2023 (12) TMI 936 - HC - Income Tax

Exemption from deduction of Tax u/s 194N and 194A to Co-operative Societies - petitioner had taken a stand that they are business correspondents to pass on the cash benefits as mandated by the State Government and hence, they are qualified for being exempted under Section 194N - DR contented that Central government had also increased the limit of Rs. 1 crore as determined in the provisions of Section 194N of the IT Act to a sum of Rs. 3 Crore, and the same had came into force with effect from 01.04.2023 only with an intention to grant benefits to the members of the Co-operative Societies HELD THAT - The activities of the Co-operative Societies, such as accepting the deposits, paying the interest and thereafter redeeming the same for granting loan to agriculturists, weavers or to it's members, are appears to be partly as a banking activities, however, the active involvement of the petitioners/cooperative societies, to act as a business correspondents of a State Government for the distribution of the cash benefits to its members as well as to the non-members such as Pongal enam, flood relief, Covid reliefs and other reliefs, would appears that it is not a banking transaction but a transaction other than the banking activities in nature. As far as the application of Section 194A of the IT Act is concerned, the petitioners are liable to deduct the TDS as provided thereunder. Whenever the deposits or investments are made with the societies, the societies are liable to deduct the tax on the interest payment. The eligibility for deduction must be tested by the Authorities in the course of assessment as it involves the determination of several questions of fact. The society is always entitled to, in the return of income filed by it, seek credit of the taxes attributable to the income returned by it and any excess deduction, if the stand of the societies is accepted in assessment, would have to be refunded to them. Therefore, it would be a premature petition to challenge the circular issued by the Authority concerned. In the present case, the petitioners/Co-operative Societies have challenged the three circulars dated 16.03.2021, 05.08.2021 and 01.04.2021 issued by the 3rd respondent. The said circulars mandate the compliance of provisions of Sections 194A and 194N of the IT Act and in those circulars, the 3rd respondent had not mentioned anything contrary to the provisions of Sections 194A and 194N of the IT Act. Merely, they had brought into the knowledge of the petitioners/Societies to comply with the said provisions along with the latest amendments thereunder. At any cost, the same cannot be challenged under Article 226 of the Constitution of India, unless and otherwise, the provisions of Sections 194A and 194N of the IT Act are struck down with regard to the Cooperative Societies are concerned. This Court had came across many cases, where the officers of the cooperative societies viz., Secretary or other Officials, in collusion with other officers, had opened hundreds of fictitious accounts and granted loans to those fictitious accounts. Thereafter, if there is any loan waiver or interest waiver granted by the Government, the same benefits will goes to the persons, who are all involved in the creation of those fictitious accounts. Hence, this is where the Societies are functioning in an unregulated manner. It is also due to the reason that the qualified Auditors had not been mandated to audit the accounts of the Societies and only the departmental audits have been conducted, which would pave the way for all sort of malpractices in those cooperative societies. Under these circumstances, Section 194N of the IT Act would be one of the ways to curb the malpractices in distribution of cash and encourage the cashless economy. Now-a-days, the Central Government is granting benefits to the poor people through their bank accounts. Hence, if it is possible for the land-less people to open their bank accounts, certainly, the petitioners/Co-operative Societies cannot plead any excuse that its members, who are all having lands, are not in a position to open the bank accounts since it is very easy process to open the bank account for anyone at present. If any distribution of cash for reliefs such as Pongal enam, flood relief, covid relief, etc., the same can be rooted through the respective bank accounts directly, whereby unnecessarily the members need not approach the Co-operative Societies for claiming the said reliefs. On the other hand, it will be automatically credited to their respective bank accounts and message, intimating the said deposit, will also be sent to their phones. In such case, the valuable time of the farmers and other members of the societies will be saved and the work of the cooperative society will also get reduced. This Court is inclined to suggest and pass the following orders (i) Any benefit, such as pongal enam, flood reliefs, etc., shall be made only through the bank accounts of the respective members or non-members of the Co-operative Societies. The said act will save the valuable time of the members of the said Societies since if they are called for the payment of cash, initially they have to approach the Society or ration shop, etc., to register their name along with the address and thereafter, again they have to approach the Society or ration shop, etc., to collect the money, which would unnecessarily cause hardship for the members as well as the general public. On the other hand, if the funds are transferred to the respective bank accounts of the beneficiaries, it would be hassle-free for the public and there will be no question of mishandling of any cash; (ii) If there is payment of cash for all the benefits provided by Government, such as pongal enam, flood reliefs, etc., it would only encourage and pave way for the mishandling of money and the same will also lead to the misappropriation of money and corruption at a large extent. When a way is available to completely eradicate the corruption and mishandling of money, etc., necessarily the Government/Societies, etc., should follow the same and distribute all sorts of reliefs through their bank accounts, in which case, the question of TDS would not arise. (iii) When the reliefs are credited to the respective bank accounts of the beneficiaries, the withdrawal of the same should be allowed only in the presence of the beneficiaries in person. At any cost, the officials of the cooperative societies/ration shops, etc., should not be allowed for withdrawal of the said reliefs by bringing the cheques from its members. If it is allowed, there are chances for malpractices and mishandling of cash hereagain. (iv) In a similar way, if any loan is granted to the members of the societies, the said loan has to be directly credited to the respective bank accounts of the members, in which case, the withdrawal should be permitted only in the presence of respective members of the cooperative society since there is a chance for collecting of cheques by the Societies from its members and withdrawing the loan amount under the guise of helping the poor farmers, which again lead to mishandling of money. Hence, the same should not be allowed. The aforesaid aspects has to be ensured by the respective banks and Co-operative Societies and other Government Agencies, who are involved in the distribution of cash to public. (v) Further, this Court would suggest to consider and make a provision to audit the Co-operative Societies through the Chartered Accountant in addition to the present method of scrutinising the records by the Auditors. (vi) The 1st respondent shall also consider with regard to the issuance of appropriate circulars for entertaining the cashless transactions by the Co-operative Societies by amending the IT Act. Once if the petitioners/Co-operative Societies have followed the above suggestions, there is no need for them to handle any cash transaction any more. The above order would also avoid the distribution of reliefs in the fictitious name, since the same will happen very often at the cooperative societies, due to which, a large number of cases were also filed against the officials of the cooperative society and pending before the Courts. WP disposed of.

Summary

Issues Involved:
1. Exemption from deduction of Tax under Sections 194N and 194A of the Income Tax Act (IT Act).

Judgment Summary:

Issue 1: Exemption from deduction of Tax under Section 194N of the IT Act
- Petitioners' Argument: The petitioners, Co-operative Societies, argued that the impugned circulars issued under Section 194N of the IT Act, which mandate TDS on cash withdrawals exceeding certain thresholds, should not apply to them. They contended that the cash withdrawals were intended for distribution to farmers for agricultural purposes and reliefs, and thus should be exempt under the proviso to Section 194N.
- Respondent's Argument: The respondents opposed this, stating that the petitioners do not qualify for exemption as they are not Agricultural Producers Market Committees (APMCs) and are engaged in activities not covered by the exemption.
- Court's Analysis: The court examined Section 194N and its provisos, noting that the provision applies to Co-operative Societies engaged in banking. The court found that the petitioners did not establish that they were acting as business correspondents as per RBI guidelines. The court also noted the government's intent to discourage cash transactions and promote a cashless economy.
- Court's Conclusion: The court concluded that the petitioners are not entitled to exemption under Section 194N. The court emphasized the need for cashless transactions to curb malpractices and suggested that all benefits should be distributed directly to beneficiaries' bank accounts.

Issue 2: Exemption from deduction of Tax under Section 194A of the IT Act
- Petitioners' Argument: The petitioners argued that they should be exempt from TDS on interest income under Section 194A, as they are Co-operative Societies.
- Respondent's Argument: The respondents contended that Section 80P of the IT Act only exempts Co-operative Societies from paying income tax on their income, not from deducting TDS on payments made to their members.
- Court's Analysis: The court noted that the eligibility for TDS exemption under Section 194A involves several factual determinations that should be addressed during assessment. The court found the challenge to the circular premature.
- Court's Conclusion: The court concluded that the petitioners are liable to deduct TDS under Section 194A and that the circulars issued by the 3rd respondent merely mandated compliance with the IT Act provisions.

Additional Observations and Directions:
- The court highlighted the importance of a cashless economy to prevent malpractices and mishandling of cash.
- The court suggested that all government benefits should be distributed directly to beneficiaries' bank accounts to avoid corruption and inefficiencies.
- The court recommended auditing Co-operative Societies through Chartered Accountants in addition to current departmental audits.
- The court proposed that the 1st respondent consider issuing circulars to promote cashless transactions by Co-operative Societies.

Final Order:
The writ petitions were disposed of with the court's observations and directions. No costs were awarded, and the connected miscellaneous petitions were also closed.