The Bombay High Court clarified a long-standing ambiguity in the Income Tax Act, holding that a co-operative bank is entitled to the exemption under Section 194A(3)(v) for interest paid to non-member co-operative societies. This decision overturns a tribunal order that had treated the bank as an assessee-in-default and has immediate implications for TDS compliance across the co-operative banking sector.
Background & Facts
The Dispute
The appellant, Citizen Credit Co-operative Bank Ltd. (with branches at Borivali, Mulund, Malad, Kurla, Wadala, Turner Road, Santacruz and Vakola), challenged a common order dated 15 July 2025 passed by the Income Tax Appellate Tribunal, which upheld the Assessing Officer’s determination that the bank was an assessee-in-default under Section 201(1) and Section 201(1A) for failing to deduct tax on interest paid to co-operative societies. The core issue was whether the bank could rely on the exemption in Section 194A(3)(v) for interest credited to non-member co-operative societies.
Key Facts
- The bank is a multi-State co-operative society registered under the Multi-State Co-operative Societies Act, 2002 and holds a banking licence under Section 22(1) read with Section 56(o) of the Banking Regulation Act, 1949.
- Each branch obtained a separate TAN and filed separate TDS returns for Assessment Year 2016-17.
- Notices under Section 133(6) were issued to each branch; the bank complied by furnishing required details.
- On 19 January 2023, the Assessing Officer issued a notice under Section 201(1)/201(1A) to the Turner Road branch alleging non-deduction of TDS on interest of Rs.2,40,89,521 paid to co-operative societies. Similar notices were issued to the other seven branches.
- The bank responded on 20 February 2023 and again on 13 March 2023, contending that the exemption in Section 194A(3)(v) (second limb) applied because the interest was paid to non-member co-operative societies, and that the amendment by the Finance Act, 2015 did not affect this exemption.
- The Assessing Officer, on 24 March 2023, held the bank to be an urban commercial bank, not a co-operative society for the purpose of Section 80P, and ordered it to be treated as an assessee-in-default.
Procedural History
- 15 July 2025: Income Tax Appellate Tribunal (Mumbai Bench) dismissed the bank’s appeals, relying on paragraph 42.5 of CBDT Circular No.19/2015.
- 5 February 2025: Commissioner of Income Tax (Appeals) dismissed the bank’s appeals, rejecting the exemption claim.
- 11 November 2025: Tribunal rejected the bank’s rectification applications.
- 23 July 2026: Bank filed Writ Petition No. 2234 of 2026 challenging the tribunal’s order.
- 24 July 2026: Matter heard by a Division Bench of the Bombay High Court (Coram: G. S. Kulkarni & Aarti Sathe, JJ).
- 06 August 2026: Judgment pronounced.
Parties' Positions
- Appellant (Bank): Asserted that the second part of Section 194A(3)(v) includes co-operative banks, relying on CBDT Circular No.19/2015 paragraph 42.7 and case law (Kaipuzha Service Co-operative Bank Ltd. v. Commissioner of Income Tax (TDS), Coimbatore District Central Co-operative Bank Ltd. v. Income Tax Officer, TDS Ward-1).
- Respondent (IT Officer): Maintained that the amendment by Finance Act, 2015 expressly excluded co-operative banks from the exemption, citing paragraph 42.5 of the same circular and arguing that specific provisions in Section 194A(3)(i)(b) and Section 194A(3)(viia)(b) override the general exemption.
Relief Sought
The bank sought quashing of the tribunal order, declaration of entitlement to the exemption under Section 194A(3)(v) for interest paid to non-member co-operative societies, and reversal of the default status under Section 201(1)/201(1A).
The Legal Issue
Whether a co-operative bank, being a co-operative society under the Multi-State Co-operative Societies Act, 2002, is entitled to the exemption from deduction of tax at source under the second limb of Section 194A(3)(v) of the Income Tax Act for interest paid to non-member co-operative societies, thereby negating its liability as an assessee-in-default under Section 201(1) and Section 201(1A).
Arguments Presented
For the Appellant
- The bank argued that the legislature deliberately omitted the words “co-operative bank” in the second limb of Section 194A(3)(v), indicating an intention to include co-operative banks within the exemption.
- Relied on CBDT Circular No.19/2015 paragraph 42.7, which expressly states that the exemption continues to apply to co-operative banks for interest paid to non-member co-operative societies.
- Cited precedents (Kaipuzha Service Co-operative Bank Ltd.; Coimbatore District Central Co-operative Bank Ltd.) supporting a uniform interpretation of “co-operative society” to include co-operative banks.
For the Respondent
- Contended that the Finance Act, 2015 amendment, as explained in paragraph 42.5 of the circular, expressly excluded co-operative banks from the exemption, making them liable to deduct TDS on such interest.
- Emphasised the specific provisions of Section 194A(3)(i)(b) and Section 194A(3)(viia)(b) that impose a TDS obligation on co-operative banks, arguing that specific provisions override the general exemption.
- Asserted that the Assessing Officer correctly classified the bank as an urban commercial bank for the purpose of Section 80P, thereby negating any exemption claim.
The Court's Analysis
The Court began by interpreting the language of Section 194A(3)(v). It observed that the first limb expressly excludes a co-operative bank, while the second limb makes no such exclusion, suggesting legislative intent to extend the exemption to co-operative banks when the interest is paid to another co-operative society.
“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.”
The Court gave considerable weight to CBDT Circular No.19/2015 paragraph 42.7, which clarifies that the exemption “shall continue to apply to the co-operative bank” for interest paid to non-member co-operative societies. It rejected the Respondent’s reliance on paragraph 42.5, noting that paragraph 42.5 deals with the first limb concerning interest to members, which was not at issue.
The Court also examined the hierarchy of statutory provisions, emphasizing that specific provisions (Section 194A(3)(i)(b) and Section 194A(3)(viia)(b)) cannot be read to override a clear legislative intent expressed in the general exemption clause when the latter is expressly inclusive. It held that the exemption in the second limb is a “general provision” that applies unless expressly excluded, which the amendment did not do.
Furthermore, the Court distinguished the functions of Section 80P (assessment-stage deduction) from Section 194A (transaction-stage TDS), concluding that the Assessing Officer’s conflation of the two provisions was erroneous.
In light of the above reasoning, the Court concluded that the bank is entitled to the exemption under Section 194A(3)(v) for interest paid to non-member co-operative societies and therefore cannot be treated as an assessee-in-default under Section 201(1)/201(1A).
The Verdict
The Division Bench set aside and quashed the tribunal’s order dated 15 July 2025. It held that the appellant-bank is entitled to an exemption from deduction of tax at source under Section 194A(3)(v) for interest paid to its depositors/non-member co-operative societies. Consequently, the bank is not an assessee-in-default under Section 201(1) and Section 201(1A). The appeals were allowed and no costs were awarded.
What This Means For Similar Cases
Legislative Intent Governs Interpretation
- Courts will look to the plain language of a provision and the absence of explicit exclusion to infer legislative intent.
- Practitioners should examine both limbs of a clause separately; an exclusion in one limb does not automatically extend to another.
CBDT Circulars Carry Persuasive Weight
- Paragraphs of CBDT circulars that explain statutory provisions are binding unless contradicted by a subsequent amendment.
- When relying on a circular, cite the specific paragraph (e.g., 42.7) to demonstrate alignment with the legislature’s intent.
Distinguish Assessment-Stage and Transaction-Stage Provisions
- Section 80P deals with deductions at the assessment stage and does not affect the TDS obligation under Section 194A.
- Arguments that mix the two provisions are likely to be rejected.
Practical Checklist for Co-operative Banks
- Verify whether the interest recipient is a co-operative society and not a member; if so, the exemption under Section 194A(3)(v) applies.
- Ensure TDS is deducted only when the interest exceeds the Rs.10,000 threshold post-1 June 2015 for members.
- Maintain documentation of the nature of the depositor (member vs non-member) to substantiate the exemption claim during assessments.
