ORDER
Prabhash Shankar, Accountant Member.- The present appeal is filed by the assessee against the order passed by the Learned Commissioner of Income-tax, Appeal, ADDL/JCIT(A)-2, Noida[hereinafter referred to as “CIT(A)”] pertaining to the order passed u/s. 201(1)/201(1A) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 31.03.2021 for the Assessment Year [A.Y.] 2014-15.
2. The grounds of appeal are as under:
| 1. | | The impugned order dated 07.12.2024, passed by the CIT(A) under section 250 of the Income Tax Act, 1961 (“Act”) is perverse, arbitrary and bad in law. |
| 2. | | The CIT(A) erred on facts and in law in confirming the action of the assessing officer in treating the appellant as co-operative bank and not providing the benefits of Section 194A(3)(v) of the Act even though the appellant society accepts deposits only from its members. |
| 3. | | The CIT(A) erred on facts and in law in confirming the action of the assessing officer in treating the appellant as “assessee in default” for Rs. 26,40,976/- under section 201(1) of the Act. |
| 4. | | The CIT(A) erred on facts and in law in passing the impugned order without considering the orders passed in favor of the appellant in deciding that appellant is not a cooperative bank. |
| 5. | | The assessing officer erred on facts and in law in levying interest under section 201(1A) of the Act. |
| 6. | | That the assessing officer erred on facts and in law in initiating penalty proceedings under section 271C of the Act. |
3. Facts in brief are that the assessee, a Co-operative society for the relevant year paid interest on Time deposits of its Members amounting to Rs.1,58,05,328/-. The TDS authority found that no TDS was deducted by it on the interest exceeding Rs 10,000/- paid, thus violating the provisions of section 201(1) and 201(1A) of the Act. He held that the assessee was engaged in money lending activity in the nature of banking and was under obligation to deduct TDS. Before him, it was contented that the assessee was not a bank and the interest paid only to the Member was not liable to TDS as per section 194A(3)(v) of the Act. It was also submitted that as per section 5 clause (CCV) of Banking Regulations Act,1949,it was not a Primary Co-operative Bank as none of the conditions therein were applicable to it. However, the TDS authority rejected the contention and held it as a defaulter in terms of above sections.
4. In the subsequent appeal before the ld.CIT(A),the assessee reiterated the same contentions submitting Member wise details called for by the AO during the assessment proceedings, break up of name, address, PAN and amount of interest paid to each recipient during the assessment proceedings. It was stated that it was not given opportunity of getting and submitting the details of Members, who had filed the return, declared and offered the said interest income in their individual income tax returns. It also submitted break up of interest paid above the threshold limit of Rs. 10,000/- of Rs. 1,34,74,722/- to the Members. No opportunity was given to the assessee to furnish the certificate under proviso to Section 201(1) of the Act.
4.1 As regard the contention that it was not liable to deduct tax at source on interest paid to its members as it is a co-operative credit society and not a co-operative bank, it was not found tenable by the ld.CIT(A) for the following reasons:
| (a) | | As per the assessment order for A.Y. 2012-13, it was evident that the appellant was carrying out the business of lending money and accepting deposits, which is the primary objective of a co-operative credit society and in line with banking business. |
| (b) | | The definition of “co-operative bank” under section 5(cci) of the Banking Regulation Act, 1949 includes a primary co-operative bank. Further, section 5(ccv) of the said Act defines a primary co-operative bank as a co-operative society whose primary object or principal business is the transaction of banking business. |
| (c) | | The appellant’s main activities of accepting deposits and providing loans to members clearly fell within the ambit of banking business. The mere fact that these activities are restricted to members does not alter the nature of the business. |
| (d) | | The Hon’ble Supreme Court in the case of Citizen Co-operative Society Limited v. ACIT ITR 1 (SC) has held that cooperative credit societies carrying on banking business are to be treated as co-operative banks for the purpose of TDS provisions. |
| (e) | | Similarly, the Hon’ble Bombay High Court in CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. 59(Mag.)/362 ITR 331 (Gujarat) has held that a co-operative credit society engaged in banking activities is to be treated as a co-operative bank for tax purposes. |
4.2 Accordingly, it was held by him that the appellant was rightly considered as a co-operative bank for the purpose of TDS provisions. Consequently, the exemption under section 194A(3)(v) of the Act was not applicable to it. The AO has correctly held the appellant to be an “assessee in default” under section 201(1) of the Act for non-deduction of tax at source on interest payments made to its members. The contention that it did not have facilities like cheque books etc. which are typical of banks, was not found relevant for determining its status as a co-operative bank. The nature of activities carried out by it i.e., accepting deposits and providing loans was the crucial factor in this determination. He also placed reliance on of Kerala State Co-operative Marketing Federation Ltd. v. CIT ITR 814 (SC) and Mehsana Urban Co-op. Bank Ltd. v. ITO [2018] 409 ITR 606 (Guj). Thus, the order treating the assessee as an “assessee in default” under section 201(1)/201(1A) of the Act was upheld.
5. Before us, the ld.DR has relied on the orders of authorities below while the ld.AR has reiterated the same contentions as made before the ld.CIT(A). It is claimed that the assessee was paying interest only to Members and not to any member of public. Its case was also covered by the CBDT Circular no.19/2015.He has also placed reliance on certain decisions of High Courts claiming to be directly applicable to its facts i.e CIT v. National Co-Operative Bank Ltd. 352/387 ITR 702 (Karnataka), Bagalkot District Central Co-op. Bank v. Jt. CIT (Bangalore – Trib.).
6. We have carefully considered all the relevant facts of the case. We also note that the assessee is a cooperative credit society only and is not a bank holding RBI licence as per Banking Regulations Act. Moreover, it is paying interest to its Members only and is also not dealing with public at large. We find that plethora of decisions of courts and Tribunals which have held similar issue in favour of the assessees by holding that even as per CBDT Circular No. 19/2015, before introduction of the said circular, as per the provisions of section 194A(3)(v) of the Act, interest paid to members was not liable to deduct TDS.
6.1 In this regard, we refer to the decision in the case of National Co-operative Bank Ltd. (supra) reproducing the relevant extracts as below:-
“2. We have heard Mr. Aravind K.V., learned counsel appearing for the appellants. As such, if we see the observations of the Tribunal in this regard, the considerations are at paragraphs 12 to 14 which read as under:
12. We have heard the rival submissions. At the time of hearing of the appeal, it was brought to our notice by the learned counsel for the assessee that the Bangalore Bench of ITAT in the case of Bagalkot District Central Co-op. Bank v. CIT 117 (Bangalore – Trib.) held that Co-operative Societies carrying on banking business while paying interest to members on time deposit and deposits other than time deposits need not deduct tax at source u/s 194A of the Act by virtue of exemption granted u/s 194A(3)(v) of the Act. The learned DR relied on the stand taken by the revenue in the grounds of appeal filed before the Tribunal.
13. We have considered the rival submissions. This Tribunal in the case of Bagalkot District Central Co-operative Bank (supra) dealt with identical issue and identical stand taken by the revenue and the Assessee in the case of cooperative society engaged in banking business and have upheld identical order of CIT(A). The relevant observations of the Tribunal in this regard were as follows:
“15. We have given a very careful consideration to the rival submissions. We are of the view that the submissions made by the learned counsel for the Assessee deserves to be accepted. As rightly contended by him Sec. 194A(3)(i)(b) of the Act is a provision which mandates deduction of tax at source by a co-operative society carrying on the business of banking, where the income in the form of interest which is paid by such society is in excess of ten thousand rupees. Sec. 194A(3)(v) of the Act provides that tax need not be deducted at source where the income in the form of interest is credited or paid by a co-operative society to a member thereof or to any other cooperative society. This provision therefore applies to all co-operative societies including co- operative society engaged in the business of banking. It is not possible to exclude co-operative society engaged in the business of banking from the provisions of sec. 194A(3)(v) of the Act on the ground that the same is covered by the provisions of sec. 194A(3)(i)(b) of the Act. Sec. 194A(3)(v) of the Act refers to payment by a co-operative society to a member and payment by a co-operative society to non-member continue to be governed by the provisions of Sec. 194A(3)(i)(b) of the Act. Similarly u/s 194A(3)(viia)(b) interest on deposits other than time deposits even if the payment is made to a non- member by a co-operative society, the cooperative society need not deduct tax at source. Thus this section carves out another exception to Sec. 194A(3)(i)(b) of the Act. We do not think that any of the above provisions can be called a general provision and other provision called specific provisions. Each provision overlap and if read in the manner as indicated above, there is perfect harmony to the various provisions. We do not agree with the view expressed by the Pune ITAT SMC in the case of Bhagani Nivedita Sahakari Bank Ltd. (supra) when it says that cooperative society as mentioned in cl.(v) is a general species, whereas the other five categories of co-operative societies which are specifically referred to in other provisions are specific co-operative societies. The further conclusion in the said decision that the term ‘co-operative society’ in cl.(v) of S.194A(3) as to be interpreted as co- operative society other than cooperative bank, is again unsustainable. The law is well settled that by a process of interpretation one cannot add-on words that are not found in the text of the statute. Such a course is permitted only when there is “causes omisus”. We do not think that the provisions of Sec. 194A(3)(v) suffers from any causes omisus as has been interpreted by the ITAT Pune Bench SMC.
16. We are also of the view that the decision of the Hon’ble Kerala High Court in the case of Moolamattom Electricity Board Employees Co-op Bank Ltd. (supra) supports the plea of the Assessee before us. The petitioners in that case were primary credit societies registered under the Kerala Cooperative Societies Act. In view of the specific provisions of Sec. 194A(3)(viia) of the Act, they claimed that they need not deduct tax at source on interest paid. It was submitted by the petitioner that sub-s.194A(3)(v) deals with such income credited or paid by a co-operative society to a member whereas sub.s (3)(viia)(a) provides a total exemption to deposits with the primary credit society. The Hon’ble Kerala High Court accepted their plea and in their judgment have observed that Sec. 194A(3)(i) exemption limit of Rs. 10,000/- to interest paid on time deposits with cooperative societies engaged in carrying on in business of banking is allowed but that does not mean that all co-operative societies who have credited or paid exceeding Rs. 10,000/- are liable to deduct tax at source. The Court held that co- operative society engaged in carrying on business of banking and primary credit societies stand on different footing and belong to different class. That does not mean that Sec. 194A(3)(v) of the Act is applicable only to co-operative societies other than co-operative societies carrying on the business of banking as observed in para 37 of its judgment the Pune ITAT in the case of Bhagani Nivedita Sahakari Bank Ltd. (supra). In fact in para 2 of Circular No. 9 dated 11.09.2002, the CBDT has very clearly laid down that co-operative societies carrying on banking business when it pays interest on deposits by its members need not deduct tax at source in view of the provisions of Sec. 194A(3)(v) of the Act. CBDT Circular dated 11.09.2002 clarified certain aspects which are relevant to the present case. The same reads thus:
“Sub: Tax deduction at source under section 194A of the Income-tax Act 1961–Applicability of the provisions in respect of income paid or credited to a member of co-operative bank – Reg.11.09.2002 TDS 194A
Under Section 194A of the Income-tax Act, 1961, Tax is deductible at source from any payment of income by way of interest other than income by way of interest on securities. Clause (V) of Sub- Section (3) of Section 194A exempts such income credited or paid by a co-operative society to a member thereof from the requirement of TDS. On the other hand, clause(viia) of Sub-Section (3) of Section 194A exempts from the requirement of TDS such income credited or paid in respect of deposits (other than time-deposits made on or after 1st July, 1995) with a co-operative society engaged in carrying on the business of banking.
2. Representations have been received in the Board seeking clarification as to whether a member of a co-operative bank may receive without TDS interest on time-deposit made with the co-operative bank on or after 1st July, 1995. The Board has considered the matter and it is clarified that a member of a co-operative bank shall receive interest on both time deposits and deposits other than time- deposits with such co-operative bank without TDS under section 194A by virtue of exemption granted vide clause (v) of sub-section (3) of the said section. The provisions of clause (viia) of the said sub-section are applicable only in case of a non-member depositor of the cooperative bank, who shall receive interest only on deposits other than time deposits made on or after 1st July, 1995 without TDS under section 194A.
3. A question has also been raised as to whether normal members, associate members and sympathiser members are also covered by the exemptions under section 194A(3)(v). It is hereby clarified that the exemption is available only to such members who have joined in application for the registration of the co-operative society and those who are admitted to membership after registration in accordance with the bye-laws and rules. A member eligible for exemption under section 194A(3)(v) must have subscribed to and fully paid for at least one share of the co-operative bank, must be entitled to participate and vote in the General Body Meetings and/or Special General Body Meetings of the co-operative bank and must be entitled to receive share from the profits of the co-operative bank.[F.No. 275/106/2000-IT(B)] (2002) 177 CTR (St) 1″
18. It can be seen from para 2 of the Circular referred to above that the CBDT has very clearly laid down that co-operative societies carrying on banking business when it pays interest on deposits by its members need not deduct tax at source. The above interpretation of the provision by the CBDT which is in favour of the Assessee, in our view is binding on the tax authorities.
19. In the case decided by ITAT Panaji Bench in Bailhongal Uraban Co-op Bank Ltd. v. JCIT order dated 28.08.2013, the Tribunal proceeded on the footing that the aforesaid Circular has been quashed by the Hon’ble Bombay High Court in the case of the Jalgaon District Central Co-operative Bank Ltd. v. Union of India 265 ITR 423 (Bom.) and therefore choose to follow the decision rendered by Pune ITAT SMC in the case of Bhagani Nivedita Sahakari Bank Ltd. (supra). In our view the Hon’ble Bombay High Court in the case of Jalgaon District Central Co- operative Bank Ltd. was dealing with a case of challenge to para 3 of CBDT Circular No. 9 dated 11.09.2002 which tried to interpret the word “member” as given in sec. 194A(3)(v) of the Act. It is only that part of the Circular that had been quashed by the Hon’ble Bombay High Court and the other paragraphs of the Circular had no connection with the issue before the Hon’ble Bombay High Court. How could it be said that the entire Circular has been quashed by the Hon’ble Bombay High Court? In our view para 2 of the Circular still holds good and the conclusion of the ITAT Pune Bench in the case of the Bailhongal Uraban Co-op Bank Ltd. (supra) are not factually correct. Consequently, the conclusions drawn in the aforesaid decision also contrary to facts and hence cannot be considered as precedent.
20. The learned counsel for the Assessee as brought to our notice that the ITAT Vishakapatnam Bench in the case of the Vishakapatnam Cooperative Bank ITA No. 5 and 19 of 2011 order dated 29.08.2011 as held that co-operative societies carrying on banking business when it pays interest to its members on deposits it need not deduct tax at source in view of the provisions of Sec. 194A(3)(v) of the Act. Similar view has also been expressed by the Pune Bench of the ITAT in the case of Ozer Merchant Cooperative Bank ITA No. 1588/pN/2012 order dated 30.10.2013. We may add that in both these decisions the discussion did not turn on the interpretation of sec. i94A(3)(i)(b) of the Act vis-a-vis sec. 194A(3)(v) of the Act. It is thus clear that the preponderance of judicial opinion on this issue is that co-operative societies carrying on banking business when it pays interest to its members on deposits need not deduct tax at source in view of the provisions of sec. 194A(3)(v) of the Act.
21. For the reasons given above, we hold that the Assessee which is a cooperative society carrying on banking business when it pays interest income to a member both on time deposits and on deposits other than the deposits with such co-operative society need not deduct tax at source Under Section 194A by virtue of the exemption granted vide Clause (V) of Sub-Section (3) of the said section”
14. In our view the above decision rendered by the co- ordinate bench is squarely applicable to the facts of the present case. In fact the CIT(A) in cancelling the order of the AO has placed reliance on the aforesaid decision. Respectfully following the decision of the co-ordinate bench referred to above, we uphold the order of the CIT(A).’
3. The aforesaid shows that the Tribunal was bound by its earlier decision in case of Bagalkot District Central Co-op. Bank v. Jt. CIT 117 (Bang.). When we further enquired from the learned counsel for the Revenue as to whether the decision of the Tribunal was carried by the Department before this Court or not and in response thereto, the learned counsel for the appellants has brought to our notice the decision of this Court dated 16.12.2015 in ITA 100116/2014 whereby, the view taken by the Tribunal has not been interfered with. We may record that this Court in the above referred decision observed thus:
‘In this appeal by the Revenue, the issue involved is for consideration whether the Co-operative Bank was required to deduct tax while paying interest to its members on time-deposits under Section 194-A of the Income-tax Act.
2. The Ministry of Finance, Government of India vide Circular No. 19/2015 in F.No. 142/14/2015-TPL, has held that the Co-operative Banks are not required to deduct tax at source on time deposits of its members paid or credited on or before 1.7.2015. The relevant portion of the circular reads as under:
“42.5. In view of this, the provisions of the section 194A(3)(v) of the Income-tax Act have been amended so as to expressly provide that the exemption provided from deduction of tax from payment of interest to members by a co-operative society under section 194A(3)(v) of the Income-tax Act shall not apply to the payment of interest on timedeposits by the co-operative banks to its members. As this amendment is effective from the prospective date of 1st June, 2015, the cooperative bank shall be required to deduct tax from the payment of interest on time deposits of its members, on or after the 1st June, 2015. Hence, a co-operative bank was not required to deduct tax from the payment of interest on time deposits of its members paid or credited before 1st June, 2015.”
3. In view of the aforesaid circular, this appeal does not survive for consideration and is accordingly dismissed. No costs.’
4. As such, in view of the referred decision of this Court in case of Bagalkot District Central Co-op. Bank (supra) referred when the question is already covered by the decision of this Court, it cannot be said that any substantial question of law would arise for consideration.
5. However, the learned counsel appearing for the appellants- Revenue made an attempt to contend and reiterate the same contention that in view of special provision section 194A(3)(b), the general exemption as provided under 194A(3)(v), would not be applicable for the Co-operative Banks and he contended that the view taken by the Tribunal cannot be said as correct view and this Court may independently consider the matter and may hold that in view of specific provision, general exemption would not be available to cooperative bank. Hence the TDS from the interest exceeding the amount of Rs. 10,000/- was required to be deducted by the respondent-assessee in the present case which is a co-operative bank.
6. As such, we are not impressed by the submission that there is any specific provision and therefore general exemption would not apply for the simple reason that the word ‘Members’ is missing in clause (b). Further, in Circular No. 19/2015 dated 27.11.2015 at paragraph 42.5 it has been inter alia mentioned as under:
“.. Hence, the Co-operative Bank was not required to deduct tax from the payment of interest on the time-deposits of its members paid or credited before first June 2015”.
7. Under the circumstances, the question of specific provision as against general provision would not arise for further consideration. Hence, we find that no substantial questions of law would arise for consideration.”
6.2 In the case of Vasavi Credit Co-Operative [IT Appeal 412 & 413 (Bang) of 2020, dated 18.01.2021],exactly similar issue was decided in favour of the assessee with following observations:
2. The assessee is a Credit Co-operative Society and it is engaged in the business of accepting deposits from its members and lending loan to its members. The revenue carried out a survey operation in the hands of the assessee. It was noticed that the assessee has not deducted tax at source from the payment of interest made on deposits. Hence, the proceedings u/s 201 of the Act was initiated against the assessee for the year under consideration. The assessee submitted before the A.O. that it has paid interest to its members only and hence, as per the provisions of section 194A(3)(v) of the Act, the assessee is not required to deduct tax at source from the interest paid to its members.
3. The A.O. noticed that the assessee is having two types of members, viz., Regular Members and Associate Members. It has paid interest to both its regular members and also associate members. The AO noticed that associate members become members only for the purpose of making deposits and taking loans. They are not entitled to voting rights in the general body meetings. Hence the AO took the view that the associate members are not eligible for exemption u/s 194A(3)(v) of the Act. In this regard, the A.O., placed his reliance upon the CBDT Circular No.9/2002 dated 11.9.2002, wherein it was stated n paragraph 3 as under:-
“3. A question has also been raised as to whether nominal members, associate members and sympathizer members are also covered by the exemption under section 194A(3)(v). It is hereby clarified that the exemption is available only to such members who have joined in application for the registration of the co-operative society and those who are admitted to membership after registration in accordance with the bye- laws and rules. A member eligible for exemption under section 194A(3)(v) must have subscribed to and fully paid for at least one share of the co- operative bank, must be entitled to participate and vote in the General Body Meetings and/or Special General Body Meetings of the co-operative bank and must be entitled to receive share from the profits of the co- operative bank.”
Accordingly, the AO took the view that the exemption given u/s 194A(3)(v) of the Act for not deducting TDS will not apply to the interest given to the associate members. The A.O. also took support of the decision rendered by
Hon’ble Supreme Court in the case of the Citizen Co-operative Society v. ACIT (Civil Appeal Noi.10245 of 2017) and observed that the decision rendered by Hon’ble Supreme Court of India clearly classifies members and non-members and hence the above said decision shall apply to the instant case. Accordingly, the A.O. held that the assessee is liable to deduct tax at source from the interest payments made to associate members. The assessee had paid interest of Rs.2,61,74,593/- to the associate members, which were above the threshold limit of Rs.10,000/- prescribed for not deducting tax at source. Accordingly, the AO raised demand of Rs.261,74,593/- u/s 201(1) of the Act and Rs.10,19,440/- as interest u/s 201(1A) of the Act.
4. The Ld. CIT(A) confirmed the orders passed by the A.O. He noticed that though the associate members hold shares and entitled to dividend, yet they do not have right to vote and to become office bearers of the society. Accordingly, the Ld. CIT(A) held that the principles of mutuality will not apply to associate members. With regard to the principles of mutuality, the Ld CIT(A) placed his reliance on the decision rendered in the case of
CIT v.
Bankipur Club (
226 ITR 97) and Chelmsford Club (
243 ITR 89). Accordingly, he held that the associate members are distinctly different and they cannot be equated with regular members. Accordingly, the Ld CIT(A) held that the A.O. was justified in raising the impugned demands. Aggrieved, the assessee has filed these appeals before us,
i.e., one against the demand raised u/s 201(1) and another on the interest charged u/s 201(1A) of the Act.
5. We heard the parties and perused the record. In the instant case, the assessee is contending that it is not required to deduct tax at source from the interest paid to its members in view of sec.194A(3)(v). The said section reads as under:-
“194A(3) The provisions of sub-section (1) shall not apply–
(i)..
(ii)..
(iii)..
(iv)..
(v) to such income credited or paid by a co-operative society (other than a cooperative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society.”
There should not be any dispute that the interest paid by a cooperative society to its members is not liable for deduction of tax at source u/s 194A of the Act. The dispute is whether “an associate member” would fall under the category of “member” as mentioned in sec.194A of the Act.
6. The tax authorities have taken the view that the “member” should be construed as a person who has subscribed to the shares and he should be entitled to participate in profits, entitled to vote and entitled to participate in the management of the society. Admittedly the Associate members are not entitled to become office bearers of the society. The Ld CIT(A) has expressed the view that the associate members are not entitled to vote also.
7. We noticed earlier that the AO has relied upon the decision rendered by Hon’ble Supreme Court in the case of Citizen Co- operative Society (supra). However, the said decision was rendered in the context of sec.80P of the Act. The Ld CIT(A) also held that the Principles of Mutuality should be followed and hence associate members cannot be equated with regular members.
8. Hence the controversy is whether the associate members would fall under the category of “members” used in sec. 194A(3)(v) of the Act. We notice that the Hon’ble Supreme Court in a recent case of The Mavilayi Service Cooperative Bank Ltd & Ors v. CIT (Civil Appeal Nos.7343 – 7350 of 2019 dated January, 21, 2021 has observed as under with regard to the expression “members” used in sec.80P of the Act:-
“4 6. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v. Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 referred to section 80P of the IT Act and then held:
“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the cooperative Societies Act. The said provision reads as under:
“2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;”
Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).
47. Further, unlike the facts in Citizen Cooperative Society Ltd, (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows:
“59. Restrictions on loans.- (1) A society shall not make a loan to any person or a society other than a member:
Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank.
Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society.
(2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit.
(3) Granting of loans to members or to non-members under sub-section (2) and recovery thereof shall be in the manner as may be specified by the Registrar.”
Thus, the giving of loans by a primary agricultural credit society to nonmembers is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra).”
9. The above said decision of Hon’ble Supreme Court makes it clear that the term “member” has not been defied under the Income tax Act and hence its meaning should be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. As per sec. 2(f) of the Karnataka Co-operative Societies Act, 1959, the expression “member” is defined as under:-
2(f) “Member” means a person joining in the application for registration of cooperative society and a person admitted to membership after such registration in accordance with this Act, the rules and the by-laws and includes, a nominal and an associate member.” Further, section 18 of the above said Co-operative Societies Act defines “Associate Member” as under:-
“An associate member may hold shares but shall not be entitled to become an office bearer of the Society.”
10. We notice that the decision in the case of Citizen Co-operative Society (supra) and The Mavilayi Service Co-operative Bank Ltd & Ors (supra) have been rendered in the context of deduction claimed by them u/s 80P of the Act. Even in that situation also, the Hon’ble Supreme Court has expressed the view that the expression “member” should be construed as defined in the respective co- operative Societies Act.
11. We are concerned with the liability of the assessee for deduction of tax at source u/s 194A of the Act from the interest paid by the assessee. The assessee herein has paid interest to its “associate members” without deduction of tax at source. As per the definition of the term “member” given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959, “member” includes an associate member. Hence the assessee is able to collect deposit from them and also lend the money to them. Hence, we are of the view that the associate members should be construed as “members” only for the purpose of sec.194A of the Act, since the definition of the term “member” should be construed as given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959.
12. In the case of M/s The Government Employees Co-Operative Bank Limited v. ACIT (ITA No.1485/Bang/2019 dated 31-12- 2020), the co-ordinate bench has expressed the following view:-
“11. We have considered the rival submissions. We find that a sum of Rs. 93,36,928/- is interest paid to Associate Members. The CIT(A) has, however, made a reference to the decision of Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd., v. ACIT in appeal No.10245 of 2017 Dt. 08.08.2017 which was a decision referred in the context of allowing deduction u/s. 80P(2)(a)(i) of the Act.
12. We are of the view that the analogy so drawn by the CIT(A) is erroneous. The provisions of Sec.194A which are in relation to deduction of tax at source cannot be equated with the provisions of Sec. 80P(2)(a)(i) of the Act, which deals with deduction while computing total income. The admitted position is that the sum of Rs.93,36,928/- has been paid to Associate Members and CIT(A) has equated it and named them as non- members. In our view this approach is erroneous.”
It can be noticed that the co-ordinate bench has expressed the view that the liability to deduct tax at source u/s 194A of the Act cannot be equated with the provisions of sec.80P of the Act.
13. This view combined with the decision of Hon’ble Supreme Court holding that the term “members” should be construed as defined in the respective cooperative societies Act would lead us to the conclusion that the associate members should be considered as included in the term “members” used in sec.194A(3)(
v) of the Act. We notice that paragraph 3 of CBDT Circular (referred supra) has been quashed by Hon’ble Bombay High Court in the case of
Jalagaon District Central Co-operative Bank Ltd. v.
Union of India (
265 ITR 423). Accordingly, we hold that the assessee is not liable to deduct tax at source from the interest payments made to Associate members as per sec.194A(3)(
v) of the Act.
14. In view of the foregoing discussions, we set aside the orders passed by Ld CIT(A) and direct the AO to delete the demand raised u/s 201(1) and 201(1A) of the Act
6.3 The coordinate bench of ITAT, Mumbai has dealt with similar case in Shree Sidhivinayak Nagari Sahakari v. Asstt. CIT [IT Appeal No. 5855 (Mum) of 2015, dated 16-6-2017].Relevant parts are extracted below”:
“7. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present appeal has been sought by the assessee for adjudicating as to whether a co-operative bank as per the preamended Sec. 194A(3)(v) remained under a statutory obligation to deduct tax at source on the interest paid to its members, or not. As per Sec. 194A(1) of the IT Act, any person not being an individual or a HUF, who is responsible for paying to a resident any income by way of interest other than income [by way of interest of securities], shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Sub-section (3) of Sec. 194A carves out the exceptions wherein deduction of tax at source as envisaged in sub-section (1) of Sec. 194A of the Act had been dispensed with by the legislature.
8. We find that as per sub-section (v) to Sec.194A [as was available on the statute prior to its amendment vide the Finance Acts, 2015 w.e.f. 01.06.2015], income credited or paid by a co-operative society to a member thereof or to any other co-operative society was not liable for deduction of tax at source. Our aforesaid view stands fortified by the CBDT Circular No. 19/2015, dated 27.11.2015, wherein at Para 42.5 of the said circular pertaining to rationalisation of provisions relating to deduction of tax on interest (other than interest on securities), it is stated as under:
“42.5 In view of this, the provisions of the Sec.194A(3)(v) of the Income Tax Act have been amended so as to expressly provide that the exemption provided from deduction of tax from payment of interest to members by a cooperative society under Section 194A(3)(v) of the Income-tax Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members. As this amendment is effective from the prospective date of 1st June, 2015, the co-operative bank shall be required to deduct tax from the payment of interest on time deposits of its members, on or after the 1st June, 2015. Hence, a cooperative bank was not required to deduct tax from the payment of interest on time deposits of its members paid or credited before 1st June, 2015.” (Emphasis supplied)
On a perusal of the aforesaid extract of the CBDT Circular No. 19/2015, dated 27.11.2015, it can safely or rather inescapably be gathered that a co- operative bank was not required to deduct tax at source on the interest that was paid or credited before 1st June, 2015 on the time deposits of its members. In fact, we find that the aforesaid CBDT Circular No. 19/2015 had been deliberated upon by the Hon”ble High Court of Karnataka in certain cases viz. (i) CIT v. v. Bijapur District Central 211 (Kar); (ii) CIT v. BasaveshwaraShahakari Bank (Kar); and (iii) CIT, Belgaum v. Shri Siddeshwar Co- operative Bank Ltd. (Kar).
In the aforesaid judgments, it was observed that as the amendment made to Sec.194A(3)(
v) was applicable prospectively w.e.f 01.06.2015, therefore, a co-operative bank was not required to deduct tax at source on interest that was paid or credited on time deposits of its members before 01.06.2015. On a similar line the Hon’ble High Court of Madras in the case of
Coimbatore District Central Co-operative Bank Ltd. v.
ITO, TDS Ward- 1(5), Coimbatore
(2016) 382 ITR 266 (Mad) had concluded that as the amendment made to sub- section (3) of Sec. 194A w.e.f 01.06.2015 had a prospective operation, therefore, prior to the said amendment no obligation was cast upon a co- operative society carrying on banking business with the approval of Reserve Bank of India to deduct tax at source under Sec.194A on the interest paid to its members. Further, we find that the Hon”ble High Court of Bombay in the case of
Jalgaon District Central Cooperative Bank Ltd. v.
Union of India (2004) 265 ITR 423 (Bom), while deliberating on the scope and gamut of the CBDT Circular No. 9/2002, dated 11.09.2002, had observed that Sec.194A(3)(
v) suggests that the provisions relating to TDS are inapplicable to the income credited or paid by the co-operative society to a member thereof or to any other co-operative society.
In our considered view, it is only pursuant to the amendment made to clause (v) to Sec. 194A (3), vide the Finance Act, 2015 w.e.f 01.06.2015 that interest income credited or paid by a co-operative bank to a member thereof had been made liable for deduction of tax at source.
Be that as it may, in our considered view during the period relevant to the year under consideration before us viz. A.Y. 2012-13, 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. The CIT(A) has, however, made a reference to the decision of Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd., v. ACIT in appeal No.10245 of 2017 Dt. 08.08.2017 which was a decision referred in the context of allowing deduction u/s. 80P(2)(a)(i) of the Act.
12. We are of the view that the analogy so drawn by the CIT(A) is erroneous. The provisions of Sec.194A which are in relation to deduction of tax at source cannot be equated with the provisions of Sec. 80P(2)(a)(i) of the Act, which deals with deduction while computing total income. The admitted position is that the sum of Rs.93,36,928/- has been paid to Associate Members and CIT(A) has equated it and named them as non- members. In our view this approach is erroneous.”The liability to deduct tax at source u/s 194A of the Act cannot be equated with the provisions of sec.80P of the Act.
we are of the considered view that the same is distinguishable on facts. The Hon’ble High Court in its aforesaid judgement by carrying out a conjoint reading of clause (viia) and clause (v) of Sec.194A (3), has concluded that a cooperative bank was under an obligation to deduct tax at source on interest above Rs.10,000/- credited on its time deposits. However, we find that there is no specific observation of the Hon’ble High Court that as per the preamended Sec.194A(3)(v) of the IT Act (i.e prior to its amendment vide the Finance Act, 2015 w.e.f 01.06.2015), any obligation was cast upon a cooperative 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.
9. On the basis of our aforesaid deliberations, we are persuaded to subscribe to the contention advanced by the ld. A.R that as per the pre- amended clause (v) to Sec. 194A(3) of the IT Act (i.e prior to its amendment vide the Finance Act, 2015 w.e.f 01.06.2015), a co-operative bank was underno obligation to deduct tax at source on the interest credited or paid to a member prior to 01.06.2015. We thus after considering the aforesaid CBDT Circular No.19/2015, dated 27.11.2015 and respectfully following the aforementioned judicial pronouncements which seizes the issue under consideration, therein conclude that as per the mandate of law as was available on the statute during the year under consideration viz. A.Y 2012- 13, no statutory obligation was cast upon the assessee co-operative society to deduct tax at source on the interest of Rs.1,15,21,357/- that was paid or credited by it on the time deposits of its members. On the basis of our aforesaid observations, the disallowance of the interest expenditure of Rs. 1,15,21,357/- made by the A.O under Sec.40(a)(ia) of IT Act for the alleged failure on the part of the assessee to deduct tax at source on the said amount under Sec. 194A is vacated.
10. We thus in terms of our aforesaid observations set aside the order of the CIT(A) and delete the disallowance of Rs.1,15,21,357/- made by the A.O under Sec.40(a)(ia) of the IT Act. The Grounds of appeal Nos. 1 & 2 raised by the assessee are allowed.”
7. In the light of above judicial position, respectfully following the same, 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 preamended 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. We order accordingly and set aside the appellate order allowing ground no.1 to 6.
8. In ground no.7,it is claimed that the AO erred on facts and in law in initiating penalty proceedings under section 271C of the Act.The ground is premature since no penalty order is passed and accordingly dismissed.
9. In the result, the appeal is partly allowed.