ITO-TDS-1(1)(3), MUMBAI vs. BOMBAY MERCANTILE CO-OPERATIVE BANK LIMITED, MUMBAI

The grounds raised by the Revenue in all the four appeals are substantially identical. The principal issue arising for consideration is whether the assessee, being a co-operative bank, was required to deduct tax at source under section 194A of the Act on interest paid or credited on time deposits to other co-operative societies. The Revenue has challenged the view of the learned JCIT(A) that the second limb of section 194A(3)(v) continues to operate in respect of interest paid by a co-operative bank to another co-operative society and that the provisions contained in sections 194A(3)(i)(b) and 194A(3)(viia)(b) do not override the said exemption. The consequential liability under sections 201(1) and 201(1A) is also in dispute.

The brief facts, as emerging from the orders of the Assessing Officer, are that, on verification of the assessee’s TDS records, it was noticed that the assessee had paid or credited interest on deposits maintained with it by various co-operative societies without deducting tax at source. In the lead appeal, the Assessing Officer treated the assessee as an assessee in default under section 201(1) and charged interest under section 201(1A), apart from levying late filing fee under section 234E. Similar orders were passed in the connected appeals in respect of interest paid to other co-operative societies. The Assessing Officer proceeded on the basis that, being a co-operative bank carrying on banking business, the assessee was required to deduct tax under section 194A once the prescribed threshold was exceeded and that the exemption contained in section 194A(3)(v) was not available.

The Assessing Officer, in substance, held that the expression “other than a co-operative bank” inserted in the first limb of section 194A(3)(v) by the Finance Act, 2015 with effect from 01.06.2015 brought co- operative banks within the TDS framework in respect of interest payments. According to the Assessing Officer, sections 194A(3)(i)(b) and 194A(3)(viia)(b), being provisions specifically applicable to a co-operative society engaged in the business of banking, would prevail over the exemption contained in section 194A(3)(v). The contention that the second limb of section 194A(3)(v), relating to payment by one co- operative society to another co-operative society, remained unaffected by the amendment was accordingly not accepted.

Aggrieved, the assessee carried the matter in appeal before the learned JCIT(A). The learned JCIT(A), after considering the submissions of the assessee and the provisions of section 194A(3)(v), held that the amendment made by the Finance Act, 2015 excluded a co-operative bank only from the first limb of clause (v), namely, the exemption in respect of interest paid to its members, whereas no corresponding exclusion was made in the second limb dealing with interest paid by a co-operative society to any other co-operative society. Relying upon the explanatory material relating to the Finance Act, 2015 and the judicial decisions referred to in the appellate orders, the learned JCIT(A) held that the assessee was not required to deduct tax at source on interest paid to the co-operative societies in question and accordingly directed reduction/deletion of the consequential demand under sections 201(1) and 201(1A). The Revenue is aggrieved and is before us.

During the course of hearing, the learned Departmental Representative (ld.DR) relied upon the grounds raised by the Revenue and supported the orders of the Assessing Officer. It was submitted that the assessee, being a co-operative bank, falls within the specific provisions contained in sections 194A(3)(i)(b) and 194A(3)(viia)(b) and, therefore, could not take shelter under the exemption contained in section 194A(3)(v). According to the ld.DR, the amendment made by the Finance Act, 2015 was intended to bring co-operative banks within the TDS regime in respect of interest on time deposits and the interpretation adopted by the learned JCIT(A) would render the specific provisions relating to co- operative banks otiose.

Per contra, the learned Authorised Representative (ld.AR) supported the orders of the learned JCIT(A). It was submitted that the interest in question was paid to co-operative societies which were not members of the assessee and that section 194A(3)(v) contains two distinct limbs. According to the ld.AR, the expression “other than a co-operative bank” was consciously inserted only in the first limb, whereas the second limb covers income credited or paid by a co-operative society to any other co- operative society and contains no such exclusion. It was, therefore, contended that the exemption continued to apply to the assessee in respect of interest paid to other co-operative societies during the year under consideration.

The Ld.AR further placed reliance upon the decision of the coordinate Bench in the assessee’s own case for Assessment Year 2016- 17 in ITA Nos. 1306 and 1307/Mum/2025, dated 26.08.2025, and the subsequent coordinate Bench decision in the assessee’s own case in ITA Nos. 3205 and 3206/Mum/2025, dated 07.01.2026. It was submitted that the controversy concerning the applicability of section 194A(3)(v) to interest paid by the assessee to other co-operative societies had already been considered in the assessee’s own case and that the view taken therein supported the assessee’s claim. Reliance was also placed on the decision of the coordinate Bench in Citizen Credit Co-operative Bank Ltd. in ITA Nos. 6305 to 6402/Mum/2025 and 6385 to 6442/Mum/2025, dated 19.01.2026, which had taken a contrary view, and on the subsequent judgment of the Hon’ble Bombay High Court reversing that decision.

We have considered the rival submissions and perused the material available on record. The controversy before us is whether, for Assessment Year 2016-17, the exclusion of a co-operative bank appearing in the first limb of section 194A(3)(v), after its amendment by the Finance Act, 2015 with effect from 01.06.2015, can be extended to the second limb of the provision, which covers income credited or paid by a co-operative society to any other co-operative society. On a plain reading, the first limb refers to income credited or paid by a co-operative society, other than a co- operative bank, to a member thereof. The words “other than a co- operative bank” qualify the co-operative society in that limb. The second limb, however, refers to income credited or paid by a co-operative society to any other co-operative society. The exclusion of a co-operative bank appearing in the first limb has not been incorporated into the second limb. The statutory language, therefore, does not permit the qualification appearing in the first limb to be extended to the second limb by interpretation.

We also find that this very issue was considered by the coordinate Bench in the assessee’s own case for the same Assessment Year 2016-17 in ITA Nos. 1306 and 1307/Mum/2025, dated 26.08.2025, and thereafter in ITA Nos. 3205 and 3206/Mum/2025, dated 07.01.2026. The coordinate Bench, on consideration of the amended provisions of section 194A(3)(v), took a view in favour of the assessee in respect of interest paid to other co-operative societies. In the absence of any distinguishing feature in the facts or any subsequent binding decision requiring a different approach, judicial discipline ordinarily requires a coordinate Bench to follow the view already taken by another coordinate Bench on an identical issue. We, therefore, take note of and respectfully follow the said decisions, subject to the subsequent binding pronouncement of the Hon’ble jurisdictional High Court referred to hereinafter.

The contention of the Revenue that sections 194A(3)(i)(b) and 194A(3)(viia)(b), being specific provisions, must override section 194A(3)(v) also does not alter the position. The provisions contained in section 194A(3) operate as specified exclusions from the general charging mechanism contained in section 194A(1), and clause (v) itself constitutes a specific statutory exception in respect of the category of payments described therein. Once the payment falls within the second limb of clause (v), namely, income credited or paid by a co-operative society to any other co-operative society, the exemption cannot be displaced merely by characterizing clauses (i)(b) and (viia)(b) as specific provisions. The question has to be answered by giving effect to the language employed by the legislature in the respective clauses. The amendment made by the Finance Act, 2015 likewise does not support the construction urged by the Revenue, since the legislature specifically introduced the expression “other than a co-operative bank” in the first limb but did not introduce a corresponding exclusion in the second limb.

One of the grounds raised by the Revenue refers to the decision of the Coordinate Bench of the Tribunal, Mumbai, in the case of Citizen Credit Co-operative Bank Ltd. in ITA Nos. 6305 to 6402/Mum/2025 and 6385 to 6442/Mum/2025, dated 19.01.2026, wherein it was held that the provisions contained in sections 194A(3)(i)(b) and 194A(3)(viia)(b) would prevail over section 194A(3)(v). The Ld.AR has pointed out that the said decision has subsequently been reversed by the Hon’ble jurisdictional High Court in the case of Citizen Credit Co-operative Bank Ltd. v. Income Tax Officer, TDS Ward, Mumbai, in Income Tax Appeal (L) No. 2533 of 2026 along with Interim Application No. 3436 of 2026 and connected appeals, vide judgment dated 06.08.2026.

We have carefully considered the aforesaid judgment of the Hon’ble Bombay High Court. The issue before the Hon’ble High Court was whether a co-operative bank was entitled to exemption from deduction of tax at source under section 194A(3)(v) in respect of interest paid to depositor co-operative societies which were not its members. The Hon’ble High Court held that section 194A(3)(v) is required to be read in two distinct parts: the first part refers to income credited or paid by a co-operative society, other than a co-operative bank, to a member thereof, whereas the second part refers to income credited or paid by a co-operative society to any other co-operative society. The Hon’ble High Court observed that, while the legislature had consciously excluded a co-operative bank from the first part, no such exclusion had been made in the second part. It further held that the inherent legal character of a co-operative bank as a co-operative society does not stand extinguished merely because it carries on the business of banking and that a co-operative bank consequently continues to fall within the expression “co-operative society” occurring in the second part of section 194A(3)(v). The Hon’ble High Court also took note of paragraph 42.7 of CBDT Circular No. 19/2015 dated 27.11.2015, which clarifies that the existing exemption under section 194A(3)(v) in respect of interest paid by a co-operative society to another co-operative society continues to apply to co-operative banks and, consequently, a co- operative bank is not required to deduct tax at source from interest paid on time deposits to a depositor being a co-operative society.

The Hon’ble Bombay High Court accordingly held that the assessee before it was entitled to exemption from deduction of tax at source under section 194A(3)(v) in respect of interest paid to non-member co-operative societies and, consequently, could not be treated as an assessee in default under section 201(1) or be subjected to consequential interest under section 201(1A). The impugned order of the Tribunal was quashed and set aside. The said judgment, being a subsequent judgment of the Hon’ble jurisdictional High Court on the very issue, is binding upon us. Consequently, the contrary view taken by the Coordinate Bench in its order dated 19.01.2026, which forms the basis of the ground raised by the Revenue, no longer holds the field. The issue before us is, therefore, required to be decided in accordance with the law laid down by the Hon’ble jurisdictional High Court.

In view of the aforesaid legal position, we hold that, for the assessment year under consideration, the interest paid or credited by the assessee, being a co-operative bank, to other co-operative societies is covered by the second limb of section 194A(3)(v) of the Act. The assessee was, therefore, not required to deduct tax at source under section 194A on such payments. Consequently, the foundation for treating the assessee as an assessee in default under section 201(1), and for charging consequential interest under section 201(1A), does not survive in respect of the payments forming the subject matter of the present appeals. The consequential grounds relating to sections 194A(3)(i)(b) and 194A(3)(viia)(b), the amendment made by the Finance Act, 2015 and the interpretation of the second limb of section 194A(3)(v) stand answered accordingly.

In the result, the relief granted by the learned JCIT(A) on the principal issue and, consequently, the deletion/reduction of the demand under sections 201(1) and 201(1A), calls for no interference. The grounds raised by the Revenue in ITA Nos. 7397, 7398, 7399 and 7400/Mum/2026 are dismissed and the respective orders of the learned JCIT(A) are upheld to the extent challenged before us.

In the result, all the four appeals filed by the Revenue are dismissed.