TDS on government scheme funds: bank interest was exempt, and default liability under sections 201(1) and 201(1A) could not arise.

Interest credited by a bank on programme funds held in a separate account for a Central Government sponsored scheme was treated as belonging to the Ministry of Rural Development and not as the agency's income. On that basis, the payment fell within the exemption for sums payable to the Government under section 196, and the agency was also covered by the notified category under section 194A(3)(iii)(f). The internal accounting manual could not override the statutory position. As the interest was not subject to tax deduction at source, the bank could not be treated as an assessee in default under sections 201(1) and 201(1A).

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Issues: Whether tax was deductible at source under section 194A on interest credited by the bank on programme funds of the State Rural Road Development Agency, and whether the bank could be treated as an assessee in default under sections 201(1) and 201(1A).

Analysis: The funds were held in a separate programme account for a Central Government sponsored scheme, and the interest accrued on those funds was found to belong to the Ministry of Rural Development / Central Government, not to the agency as its income. On that basis, the payment of interest fell within the exemption for sums payable to the Government under section 196. The Tribunal also accepted that the agency was covered by the notified category under section 194A(3)(iii)(f), and that the internal accounting manual could not override the statutory position. Since the interest was not chargeable to TDS in the first place, the bank could not be fastened with liability under sections 201(1) and 201(1A).

Conclusion: The bank was not liable to deduct tax at source on the interest, and the demand raised under sections 201(1) and 201(1A) was unsustainable.

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