ITAT Rules Political Parties Not Exempt from TDS: Vijaya Bank Case Remanded for Fresh Review

ITAT Bangalore, in a recent case, ruled that the exemption under section 13A does not remove TDS liability under section 194A, and hence set aside CIT(A)’s relief and remanded the case back to the tax authorities for section 201(1) verification.

The case had been filed by the tax department (DCIT Circle 7(1)(1), Bangalore), challenging an order passed in favour of Vijaya Bank by the National Faceless Appeal Centre, Delhi (NFAC)/CIT(A) on March 27, 2024. The case was decided on December 05, 2025, and is related to the assessment year 2010-11.

The case is regarding a disallowance worth Rs. 6.98 crore made by the tax department under section 40(a)(ia) read with section 194A of the Income Tax Act, related to interest paid to a political party. However, CIT(A)/NFAC had deleted the disallowance, holding that the assessee is not under default under section 201 of the Act.

The key dispute in the present case was whether the bank was obliged to deduct tax at source (TDS) on interest paid to the All India Congress Party, which is a political party enjoying exemption under section 13A of the Income Tax Act. The Assessing Officer disallowed this interest, as no TDS was deducted, asserting that political parties are not exempt from TDS under section 194A.

Previously, the bank disclosed its total income at Rs. 390.56 crore. However, after professing a return, the tax department assessed the bank’s income at Rs. 422.71 crore, making some disallowances under section 40(a)(ia) of Interest paid to Political Party Rs. 6.98 crore. The initial assessment was completed on February 07, 2013, and reassessment was initiated on March 27, 2017. The bank objected to the reassessment; however, the tax department rejected the raised objections and made a disallowance on December 29, 2017.

the aggrieved bank filed an appeal before the CIT(A), who deleted the disallowance, referencing the Punjab & Haryana High Court decision in the Canara Bank case, which held that if the recipient’s income is exempt, the payer cannot be treated as an assessee in default, and thus no disallowance can be made under section 40(a)(ia).

The tax department, dissatisfied with the order of CIT(A), approached the ITAT Bangalore. The appeal was filed late to the statutory allowed deadline; however, the tribunal condoned the delay and accepted the appeal, which resulted from an appeal initially filed before ITAT Mumbai but dismissed for jurisdictional reasons.

During the hearing, the ITAT noted that, “according to the provisions of section 194A of the Income Tax Act, there is no exemption provided in the explanation to section 194A of the Income Tax Act if the interest is paid to a political party. Therefore, according to the provisions of section 194A of the act, the tax should have been deducted by the assessee bank at the time of making payment to political parties.” Additionally, exemption under section 13A is conditional and does not automatically relieve the bank of TDS obligations. The ITAT distinguished the Canara Bank case, as it did not concern interest paid to political parties specifically.

Therefore, the ITAT sent the case back to the tax department for reconsideration, directing the bank to prove that the conditions of the first proviso to section 201(1) apply, which could exempt the bank from being deemed an assessee in default and thus avoid disallowance.