Principal Commissioner Of Income Tax Jaipur-I, Jaipur v. M/S. Vaishali Urban Co-Operative Bank Ltd., D

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 246 / 2016 Principal Commissioner of Income Tax Jaipur-I, Jaipur ----Appellant Versus M/s. Vaishali Urban Co-operative Bank Ltd., D-43, Janpath, ShyamNagar, Jaipur (Raj.) ----Respondent D.B. Income Tax Appeal No. 312 / 2017 Pr. Commissioner of Income Tax Jaipur-II, Jaipur. ----Appellant Versus M/s. Malviya Urban Cooperative Bank Ltd., 203, Anukampa-I, M.I. Road, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. K.D. Mathur for Mr. R.B. Mathur For Respondent(s) : Mr. Tanuj Agarwal _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 01/11/2017 1.In both appeals since identical question of law and facts areinvolved they are decided by this common judgment. 2.By way of these appeals, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeals preferred by the department confirming theorder of CIT(A). 3.Counsel for the appellant framed the following questions of law in DBITA No. 312/2017:- “i) Whether in the facts and circumstances of thecase the ITAT has erred in holding that interestpaid by assessee is governed by clause (v) of subsection (3) of section 194A of the Act and not bysub clause (b) of clause (I) of sub section (3) ofsection 194A of the Act. ii) Whether in the facts and circumstances of thecase the ITAT was justified in confirming theorder of CIT(A) in deleting the disallowance ofRs. 48285223/- made u/s 40(a)(ia) of the IT Acton account of interest paid by the assesseewithout making TDS thereon.” 4.While admitting the DBITA No. 246/2016, this Court on 15[th] November, 2016, framed the following substantial of law: “i) Whether in the facts and circumstances of thecase the ITAT has erred in holding that interestpaid by assessee is governed by clause (v) of subsection (3) of section 194A of the Act. In fact theinterest paid by assessee is governed by subclause (b) of clause (I) of sub section (3) ofsection 194A of the Act.” 5.Counsel for the appellant has taken us to the order of theassessing officer and contended that the assessing officer whileconsidering the matter relied on provisions of 194A and aftertaking into consideration the interest paid to the members of the society is held as under:- 6.1. During the year under consideration, theassessee has claimed following expenses:- But no TDS was found to be made on theabove expenses, hence vide letter dated19.12.2013, assessee was requested to file copy of TDS return filed in support of TDSmade on the above expenses.” 6.Against which the assessee preferred an appeal and theCIT(A) while considering the matter has observed as under;- “i) Interest paid by the Co-operative banks to itsmember depositors are attracted by theprovisions of section 194A of the Act,accordingly, additions made of Rs. 83,87,237/-is hereby deleted. Assessee gets a relief to thatextent.” 7.The Tribunal while considering the same has affirmed thefinding given by the CIT(A). 8. Counsel for the respondent has submitted that the questionregarding deletion of disallowance of Rs. 83,87,237/- u/s 40(a)(ia)of the Income Tax Act, 1961, by learned ITAT by holding that theinterest paid by assessee is governed by section 194A(3)(v) asagainst section 194A(3)(i)(b) contemplated by the revenuedepartment. He also contended while inviting the provisions as under:- a) Section 194(3)(v), prior to its amendmentby the Finance Act, 2015, provides exemptionfrom deduction of tax at source as under:- “v) to such income credited or paid by a co-operative society to a member thereof or toany other co-operative society”. 7.The Tribunal while considering the same has affirmed thefinding given by the CIT(A). 8. Counsel for the respondent has submitted that the questionregarding deletion of disallowance of Rs. 83,87,237/- u/s 40(a)(ia)of the Income Tax Act, 1961, by learned ITAT by holding that theinterest paid by assessee is governed by section 194A(3)(v) asagainst section 194A(3)(i)(b) contemplated by the revenuedepartment. He also contended while inviting the provisions as under:- a) Section 194(3)(v), prior to its amendmentby the Finance Act, 2015, provides exemptionfrom deduction of tax at source as under:- “v) to such income credited or paid by a co-operative society to a member thereof or toany other co-operative society”. The revenue department interpreted section194(3)(v) as co-operative society mentionedtherein does not include co-operativesocieties engaged in banking business asseparate exemption upto Rs. 10,000/- wasavailable to them under section 194A(3)(i)(b)of the Act. b) the Circular no. 9/2002 dated 11.9.2002,issued by CBDT, exempted co-operative banksfrom deducting tax at source under section194A(3)(v) of the Act. The ld. ITAT, in the present appeal, upholdingthe order of the learned CIT(A), decided theissue in favour of the assessee afterconsidering the aforesaid CBDT circular,various judgments cited before it and Hon’bleSupreme Court’s judgment in the case of K.P.Varghese vs. ITO (1981) 131 ITR 597 (SC)holding that circulars issued by CBDT whichare favourable to assessee are binding on therevenue. c) the Finance Act, 2015, amended theaforesaid provisions of section 194A(3)(v)w.e.f. 01.06.2015 as under:- “v) to such income credited or paid by a co-operative society (other than a co-operativebank) to a member thereof or to such incomecredited or paid by a co-operative society toany other cooperative society.” From the above amendment made by theFinance Act, 2015, with prospective effectfrom 01.06.2015 co-operative banks shall beliable to deduct tax at source on interestpayments. However, for the period prior to01.06.2015, co-operative banks were coveredunder the exemption under section 194A(3)(v) and hence not liable to deduct tax atsource on interest payments. Since thepresent appeal relates to assessment year2011-12, the respondent cooperative bankwas exempted from the requirement of tax atsource under section 194A(3)(v) of the Act.” 9.He has also relied upon the decision of Madras High Court in case of M/s The Coimbatore District vs. The Income Tax reportedin 382 ITR 266 wherein it has been held as under:- “As there is no difference in the functioning of theco-operative banks and other commercial banks,the Finance Act, 2006 and Finance Act, 2007amended the provisions of the Act to provide forco-operative banks a taxation regime which issimilar to that for the other commercial banks.Therefore, there is no rationale for treating the co-operative banks differently from other commercialbanks in the matter of deduction of tax andallowing them to avail the exemption meant forsmaller credit co-operative societies formed for thebenefit of small number of members. However, asmentioned earlier, a doubt has been created regarding the applicability of the specificprovisions mandating deduction of tax from thepayment of interest on time deposits by the co-operative banks to its members by claiming thatgeneral exemption provided is also applicable forpayment of interest to member depositors. In viewof this, it is proposed to amen the provisions of thesection 194A of the Act to expressly provide fromthe prospective date of 1st June, 2015 that theexemption provided from deduction of tax frompayment of interest to members by a co-operativesociety under section 194A(3)(v) of the Act shallnot apply to the payment of interest on timedeposits by the co-operative banks to itsmembers. regarding the applicability of the specificprovisions mandating deduction of tax from thepayment of interest on time deposits by the co-operative banks to its members by claiming thatgeneral exemption provided is also applicable forpayment of interest to member depositors. In viewof this, it is proposed to amen the provisions of thesection 194A of the Act to expressly provide fromthe prospective date of 1st June, 2015 that theexemption provided from deduction of tax frompayment of interest to members by a co-operativesociety under section 194A(3)(v) of the Act shallnot apply to the payment of interest on timedeposits by the co-operative banks to itsmembers. 63. It can be seen from the last part of the portionextracted above that the very note explaining theclause was specific to the effect that the proposalwas to bring forth an amendment with prospectiveeffect from 1.6.2015. There is no dispute now thaton and from 1.6.2015 the appellant cannot escapethe liability from deduction of tax at source. 64. Once an amendment is introduced, for thepurpose of removing the anomalous situation orfor the purpose of removing the confusions both inthe manner in which the provisions stood and themanner in which they were understood, the samecould be taken only to have prospective effect. Itmust be pointed out that the Parliament did notchoose to answer a question. Rather it chose toamend the provisions. It is now well settled thatan amendment can only be prospective unless it ismade retrospective by express language ornecessary implication. Apart from the fact that theexpress language of Section 194A afteramendment does not indicate any retrospectivity,the note explaining the clauses goes one stepfurther in making it clear that it was intended tohave prospective effect from 1.6.2015.” 9.1. He has relied upon another decision of Karnataka High Court in Tax Appeal No. 100116/2014 decided on 16[th] December, 2015 wherein it has been held as under:- “2. The Ministry of Finance, Government ofIndia vide Circular No.19/2015 inF.No.142/14/2015- TPL, has held that theCo-operative Banks are not required todeduct tax at source on time deposits of its members paid or credited on or before1.7.2015. The relevant portion of thecircular reads as under: “42.5 In view of this, the provisions of thesection 194A(3)(v) of the Income-tax Acthave been amended so as to expresslyprovide that the exemption provided fromdeduction of tax from payment of interestto members by a co-operative societyunder section 194A(3)(v) of the Income-tax Act shall not apply to the payment ofinterest on time deposits by the co-operative banks to its members. As thisamendment is effective from theprospective date of 1[st]June, 2015, the co-operative bank shall be required todeduct tax from the payment of intereston time deposits of its members, on orafter the 1[st]June, 2015. Hence, acooperative bank was not required todeduct tax from the payment of intereston time deposits of its members paid orcredited before 1 stJune, 2015.” 9.2. He has also relied upon the decision of Karnataka High Court in case of Commissioner of Income Tax, Belgaum vs. ShriSiddeshwar Co-operative Bank Ltd. reported in [2016] 71taxmann.com 126 (Karnataka) wherein it has been held asunder:- “The definition of non-performing assets is asfollows:- 1. Non-performing assets: An asset, including a leased asset, becomesnon-performing when it ceases to generateincome for the bank. A “non-performing asset” (NPA) is a loan or anadvance where: (i) the interest and/or instalment of principalremain overdue for a period of more than 90 days in respect of a term loan; ii) the account remains “out of order” for aperiod of more than 90 days as indicated below,in respect of an Overdraft/Cash Credit (OD/CC); iii) the bill remains overdue for a period of morethan 90 days in the case of bills purchased anddiscounted; “The definition of non-performing assets is asfollows:- 1. Non-performing assets: An asset, including a leased asset, becomesnon-performing when it ceases to generateincome for the bank. A “non-performing asset” (NPA) is a loan or anadvance where: (i) the interest and/or instalment of principalremain overdue for a period of more than 90 days in respect of a term loan; ii) the account remains “out of order” for aperiod of more than 90 days as indicated below,in respect of an Overdraft/Cash Credit (OD/CC); iii) the bill remains overdue for a period of morethan 90 days in the case of bills purchased anddiscounted; iv) the instalment of principal or interest thereonremains overdue for two crop seasons for shortduration crops; v) the instalment of principal or interest thereonremains overdue for one crop seasons for longduration crops. Banks should, classify an account as NPA only ifthe interest charged during any quarter is notserviced fully within 90 days from the end of thequarter.’ Further, asset classification which is separatelydealt with reference to categories of non-performing assets, as follows: “Banks are required to classify non-performingassets further into the following three categoriesbased on the period for which the asset hasremained non-performing and the realisability ofthe dues; a) Sub-standard Assets b) Doubtful Assets c) Loss Assets” Therefore, it is evident that the merenomenclature adopted with reference to the badloans and advances receivable, would refer to allnon-performing assets of any nature, ofwhatever category it was placed as a non-performing asset and therefore, the decision ofthis court in Canfin Homes Ltd’s case wouldsquarely apply.” 10.We have heard counsel for both the sides. 11.Taking into consideration the date on which the bank wasoriginally treated as a society, it was not justified in deducting theTDS. Thus, the view taken by the CIT(A) is required to beconfirmed therefore, the same is confirmed. 12.In appeal No. 312/2017, no substantial question of lawarises and in appeal no. 246/2016, the issue is answered in favour of assessee against the department. 13.Both the appeals stand dismissed. (VIJAY KUMAR VYAS)J. A.Sharma/37 & 42 (K.S. JHAVERI)J.