INCOME TAX ACT, 1961

Section 40(a)(ia)

Business disallowance under section 40(a)(ia) - Interest paid to residents without deduction of tax - Interest being paid by co-operative bank to its members -

Assessee was a co-operative bank. AO made disallowance under section 40(a)(ia) on the ground that the assessee ought to have deducted tax at source under section 194A on interest paid to HUF and unregistered firms, which were not legal members in accordance with bye-laws of the assessee. He alleged that the definition of “Person” in clause 4(ix) of the bye-laws of the assessee did not include HUF and unregistered firms. Assessee submitted that both the said entities were members of the bank as they had been admitted as 'Members' by way of an application made by them to the bank and then passing a resolution to the extent of their admission as members of the bank in its Board of Directors meeting. Held: In terms of section 194A(3)(v), payment of interest by a co-operative bank to its members, whether admitted in accordance with the bye-laws or otherwise, does not require deduction of tax at source. So long as any person is a “Member”, payment of interest to him has to be covered within the mandate of section 194A(3)(v) requiring no deduction of tax at source. Since the assessee made payment of interest to HUF and unregistered firms, which happened to be its “Members”, there was no requirement to deduct tax at source under section 194A on such interest payment made by the assessee and hence, the disallowance made under section 40(a)(ia) was deleted.

REFERRED : Jalgaon District Central Co-operative Bank Ltd. v. UOI & Others (2004) 265 ITR 423 (Bom-HC) : 2004 TaxPub(DT) 0908 (Bom-HC)

FAVOUR : In assessee's favour

A.Y. : 2013-14

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