Bangalore Tribunal holds exemption of interest income in the hands of resident payee does not absolve the payer from tax withholding obligations

In the case of Vijaya Bank ^[1] (Taxpayer), the Bangalore Income Tax Appellate Tribunal (Tribunal) held that the Taxpayer bank was required to withheld taxes while making payment of interest to political party [governed by section (s.)13A of Income Tax Act, 1961 (ITA)) under s. 194A of ITA. This is based on the literal reading of s. 194A of the ITA which does not provide any exemption from withholding on interest paid to political party (covered by s. 13A of the ITA). Hence, the Tribunal held that the Taxpayer ought to have deducted appropriate tax while making payment of interest to political party. Further, the Tribunal also noted that exemption under s. 13A of the ITA in the hands of political party is not a blanket exemption but is subject to satisfaction of certain conditions. In such case, it is incorrect to state that no taxes were required to be deducted when payment is made to a political party. Consequently, the matter was remanded to the tax authority for determining whether benefit of proviso to s. 201 of the ITA (for not treating the Taxpayer bank as assessee-in-default if the recipient has taken into account the subject income while filing its return of income and paid applicable tax on returned income ) is available in the present case.

^[1] DCIT v. Vijaya Bank [ITA No.2296/Bang/2024; order dated 5 December 2025