Bombay High Court Holds Co-operative Bank Need Not Deduct TDS on Interest Paid to Non-Member Co-operative Societies; Quashes Tribunal Order and Allows Appeals
Bombay High Court Holds Co-operative Bank Exempt From TDS on Interest Paid to Non-Member Co-operative Societies; Allows Appeals
Facts
Citizen Credit Co-operative Bank Ltd. is a Multi-State Co-operative Society registered under the Multi-State Co-operative Societies legislation and holds an RBI banking licence. Thus, while it carries on the business of banking as a co-operative bank, it continues to be a co-operative society.
The dispute concerned Assessment Year 2016-17 and eight branches of the Bank. Each branch had a separate TAN and filed separate TDS returns. The Income Tax Department initiated proceedings under Sections 201(1) and 201(1A) on the ground that the Bank had not deducted TDS under Section 194A on interest paid on fixed deposits maintained by co-operative societies. These depositor societies were not members of the Bank and, according to the Bank, could not become members under its bye-laws.
The Assessing Officer held the Bank to be an assessee-in-default. In the Turner Road branch alone, the disputed interest was Rs. 2,40,89,521. Similar orders were passed for the other seven branches.
The CIT(A) dismissed the Bank’s appeals. The Income Tax Appellate Tribunal also rejected the appeals by its common order dated 15 July 2025, holding that TDS was required on interest paid to other co-operative societies. The Bank therefore approached the Bombay High Court under Section 260A.
Issues
The principal questions before the High Court were:
- Whether a co-operative bank is entitled to the exemption under Section 194A(3)(v) from deducting TDS on interest paid to depositors who are non-member co-operative societies.
- Whether the Bank could consequently be treated as an assessee-in-default under Section 201(1) and made liable for interest under Section 201(1A).
- Whether the Finance Act, 2015 amendment removed the exemption only for interest paid by co-operative banks to their members, or also for payments to other co-operative societies.
- Whether the Revenue and Tribunal had wrongly relied upon paragraph 42.5 instead of paragraph 42.7 of CBDT Circular No. 19/2015.
Appellant’s Arguments
The Bank argued that Section 194A(3)(v) had to be read in two distinct parts.
The first limb concerned interest credited or paid by a co-operative society, other than a co-operative bank, to its members. The Finance Act, 2015 altered the TDS position concerning interest paid by co-operative banks to their members.
However, the second limb separately covered income credited or paid by one co-operative society to another co-operative society. According to the Bank, this limb remained unaffected and squarely covered interest paid by it to depositor co-operative societies that were not its members.
The Bank strongly relied upon paragraph 42.7 of CBDT Circular No. 19/2015, which clarified that the existing Section 194A(3)(v) exemption for interest paid by a co-operative society to another co-operative society continued to apply to co-operative banks.
It further argued that Section 80P had no relevance to the independent question of TDS liability under Section 194A.
Respondent’s Arguments
The Revenue supported the Tribunal’s interpretation.
It contended that the Tribunal had correctly applied Section 194A(3)(v) and that the interpretation advanced by the Bank was erroneous.
The Revenue also disputed the Bank’s reliance upon paragraph 42.7 of CBDT Circular No. 19/2015 and maintained that the Tribunal had correctly relied upon paragraph 42.5.
Accordingly, the Revenue argued that no substantial question of law arose and that the appeals ought to be dismissed.
Analysis of the Law
The High Court undertook a strict interpretation of Section 194A(3)(v).
The Court held that the second limb of the provision continued to cover interest paid by a co-operative society to another co-operative society. A co-operative bank could not simply be excluded from the expression “co-operative society” when the statutory language itself did not create such an exclusion.
The Court stressed a fundamental principle governing interpretation of fiscal statutes: a Court cannot insert words which the legislature has not enacted. Accepting the Revenue’s interpretation would effectively require the Court to read an exclusion of co-operative banks into the second limb of Section 194A(3)(v), despite no such exclusion appearing there.
The statutory interpretation was further reinforced by CBDT Circular No. 19/2015. Paragraph 42.7 expressly stated that the existing exemption for interest paid by one co-operative society to another continued to apply to a co-operative bank and, therefore, a co-operative bank was not required to deduct tax from interest on time deposits paid to a depositor that was itself a co-operative society.
The Court thus distinguished between:
- interest paid by a co-operative bank to its members, to which the 2015 amendment introduced TDS requirements; and
- interest paid to another/non-member co-operative society, which continued to enjoy the statutory exemption.
Precedent Analysis
The Bank relied upon Kaipuzha Service Cooperative Bank Limited & Ors. v. Commissioner of Income Tax (TDS) & Ors. and Coimbatore District Central Cooperative Bank Limited v. Income Tax Officer, TDS Ward-1(5), Coimbatore.
The Bombay High Court particularly examined the Madras High Court’s decision in Coimbatore District Central Co-operative Bank Ltd. The Madras High Court had considered the Banking Regulation Act, Multi-State Co-operative Societies Act and other relevant enactments and held that, except where the Income Tax Act expressly provides otherwise, there is no general statutory dichotomy between a co-operative society carrying on banking business and a co-operative bank.
This supported the proposition that merely because Citizen Credit carried on banking business under an RBI licence, it did not cease to possess its legal character as a co-operative society for purposes of Section 194A(3)(v).
Court’s Reasoning
The High Court found the Revenue’s interpretation inconsistent with the plain language and legislative structure of Section 194A(3)(v).
The 2015 amendment addressed the specific issue of interest paid by co-operative banks to their members. It did not remove the separate exemption applicable where interest was paid by a co-operative society to another co-operative society.
The distinction was expressly confirmed by CBDT Circular No. 19/2015. Paragraph 42.5 concerned the TDS requirement on time-deposit interest paid by co-operative banks to their members after 1 June 2015. By contrast, paragraph 42.7 preserved the exemption for interest paid to depositor co-operative societies.
The Tribunal therefore erred in relying upon paragraph 42.5 without giving effect to paragraph 42.7.
The Court also rejected the approach of mixing Section 80P, which deals with deductions in computing income, with the Bank’s obligation to deduct tax at source under Section 194A. The Assessing Officer’s intermixing of these distinct statutory provisions was held to be unfounded.
Most importantly, the Court held that the Revenue’s interpretation would require words to be inserted into the statute excluding co-operative banks from the second limb of Section 194A(3)(v). Such an interpretation was impermissible, particularly in construing a taxing statute.
Conclusion
The Bombay High Court allowed all eight appeals and quashed and set aside the common judgment and order of the Income Tax Appellate Tribunal.
It held that Citizen Credit Co-operative Bank was entitled to exemption from deduction of TDS under Section 194A(3)(v) on interest paid to its depositors who were non-member co-operative societies.
Consequently, the Bank could not be treated as an assessee-in-default under Section 201(1), nor subjected to consequential interest under Section 201(1A).
The appeals were allowed with no order as to costs.
Case Details
Case: Citizen Credit Co-operative Bank Ltd. v. Income Tax Officer, TDS Ward, Mumbai
Court: Bombay High Court, Ordinary Original Civil Jurisdiction
Case Number: Income Tax Appeal (L) Nos. 2533, 2547, 2548, 2549, 2554, 2555, 2556 & 2558 of 2026 with connected Interim Applications
Judges: Justice G. S. Kulkarni and Justice Aarti Sathe
Date: 06 August 2026
Result: Appeals allowed; ITAT order quashed; Bank held exempt from TDS under Section 194A(3)(v) on interest paid to non-member co-operative societies and not an assessee-in-default under Sections 201(1)/201(1A).
