ITO, MYSORE vs. THE MYSORE MERCHANT CO-OPERATIVE BANK LTD.,, MYSORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ B ” BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. Nos.86 & 87/Bang/2015 (Assessment Years : 2011-12 & 2012-13) Income Tax Officer, Vs. The Mysore Merchant Co-operative TDS Ward, Mysore. Bank Ltd., Jaganmohan Palace Road, Mysore. PAN BLRTO 3050F Appellant Respondent.

Appellant By : Dr.P.K. Srihari, Addl. CIT (D.R.) Respondent By : Ms. Vinutha, C.A. Date of Hearing : 26.05.2015. Date of Pronouncement : 29.06.2015. O R D E R Per Shri Jason P. Boaz, A.M. : These appeals by Revenue are directed against the composite order of the Commissioner of Income Tax (Appeals), Mysore dt.16.10.2014 for Assessment Years 2011- 12 and 2012-13. The appeals having common / identical issues were heard together and are being disposed off by way of this combined order. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is a co-operative society engaged in the business of banking. A survey under Section 133A of the Income Tax Act, 1961 (in short 'the Act') was conducted at

2 ITA Nos.86 & 87/Bang/2015 the assessee's business premises on 26.11.2013 in order to verify its compliance to the Tax Deduction at Source (‘TDS’) provisions. In the course of the survey, it was noticed that in the period relevant to Assessment Years 2011-12 and 2012-13, the assessee had not deducted tax at source in respect of interest paid to members relying on the specific exception provided for under the provisions of section 194A(3)(v) of the Act. The Assessing Officer was of the view that the provisions of section 194A(3)(v) of the Act are not applicable to a co-operative society carrying on the business of banking; but rather the provisions of Section 194A(3)(viia) of the Act. The Assessing Officer held that the assessee had failed to deduct tax at source as per the provisions of section 194A(3) of the Act. On the basis of the details of interest paid in the period relevant to Assessment Years 2011-12 and 2012-13, the Assessing Officer passed orders under Section 201(1) and 201(1A) of the Act dt.31.3.2014 determining the following demands :- Asst. Year Demand u/s.201(1) Demand u/s. 201(1A) 2011-12 31,32,522 11,27,708 2012-13 31,24,020 7,49,765

2.2 Aggrieved by the orders of the ITO (TDS), Mysore dt.31.3.2014 for both Assessment Years 2011-12 and 2012-13, the assessee preferred appeals before the CIT (Appeals), Mysore. The learned CIT (Appeals), allowed the assessee's appeals following the decision of a co-ordinate bench of this Tribunal in the case of the Bagalkot District

3 ITA Nos.86 & 87/Bang/2015 Central Co-operative Bank V JCIT in ITA No.1572/Bang/2013 dt.30.5.2014, held as under :- “5.6 Respectfully following the decision of Hon'ble ITAT which is binding on me, it is held that the appellant being a co-operative society carrying on banking business, when it pays interest income to its members both on time deposits and on deposits other than time deposits with such co-operative societies need not deduct tax under Section 144A by virtue of exemption granted vide clause (v) of sub-section (3) of the said section. However, the interest paid to non-members are not covered under this has held by Hon'ble ITAT in the order, A.O. is directed to restrict the addition only to this if there is any interest paid to non-members. It is ordered accordingly. 6. For statistical purpose the appeals are treated as allowed.” 3. Revenue is now aggrieved by the orders of the CIT (Appeals), Mysore dt.16.10.2014 for both Assessment Years 2011-12 and 2012-13 and has preferred these appeals before the Tribunal raising the following identical grounds for both assessment years :- For A.Y. 2011-12 “ 1. The learned CIT (Appeals) has erred in granting relief contrary to the findings in the earlier part of the order. 2. The learned CIT (Appeals) has erred in relying on the decision of Hon'ble ITAT, Bangalore Bench in the case of The Bagalkot District CentralCo-op. Bank Vs. JCIT in ITA No.1512/Bang/2013 which is erroneous and against the law. 3. The learned CIT (Appeals) ought to have considered the orders of the Hon'ble ITAT, Pune (857 ITD 569) and Hon'ble ITAT, Panaji Bench order in the case of Bailhongal Urban Co-operative Bank dt.28.8.2013, which have been decided in favour of the Department. 4. The learned CIT (Appeals) erred in relying on the decision of the Hon'ble ITAT, Bangalore which held that the provisions of section 194A(3)(v) are applicable to the deposits made with the assessee, the assessee being a co-operative bank. 5. The learned CIT (Appeals) erred in relying on the decision of the Hon'ble ITAT, Bangalore which had failed to appreciate the fact that the clause 194A(3)(viia) is a specific provision which has overriding effect on the general provisions of clause 194A(3)(v).

4 ITA Nos.86 & 87/Bang/2015 6. The learned CIT (Appeals) erred in relying on the decision of the Hon'ble ITAT, Bangalore which failed to appreciate that the clause 194A(3)(v) is a general clause applicable to co-operative societies in general, it is a normal principle of interpretation of law that in the presence of a specific provision the general provision will not apply. For these and other grounds that may be raised during the course of appeal and actual hearing, the appellant prays that the order of learned CIT (Appeals) may be set aside and cancelled.” For A.Y. 2012-13 “ 1. The learned CIT (Appeals) has erred in granting relief contrary to the findings in the earlier part of the order. 2. The learned CIT (Appeals) has erred in relying on the decision of Hon'ble ITAT, Bangalore Bench in the case of The Bagalkot District CentralCo-op. Bank Vs. JCIT in ITA No.1512/Bang/2013 which is erroneous and against the law. 3. The learned CIT (Appeals) ought to have considered the orders of the Hon'ble ITAT, Pune (857 ITD 569) and Hon'ble ITAT, Panaji Bench order in the case of Bailhongal Urban Co-operative Bank dt.28.8.2013, which have been decided in favour of the Department. 4. The learned CIT (Appeals) erred in relying on the decision of the Hon'ble ITAT, Bangalore which held that the provisions of section 194A(3)(v) are applicable to the deposits made with the assessee, the assessee being a co-operative bank. 5. The learned CIT (Appeals) erred in relying on the decision of the Hon'ble ITAT, Bangalore which had failed to appreciate the fact that the clause 194A(3)(viia) is a specific provision which has overriding effect on the general provisions of clause 194A(3)(v). 6. The learned CIT (Appeals) erred in relying on the decision of the Hon'ble ITAT, Bangalore which failed to appreciate that the clause 194A(3)(v) is a general clause applicable to co-operative societies in general, it is a normal principle of interpretation of law that in the presence of a specific provision the general provision will not apply. For these and other grounds that may be raised during the course of appeal and actual hearing, the appellant prays that the order of learned CIT (Appeals) may be set aside and cancelled.”

5 ITA Nos.86 & 87/Bang/2015 4.1 Though Revenue has raised several grounds (supra), the issue in question relates to the applicability of the provisions of Section 194A(3)(5) of the Act in the case on hand. We have heard both the learned Departmental Representative in support of the above grounds of appeal raised by Revenue and the learned Authorised Representative in support of the impugned orders of the learned CIT (Appeals). We find that the issues in question before us were considered by a co-ordinate bench of this Tribunal in the case of the Bagalkot District Central Co-operative Bank in ITA No.1572/Bang/2013 dt.30.5.2014 and it was held that the assessee, which is a co-operative society carrying on banking business, when it pays interest to a member both on time deposits and on deposits other than time 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. The operative portion of this order of the co-ordinate bench from paras 12 to 23 thereof are extracted hereunder :- “ 12. We have heard the rival submissions. The learned counsel for the Assessee after referring to the relevant provisions of Sec.194A(3)(i)(b), 194A(3)(v) and 194A(3)(viia) of the Act (these provisions have already been extracted in the earlier part of this order and are not being repeated), submitted that an analysis of the provisions would disclose that: a) U/s. 194A(3)(i)(b) a Co-operative Bank need not deduct tax at source if the amount of interest paid does not exceed Rs. 10,000 whether the payment is made to a member or non- member or whether the interest is on time deposit or non-time deposit.

6 ITA Nos.86 & 87/Bang/2015 b) U/s 194A (3)(v) a Co-operative Society irrespective of its nature of activity need not deduct tax at source on any interest paid to its members whether on time deposits or non-time deposits c) U/s l94A(3)(viia)(a), a primary agricultural credit Co-operative Society or a Cooperative land mortgage bank or a co-operative land development bank need not deduct tax at source on any interest paid by it in respect of deposits received by it. d) U/s 194A(3)(viia)(b) of the Act a co-operative society other than a co-operative society or a bank referred to in Clause (a) need not deduct tax at source on interest paid on any deposit other than time deposits. 2.3 The following chart explains the position: Any Interest on Interest Type of Rs. 10,000 or Amount/Any deposits other on time Interest / less type of interest than time- deposit Payee paid by a Co-op deposits 194A 1 94A(3)(i)(b) Society 194A(3)(viia)(b) (3)(v) 194A(3)(v) Member Exempt Exempt Exempt Exempt TDS to Non-Member Exempt TDS to be made Exempt be made

According to him the above chart would clearly show that when a co-operative society is paying interest to its members, it need not deduct tax at source. It was his submission that the Assessee is a co-operative society registered under the Mysore Co-operative Societies Act vide the certificate issued by the Registrar of Co-operative Societies. 13. With regard to the reliance placed by the learned Assessing Officer on the decision of the Hon’ble ITAT Pune Bench in Bhagani Nivedita Sahakari Bank Ltd Vs ACIT (87) ITD 569, it was submitted by him that in that case the Hon’ble Tribunal held that the provision of S. 194A(3)(v) of the Act is not applicable to a Co-operative Bank. The Hon’ble Tribunal held that u/s. l94A(3)(v) were to apply to a Co-operative Bank, there will be a conflict between 194A(3)(viia)(b) and S.

7 ITA Nos.86 & 87/Bang/2015 194A(3)(v). It was his submission that there is no conflict. S.194A(3)(viia)(b) would apply to all co-operative banks when they pay interest on deposits other than time deposit whether to members or non-members whereas S. 194A(3)(v) applies to payment to members including interest on time-deposits”. The classification itself is different. S.194A(3)(v) classifies the payees into members or non-members whereas 194A(3)(viia)(b) classifies the nature of interest whether it is on time deposit or a non-time deposit When the classification is on a totally different criterion, there cannot be any conflict between the two sections. They operate in two different fields. It is respectfully submitted that the Hon’ble ITAT Bench erred in holding that there is a conflict between 194A(3(v) and 194A(3)(viia)(b). It was further submitted by him that the Hon’ble ITAT Pune Bench did not have the benefit of Circular No. 9/2002 dated 11.9.2002 (257 ITR St 36). In this circular the Board has clarified as under: “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 where 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 co- operative bank, who shall receive interest only on deposits other than time deposits made on or after July 1, 1995 without TDS under section 194A”. It was also submitted by him that the learned Assessing Officer has stated that the Circular was struck down in Jalgaon District Central Cop-operative Bank Ltd Vs Union of India (265)ITR 423. According to him the observations of the AO in this regard were not correct as the Hon’ble High Court struck down only that portion of circular which dealt with Boards clarification as to who is a member. The court never had an occasion to go into a question whether S. 194A(3)(v) of the Act would cover- a co-operative bank or not. It was finally submitted that the Assessee is entitled to deduction and no disallowance is called for u/s 40(a)(ia) of the Act. 14. The learned DR while reiterating the stand of the AO/CIT(A)further relied on the decision of the ITAT Panaji Bench in ITA No.85/PN/2013 for AY 09-10 in the case of The Bailhongal Uraban Co-op Bank Ltd. Vs. JCIT order dated 28.8.2013 wherein the Tribunal followed the order of SMC Bench in the case of Bhagani Nivedita Sah Bank Ltd. Vs. ACIT 87 ITD 569 (Pune). Without prejudice to his submission that TDS provisions were applicable even in the case of payment

8 ITA Nos.86 & 87/Bang/2015 of interest to member depositors by a co-operative society, it was submitted by him that the order of the AO/CIT(A) is not clear as to whether the interest disallowed pertains to interest paid to members or non-members and this aspect has to be verified, if necessary. In particular it was submitted that if clause(v) of Sec.194A(3) exempts co-operative societies from the provisions of TDS when it pays interest to its members then there was no need to have Sec.194A(3)(viia) of the Act specifically exempting certain co-operative societies from the obligation to deduct tax at source when it pays interest. To this argument, we have already noticed the argument of the learned counsel for the Assessee that these two provisions operate in different field. We may clarify here that the said argument of the learned counsel for the Assessee is a clear answer to the above argument of the learned DR. The learned DR also filed written submission before us, in which the stand of the revenue, as reflected in the orders of the lower authorities, has been reiterated. 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 co-operative 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 Socieity to a member and payment by a co-operative society to non-member would 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 co-operative 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 provisions called specific provisions. Each provision over-lap 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

9 ITA Nos.86 & 87/Bang/2015 Bhagani Nivedita Sahakari Bank Ltd. (supra) when it says that Co-operative 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) has to be interpreted as co-operative society other than co-operative 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 “causus omisus”. We do not think that the provisions of Sec.194A(3)(v) suffers from any causus 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 Kerela 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 Co-operative 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 co-operative societies engaged in carrying on 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 Sah Bank Ltd. (supra). In fact in para-2 of Circular No.9 dated 11.9.2002, 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. 17. We also find that the CBDT in Circular No.9 dated 11.9.2002 clarified certain aspects which are relevant to the present case. The same reads thus: “Circular No.9 of 2002

10 ITA Nos.86 & 87/Bang/2015 “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 the 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 co-operative 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 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. [F. No. 275/106/2000-IT(B)]

11 ITA Nos.86 & 87/Bang/2015 (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 provisions 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 ITA No.85/PN/2013 for AY 09- 10 in the case of The Bailhongal Uraban Co-op Bank Ltd. Vs. JCIT order dated 28.8.2013, 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. Vs. Union of India 265 ITR 423 (Bom) and therefore chose 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.’s case was dealing with a case of challenge to para-3 of CBDT Circular No.9 dated 11.9.2002 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 has brought to our notice that the ITAT Vishakapatnam Bench in the case of The Visakhapatnam Co-operative Bank ITA No.5 and 19 of 2011 order dated 29.8.2011 has 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 Co-operative 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.194A(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

12 ITA Nos.86 & 87/Bang/2015 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 co- operative society carrying on banking business when it pays interest income to a member both on time deposits and on deposits other than time 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. 22. We however find, as submitted by the learned DR, that the orders are not clear as to whether the entire interest disallowed u/s.40(a)(ia) of the Act relates to interest paid to members or part of the interest is also paid to non-members. We therefore set aside the order of the CIT(A) for the limited purpose of verifying as to any portion of the interest disallowed relates to payment to non-members and in that event restrict the disallowance in so far as it relates to payment of interest by the Assessee to non-members without deduction of tax at source. 23. In the result, the appeal of the Assessee is treated as allowed for statistical purposes.” 4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of The Bagalkot District Central Co-operative Bank (supra), we hold that the assessee, which is a co-operative society carrying on the business of banking, need not deduct tax at source under Section 194A of the Act when it pays interest to a member both on time deposits and deposits other than time deposits kept with such co-operative society, by virtue of the exemption granted vide clause (v) of sub-section (3) of Section 194A of the Act. 4.3 As submitted by the learned Departmental Representative and observed by the learned CIT (Appeals), it is not clear whether the entire interest in question relates to interest paid to members or whether a part of the interest is also paid to non-members.

13 ITA Nos.86 & 87/Bang/2015 In this view of the matter, we uphold the decision of the learned CIT (Appeals) in directing the Assessing Officer to verify whether any portion of the interest in question relates to payments to non-members and to restrict the disallowance only to the extent of payment of interest to non-members without deduction of tax at source. Consequently, Revenue’s Grounds at S.Nos. 1 to 7 are dismissed. 5. In the result, Revenue’s appeals for Assessment Years 2011-12 and 2012-13 are dismissed. Order pronounced in the open court on 29th June, 2015.

Sd/- Sd/- (N.V.VASUDEVAN) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore