2025 (7) TMI 1036 - AT - Income Tax

TDS u/s 194A - non-deduction of tax from interest paid to co-operative societies - HELD THAT - In the present case it is evident that assessee is a co-operative society registered under the Co-operative Societies Act of the respective state for the purpose of registration of cooperative society. In order to carry on the business of the banking it has been granted a banking licence from RBI and thus is referred to as a co-operative bank. It is also a fact on record that assessee has made payment of interest to its customers who are co-operative housing societies on which tax deduction at source has not been done or if done it is at lower rate than prescribed. Considering the applicable provisions of the Act as well as judicial precedents refereed above and considering explanation given in the explanatory memorandum to Finance Bill 2015 we hold that by virtue of provisions contained in section 194A(3)(v) assessee is not required to deduct tax at source from the interest payment made by it on time deposits to other co-operative societies. Accordingly the assessee cannot be treated as assessee in default u/s.201 of the Act. The demand raised by the AO in respect of non-deduction and short deduction of tax at source along with interest there on is deleted. For above finding we also gainfully refer to the decision of HP State Co-operative Bank Ltd 2025 (3) TMI 84 - ITAT CHANDIGARH wherein similar issue had come up and it was held that assessee was not required to deduct tax at source in view of Section 194A(3)(v). Thus grounds raised by the assessee in this respect are allowed.

Summary

ISSUES:

• Whether the assessee, a co-operative society carrying on banking business with RBI license, is required to deduct tax at source (TDS) under Section 194A of the Income-tax Act, 1961 on interest paid to other co-operative societies.
• Whether the exemption under Section 194A(3)(v) for non-deduction of TDS on interest paid by a co-operative society to its members or to other co-operative societies applies to a co-operative bank.
• Whether the assessee can be held as 'assessee in default' under Section 201(1)/(1A) for non-deduction or short deduction of TDS on such interest payments.

RULINGS / HOLDINGS:

• The assessee, being a co-operative society registered under the Co-operative Societies Act and holding a banking license from RBI, is not required to deduct tax at source under Section 194A(3)(v) on interest paid to other co-operative societies, as the exemption applies to co-operative banks as well.
• The phrase "other than a co-operative bank" inserted by the Finance Act, 2015 in Section 194A(3)(v) applies only to the first limb concerning payment of interest to members, and not to interest paid by a co-operative society to another co-operative society, thus exempting the assessee from TDS deduction in such cases.
• The assessee cannot be treated as 'assessee in default' under Section 201 of the Act for non-deduction or short deduction of TDS on interest paid to co-operative societies, and the demand raised on this ground is deleted.

RATIONALE:

• The Court relied on the definitions under the Banking Regulation Act, 1949 and the Income-tax Act, 1961, distinguishing between "co-operative bank" and "co-operative society" and noting that a co-operative society carrying on banking business with RBI license is considered a co-operative bank.
• The Court examined the statutory provisions of Section 194A, particularly sub-section (3)(v), including amendments made by the Finance Act, 2015, and the explanatory memorandum to the Finance Bill, 2015, which clarified that the exemption from TDS deduction on interest paid by a co-operative society to another co-operative society continues to apply to co-operative banks.
• Judicial precedents, including the Supreme Court decisions interpreting the Banking Regulation Act, 1949 and the status of co-operative societies conducting banking business, were applied to affirm that the assessee qualifies as a co-operative bank and is entitled to the exemption under Section 194A(3)(v).
• The principle that a special provision excludes the operation of a general provision was considered but found not to override the specific exemption granted under Section 194A(3)(v) as amended.
• The decision of the Co-ordinate Bench of ITAT Chandigarh in a similar matter was relied upon to support the conclusion that no TDS deduction is required in such circumstances.