Co-operative Bank's TDS Exemption on Interest Paid to Non-Member Co-operative Societies Upheld — ITAT Mumbai
Overview of the Case
The Income Tax Appellate Tribunal, Mumbai Bench, adjudicated four consolidated appeals filed by Citizencredit Co-operative Bank Limited against orders passed by the Additional Commissioner/Joint Commissioner of Income-tax (Appeals), which had in turn arisen from proceedings initiated by the Income Tax Officer, TDS Ward, Mumbai, under Section 201(1)/Section 201(1A) of the Income-tax Act, 1961.
The central controversy across all four appeals was whether Citizencredit Co-operative Bank Limited — an urban co-operative bank — was obligated to deduct tax at source under Section 194A on interest paid to co-operative societies that were neither its members nor eligible to become members under its bye-laws, and whether the bank could consequently be declared an assessee-in-default.
The four appeals — ITA No. 1482/Mum/2026, ITA No. 1483/Mum/2026, ITA No. 1484/Mum/2026, and ITA No. 1485/Mum/2026 — were heard together and disposed of by a single consolidated order, with ITA No. 1482/Mum/2026 treated as the lead appeal.
Background and Factual Matrix
On examination of the assessee's TDS records, it was observed that the bank had paid or credited interest on fixed deposits held by several co-operative societies that did not qualify as members of the bank and could not, under the bank's bye-laws, become members. No tax was deducted at source on such interest payments. The assessee's position was that these payments were covered by the second limb of Section 194A(3)(v) of the Income-tax Act, 1961, which exempts interest paid by a co-operative society to any other co-operative society from TDS obligations.
The Assessing Officer (AO) issued a show-cause notice under Section 201(1)/Section 201(1A) requiring the assessee to explain why TDS had not been deducted. The assessee reiterated its exemption claim, but the AO rejected the explanation and passed an order declaring the bank an assessee-in-default, raising demands for tax and interest.
Grounds Raised in Each Appeal
The grounds across the four appeals can be categorised as follows:
- ITA Nos. 1482/Mum/2026 and 1485/Mum/2026: Five identical grounds each, all centered on the applicability of
Section 194A(3)(v)to a co-operative bank paying interest to non-member co-operative societies. - ITA No. 1483/Mum/2026: Seven grounds — Grounds 1 to 5 mirror the above; Ground 6 concerns TDS obligations on NRE fixed deposit interest paid to five NRE account holders; Ground 7 pertains to interest on a fixed deposit closed before the Finance Act, 2015 amendment came into effect.
- ITA No. 1484/Mum/2026: Six grounds — Grounds 1 to 5 are identical to the common issue; Ground 6 raises the question of whether the assessee can be treated as an assessee-in-default where the deductee had already filed a return, included the interest income, and discharged the applicable tax liability, with reference to the proviso to
Section 201of the Act.
The Assessing Officer's Threefold Reasoning
The AO's conclusion that TDS was mandatorily deductible rested on three distinct lines of reasoning:
Section 80P argument: The AO contended that an urban co-operative bank, conducting business akin to a commercial bank, does not qualify as a "co-operative society" for the purposes of
Section 80Pof the Act. Consequently, the recipient co-operative societies could not claim the deduction underSection 80P(2)(d)on interest received from the bank, and therefore the bank was obligated to deduct tax.Finance Act, 2015 amendment: The AO held that the amendment introduced by the Finance Act, 2015 with effect from 1st June 2015, which expressly excluded co-operative banks from the exemption under
Section 194A(3)(v)relating to interest paid to members, effectively removed the exemption available to co-operative banks under the said clause.Specific provision prevailing over general: The AO further held that
Section 194A(3)(i)(b)andSection 194A(3)(viia)(b), which prescribe a monetary threshold of Rs. 10,000/- for interest paid by a co-operative bank, being specific provisions, must prevail over the general exemption inSection 194A(3)(v). The AO held that no distinction was warranted between interest paid to member societies and non-member societies.
On the basis of this combined reasoning, the AO declared the assessee an assessee-in-default under Section 201(1) and charged interest under Section 201(1A).