INCOME TAX OFFICER(TDS), HUBLI vs. GENERAL MANAGAR,, HUBLI

PER BENCH:

ITA Nos. 1191 to 1194/Bang/2014 are appeals by the Revenue against

common order dated 9.6.2014 of CIT(A), Hubli, relating to the assessment year

2009-10 to 2012-13. The Assessee has filed cross-objection against the very

same order of the CIT(A). The Cross-objection is purely supportive.

The appeals and cross-objections arise out of proceedings initiated u/s.201(1)

and 201(1A) of the Income Tax Act, 1961 (Act). In the course of proceedings

u/s.201(1) & 201(1A) of the Act, the AO noticed that the Assessee had paid

interest on deposits from members and payment to each of the depositors

exceeded a sum of Rs.10,000/- for the various Assessment Years as per the

following details:

Particulars FY 2011-12 FY 2010-11 FY 2009-10 FY 2008-09 FY Default Rs.1,60,70,633 Rs.1,49,33,436 Rs.1,54,55,579 Rs2,08,49,807 u/s.194-A: TDS not made on interest above Rs.10,000/- 2

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

The AO was of the view that as per the provisions of Sec.194A(1) of the Act,

the Assessee who is responsible for paying to a resident any income by way of

interest other than income by way of interest on securities, ought to have 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, deducted income-tax thereon at the rates in force.

Admittedly the Assessee did not deduct tax at source on the payment of interest

on the deposits to members. The AO accordingly initiated proceedings against

the Assessee for treating the Assessee as an Assessee in default u/s.201(1) of

the Act for taxes not deducted at source and also proceedings for levy of

interest on taxes not deducted u/s.201(1A) of the Act.

the present case, reads as follows:

Sec.194A: Interest other than "Interest on securities". (1) 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 other than income by way of interest on 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 : (2) ….. (3) The provisions of sub-section (1) shall not apply— (i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be 3

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed— (a) ten thousand rupees, where the payer is a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution, referred to in section 51 of that Act); (b) ten thousand rupees, where the payer is a co-operative society engaged in carrying on the business of banking; (c) ten thousand rupees, on any deposit with post office under any scheme framed by the Central Government and notified by it in this behalf; and (d) five thousand rupees in any other case: ………………….. (ii) to (iv)…….. (v) to such income credited or paid by a co-operative society to a member thereof or to any other co-operative society; (vi) & (vii)…….. (viia) to such income credited or paid in respect of,— (a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank; (b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co-operative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking;”

Act was that it was a co-operative society carrying on the business of banking

and not a co-operative bank. In this regard the Assessee drew attention of the

definition of Co-operative Society as given in Sec.2(19) of the Act which reads

thus:

‘Sec.2 (19): "co-operative society" means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies ;’

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

and submitted that co-operative societies have no obligation to deduct tax at

source on interest paid to members. The Assessee thus took a stand that the

entire sum sought to be disallowed was payment of interest to members and

therefore there was no obligation to deduct tax at source in view of the

provisions of Sec.194A(3)(v) of the Act. The Assessee also drew attention of the AO to the decision of 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). In the aforesaid case co-operative societies challenged Circular No.9 of 2002 dated 11th Sept. 2002 issued by the CBDT in the context of

obligation to deduct tax at source by co-operative societies. As we have already

seen that Sec. 194A of the IT Act, 1961, deals with interest other than interest

on securities. Sub-s. (1) of s. 194A mandates deduction of income : tax at

source in respect of the income by way of interest whereas sub-s. (3) of s. 194A

engrafts an exception to the applicability of the provisions of sub-s. (1). Sec.

194A(3)(v) grants an exemption from TDS to such income credited or paid by

the co-operative society to a member thereof or to any other co-operative

society. The word "member" used in Sec.194A(3)(v) of the Act according to the

petitioner was without any words of limitation. The petitioners contended that

the expression "member" is defined in s. 2(19) of the Maharashtra Co-operative

Societies Act, 1960. The said definition of "member" includes nominal,

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

associate or sympathiser member also. Under Circular No. 9 of 2002, issued by

the CBDT, it is an accepted fact that the provisions of TDS are not enforceable

in respect of interest paid by the co-operative society/bank to its members or co-

operative societies. But the Circular mandated that TDS has to be deducted

from the interest paid to members who have joined in application for the

registration of co-operative society and those who are admitted to the

membership after registration in accordance with the bye-laws and rules. The

members eligible for exemption under s. 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 general body meeting or special general body meeting of

the co-operative bank and must be entitled to receive share from the profits of

the co-operative bank. Acting upon the aforesaid circular the AO held that

provisions of Sec.194A(3)(v) of the Act are applicable only when the payment

of interest is made by a co-operative society to such members who hold shares

and have a right to vote in general body and entitled to share of profits of the

co-operative society. Accordingly payment of interest by a co-operative society

to a member who is a nominal member or sympathiser member were held by

the AO to be subject to deduction of tax at source, if such payment to each

member exceeded Rs.10,000 in a year.

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

who were co-operative societies, the CBDT cannot issue a circular which is

contrary to the provisions of s. 194A(3)(v) of the IT Act, 1961. The circular

issued by the CBDT deprives the exemption granted by the central enactment

and, therefore, the said circular is bad in law and liable to be quashed and set

aside. The petitioner has challenged the circular issued by CBDT. The CBDT

has issued the circular by virtue of s. 119 of the IT Act, 1961. The petitioner has

found fault with the authority of CBDT. The power which has been assumed by

CBDT, does not in fact spring from s. 119 of the IT Act, 1961. No doubt, s. 119

of the Act empowers the CBDT to issue instructions to the subordinate

authorities for proper administration of the Act. Having been aggrieved by the

impugned circular co-operative societies filed writ petition under Art. 226 r/w

Art. 227 of the Constitution of India and thereby challenged the validity of the

impugned circular and the competency of CBDT to issue a circular contrary to

the provisions of Sec.194A(3)(v) of the Act. The Hon’ble Bombay High Court

held that Sec. 194A(3)(v) grants an exemption from TDS to income credited or

paid by the co-operative society to a member thereof or to any other co-

operative society. Clause (v) of sub-s. (3) of s. 194A is very lucid and clear in

its terms which suggests that the provisions relating to TDS are inapplicable to

the income credited or paid by the co-operative society to the member thereof.

The word "member" used in this provision is without any words of limitation.

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

The expression "member" is not defined in the IT Act, 1961. A co-operative

society has to be established under the provisions of law made by the State

legislature. The definition of expression "member" is given under s. 2(19) of the

Maharashtra Co-operative Societies Act, 1960. As per the definition, "member"

means a person joining an application for registration of a co-operative society,

which is subsequently registered or a person duly admitted to membership of a

society after registration and includes a nominal, associate or sympathizer

member. There is no distinction between duly registered member and nominal,

associate and sympathizer member. The impugned circular issued by CBDT,

which is in the form of clarification with regard to rights and privileges of a

duly registered member and nominal member is outside the scope of s. 119. No

doubt, s. 119 generates some power in CBDT. But the power so generated by

virtue of s. 119 is required to be utilized in a prescribed manner. CBDT is

empowered to issue only administrative instructions to the subordinate

authorities for the purpose of proper administration and enforcement of the

provisions of the IT Act, 1961. Under the garb of s. 119 CBDT has crossed its

authority. What is not contemplated in exemption clause under s. 194A(3)(v),

cannot be imported to deprive the exemption granted to co-operative society by

issuing the impugned circular. By impugned circular, the co-operative society

cannot be deprived of its right of exemption given under IT Act, 1961. The

CBDT has overstepped its authority and has issued the impugned circular

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

directly in conflict with the provisions contained in s. 194A(3)(v). Sec. 119

does not at all support the action of CBDT. CBDT has no authority to make a

crack in the exemption clause contained in s. 194A(3)(v), by issuing the

impugned circular. The CBDT cannot usurp the powers of Parliament by virtue

of s. 119. The CBDT, under the garb of s. 119, cannot exercise wider powers

than the powers bestowed on it. The CBDT has no power to introduce a

substantial change or alteration in the provisions of the IT Act, 1961, by

importing the ideas unknown to the IT Act, 1961. The impugned circular,

therefore, does not stand to the legal test. The impugned circular No. 9 of 2002,

dt. 11th Sept., 2002 was accordingly quashed and set aside.

detect tax at source on the aforesaid sums which was interest paid to its

members.

following reasons: 1. Under the Act different benefits are given to different co-operative societies depending upon the nature of a particular co-operative society. According to the AO, Sec.194A(3)(v) of the Act was a general provision granting benefit to all co-operative societies. But Sec.194A(3)(i)(b) of the Act specifically provides that a co-operative society carrying on the business of banking, if it pays interest on deposits exceeding Rs.10,000 then it has to deduct tax at source. He 9

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

held that specific provisions will override general provisions and therefore the Assessee being a co-operative society engaged in the business of banking had to deduct tax at source on payment of interest in excess of Rs.10,000/-.

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

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. Petitioners are primary credit societies and, therefore, there is exemption towards deduction in respect of income credited or paid for the deposits. Their claim of exemption is reinforced and made clear by a reading of sub-s. (3)(viia)(b) wherein deposits with the primary credit society referred in sub-cl. (a) engaged in carrying on the business activity are exempted. 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.

obligation to deduct tax at source on interest paid u/s.194A(1) of the Act and

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

since the Assessee failed to so deduct tax at source, the Assessee was liable to

be treated as an Assessee in default u/s.201(1) of the Act and was also liable to

pay interest on tax not deducted at source u/s.201(1A) of the Act.

holding 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. Aggrieved by the order of the CIT(A),

the revenue has preferred the present appeals before the Tribunal.

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, Vs. JCIT (2014) 48 Taxmann.com 117 (Bangalore-Trib) held that co-

operative societies carrying on banking business while paying interest to

members on time deposits and deposits other than time deposits need not deduct

tax at source u/s.194-A 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.

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

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 co-

operative 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 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 Society 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 Bhagani Nivedita Sahakari Bank Ltd. (supra) when it says that Co- 13

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

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 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 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.

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

“Circular No.9 of 2002 “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 15

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

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”

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

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 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

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).

purely supportive in nature except that in ground No.6 it has been pointed out

that in Finance Act, 2015 provisions of Sec.194A(3(v) of the Act have been

made not applicable to co-operative banks but the said amendment is only

prospective from 1-6-2015. According to the Assessee the aforesaid

amendment is a recognition of the existing position of law as interpreted by the

ITA Nos.1191 to 1194/Bang/2014 & C.O.Nos.25 to 28/Bang/2015

various benches of the tribunal in favour of co-operative banks. We are of the view since the C.O.s are only supportive they are not maintainable and are therefore dismissed as not maintainable.

Sd/- Sd/- (JASON P BOAZ) (N. V. VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore, Dated, the 20th March, 2015. DSM Copy to: 1. The assessee 2. The Assessing Officer 3. The Commissioner of Income-tax 4. Commissioner of Income-tax(A) 5. DR 6. GF, ITAT, Bangalore

By Order

Assistant Registrar, ITAT, Bangalore.