Co-operative society TDS exemption applies to interest paid to another co-operative society, but not to Treasury deposits.

Primary Agricultural Credit Societies were treated as entitled to tax deduction at source exemption on interest paid to another co-operative society, because the statutory condition in Section 194A(3)(iii)(v) is satisfied when both payer and recipient are co-operative societies. By contrast, exemption for interest on deposits with the Treasury was denied under Section 194A(3)(iii)(a), because a co-operative society qualifies only if it carries on banking in the legal sense of accepting deposits from the public for lending or investment. A society dealing only with its members does not meet that test, and the exemption must be strictly construed.

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Issues: (i) Whether Primary Agricultural Credit Societies were entitled to exemption from tax deduction at source under Section 194A(3)(iii)(v) of the Income-tax Act, 1961 in respect of interest paid on deposits made with other co-operative societies such as District Co-operative Banks; and (ii) whether such societies were entitled to exemption under Section 194A(3)(iii)(a) of the Income-tax Act, 1961 in respect of interest on deposits made with the Treasury.

Issue (i): Whether Primary Agricultural Credit Societies were entitled to exemption from tax deduction at source under Section 194A(3)(iii)(v) of the Income-tax Act, 1961 in respect of interest paid on deposits made with other co-operative societies such as District Co-operative Banks.

Analysis: The exemption applies to interest credited or paid by a co-operative society to another co-operative society. Since Primary Agricultural Credit Societies are co-operative societies and the deposits in question were made with another co-operative society, the statutory condition was satisfied. The revenue accepted that the exemption would be available in such a situation.

Conclusion: Yes. The petitioners were entitled to exemption under Section 194A(3)(iii)(v) of the Income-tax Act, 1961 in respect of interest from deposits made with co-operative banks.

Issue (ii): Whether such societies were entitled to exemption under Section 194A(3)(iii)(a) of the Income-tax Act, 1961 in respect of interest on deposits made with the Treasury.

Analysis: The phrase "co-operative society engaged in carrying on the business of banking" was construed by reference to the banking law definition of banking, which requires acceptance of deposits from the public for lending or investment. A Primary Agricultural Credit Society, whose activity is confined to dealings with its members and which is excluded from the ordinary application of the Banking Regulation Act, does not satisfy that test merely because it accepts deposits from members or carries on allied financial activities. The exemption, being in the nature of a tax deduction exception, had to be strictly construed.

Conclusion: No. The petitioners were not entitled to exemption under Section 194A(3)(iii)(a) of the Income-tax Act, 1961 in respect of interest from deposits made with the Treasury.

Final Conclusion: The writ petitions succeeded only to the limited extent of recognising exemption for interest received from deposits made with co-operative banks, while the challenge to tax deduction on interest from Treasury deposits failed.

Ratio Decidendi: For purposes of Section 194A(3)(iii)(a) of the Income-tax Act, 1961, a co-operative society is covered only if its business amounts to banking in the legal sense of accepting deposits from the public, and the exemption must be strictly construed.

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