Co-Operative Bank Not Obligated To Deduct TDS On Interest Paid To Non-Member Co-Operative Societies Under Section 194A(3)(v) Income Tax Act: Bombay High Court

"The legislature in not excluding the co-operative banks in the second part has made such intention clear to grant the benefit to co-operative banks to remain exempted from the applicability of sub-section (1) of Section 194A." Bombay High Court, in a significant ruling, held that a co-operative bank is not under an obligation to deduct tax at source (TDS) on interest paid to non-member co-operative societies under Section 194A(3)(v) of the Income Tax Act, 1961.

A division bench comprising Justice G.S. Kulkarni and Justice Aarti Sathe observed that the second limb of Section 194A(3)(v) applies to all co-operative societies, including co-operative banks, when paying interest to other co-operative societies, regardless of membership status.

The appellant, Citizen Credit Co-operative Bank Ltd., a multi-state co-operative society holding an RBI banking license, faced scrutiny for multiple branches for Assessment Year 2016-17. The Income Tax Department initiated proceedings under Section 201/201(1A) of the IT Act, treating the bank as an assessee-in-default for failing to deduct TDS on interest paid on fixed deposits held by co-operative housing societies that were not its members. Both the Assessing Officer and the Commissioner of Income Tax (Appeals) ruled against the bank, a view subsequently upheld by the Income Tax Appellate Tribunal (ITAT), prompting the present appeals.

The primary question before the court was whether a co-operative bank is entitled to exemption from deducting income tax under Section 194A(3)(v) qua interest amounts paid to depositors who are co-operative societies. The court was also called upon to determine whether the lower authorities erred in treating the bank as an assessee-in-default under Section 201(1) and levying interest under Section 201(1A) of the Act.

Court Analyzes Dual Structure of Section 194A(3)(v) - "Section 194A(3)(v) Contains Two Distinct Limbs"

Analyzing the statutory framework, the court observed that Section 194A(3)(v) must be bifurcated into two independent parts. The first part, concerning interest paid by a co-operative society (other than a co-operative bank) to its members, explicitly excludes co-operative banks from claiming exemption for member-depositors post the Finance Act, 2015 amendment. However, the second part exempts interest paid by a co-operative society to any other co-operative society without such an exclusion.

"Legislature Consciously Omitted Co-operative Banks From Second Limb"

The bench noted that the inherent legal character of a co-operative bank as a co-operative society does not stand obliterated merely because it holds a banking license. The court emphasized that if the legislature intended to exclude co-operative banks from the second limb of clause (v), it would have done so expressly, just as it did in the first limb.

"CBDT Circular No. 19 of 2015 Supports Exemption"

Referring to Central Board of Direct Taxes (CBDT) Circular No. 19 of 2015, the court highlighted paragraph 42.7, which explicitly clarifies that the existing exemption under Section 194A(3)(v) for interest paid by a co-operative society to another co-operative society continues to apply to co-operative banks. The bench criticized the ITAT for erroneously relying on paragraph 42.5—which deals with member deposits—while completely overlooking paragraph 42.7.

"Section 80P and Section 194A Operate at Different Stages"

Addressing the revenue's reliance on Section 80P(2)(d), the court held that mixing assessment-stage deductions under Section 80P with transactional-stage TDS obligations under Section 194A was legally misconceived. While Section 80P determines final tax liability, Section 194A(3)(v) operates as a self-contained exemption mechanism at the point of credit or payment.

"No Distinction Between Co-operative Societies Engaged in Banking and Banks"

Relying on the Madras High Court ruling in Coimbatore District Central Co-operative Bank Ltd. and the Kerala High Court decision in Kaipuzha Service Co-operative Bank Ltd., the bench reiterated that statutory enactments do not create a dichotomy between co-operative societies engaged in banking and co-operative banks for the purpose of inter-society interest payments.

Concluding the matter, the High Court quashed and set aside the impugned tribunal order. The court answered the substantial questions of law in favor of the assessee, holding that the bank is entitled to exemption under Section 194A(3)(v) for interest paid to non-member co-operative societies and cannot be treated as an assessee-in-default under Section 201.

Date of Decision: 06 August 2026