Bombay HC Deletes Section 194A TDS Demand on Co-operative Bank for AY 2016-17

Decision in brief

The Bombay High Court ruled in favour of Citizen Credit Co-operative Bank Ltd. in a batch of eight appeals concerning AY 2016-17. It held that the second part of Section 194A(3)(v), as applicable to that year, covered interest paid by one co-operative society to another co-operative society.

A co-operative bank does not lose its basic legal character as a co-operative society merely because it carries on banking business. Therefore, interest paid by the bank to depositors that were co-operative societies fell within the inter-society exemption considered by the Court.

The ruling is important but year-specific. A later amendment made by the Finance Act, 2020 can change the TDS result for later financial years when its statutory conditions are met.

Background of the dispute

Citizen Credit Co-operative Bank was registered as a multi-State co-operative society and held a banking licence from the Reserve Bank of India. Its branches had separate TAN registrations and filed separate TDS returns.

The Department initiated proceedings after examining interest paid on fixed deposits held by co-operative societies. The depositor societies were not members of the bank. Notices under Sections 201(1) and 201(1A) alleged failure to deduct tax under Section 194A.

The Assessing Officer treated the branches as assessees in default. The CIT(A) and the Mumbai ITAT upheld that approach, leading to eight appeals before the Bombay High Court under Section 260A.

Questions before the Bombay High Court

The first question was whether the bank could claim the benefit of Section 194A(3)(v) for interest paid to depositors that were co-operative societies.

The second question was whether the resulting orders under Section 201(1) and the interest charged under Section 201(1A) could survive if no tax was required to be deducted on those payments.

The Court examined the precise wording of Section 194A(3)(v), the definition of a co-operative society in Section 2(19), the 2015 amendment and CBDT Circular No. 19/2015.

Two separate parts of Section 194A(3)(v)

The High Court divided the relevant clause into two distinct parts. The first concerned interest paid by a co-operative society to its member. Following the Finance Act, 2015 amendment, a co-operative bank could not use that member-based exemption for the covered interest payments.

The second part concerned interest paid by a co-operative society to any other co-operative society. Unlike the first part, this wording did not exclude a co-operative bank from the payer category.

The dispute concerned only the second part because the depositors were co-operative societies that were not members of the bank.

What the Finance Act, 2015 changed

The Finance Act, 2015 expressly inserted the words other than a co-operative bank into the member-payment part of Section 194A(3)(v), with effect from 1 June 2015.

The Court said that this exclusion stopped a co-operative bank from claiming the general member exemption for the relevant payments to its members. Citizen Credit Co-operative Bank was already deducting tax on interest credited to members, so that issue was not before the Court.

Crucially, the same exclusion was not inserted into the separate wording for payments from one co-operative society to another co-operative society.

Why a co-operative bank remained a co-operative society

The Court relied on the legal character of the assessee. Citizen Credit was registered as a co-operative society, and the Income-tax Act definition in Section 2(19) includes a co-operative society registered under the relevant law.

Obtaining a banking licence and carrying on banking business did not extinguish that character. A co-operative bank remained a co-operative society for the second part of Section 194A(3)(v), unless the statutory text specifically excluded it.

Because Parliament had expressly referred to a co-operative bank in the first part but not in the second, the Court declined to add an exclusion that the legislation did not contain.

CBDT Circular No. 19/2015 supported the distinction

The Court also examined CBDT Circular No. 19/2015, which explained the Finance Act, 2015 changes. Paragraph 42.7 stated that the exemption for interest paid by a co-operative society to another co-operative society continued to apply.

According to the High Court, that clarification directly supported the bank position. The 2015 amendment targeted the member-based exemption used by co-operative banks, not the separate exemption for inter-society interest payments.

The Court found that the ITAT had focused on the circular discussion concerning member deposits but had not given proper effect to paragraph 42.7.

Why the ITAT view was set aside

The ITAT had treated the 2015 amendment as withdrawing the exemption from co-operative banks more generally. It also relied on provisions dealing with time deposits and the applicable threshold.

The High Court found a legal error in treating both parts of Section 194A(3)(v) on the same footing. The legislature had used different wording, and each part had to be given its own meaning.

The Court held that the second part was not restricted in the manner assumed by the Tribunal. For AY 2016-17, the bank therefore did not have to deduct TDS on the disputed interest paid to non-member co-operative societies.

Final decision

The Bombay High Court answered the substantial questions of law in favour of the assessee. It allowed all eight appeals concerning the Borivali, Mulund, Malad, Kurla, Wadala, Turner Road, Santacruz and Vakola branches.

The common Mumbai ITAT order dated 15 July 2025 was set aside to the extent challenged. The findings treating the bank branches as assessees in default under Section 201(1), together with the related Section 201(1A) interest, could not continue.

The judgment was reserved on 24 July 2026 and pronounced on 6 August 2026.

The assessment year limitation matters

The case concerned AY 2016-17 and the statutory language applicable to that year. This date is not a minor detail. The bank itself stated that it began deducting tax on interest paid to co-operative societies after the later Finance Act, 2020 amendment.

The ruling should therefore be used to analyse disputes under the pre-2020 framework and years governed by comparable wording. It should not be presented as a blanket statement that co-operative banks never need to deduct TDS on interest paid to a co-operative society.

Before relying on the judgment, the payment year, legal status of the depositor, membership position and amendments then in force should be checked.

Finance Act, 2020 caution for later years

The Finance Act, 2020 inserted a proviso affecting co-operative societies covered by clauses (v) and (viia) of Section 194A(3). Broadly, a co-operative society can be required to deduct tax when its turnover in the immediately preceding financial year exceeds Rs. 50 crore and the interest crosses the applicable statutory threshold.

That later proviso can override the exemption when its conditions are satisfied. Current thresholds and the exact text applicable to the relevant financial year must be verified separately because the limits can be amended.

This is why the Bombay High Court result for AY 2016-17 cannot be copied mechanically into a current-year TDS decision.

Practical impact for older TDS disputes

For pre-2020 disputes with similar facts, the judgment provides strong support for separating the member-payment limb from the co-operative-society-payment limb of Section 194A(3)(v).

A co-operative bank facing a Section 201 demand should identify whether the payee was legally registered as a co-operative society and whether the payment fell in a year before the 2020 proviso applied.

The decision can also help a depositor society reconcile Form 26AS, interest certificates and tax return records where the payer did not deduct tax under the earlier framework.

Compliance checklist for co-operative banks

• Identify the financial year and assessment year before applying any Section 194A exemption.
• Verify whether each depositor is a registered co-operative society, a member, an individual or another type of entity.
• Keep society registration certificates, PAN records, deposit documents and interest ledgers.
• Separate interest paid to members from interest paid to another co-operative society.
• For later years, test the Finance Act, 2020 proviso, including turnover and the applicable interest threshold.
• Review the current Section 194A text before quarterly TDS returns are filed.
• Where an older Section 201 demand is pending, map the facts directly to the two limbs identified by the Bombay High Court.
• Preserve the full judgment and CBDT Circular No. 19/2015 with the legal file.

What the ruling does not say

The judgment does not exempt every fixed-deposit interest payment made by a co-operative bank. The payee status, year of payment, membership position and statutory amendments remain decisive.

It does not decide the taxability of the interest in the hands of the recipient society. A payment can be taxable income for the recipient even when the payer was not required to deduct TDS under the provision considered by the Court.

It also does not remove ordinary TDS obligations for member deposits covered by the first part of Section 194A(3)(v) or for later years governed by the 2020 proviso.

Key takeaway

The central principle is that the two parts of Section 194A(3)(v) must be read separately. For AY 2016-17, excluding a co-operative bank from the member exemption did not automatically exclude it from the exemption for interest paid by one co-operative society to another.

Because Citizen Credit remained a co-operative society in law and its relevant depositors were also co-operative societies, the Bombay High Court deleted the TDS default findings against its eight branches.

Conclusion

In Citizen Credit Co-operative Bank Ltd. v. ITO, decided on 6 August 2026, the Bombay High Court delivered a significant Section 194A ruling for AY 2016-17. It held that the 2015 amendment removed the member-based exemption for co-operative banks but did not erase the separate inter-society exemption.

For taxpayers and advisers, the practical lesson is to avoid broad labels and read each statutory limb with the correct year. The decision is valuable for older TDS disputes, while present-year compliance must also account for the Finance Act, 2020 proviso and any later threshold changes.