2025 (10) TMI 1218 - AT - Income Tax

Cooperative credit society not liable to deduct TDS under s.194A(3)(v); no default, interest or penalty under s.201/s.271C

ITAT held that the cooperative credit society was not liable to deduct TDS under s.194A(3)(v) on interest paid to members for AY 2014-15, being not a bank ... TDS u/s 194A(3)(v) - deduct tax at source on interest paid to its members - appellant to be an “assessee in default” u/s 201(1) for non-deduction of tax at source on interest payments made to its members - assessee is a cooperative credit society only and is not a bank holding RBI licence as per Banking Regulations Act - HELD THAT:- We hold that the assessee is not liable to make TDS deduction on interest paid to Members. It is not a bank but merely a credit cooperative society. Therefore, in terms of section 194A(3)(v), it was exempted from making TDS on deposits of the members. Even if it is presumed to be a bank as treated by authorities below for the sake of argument, in our considered view, during the period relevant to the year under consideration before us viz. A.Y. 2014-15, no statutory obligation was cast upon a co-operative bank to deduct tax at source on the interest income paid or credited on the time deposits of its members before 1st June 2015. Reliance of the ld.CIT(A) on certain decisions of hon’ble Apex Court and High Courts are also misplaced and distinguishable as we find that there is no specific observation therein that as per the pre- amended sec. 194A(3)(v) of the Act (i.e prior to its amendment vide the Finance Act, 2015 w.e.f 01.06.2015), any obligation was cast upon a co-operative bank to deduct tax at source on any interest credited or paid by the co-operative society to its members prior to 01.06.2015.Therefore we hold that there was no liability of the assessee u/s 201(1) and consequently no interest u/s 201(1A) could be charged. AO erred on facts and in law in initiating penalty proceedings u/s 271C. ISSUES PRESENTED AND CONSIDERED 1. Whether a co-operative credit society that accepts deposits from and pays interest to its members was obliged to deduct tax at source under section 194A(1) read with section 194A(3) of the Income-tax Act for the relevant year (pre-amendment effective 01.06.2015). 2. Whether the co-operative credit society should be treated as a 'co-operative bank' for the purpose of denying exemption under section 194A(3)(v) and consequently held an 'assessee in default' under section 201(1) for non-deduction of TDS and liable to interest under section 201(1A). 3. Whether members (including associate/nominal members as defined under the relevant State Cooperative Societies Act) fall within the expression 'member' in section 194A(3)(v) so as to attract the exemption from TDS. 4. Whether reliance on CBDT circular(s) and coordinate/High Court/Supreme Court decisions that interpret section 194A(3)(v) is binding or distinguishable on the facts, and whether such precedents require treating the society as liable to deduct TDS for the period before the 2015 amendment. 5. Whether initiation of penalty proceedings under section 271C was premature where no penalty order had been passed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Obligation to deduct TDS by a co-operative credit society paying interest to members (legal framework) Legal framework: Section 194A(1) imposes TDS on interest payments; sub-section (3) specifies exceptions, including clause (v) (exemption for income credited or paid by a co-operative society to a member) and clause (viia)/(i)(b) provisions concerning co-operative societies carrying on banking business. Precedent treatment: Multiple coordinate-bench tribunal decisions and several High Court decisions, as well as CBDT circular(s), have interpreted pre-2015 law to exempt interest paid by co-operative societies to their members from TDS. A finance-act amendment effective 01.06.2015 expressly modified clause (v) prospectively to exclude time-deposits of co-operative banks from the exemption. Interpretation and reasoning: The Tribunal examined the statutory text pre-amendment and held that clause (v) applied to payments by a co-operative society to its members irrespective of whether the society carried on banking-like activities; thus the exemption was available for interest paid/credited before 01.06.2015. The Tribunal placed weight on CBDT Circular interpretations (which carve out member-payments from TDS) and on a body of tribunal and High Court decisions that harmonised overlapping sub-clauses rather than treating clause (v) as inapplicable to societies engaged in banking business. Ratio vs. Obiter: Ratio - under pre-amendment law, a co-operative society paying interest to its members was not required to deduct TDS under section 194A(3)(v) for payments/credits made before 01.06.2015. Obiter - comments on operational features (e.g., cheque-books) being irrelevant to characterization. Conclusions: No statutory obligation to deduct tax at source arose under section 194A for interest paid to members by the society for the assessment year in question (pre-amendment period). Issue 2 - Characterisation as 'co-operative bank' and consequence of such characterisation for sections 194A(3) and 201(1)/201(1A) Legal framework: Section 5 of the Banking Regulation Act provides definitions relating to co-operative banks/primary co-operative banks; tax consequences under section 194A depend on whether the payer falls within the exceptions of sub-section (3) as a 'co-operative society' or as a co-operative bank subject to carve-outs. Precedent treatment: Authorities below concluded the society's primary activity (accepting deposits and lending) brought it within banking business and thus treated it as a co-operative bank for TDS purposes; however, coordinate benches and High Courts have held that even co-operative societies engaged in banking business may claim exemption under section 194A(3)(v) for payments to members prior to the 2015 amendment. Interpretation and reasoning: The Tribunal acknowledged that the society was a co-operative credit society and accepted that it performed deposit-taking and lending, but concluded (i) such activity does not ipso facto negate the statutory exemption under section 194A(3)(v) for member-payments during the pre-amendment period, and (ii) even if treated as a co-operative bank, the amendment making time-deposits of co-operative banks subject to TDS is prospective from 01.06.2015, so no obligation arose for earlier credits/payments. Ratio vs. Obiter: Ratio - treatment of the payer as a co-operative bank does not, for the pre-amendment period, extinguish the section 194A(3)(v) exemption for member-payments; accordingly, AO's determination of default under section 201(1) and interest under section 201(1A) is unsustainable for amounts paid/credited before 01.06.2015. Obiter - the absence of typical banking facilities is immaterial to the characterization. Conclusions: The society was not liable to be treated as an 'assessee in default' under section 201(1) nor chargeable to interest under section 201(1A) for the relevant pre-amendment period on interest paid/credited to members. Issue 3 - Scope of 'member' (including associate/nominal members) under section 194A(3)(v) Legal framework: The Income-tax Act does not define 'member' for section 194A; interpretation requires reference to State Co-operative Societies Act definitions and relevant circulars. Precedent treatment: Several coordinate-bench decisions and High Court/Supreme Court commentary have held that the meaning of 'member' must be read with the definition under the State cooperative statute applicable to the society; some decisions construed associate/nominal members as included where state law so defines. Interpretation and reasoning: The Tribunal noted authorities holding that 'member' includes associate members where the State Act's definition so provides; earlier CBDT circular guidance on who qualifies as a member was partly subject to judicial review, and the Tribunal treated the coordinate-bench and High Court authorities as persuasive on construing 'member' in context of the applicable society law for TDS exemption purposes. Ratio vs. Obiter: Ratio - where the applicable cooperative statute defines 'member' to include associate or nominal members, such persons fall within section 194A(3)(v)'s exemption; this supports non-deduction of TDS on interest paid to such members for the pre-amendment period. Obiter - analysis distinguishing section 194A from section 80P in contexts where earlier Supreme Court decisions arose. Conclusions: Associate/nominal members qualifying as 'members' under the relevant State Act are covered by section 194A(3)(v) and attract the exemption for the pre-amendment period; thus payments to such members do not render the payer a defaulter under section 201(1) for that period. Issue 4 - Role and binding force of CBDT circulars and prior judicial decisions Legal framework: Administrative circulars can clarify statutory scope; judicial precedents (tribunal benches, High Courts, Supreme Court) interpret law and are followed or distinguished on facts. Precedent treatment: The Tribunal surveyed a preponderance of tribunal decisions, decisions of High Courts, and CBDT Circular No.19/2015 (and earlier circulars) that supported non-deduction for member-payments before the 2015 amendment. It noted that parts of earlier CBDT circulars have been partially quashed but not in a manner that negates the circular guidance relevant to clause (v) for the pre-amendment period. Interpretation and reasoning: The Tribunal followed coordinate-bench and appellate judicial pronouncements that harmonised overlapping sub-clauses of section 194A(3), accepted the administrative clarification that member-payments were exempt pre-amendment, and treated contrary decisions as distinguishable on facts or law. The Tribunal emphasized the prospective effect of the 2015 amendment and found no authority compelling a different conclusion for pre-01.06.2015 credits/payments. Ratio vs. Obiter: Ratio - CBDT circular interpretation and a body of judicial decisions support exemption under section 194A(3)(v) for member-payments prior to the 2015 amendment and are binding in the sense of persuasive precedential value for similarly constituted benches. Obiter - commentary on specific High Court/Supreme Court decisions as distinguishable where they did not expressly address the pre-amendment status of clause (v). Conclusions: Reliance on CBDT circulars and coordinate judicial decisions is justified to hold that no TDS obligation arose for interest paid/credited to members before 01.06.2015; contrary authority was distinguishable. Issue 5 - Penalty proceedings under section 271C Legal framework: Penalty under section 271C follows imposition procedures and requires a final penalty order. Precedent treatment and reasoning: The Tribunal noted that no penalty order had been passed; therefore the challenge to initiation of penalty proceedings was premature. Ratio vs. Obiter: Ratio - a ground challenging penalty is premature if no penalty has been imposed; the appropriate remedy is to await a penalty order and then contest it. Obiter - none. Conclusions: The ground on initiation of penalty proceedings was dismissed as premature.