In a significant ruling for cooperative societies, the Visakhapatnam bench of income-tax appellate tribunal (ITAT) has observed that interest paid or payable by a cooperative society to its members is exempt from tax deduction at source (TDS) under Section 194A(3)(v) of the Income Tax Act, 1961.
However, while affirming the legal position, the tribunal remanded the matter to the assessing officer (AO) for fresh adjudication to verify whether the interest payments were made exclusively to members or partly to non-members. In
an order passed last week, the Bench comprising Udayan Das Gupta (judicial member) and Omkareshwar Chidara (accountant member) observed:
"...we are of the opinion that interest paid or payable to the members of the cooperative society are exempt from deduction of tax deducted at source (TDS) as per provisions of section 194A(3)(v) of the Act. However, the issue raised by the tax department representative regarding verification, particularly as to whether interest has been paid only to the members or outsiders, needs to be verified from the books of account and other documentary evidence. In the instant case, the same was not possible as the assessment order was passed ex parte in the absence of any representation by the assessee."
The case involved The Edara Primary Agricultural Cooperative Credit Society Ltd, an Andhra Pradesh-based primary agricultural cooperative credit society that provides credit facilities to its members and supplies agricultural inputs such as fertilisers and seeds. The appeals pertained to assessment years (AYs) 15-16, 16-17 and 17-18.
Dispute over TDS and Section 80P Deduction
For AY2017-18, the assessing officer disallowed the Society's deduction claim under Section 80P amounting to ₹25.89 lakh. The AO also disallowed 30% of the interest expenditure of ₹21.74 lakh under Section 40(a)(ia), holding that the Society had failed to deduct TDS on interest payments aggregating to about ₹72.49 lakh.
Before the tribunal, the Society argued that all interest payments had been made exclusively to its members and not to outsiders. It contended that Section 194A(3)(v) expressly exempts interest credited or paid by a cooperative society, other than a cooperative bank, to its members from TDS requirements.
The Society relied on the statutory provision that excludes such payments from the scope of Section 194A(1), which governs TDS on interest payments.
After examining the submissions, the tribunal agreed with the Society's legal contention.
“We are of the opinion that interest paid or payable to the members of the cooperative society are exempt from deduction of TDS as per provisions of Section 194A(3)(v) of the Act,” the Bench held.
Verification Required
Despite agreeing on the legal principle, the tribunal noted that the assessment had been completed ex parte and that no documentary evidence was available on record to establish whether the interest payments were made solely to members.
The tax department argued that verification was necessary to determine whether any portion of the interest had been paid to non-members, which could alter the tax treatment.
Accepting this contention, the tribunal held that the issue required examination of the books of account and supporting records. It therefore remanded the matter to the assessing officer for fresh adjudication after considering all relevant documentary evidence.
The bench also directed the AO to verify the Society's claim for deduction under Section 80P. The Society had contended that it filed a valid return under Section 139(4) and that the amended provisions of Section 80AC were not applicable to the assessment year in question.
Cash Deposits Also Sent Back for Fresh Examination
The tribunal also dealt with appeals relating to AY15-16 and AY16-17, in which cash deposits made by the Society were treated as unexplained money under Section 69A of the Income Tax Act.
The Society maintained that the deposits represented collections from members and recoveries of loans advanced in the ordinary course of business.
The bench observed that accepting deposits and recovering loans from registered members are routine business activities of cooperative credit societies. However, it held that the identity, genuineness and creditworthiness of members, along with supporting documentary evidence, must be verified by the tax authorities.
Accordingly, the tribunal set aside all three appeals and remanded them to the assessing officer for fresh adjudication after examining the books of account, audit reports and other supporting documents.
The bench clarified that it had not expressed any final opinion on the merits of the disputes and that all legal and factual issues remain open for consideration.
Wider Implications
The ruling is likely to be cited in disputes involving cooperative societies and the applicability of TDS provisions on interest payments made to members. It reinforces the legal position that interest paid by a cooperative society to its members is generally exempt from TDS under Section 194A(3)(v), while highlighting the importance of maintaining proper records to establish member status and support tax claims.
The decision may also have implications for cases in which tax authorities invoke disallowance under Section 40(a)(ia) for alleged non-compliance with the TDS provisions under Section 194A.
