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August 22, 2022

Interest paid by cooperative banks to nominal members is not subject to TDS

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Interest paid by cooperative banks to nominal members is not subject to TDS

Facts and Issues of the case

The appellant is a cooperative-bank registered under the provisions of the Maharashtra Cooperative Act. It is engaged in the business of banking. the Assessing Officer formed an opinion that the income had escaped assessment to tax, as the assessee had failed to deduct TDS on the interest paid on deposits.

Therefore, AO was of the opinion that addition under the provisions of section 40(a)(ia) is required to be made. Accordingly, the assessment was completed by the Assessing Officer after disallowing the interest paid on deposits received from non- members rejecting the contention of the appellant that those categories of persons are nominal members of the society who are also the members of the society.

Observations by the Court

The Court has heard the rival submissions and perused the material on record. The issue in the present appeal relates to the applicability of exemption under clause (v) of sub-section (3) of section 194A of the Act, in the case of a cooperative bank. The provisions of section 194A requires the cooperative bank to deduct tax from interest payment one time deposit, as the amount of such payment exceed the prescribed threshold limit.

Further, the provisions of section 194A(3)(v) provides a general exemption from tax deduction at source on the payment of interest by all the cooperative societies to its members. But the issue in the present appeal relates to whether a nominal member, who is not a registered member of the society, can be treated as a member of the cooperative society whether the exemption is available under clause (v) of sub-section (3) of section 194A of the Act.

There is no dispute as to the fact that the above categories of persons mentioned above are nominal members of the societies as per bye-laws of the appellant society. The term “member” has been defined by the Maharashtra Cooperative Societies Act to include a nominal members.

In the present case also, the provisions of Maharashtra Cooperative Societies Act provides that the members includes nominal members and, therefore, we do not see any reason as to why the exemption under clause (v) of sub-section (3) of section 194A of the Act cannot be given in the case of members referred to above. Therefore, the reasoning of the lower authorities cannot be appreciated in the eyes of law.

Accordingly, the orders of the lower authorities are hereby reversed and direct the Assessing Officer to delete the addition made u/s 40(a)(ia) of the Act for non-deduction of TDS on interest paid on deposit received from the nominal members of the society.


TDS is not to be deducted by co-operative banks on interest paid to its nominal members.


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