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September 24, 2020

TDS on Cash Withdrawal u/s 194N is not applicable when the sums withdrawn do not constitute income for recipient

by shivam jaiswal in Income Tax, Legal Court Judgement

TDS on Cash Withdrawal u/s 194N is not applicable when the sums withdrawn do not constitute income for recipient

The Government of India to discourage cash transactions in the country and promote digital economy, introduced Section 194N in the Income Tax Act, 1961 for deducting tax at source (TDS) at the rate of 2% on cash withdrawals over and above Rs 1 crore. The Finance Act, 2020 tightened it by lowering the threshold of Rs 1 crore to Rs 20 lakh for those who have not filed their income tax returns (ITRs) for the past three years. Further, the rate of TDS has also been increased to 5% for taxpayers whose withdrawal exceeds Rs 1 crore.

The below mentioned persons making the cash payment will have to deduct TDS under Section 194N:

  • Every banking company
  • A co-operative bank
  • A post office

The Central Government, in consultation with the Reserve Bank of India (RBI), is empowered to exempt by way of notification in Official Gazette, persons or class of persons so that payments made to such persons or class of persons shall not be subjected to TDS under section 194N.

Consequences of TDS defaults are covered under 201 and 201(1A) of Income Tax Act 1961. Section 201(1) states that any person liable to deduct TDS on the income distributed, makes default in the deduction and/or payment of TDS, shall be treated “assessee in default” and penalty U/s 221 shall be payable by such assessee. The only rescue given to assessee is that the TDS deductible in respect of a resident, who has furnished his return of income under section 139 and has taken into account such sum for computing the income and the due taxes are paid on such income, shall not be considered for the purpose of section 221 on furnishing a certificate from an Accountant.

According to section 201(1A), without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest:-

  • at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and
  • at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid,

and such interest shall be paid before furnishing the statement in accordance with the provisions of section 200(3)

Let us refer to the case of Tirunelveli District Central Cooperative Bank Limited Vs JCIT- TDS (Madras High Court) where the issue under consideration was whether TDS on Cash Withdrawal u/s 194N is applicable even though the sums withdrawn did not constitute income in the hands of the recipient.

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Facts of the Case:

  • The petitioners were Societies registered under the Tamil Nadu Co-operative Societies Act, 1983, licensed by the RBI to carry on banking business.
  • The main account holders with the petitioners were various Primary Co-operative Societies, who provided loans and advances to the end recipients.
  • The petitioners granted loans to the member-Societies by crediting the same in the loan accounts standing in their names.
  • The member-Societies in-turn transferred the funds to the farmers through banking channels, if they also had accounts. Most of the farmers did not have bank accounts. Therefore, the member-Societies withdrew cash from their accounts for making cash disbursements.
  • The Government of Tamil Nadu utilized the banking infrastructure of the petitioners and their member-Societies for distributing welfare assistance to the ration cardholders on Pongal.
  • Every ration cardholder was entitled to collect Rs.1,000 along with Pongal gift. The Tamil Nadu Civil Supplies Corporation is the Nodal Agency and the petitioner-Banks along with the Primary Co-operative Societies were roped in to lend their logistical support.
  • The petitioners contended that such withdrawal of cash by the Primary Co-operative Societies from the Savings Bank Account maintained by them with the petitioners would not constitute income at the hands of the respective Primary Co-operative Societies.
  • The jurisdictional Income Tax Officers conducted survey proceedings at the business premises of the petitioners under Section 133A[2A] of the Income Tax Act, 1961 and found that the petitioners were not deducting tax as required under Section 194N.
  • The jurisdictional authority informed the banks that they had failed to comply with the provisions of Section 194N and called upon them to explain in writing as to why an order should not be passed under Section 201[1] and 201[1A] to recover the default amount with interest from them.
  • The impugned orders stated that the petitioners herein were Co-operative Banks engaged in the business of banking and that they had failed to comply with the terms of Section 194N and the explanation given by them was not satisfactory
  • The jurisdictional authorities noted that various Co-operative Societies were account holders of the petitioners herein. The account holders were not carrying on the business of banking. Therefore, the petitioner-Banks were obliged to have deducted tax when the cash withdrawals exceeded the limit of Rs 1 crore.
  • The petitioners failed to do so. Since the deductor Banks defaulted in complying with the provisions of the statutory provisions, they were deemed to be the assessees in default.
  • It was declared that the petitioners were liable to pay the said default amount with interest.

Observations of the HC on the role of the petitioners while acting as business correspondents

  • The petitioners initially contended that the primary Societies, who withdrew sums beyond the limit of Rs 1 crore were also Co-operative Societies engaged in carrying banking business. But this contention was effectively demonstrated to the incorrect by the Standing counsel.
  • The exempting proviso to Section 194N also included business correspondents of the Co-operative Societies engaged in carrying on the business of banking.
  • The petitioners drew attention to G.O.(2D) No.66, Co-operation, Food and Consumer Protection Department dated 26.11.2019, whereby, the Tamil Nadu Government had sanctioned cash support of Rs.1,000 to all the rice cardholders.
  • The Tamil Nadu Civil Supplies Corporation was appointed as the Nodal Agency for distribution of cash support for the Pongal festival 2020. It was to coordinate with the Co-operative Societies to ensure the distribution of cash support to all the rice cardholders.
  • The petitioners acted as a channel between the Government and the end recipients. The Government had placed this welfare fund in the hands of the petitioner-Banks, who in-turn credited the same in the Saving Bank accounts of the member-Societies, who after withdrawing the same, distributed to the end-recipients, namely, rice cardholders.
  • This business correspondent model was initiated by the RBI to promote financial inclusion in India. Under this framework, the Banks were permitted to use the services of third-party agents to provide banking and financial services such as credit and savings on their behalf.
  • In the case on hand, the Primary Co-operative Societies acted as business correspondents to pass on the cash benefit as mandated by the State Government.
  • HC therefore concluded that at least this part of the transaction between the petitioners and their members would qualify for being exempted under the proviso to Section 194N.
  • Therefore, when the entire volume of transaction was taken into account, this part had to be necessarily segregated.
  • The petitioner-Banks could not have deducted 2% from the Pongal gift fund even if it had breached the ceiling limit of Rs 1 Crore. If the writ petitioner-Banks had done so, they would have violated the mandate issued by the State Government.
  • The impugned orders had failed to take note of this relevant aspect. If a quasi-judicial order did not take note of relevant materials, it was liable to be quashed on that ground.

Observations of HC on assessment done before the end of the previous year

  • The key expression occurring in Section 194N was “during the Previous Year”.
  • Section 3 defined “previous year” as the financial year immediately preceding the assessment year.
  • The transactions in question had taken place during 01.04.2019 to 31.03.2020. The assessment year can only be 2020-2021.
  • In fact, in all the impugned orders 2020-2021 were rightly shown as the assessment year. However, the assessments were made even before the previous year ended.
  • Thus, on the very face of it, the impugned orders were hastily and prematurely passed.

Observations of the HC pertaining to provisions of Section 201

  • The orders were passed under Section 201.
  • A mere look at Section 201 would indicate that the deductor even if he had failed to comply with the requirements of Section 194N, shall not be deemed to be an assessees in default in respect of such tax, if the payee had furnished his return of income under Section 139 and had taken into account such sum for computing income in such return of income and had paid the tax due on the income declared by him in such return of income and that certificate is furnished in the prescribed format.
  • The standing counsel urged that HC should ignore the nature of the transaction by having regard to the object behind incorporation of Section 194N and the language of Section 198.
  • Section 194N was introduced to promote digital payments and to discourage the practice of making business payments in cash
  • To promote a less cash economy, TDS at 2% was proposed to be levied on cash withdrawal exceeding Rs 1 crore in a year from the bank account.
  • The core argument of the Standing Counsel was that even if the sum withdrawn by the member-Societies did not represent income at their hands still the petitioner-Banks were obliged to deduct 2% on sum exceeding Rs 1 crore.
  • But, Section 194N indicated that this deduction was to be a deduction of income tax at source. Section 194N was falling under Chapter XVII that dealt with collection and recovery of tax.
  • Section 198 stated that the sum deducted in accordance with Section 194N for the purpose of computing the income of an assessee should not be deemed to be the income received.
  • Having regard to the overall scheme of the chapter and particularly, by reading Section 194N along with Section 201, one can safely come to the conclusion that if the sum received by the assessee would not be an income at his hands, then, the question of deduction under Section 194N would not arise.

Reference to Commissioner of Income Tax Vs. M/s. Vasisth Chay Vyapar Limited (2019) by HC

  • The Supreme Court observed that income tax was levied on income. If income did not result at all, there could not be levy of tax.
  • Even if an entry of hypothetical income was made in the books of account, but, if the income did not result at all, then there was neither accrual nor receipt of income and no tax could be levied.
  • As rightly contended by the standing counsel, the deductor cannot himself decide whether the sum withdrawn by the account-holder would not represent income at his hands and therefore, they were not obliged to deduct TDS at 2% on the sum exceeding the ceiling limit.
  • But if in the enquiry, the deductor was able to place materials before the authority so as to bring his case within the proviso to Section 201(1), the authority was bound to drop further proceedings.

HC referred to the case of Hindustan Coca Cola Beverages Private Limited Vs. Commissioner of Income Tax

  • The Supreme Court in the said decision observed that the circular No. 275/201/95- IT(B) dated 29.1.1997 issued by the Central Board of Direct Taxes should put an end to the controversy.
  • The circular declared that no demand visualized under Section 201(1) should be enforced after the tax deductor had satisfied the officer-in-charge of TDS, that taxes due were paid by the deducted-assessee.
  • However, this would not alter the liability to charge interest under Section 201(1A) till the date of payment of taxes by the deducted-assessee or the liability for penalty under Section 271C.

Observations of HC on the current case

  • HC did not fault the respondents for having issued show cause notices to the writ petitioners for not having complied with Section 194N.
  • But then, the enquiry could have been held only after the commencement of the assessment year and not in the previous year itself.
  • HC did not agree with the stand of the petitioners’ that the volume of transaction that had taken place prior to 01.09.2019 should be ignored.
  • The standing counsel stated that the computation of tax was made only with effect from 01.09.2019 and there was no levy on the transaction before the cut-off date.
  • CBDT had issued a clarification that the provision having come into effect from 01.09.2019 any cash withdrawal prior to the said date would not be subjected to TDS.
  • However, since the threshold of Rs 1 crore was with respect to the previous year, with reference to the assessment year 2020-2021, the cash withdrawal for triggering Section 194N shall be counted from 01.04.2019.
  • The petitioners did not question the validity of the provision. The provision employed the expression “Previous year”.
  • With reference to the assessment year 2020-2021, the previous year would mean the period commencing from 01.04.2019 to 31.03.2020.
  • A taxing provision had to be understood in a plain manner. Such an application of the provision would not amount to retrospective operation.
  • If TDS was levied even on transactions that had taken place prior to 01.09.2019, then, that would be illegal, but that was not the case here.
  • Therefore, HC sustained the stand of the standing counsel that to calculate the threshold limit of Rs 1 crore, the transactions that had taken place with effect from 01.04.2019 would be taken into account, but actual levy of tax would be on the cash withdrawals that had taken place with effect from 01.09.2019.
  • HC also sustained the stand of the Standing counsel that the department need not wait till the time limit for the assessees to file their returns for the assessment year gets over. It was open to the department to initiate action against the deductors, who failed to act as per the requirements under Section 194N, as they also were deemed assessees.
  • However, when the enquiry was conducted, it was open to the noticees, who were to be treated as assessees in default to place materials before the Assessing Officer (AO) that the amounts received by the recipients did not represent income at their hands.
  • If by then, the assessees had also filed their returns and the case fell under the proviso to Section 201(1), the petitioners who failed to deduct cannot be fastened with any liability.

Order passed by the HC

  • Since the AO had not taken into account the entire scheme of the Act and had proceeded at breakneck speed, HC interfered with the impugned proceedings and they were accordingly quashed.
  • The matters were remitted to the file of the respective jurisdictional Assessing Officers.
  • The AO would issue fresh hearing notices to the writ petitioners. The writ petitioners could bring on record the returns filed by the member-Societies who had withdrawn cash beyond the ceiling limit of Rs 1 crore.
  • The AO would exclude Pongal cash gift distributed by the petitioner-Banks at the instance of the Government of Tamil Nadu from the entire computation.
  • This was because the member-Societies merely acted as business correspondents of the writ petitioners.
  • As regards the remaining amounts, it was open to the writ petitioners to establish before the AO that the sums withdrawn by the member-Societies did not represent income at their hands.
  • As evidence the annual income tax returns filed by the member-Societies can be produced.
  • If the respondent was satisfied that the amounts withdrawn by the member-Societies did not in fact represent income at their hands, the jurisdictional AO will drop further action.
  • If they are not so satisfied, it was open to the AO to pass further orders in accordance with law.

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