Deduction of tax at source on interest by co-operative banks must be applied to members time deposits, specific provision prevailing.

The note addresses interpretation of provisions governing deduction of tax at source on interest paid by co-operative societies, holding that specific provisions relating to co-operative banks prevail over the general exemption for co-operative society members. Applying the principle that a special provision overrides a general one, the term "Co-operative Society" in the general exemption is construed to exclude co-operative banks and categories specifically covered by the newer sub-clause. Consequently, co-operative banks must deduct TDS on interest on time deposits paid to members where the interest exceeds the prescribed threshold, and demands framed as tax, interest and recovery consequences under the tax deduction regime are sustained.

---

---

Issues: Whether a co-operative bank engaged in carrying on the business of banking is liable to deduct tax at source under section 194A(1) on interest paid/credited to its members on time (fixed) deposits when such interest exceeds the limit prescribed in the proviso to section 194A(3).

Analysis: The statutory scheme of section 194A(3) contains general and specific exemption clauses. Clause (v) generally exempts interest credited or paid by a co-operative society to its members, whereas the proviso to sub-section (3) and clause (viia)(b) specifically address time deposits with a co-operative society engaged in carrying on the business of banking and raise the exemption threshold to Rs. 10,000 for such deposits. Applying the principle that a specific provision must prevail over a general provision, and adopting a purposive construction to give effect to the legislative objective of securing TDS on interest from time deposits with banks, the term 'co-operative society' in clause (v) must be read as excluding co-operative societies engaged in banking. Contemporaneous explanatory notes and circulars confirm the legislative intent to subject interest on time deposits with co-operative banks to TDS beyond the prescribed limit. Consequently, the specific proviso and clause (viia)(b) operate to require co-operative banks to deduct tax at source on interest on time deposits exceeding the threshold, and failure to deduct renders the bank a defaulter liable to demand under section 201(1) and interest under section 201(1A).

Conclusion: The provisions requiring deduction of tax at source on interest on time deposits with co-operative banks (where such interest exceeds the prescribed limit) apply to co-operative banks engaged in banking; the assessee's appeals are dismissed and the demands under section 201(1) and interest under section 201(1A) are upheld, which is against the assessee and in favour of the Revenue.

---