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Facts
The assessee, a cooperative bank, failed to file its return of income for AY 2013-14. Information was received regarding interest income earned and deposited, leading to reassessment proceedings. The Assessing Officer made an addition on account of non-deduction of TDS on interest paid to nominal members.
Held
The Tribunal held that the exemption under Section 194A(3)(v) of the Act applies to all types of members of a cooperative bank, including nominal members, provided they are admitted as members according to the bye-laws. Therefore, the disallowance made by the Assessing Officer was not justified.
Key Issues
Whether TDS is deductible on interest paid to nominal members of a cooperative society, and if non-deduction warrants disallowance under Section 40(a)(ia).
Sections Cited
147, 148, 143(3), 40(a)(ia), 194A, 194A(3)(v)
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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI MANISH BORAD & SHRI VINAY BHAMORE
Assessment Year : 2013-14 ACIT, Cricle-2, Solapur. Vs. Manorama Co-op. Bank Ltd., Plot 4, 5, 6 Vijapur Road, Indiranagar S.O., Maharashtra- 413004. PAN : AAJFM6823C Appellant Respondent Revenue by : Ms. Shilpa N. C. Assessee by : Shri Pramod S. Shingte Date of hearing : 22.01.2025 Date of pronouncement : 22.04.2025 आदेश / ORDER
PER VINAY BHAMORE, JM:
This appeal filed by the Revenue is directed against the order dated 15.07.2024 passed by Ld. CIT(A)/NFAC for the assessment year 2013-14.
The Revenue has raised the following grounds of appeal :- “1) The Ld CIT(A), NFAC has erred in admitting this exemption u/s 194A (3)(v) to the assessee for non-deduction of TDS on interest credits of nominal members who are not actual member as per definition of person who is eligible for membership as per clause 4(ix) and Rule 9(d) of the By-laws of this appellant cooperative society. 2) The LD CIT(A), NFAC has erred in accepting that the assessee entity has business relation with commercial purpose with the cooperative society in question and this other cooperative society cannot take partake in distribution of surplus, thereby lacking in principle of mutuality in such transaction. 3) The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal
.”
3. Facts of the case, in brief, are that the assessee bank is assessed to tax under the Status AOP (Co-operative Society). The assessee did not file its original return of income for the AY 2013-14. The AO received information that the assessee bank made a time deposit of Rs.2,00,00,000/- with Cosmos Bank Ltd. and also received interest income u/s 194A from SBI amounting to Rs.66,50,548/- but did not file its return of income. Acting on this information, the AO initiated proceedings u/s 147 of the Act by issuing notice u/s 148 of the Act on 26-03-2018. Meanwhile, the assessee had filed its return of income on 20-03-2018 declaring total income at Rs.1,22,45,510/-, notice u/s 143(2) of the Act was issued on 03-12-2018. The AO completed the assessment u/s 143(3)/147 of the Act on 21-12-2018 determining the assessee's total income at Rs.1,85,09,580/- by making addition of Rs.62,64,068/- on account 40(a)(ia) r.w.s. 194A(3)(v) of the IT Act.
4. In first appeal, after considering the reply of the assessee, Ld. CIT(A)/NFAC allowed the appeal filed by the assessee. It is this order against which the Revenue is in appeal before this Tribunal.
5. Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A)/NFAC is unjustified. Ld. DR submitted before us that the assessee cooperative bank paid/credited interest to nominal members without deducting TDS & accordingly section 40(a)(ia) is attracted, since they are only nominal members and not actual member, exemption u/s 194A(3)(v) is not available to them. Ld. DR further submitted before the Bench that the principle of mutuality is not applicable between nominal members and the assessee cooperative bank. Accordingly, Ld. DR requested before the Bench to set-aside the order passed by Ld. CIT(A) and further requested to restore the order passed by the Assessing Officer.
6. Ld. AR appearing from the side of the assessee submitted before us that the order passed by Ld. CIT(A) is correct and does not require any interference. Ld. AR also relied on the orders Co-ordinate Bench of this Tribunal in the case of Nilkanth Urban Co-op Bank Ltd. vs. ACIT (ITA No.2644/PUN/2017 order dated 10.09.2020) and Mandheshwari Urban Development Co-op. Bank Ltd. & Others vs. ACIT (ITA No.1153/PUN/2018 order dated 18.07.2022).
7. We have heard Ld. Counsels from both the sides and perused the material available on record including the paper book furnished by the asssessee wherein various case laws have been referred. With regard to ground no.1 raised by the Revenue, we find that the assessee is a cooperative society engaged in the banking business. During the period under consideration, the assessee cooperative bank has paid/credited interest of Rs.62,64,068/- to other cooperative societies who are nominal members. According to the Assessing Officer, TDS was required to be made u/s 194A of the IT Act. Since the TDS was not deducted at source on this interest payment, the Assessing Officer disallowed the above payment u/s 40(a)(ia) r.w.s. 194A and added the same to the income of the assessee. It is worthwhile to mention here that the Assessing Officer made the above addition on the basis of decision passed by the CIT(A)-7, Pune in the case of Nilkanth Urban Co-operative Bank Ltd. and similar other cases. On the other hand, Ld. CIT(A)/NFAC has deleted the above addition by observing as under :- “6. I have considered the facts of the case, assessment order, appellant's written submissions and case-laws relied on by the AO and the appellant. The AO made the addition of Rs. 62,64,068/- on account of non deduction of TDS on interest credited/ paid to co-operative societies u/s. 40(a)(ia) of the Act. The appellant has submitted that in its case TDS provisions are not attracted in view of exemption provided u/s 194A(3)(v) available to appellant co-operative bank as this provision stood before 01.06.2015. The appellant has contended that the AO erred in not considering the "nominal membership" of co- operatives societies and only considered the definition of "Person" who are eligible for membership as per Clause No. 4(ix) and Rule 9(d) of the By-laws of the appellant co-operative society. The appellant referred to provisions of sec. 194A(3)(v) of the Act as these stood before 01.06.2015 and Memorandum explaining the aforesaid provisions to emphasize that a cooperative bank was not required to deduct tax from the payment of interest on time deposits of its members and/or other co-operative societies, paid or credited before 01/06/2015. Further to buttress its contention, the appellant has also placed reliance on certain judicial precedents. Considering the facts of the case and appellant's arguments, I am inclined to agree with its claim. The issue whether a co-operative bank is liable to deduct TDS on interest payment made to members/non-members is covered by the decision of the Hon'ble ITAT Pune 'B' Bench rendered in the case of Nilkanth Urban Co-operative Bank Ltd. vs. ACIT [2020] 119 taxmann.com 369 (Pune Trib.). The facts of this case were that the assessee, a Co-operative Bank, filed its return declaring total income of Rs. 97,40,280/-, during the course of assessment proceedings, the AO required the assessee to submit data relating to 'Person-wise deposits' held by the bank as on 31-03-2013 and interest credited or paid to them along with a copy of Bye-laws of the bank, elaborating the scope of its Members, the assessee furnished 'Person-wise' data of the depositors with the break-up in terms of Individual, Hindu Undivided Family (HUF), Partnership firm (registered), Partnership firm (unregistered), Company, Trust-registered, LLP, BOI, AOP, Cooperative society and Cooperative Banks and Others. On perusal of bye-laws of the assessee- bank, the AO observed that clause 4 (ix) contains definition of "Person" to mean an adult-individual, partnership firm registered or local authority or any other body corporate and public trust registered etc.
The AO perused clause 4(iv) of the bye-laws defining the term "Member" to mean a 'Person' joining with an application of registration of bank including a Nominal and Associate Member, on a conjoin treading of clauses 4(ix) and 4(iv), the AO held that only a "Person" can be a "Member". Since HUF and unregistered firms did not fall within the definition of the term "Person", the AO held that they could not be treated as "Members" and hence, interest amounting to Rs. 4,20,773/- paid to them without deduction of tax at source u/s 194A was hit by section 40(a)(ia) of the Act. The Id. CIT(A) echoec the assessment order on this point, against which the assessee came up in appeal before the Tribunal. On appeal, the Hon’ble ITAT Pune Bench held as under :- “4. We have heard the ld. DR through virtual court. Written submission filed on behalf of the assessee have also been taken into consideration. The short point for consideration is whether the ld. CIT(A) was justified in sustaining disallowance made by the AO u/s.40(a)(ia) of the Act towards interest paid to some Members without deduction of tax at source in terms of section 194A. The raison d’etre assigned for making such a disallowance is that the HUFs and Unregistered firms could not have been legally inducted as “Members” within the definition of the term `Person’ as given in the bye-laws of the assessee bank and hence, payment of interest to them was liable for deduction of tax at source u/s.194A of the Act.
Section 194A of the Act deals with deduction of tax at source on Interest other than interest on securities. Sub-section (1) provides that any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest shall at the time of payment, deduct income-tax thereon. Sub-section (3) is exception to sub-section (1), which mandates that the provisions of sub-section (1) shall not apply in certain situations narrated therein. We are primarily concerned with clause (v) of sub-section (3) of section 194A which provides that sub-section (1) shall not apply: `to such income credited or paid by a co- operative society to a member thereof or to any other co-operative society’. On a harmonious reading of sub-sections (3) and (1) of section 194A, it becomes apparent that a co-operative society is required to deduct tax at source from any interest paid by it except where the interest is paid to its Member or to any other Cooperative society. In other words, if interest is paid by it to its Members, the same does not require any deduction of tax at source.
A question arose as to whether nominal members, associate members and sympathizer members were also covered by the 194A(3)(v). The CBDT vide Circular No.9/2002 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.’ It further clarified that 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 and must be entitled to participate and vote in the General Body Meetings and/or Special General Body Meetings of the co- operative bank etc. To put it simply, the CBDT clarified that exemption under clause (v) of section 194A(3) applies to only such members who have either joined in the application for the registration of the society or those who are admitted after the registration in accordance with the bye-laws and rules. Going by the Circular, if a `Person’ has been admitted as a `Member’ contrary to the bye-laws and rules of the co-operative society, such a person will not be entitled to be covered within section 194A(3)(v).
This circular came up for consideration before the Hon’ble jurisdictional High Court in the Jalgaon District Central Cooperative Bank Ltd. and Another Vs. Union of India (2004) 265 ITR 423. The Hon’ble High Court quashed the circular by holding that it restricts the exemption under section 194A(3)(v) only to such members who have joined in application for the registration of the co-operative society and those who are admitted to the membership after the registration in accordance with the bye-laws and rules and excluding nominal, associate or sympathizer members, which position is in conflict with the provisions of section 194A(3)(v) and, therefore, outside the scope of section 119 of the Act.
In view of the quashing of the said circular, which is even otherwise not binding on the Tribunal, the position which stands is that the exception carved out in clause (v) of section 194A(3) 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 of the co-operative bank. A plain reading of section 194A(3)(v) deciphers that 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 corollary which now stands is that so long as a depositor is enrolled as a Member of a co-operative Bank, payment of any interest to such depositor-Member will not (v) u/s.194A(3) of the Act.
9. Adverting to the facts of the extant case, we find that the authorities below have denied the benefit of deduction of interest of Rs.4,20,773/- by making disallowance u/s.40(a)(ia) of the Act only on the ground that the assessee ought to have deducted tax at source u/s.194A on interest paid to HUF and Unregistered firms, who were not legal Members in accordance with the bye- laws of the assessee inasmuch as the definition of “Person” in clause 4(ix) of the bye-laws did not include HUF and unregistered firms. It is not the case of the AO that such HUFs and unregistered firms were not otherwise the Members of the assessee-bank. The assessee made it explicitly known to the authorities below, as has been recorded on page 8 of the impugned order that: `Both the above entities are members of the bank and they have been admitted as `Members’ by way of an application made by them to the bank and then passing a resolution to the extent of their admission as members of the bank in its Board of Directors meeting.’ 10. Reliance of the ld. CIT(A) on Citizen Co-operative Society Ltd. vs. ACIT (2017) 397 ITR 1 (SC) is misconceived. The issue involved in that case was about the denial of deduction u/s 80P of the Act. The AO in that case held that deduction in respect of income of co-operative societies u/s 80P was not admissible to assessee therein as benefit of deduction was admissible, inter alia, to those co-operative societies which carried on business of banking or providing credit facilities to its members. The CIT(A) rejected claim for deduction thereby upholding order of AO. The further appeals to the Tribunal and the Hon’ble High Court met with the same fate. The Hon’ble Apex Court also dismissed the appeal of the assessee by holding that that with insertion of sub- section (4) by Finance Act, 2006, it was made clear that such deduction should not be admissible to co-operative bank except where it was primary agriculture credit society or primary co- operative agriculture and rural development bank. It is manifest that the question of deduction of tax at source u/s 194A was nowhere before the Hon’ble Supreme Court, which is currently under consideration.
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 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. Since the assessee made payment of interest amounting to Rs.4,20,773/- to HUF and unregistered firms, which happened to be its “Members”, we hold that the authorities below were not justified in making and confirming disallowance u/s.40(a)(ia) of the Act. The impugned order is set aside to this extent.
In the result, the appeal is allowed.” From the above facts and findings, it is seen that in the case of Nilkanth Urban Co-operative Bank Ltd. (supra), the AO did not treat HUF and unregistered firm as "Member" of the Co-operative Bank and thus, held that the assessee was required to deduct TDS on interest payment. However, the Hon'ble ITAT noted that these entities are members of the bank and they have been admitted as 'Members' by way of an application made by them to the bank and then passing a resolution to the extent of their admission as members of the bank in its Board of Directors meeting, thus relief was granted to the assessee. In the instant case also, the AO did not treat co-operative societies as 'Member' of the Co-operative Bank whereas the appellant has clarified that co-operative societies have been admitted as "Nominal Members" by way of an application made by them to the appellant bank, passing a resolution to the extent of their admission as nominal members of the Bank in its Board of Director meeting. Thus, respectfully following the decision of the Hon'ble ITAT, it is held that co-operative societies are "Members", payment of interest to them has to be covered within the mandate of clause (v) of section 194A(3) requiring no deduction of tax at source. Accordingly, it is held that the AO was not justified in making disallowance u/s.40(a)(ia) of the Act, the addition made at Rs.62,64,068/- is directed to be deleted. The only ground raised
by the appellant regarding this issue is allowed.”
8. From perusal of the above order of Ld. CIT(A)/NFAC, we find that the Ld. CIT(A)/NFAC has placed reliance on Hon’ble Jurisdictional Bombay High Court’s judgment in the case of UOI vs. Jalgaon District Central Co-op. Bank Ltd., 265 ITR 423 (Bombay). The assessee also relied on Jurisdictional Co-ordinate Bench decisions passed in the case of Mandheshwari Urban Development Co-op. Bank Ltd. & Others vs. ACIT (ITA No.1153/PUN/2018 order dated 18.07.2022) wherein under identical facts & similar circumstances the addition made by the AO u/s 40(a)(ia) r.w.s. 194A was deleted by observing as under :- “10. In the present case also, the provisions of Maharashtra Cooperative Societies Act provides that the members includes nominal members and, therefore, we do not see any reason as to why the exemption under clause (v) of sub-section (3) of section 194A of the Act cannot be given in the case of members referred to above. Therefore, the reasoning of the lower authorities cannot be appreciated in the eyes of law. Accordingly, the orders of the lower authorities are hereby reversed and direct the Assessing Officer to delete the addition made u/s 40(a)(ia) of the Act for non-deduction of TDS on interest paid on deposit received from the nominal members of the society.”
Respectfully following above decision & in the absence of any decision in favour of Revenue, we do not find any reason to interfere with the order passed by Ld. CIT(A)/NFAC. Accordingly, we affirm the order passed by Ld. CIT(A)/NFAC wherein he deleted the addition of Rs.62,64,068/- made by the AO. Accordingly, the ground no.1 raised by the Revenue is dismissed.
With regard to ground no.2 raised by the Revenue, we find that the Assessing Officer has not mentioned anything in the assessment order regarding principle of mutuality and the addition