" eligible for membership under the cooperative society's bye-laws, thereby affecting the applicability of TDS deduction under section 40(a)(ia).

2. Whether the principle of mutuality applies to transactions between the assessee cooperative bank and other cooperative societies, particularly whether such other cooperative societies can partake in the distribution of surplus, impacting the tax treatment of interest payments.

Issue 1: Applicability of Exemption under Section 194A(3)(v) to Nominal Members and TDS Deduction

Relevant Legal Framework and Precedents:

Section 194A of the Income Tax Act mandates deduction of tax at source (TDS) on interest payments by persons other than individuals or Hindu Undivided Families (HUFs). Subsection (3)(v) provides an exemption from TDS for interest credited or paid by a cooperative society to its members or to any other cooperative society. The key question is the scope of the term "member" for purposes of this exemption.

The Central Board of Direct Taxes (CBDT) Circular No. 9/2002 attempted to restrict this exemption to members who joined in the application for registration or were admitted in accordance with bye-laws and rules, excluding nominal, associate, or sympathizer members. However, this circular was quashed by the Bombay High Court in Jalgaon District Central Cooperative Bank Ltd. v. Union of India (2004) 265 ITR 423, holding that the circular's restrictive interpretation conflicted with the statute and was beyond the scope of section 119 of the Act.

Further, the Hon'ble ITAT Pune Bench in Nilkanth Urban Co-operative Bank Ltd. vs. ACIT (2020) 119 taxmann.com 369 (Pune Tribunal) held that all types of members, including nominal members, are covered under the exemption in section 194A(3)(v), so long as they are admitted as members, irrespective of whether admission strictly complied with bye-laws.

Court's Interpretation and Reasoning:

The Tribunal examined the facts that the assessee cooperative bank credited interest to other cooperative societies admitted as "nominal members" by way of application and Board resolution. The Assessing Officer (AO) disallowed the interest payments under section 40(a)(ia) for non-deduction of TDS, on the ground that these nominal members did not qualify as "members" under the bye-laws' definition of "person".

The Tribunal relied on the decision in Nilkanth Urban Co-operative Bank Ltd., noting that the AO had similarly disallowed interest paid to HUFs and unregistered firms on the basis that they were not "persons" eligible for membership. The Tribunal emphasized that the entities were admitted as members by application and Board resolution, and thus fell within the scope of "members" for section 194A(3)(v) exemption.

The Tribunal also highlighted the Bombay High Court's quashing of CBDT Circular No. 9/2002, which attempted to restrict the exemption to only certain classes of members. The Court held that the legislature did not qualify the term "member" with adjectives like nominal or associate, and the exemption applies broadly to all members of the cooperative society.

Key Evidence and Findings:

The assessee produced bye-laws and Board resolutions evidencing admission of cooperative societies as nominal members. The Tribunal noted that the AO did not dispute the fact of membership admission, but only the classification under the bye-laws. The Tribunal found that the exemption under section 194A(3)(v) applies to all admitted members irrespective of their classification.

Application of Law to Facts:

Applying the legal principles, the Tribunal held that since the cooperative societies were admitted as nominal members, the interest credited to them was exempt from TDS deduction under section 194A(3)(v). Therefore, the addition made by the AO under section 40(a)(ia) for non-deduction of TDS was not justified.

Treatment of Competing Arguments:

The Revenue argued that nominal members are not actual members as per the bye-laws and thus the exemption does not apply, relying on the AO's interpretation and earlier decisions. The Tribunal distinguished these arguments by relying on the High Court's quashing of the restrictive circular and the broader legislative intent. The assessee's reliance on coordinate bench decisions was accepted as persuasive and applicable.

Conclusion:

The Tribunal upheld the CIT(A)'s order deleting the addition under section 40(a)(ia), holding that the exemption under section 194A(3)(v) applies to interest credited to nominal members admitted as members of the cooperative bank. The AO's disallowance was set aside.

Issue 2: Applicability of Principle of Mutuality Between Cooperative Societies

Relevant Legal Framework and Precedents:

The principle of mutuality is a fundamental concept in cooperative society taxation, where transactions among members are not regarded as income but as mutual dealings. The Revenue challenged the CIT(A)'s acceptance that the assessee had a business relationship with other cooperative societies for commercial purposes and contended that these other societies could not partake in surplus distribution, negating mutuality.

Court's Interpretation and Reasoning:

The Tribunal noted that the AO's assessment order did not specifically address the principle of mutuality or make any addition on this basis. The addition was made solely on the ground of non-deduction of TDS under section 40(a)(ia). The CIT(A) had accepted the assessee's submissions on the business relationship and mutuality principle, relying on coordinate bench decisions.

Key Evidence and Findings:

The Tribunal observed the absence of any detailed findings or reasoning by the AO on the principle of mutuality. The Revenue's ground was based on the AO's reliance on an order that was subsequently set aside by the coordinate bench. The Tribunal found no material to support the Revenue's contention.

Application of Law to Facts:

Since the AO did not make any addition or adverse finding on the mutuality issue, and the CIT(A) had accepted the assessee's position, the Tribunal dismissed the Revenue's ground as lacking merit.

Treatment of Competing Arguments:

The Revenue's argument was based on the principle that non-members or entities lacking mutuality should not benefit from cooperative society exemptions. However, the Tribunal found this argument unsubstantiated in the absence of AO findings and in light of the coordinate bench decisions favoring the assessee.

Conclusion:

The Tribunal dismissed the Revenue's ground challenging the principle of mutuality, affirming the CIT(A)'s acceptance of the assessee's position.

Significant Holdings

"In view of the categorical judgment of Hon'ble jurisdictional High Court in Jalgaon District Central Cooperative Bank Ltd. (supra) setting aside circular No.9/2002, which, in turn, made a distinction between various classes of members and entitled only some classes to the benefit of section 194A(3)(v) of the Act, there remains no doubt whatsoever that payment of interest by a co-operative bank to its Members, whether admitted in accordance with the bye-laws or otherwise, does not require deduction of tax at source. So long as any person is a 'Member', payment of interest to him has to be covered within the mandate of clause (v) of section 194A(3) requiring no deduction of tax at source."

"The exemption under clause (v) of sub-section (3) of section 194A of the Act applies to all types of Members of the eligible co-operative Banks - whether or not they were admitted to the Membership in accordance with the bye laws and rules. The legislature has not added any adjective to the term 'Member', such as, nominal or associate or sympathizer, so as to restrict the application of clause (v) only to the regular and participating members."

"The Assessing Officer was not justified in making disallowance u/s 40(a)(ia) of the Act on account of non-deduction of tax at source on interest credited to nominal members who are admitted members of the cooperative bank."

"The principle of mutuality issue raised by the Revenue is dismissed as the Assessing Officer did not make any addition or adverse finding on this ground and the CIT(A)'s order accepting the assessee's position is affirmed."

Accordingly, the Tribunal dismissed the Revenue's appeal, affirming the deletion of the addition of Rs. 62,64,068/- made under section 40(a)(ia) for non-deduction of TDS on interest credited to nominal members, and rejecting the challenge on the principle of mutuality.

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