2025 (3) TMI 726 - HC - Income Tax

Deduction of TDS u/s 194N - petitioner submitted that the amounts deposited into the 2nd respondent Bank is the subsidy granted by the Government to the petitioners for sale of various items - HELD THAT - A reading of the provision makes it clear that the 2nd respondent Bank is duty bounded to deduct tax on payments to be made to the petitioners. Even if tax was deducted on sources by the 2nd respondent Bank if no tax was payable by the petitioners the amount will have to be refunded back to the petitioners after assessments are completed pursuant to returns filed u/s 139 of the IT Act. Therefore there is no merits in the case of petitioners. It is pertinent to state that under similar circumstances this Court in Molasi Primary Agricultural Cooperative Credit Society Ltd. 2022 (11) TMI 1213 - MADRAS HIGH COURT as held provisions of Section 194 N provide for a mandatory deduction of 2% of cash withdrawals and the object is to discourage and drive the move toward a cashless or cash-free economy. The scheme of tax deduction also allows by way of an application under Section 197 for a payee to seek the remedy of deduction at nil/lower rate under various provisions of the Act. However Section 194N is conspicuous by its absence therein and does not figure in the list of such provisions.

ISSUES PRESENTED and CONSIDERED

The primary issue in this case is whether the deduction of Tax Deducted at Source (TDS) by the 2nd respondent Bank, as per the Tamil Nadu State Head Cooperative Bank Circular dated 17.03.2021, is contrary to Section 194N of the Income Tax Act, 1961. The petitioners, a Weavers Cooperative Production and Sale Society, argue that their activities, conducted on a no-profit-no-loss basis with government subsidies, should not be subject to TDS under Section 194N.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

Section 194N of the Income Tax Act mandates a 2% TDS on cash withdrawals exceeding one crore rupees during a financial year from banking institutions, including cooperative societies. The provision aims to curb black money and promote digital transactions. The Court referenced prior decisions, including a case involving the S.N.299 Molasi Primary Agricultural Cooperative Credit Society Ltd., where similar challenges to TDS deductions under Section 194N were dismissed.

Court's Interpretation and Reasoning

The Court interpreted Section 194N as applicable to the petitioners, emphasizing the statutory duty of the 2nd respondent Bank to deduct TDS on cash withdrawals exceeding the specified threshold. The Court noted that even if TDS is deducted, petitioners could claim a refund if no tax is payable upon filing their returns. The Court found no merit in the petitioners' argument that their activities should exempt them from TDS under Section 194N.

Key Evidence and Findings

The petitioners argued that the funds deposited into the 2nd respondent Bank were government subsidies for marketing their products, which should not be subject to TDS. However, the respondents maintained that the statutory provisions of Section 194N were clear and mandatory, and the deductions were in line with the law.

Application of Law to Facts

The Court applied Section 194N to the facts, determining that the 2nd respondent Bank was correct in deducting TDS on cash withdrawals exceeding one crore rupees, as the petitioners did not qualify for any exemption under the provision. The Court emphasized that the petitioners could seek a refund if the deducted amount was not taxable income.

Treatment of Competing Arguments

The petitioners contended that their operations should not attract TDS due to the no-profit-no-loss nature of their activities and government subsidies. The respondents countered that Section 194N's provisions were mandatory and aimed at reducing cash transactions. The Court sided with the respondents, referencing prior judgments that upheld the application of Section 194N.

Conclusions

The Court concluded that the deduction of TDS by the 2nd respondent Bank was lawful and in accordance with Section 194N. The petitioners' arguments were found to lack merit, and the writ petition was dismissed.

SIGNIFICANT HOLDINGS

The Court upheld the mandatory nature of Section 194N, emphasizing its role in promoting a cashless economy and curbing black money. The Court reiterated that compliance with Section 194N is non-negotiable, except where specific statutory exemptions apply. The decision reinforced the principle that statutory provisions for TDS must be adhered to, and any excess deductions can be addressed through the tax return process.

The Court's final determination was to dismiss the writ petition, affirming the legality of the TDS deductions made by the 2nd respondent Bank under Section 194N. The decision aligns with previous judgments that have consistently upheld the application of Section 194N in similar circumstances.

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