Case Law Details
Vasavi Credit Co-Operative Society Ltd. Vs ITO (ITAT Bangalore)
We are concerned with the liability of the assessee for deduction of tax at source u/s 194A of the Act from the interest paid by the assessee. The assessee herein has paid interest to its “associate members” without deduction of tax at source. As per the definition of the term “member” given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959, “member” includes an associate member. Hence the assessee is able to collect deposit from them and also lend the money to them. Hence, we are of the view that the associate members should be construed as “members” only for the purpose of sec.194A of the Act, since the definition of the term “member” should be construed as given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959.
In the case of M/s The Government Employees Co-Operative Bank Limited vs. ACIT (ITA No.1485/Bang/2019 dated 31-122020), the co-ordinate bench has expressed the following view:-
“11. We have considered the rival submissions. We find that a sum of Rs. 93,36,928/- is interest paid to Associate Members. The CIT(A) has, however, made a reference to the decision of Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd., Vs. ACIT in appeal No.10245 of 2017 Dt. 08.08.2017 which was a decision referred in the context of allowing deduction u/s. 80P(2)(a)(i) of the Act.
12. We are of the view that the analogy so drawn by the CIT(A) is erroneous. The provisions of Sec.194A which are in relation to deduction of tax at source cannot be equated with the provisions of Sec. 80P(2)(a)(i) of the Act, which deals with deduction while computing total income. The admitted position is that the sum of Rs.93,36,928/- has been paid to Associate Members and CIT(A) has equated it and named them as nonmembers. In our view this approach is erroneous.”
It can be noticed that the co-ordinate bench has expressed the view that the liability to deduct tax at source u/s 194A of the Act cannot be equated with the provisions of sec.80P of the Act.
This view combined with the decision of Hon’ble Supreme Court holding that the term “members” should be construed as defined in the respective co-operative societies Act would lead us to the conclusion that the associate members should be considered as included in the term “members” used in sec.194A(3)(v) of the Act. We notice that paragraph 3 of CBDT Circular (referred supra) has been quashed by Hon’ble Bombay High Court in the case of Jalagaon District Central Co-operative Bank Ltd. Vs. Union of India (265 ITR 423). Accordingly, we hold that the assessee is not liable to deduct tax at source from the interest payments made to Associate members as per sec.194A(3)(v) of the Act.
FULL TEXT OF THE ITAT JUDGEMENT
The assessee has filed these appeals challenging the common order passed by Ld. CIT(A)-13, Bengaluru for the financial year 2015-16 relevant to the assessment year 2016-17 confirming the demand raised by the A.O. on the assessee u/s 201(1) & 201(1A) of the Income-tax Act,1961 [‘the Act’ for short].
2. The assessee is a Credit Co-operative Society and it is engaged in the business of accepting deposits from its members and lending loan to its members. The revenue carried out a survey operation in the hands of the assessee. It was noticed that the assessee has not deducted tax at source from the payment of interest made on deposits. Hence, the proceedings u/s 201 of the Act was initiated against the assessee for the year under consideration. The assessee submitted before the A.O. that it has paid interest to its members only and hence, as per the provisions of section 194A(3)(v) of the Act, the assessee is not required to deduct tax at source from the interest paid to its members.
3. The A.O. noticed that the assessee is having two types of members, viz., Regular Members and Associate Members. It has paid interest to both its regular members and also associate members. The AO noticed that associate members become members only for the purpose of making deposits and taking loans. They are not entitled to voting rights in the general body meetings. Hence the AO took the view that the associate members are not eligible for exemption u/s 194A(3)(v) of the Act. In this regard, the A.O., placed his reliance upon the CBDT Circular No.9/2002 dated 11.9.2002, wherein it was stated n paragraph 3 as under:-
“3. A question has also been raised as to whether nominal 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 cooperative 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 cooperative bank.”
Accordingly, the AO took the view that the exemption given u/s 194A(3)(v) of the Act for not deducting TDS will not apply to the interest given to the associate members. The A.O. also took support of the decision rendered by Hon’ble Supreme Court in the case of the Citizen Co-operative Society Vs. ACIT (Civil Appeal Noi.10245 of 2017) and observed that the decision rendered by Hon’ble Supreme Court of India clearly classifies members and non-members and hence the above said decision shall apply to the instant case. Accordingly, the A.O. held that the assessee is liable to deduct tax at source from the interest payments made to associate members. The assessee had paid interest of Rs.2,61,74,593/- to the associate members, which were above the threshold limit of Rs.10,000/-prescribed for not deducting tax at source. Accordingly, the AO raised demand of Rs.261,74,593/- u/s 201(1) of the Act and Rs.10,19,440/- as interest u/s 201(1A) of the Act.
4. The Ld. CIT(A) confirmed the orders passed by the A.O. He noticed that though the associate members hold shares and entitled to dividend, yet they do not have right to vote and to become office bearers of the society. Accordingly, the Ld. CIT(A) held that the principles of mutuality will not apply to associate members. With regard to the principles of mutuality, the Ld CIT(A) placed his reliance on the decision rendered in the case of CIT vs. Bankipur Club (226 ITR 97) and Chelmsford Club (243 ITR 89). Accordingly, he held that the associate members are distinctly different and they cannot be equated with regular members. Accordingly, the Ld CIT(A) held that the A.O. was justified in raising the impugned demands. Aggrieved, the assessee has filed these appeals before us, i.e., one against the demand raised u/s 201(1) and another on the interest charged u/s 201(1A) of the Act.
5. We heard the parties and perused the record. In the instant case, the assessee is contending that it is not required to deduct tax at source from the interest paid to its members in view of sec. 194A (3)(v). The said section reads as under:-
“194A(3) The provisions of sub-section (1) shall not apply—
(i) ……..
(ii) ……..
(iii) …….
(iv) …..
(v) to such income credited or paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society.”
There should not be any dispute that the interest paid by a cooperative society to its members is not liable for deduction of tax at source u/s 194A of the Act. The dispute is whether “an associate member” would fall under the category of “member” as mentioned in sec.194A of the Act.
6.The tax authorities have taken the view that the “member” should be construed as a person who has subscribed to the shares and he should be entitled to participate in profits, entitled to vote and entitled to participate in the management of the society. Admittedly the Associate members are not entitled to become office bearers of the society. The Ld CIT(A) has expressed the view that the associate members are not entitled to vote also.
7. We noticed earlier that the AO has relied upon the decision rendered by Hon’ble Supreme Court in the case of Citizen Cooperative Society (supra). However, the said decision was rendered in the context of sec.80P of the Act. The Ld CIT(A) also held that the Principles of Mutuality should be followed and hence associate members cannot be equated with regular members.
8. Hence the controversy is whether the associate members would fall under the category of “members” used in sec. 194A(3)(v) of the Act. We notice that the Hon’ble Supreme Court in a recent case of The Mavilayi Service Co-operative Bank Ltd & Ors vs. CIT (Civil Appeal Nos.7343 – 7350 of 2019 dated January, 21, 2021 has observed as under with regard to the expression “members” used in sec.80P of the Act:-
“46. It must also be mentioned here that unlike the Andhra Act that Citizen Cooperative Society Ltd. (supra) considered, ‘nominal members’ are ‘members’ as defined under the Kerala Act. This Court in U.P. Cooperative Cane Unions’ Federation Ltd., Lucknow v.Commissioner of Income Tax, Lucknow-I (1997) 11 SCC 287 referred to section 80P of the IT Act and then held:
“8. The expression “members” is not defined in the Act. Since a cooperative society has to be established under the provisions of the law made by the State Legislature in that regard, the expression “members” in Section 80-P(2)(a)(i) must, therefore, be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. It is, therefore, necessary to construe the expression “members” in Section 80-P(2)(a)(i) of the Act in the light of the definition of that expression as contained in Section 2(n) of the cooperative Societies Act. The said provision reads as under:
“2. (n) ‘Member’ means a person who joined in the application for registration of a society or a person admitted to membership after such registration in accordance with the provisions of this Act, the rules and the bye-laws for the time being in force but a reference to ‘members’ anywhere in this Act in connection with the possession or exercise of any right or power or the existence or discharge of any liability or duty shall not include reference to any class of members who by reason of the provisions of this Act do not possess such right or power or have no such liability or duty;”
Considering the definition of ‘member’ under the Kerala Act, loans given to such nominal members would qualify for the purpose of deduction under section 80P(2)(a)(i).
47. Further, unlike the facts in Citizen Cooperative Society Ltd, (supra), the Kerala Act expressly permits loans to non-members under section 59(2) and (3), which reads as follows:
“59. Restrictions on loans.- (1) A society shall not make a loan to any person or a society other than a member:
Provided that the above restriction shall not be applicable to the Kerala State Co-operative Bank.
Provided further that, with the general or special sanction of the Registrar, a society may make loans to another society.
(2) Notwithstanding anything contained in sub-section (1), a society may make a loan to a depositor on the security of his deposit.
(3) Granting of loans to members or to non-members under subsection (2) and recovery thereof shall be in the manner as may be specified by the Registrar.”
Thus, the giving of loans by a primary agricultural credit society to nonmembers is not illegal, unlike the facts in Citizen Cooperative Society Ltd. (supra).”
9. The above said decision of Hon’ble Supreme Court makes it clear that the term “member” has not been defied under the Income tax Act and hence its meaning should be construed in the context of the provisions of the law enacted by the State Legislature under which the cooperative society claiming exemption has been formed. As per sec. 2(f) of the Karnataka Co-operative Societies Act, 1959, the expression “member” is defined as under:-
2(f) “Member” means a person joining in the application for registration of co-operative society and a person admitted to membership after such registration in accordance with this Act, the rules and the by-laws and includes, a nominal and an associate member.”
Further, section 18 of the above said Co-operative Societies Act defines “Associate Member” as under:-
“An associate member may hold shares but shall not be entitled to become an office bearer of the Society.”
10. We notice that the decision in the case of Citizen Co-operative Society (supra) and The Mavilayi Service Co-operative Bank Ltd & Ors (supra) have been rendered in the context of deduction claimed by them u/s 80P of the Act. Even in that situation also, the Hon’ble Supreme Court has expressed the view that the expression “member” should be construed as defined in the respective cooperative Societies Act.
11. We are concerned with the liability of the assessee for deduction of tax at source u/s 194A of the Act from the interest paid by the assessee. The assessee herein has paid interest to its “associate members” without deduction of tax at source. As per the definition of the term “member” given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959, “member” includes an associate member. Hence the assessee is able to collect deposit from them and also lend the money to them. Hence, we are of the view that the associate members should be construed as “members” only for the purpose of sec.194A of the Act, since the definition of the term “member” should be construed as given in sec. 2(f) of the Karnataka Co-operative Societies Act, 1959.
12. In the case of M/s The Government Employees Co-Operative Bank Limited vs. ACIT (ITA No.1485/Bang/2019 dated 31-122020), the co-ordinate bench has expressed the following view:-
“11. We have considered the rival submissions. We find that a sum of Rs. 93,36,928/- is interest paid to Associate Members. The CIT(A) has, however, made a reference to the decision of Hon’ble Supreme Court in the case of Citizens Co-operative Society Ltd., Vs. ACIT in appeal No.10245 of 2017 Dt. 08.08.2017 which was a decision referred in the context of allowing deduction u/s. 80P(2)(a)(i) of the Act.
12. We are of the view that the analogy so drawn by the CIT(A) is erroneous. The provisions of Sec.194A which are in relation to deduction of tax at source cannot be equated with the provisions of Sec. 80P(2)(a)(i) of the Act, which deals with deduction while computing total income. The admitted position is that the sum of Rs.93,36,928/- has been paid to Associate Members and CIT(A) has equated it and named them as nonmembers. In our view this approach is erroneous.”
It can be noticed that the co-ordinate bench has expressed the view that the liability to deduct tax at source u/s 194A of the Act cannot be equated with the provisions of sec.80P of the Act.
13. This view combined with the decision of Hon’ble Supreme Court holding that the term “members” should be construed as defined in the respective co-operative societies Act would lead us to the conclusion that the associate members should be considered as included in the term “members” used in sec.194A(3)(v) of the Act. We notice that paragraph 3 of CBDT Circular (referred supra) has been quashed by Hon’ble Bombay High Court in the case of Jalagaon District Central Co-operative Bank Ltd. Vs. Union of India (265 ITR 423). Accordingly, we hold that the assessee is not liable to deduct tax at source from the interest payments made to Associate members as per sec.194A(3)(v) of the Act.
14. In view of the foregoing discussions, we set aside the orders passed by Ld CIT(A) and direct the AO to delete the demand raised u/s 201(1) and 201(1A) of the Act.
15. In the result, both the appeals of the assessee are allowed. Order pronounced in the open court on 18th Jan, 2021
