ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1, INCOME TAX DEPARTMENT vs. MANORAMA COOP BANK LTD, SOLAPUR

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.

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.

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.”