TDS on co-operative bank interest depends on whether deposits are time deposits, with savings and recurring deposits excluded.

A co-operative society carrying on banking business must deduct tax at source on interest paid to members on time deposits above the statutory threshold, because the exemption for co-operative societies does not override the specific treatment of banking societies under section 194A. Interest on savings bank deposits and recurring deposits is not subject to TDS, as those deposits are treated as non-time deposits for this purpose. Where the record does not clearly establish whether the payments related to time deposits or other deposits, a finding of default under sections 201 and 201(1A) cannot be sustained without factual verification, and limited remand is required.

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Issues: (i) Whether a co-operative society engaged in the business of banking was liable to deduct tax at source on interest paid to its members on time deposits under section 194A of the Income-tax Act, 1961; (ii) Whether interest on savings bank deposits and recurring deposits paid by such co-operative society was subject to tax deduction at source; (iii) Whether the orders treating the assessee as an assessee in default under sections 201 and 201(1A) of the Income-tax Act, 1961 could be sustained without verifying the nature of the deposits.

Issue (i): Whether a co-operative society engaged in the business of banking was liable to deduct tax at source on interest paid to its members on time deposits under section 194A of the Income-tax Act, 1961.

Analysis: The provisions of section 194A were read with the legislative history of the exemption clauses and the CBDT circulars. The distinction drawn by the Act between a general co-operative society and a co-operative society engaged in banking was treated as material. The exemption in section 194A(3)(v) was held not to control the specific treatment of banking co-operative societies for time deposits under section 194A(3)(i)(b) and section 194A(3)(viia)(b). The Tribunal concluded that the earlier circular relied upon to extend the exemption was not applicable.

Conclusion: The assessee was liable to deduct tax at source on interest paid to members on time deposits exceeding the statutory threshold, and this issue was decided against the assessee.

Issue (ii): Whether interest on savings bank deposits and recurring deposits paid by such co-operative society was subject to tax deduction at source.

Analysis: The Tribunal held that the statutory scheme specifically brought time deposits within the deduction requirement, while deposits other than time deposits were outside that requirement for a co-operative society engaged in banking. Savings bank deposits and recurring deposits were treated as non-time deposits for this purpose.

Conclusion: The assessee was not liable to deduct tax at source on interest paid on savings bank deposits and recurring deposits, and this issue was decided in favour of the assessee.

Issue (iii): Whether the orders treating the assessee as an assessee in default under sections 201 and 201(1A) of the Income-tax Act, 1961 could be sustained without verifying the nature of the deposits.

Analysis: As the record did not clearly show whether the impugned interest payments related to time deposits or other deposits, the matter required factual verification. The Tribunal therefore set aside the lower orders and restored the matter to the Assessing Officer for the limited purpose of examining the nature of the deposits on which interest was paid.

Conclusion: The finding of default was not finally upheld in full and the issue was remitted for limited verification.

Final Conclusion: The appeals succeeded only in part, with liability upheld for interest on time deposits and relief granted for non-time deposits, and the matter was sent back for factual verification of the deposit-wise position.

Ratio Decidendi: Under section 194A, a co-operative society carrying on the business of banking must deduct tax at source on interest paid on time deposits above the prescribed threshold, while interest on savings bank deposits and recurring deposits is outside that deduction requirement.

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