2020 (8) TMI 728 - HC - Income Tax

TDS u/s 194N - Consequences of failure to deduct or pay u/s 201 - cash withdrawal exceeding Rupees One Crore in an year from the bank account - writ petitioners herein are Co-operative Banks engaged in the business of banking and that they had failed to comply with the terms of Section 194N of the Act and that the explanation given by them was not satisfactory - HELD THAT - No fault the respondents for having issued show cause notices to the writ petitioners for not having complied with Section 194N of the Act. But then, the enquiry could have been held only after the commencement of the assessment year and not in the previous year itself. Not agree with the stand of the writ petitioners' counsel that the volume of transaction that had taken place prior to 01.09.2019 should be ignored - as brought to notice computation of tax has been made only with effect from 01.09.2019 and there has been no levy on the transaction before the cut off date. The Central Board of Direct Taxes had issued a clarification that the provision having come into effect from 01.09.2019 any cash withdrawal prior to the said date will not be subjected to TDS. Since the threshold of One Crore Rupees is with respect to the previous year, with reference to the assessment year 2020-2021, the cash withdrawal for triggering Section 194N of the Act shall be counted from 01.04.2019. The writ petitioners have not questioned the validity of the provision. The provision employs the expression Previous year . With reference to the assessment year 2020-2021, the previous year would obviously mean the period commencing from 01.04.2019 to 31.03.2020. A taxing provision has to be understood in a plain manner. Such an application of the provision will not amount to retrospective operation. If TDS was levied even on transactions that had taken place prior to 01.09.2019, then, that would definitely be illegal, but that is not the case here. Therefore, Iustain the stand of the learned standing counsel that to calculate the threshold limit of One Crore rupees, the transactions that had taken place with effect from 01.04.2019 will have to be taken into account, but actual levy of tax will be on the cash withdrawals that had taken place with effect from 01.09.2019. Also sustain the stand of the learned 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 is open to the department to initiate action against the deductors, who have failed to act as per the requirements under Section 194N of the Act, as they are also deemed assessees. But then, when the enquiry is conducted, it is open to the noticees, who are to be treated as assessees in default to place materials before the Assessing Officer that the amounts received by the recipients do not represent income at their hands. If by then, the assessees had also filed their returns and the case falls under the proviso to Section 201(1) of the Act, the writ petitioners who have failed to deduct cannot be fastened with any liability. Since the Assessing Officers have not taken into account the entire scheme of the Act and had proceeded at breakneck speed, we are constrained to interfere with the impugned proceedings and they are accordingly quashed. The matters are remitted to the file of the respective jurisdictional Assessing Officers. Writ Petitions stand allowed.

Issues Involved:
1. Applicability of Section 194N of the Income Tax Act, 1961
2. Compliance with principles of natural justice
3. Maintainability of writ petitions
4. Interpretation of "Previous Year" under Section 194N
5. Exemption for business correspondents under Section 194N
6. Timing and procedure of the assessment orders under Section 201
7. Retrospective application of Section 194N

Issue-wise Detailed Analysis:

1. Applicability of Section 194N of the Income Tax Act, 1961:
The writ petitioners, Co-operative Banks, were alleged to have failed to comply with Section 194N of the Income Tax Act, which mandates tax deduction at source (TDS) on cash withdrawals exceeding one crore rupees. The petitioners contended that the transactions in question fell outside the purview of Section 194N, arguing that the sums withdrawn by member Societies did not constitute income.

2. Compliance with principles of natural justice:
The court found that the principles of natural justice were not adequately followed. The petitioners were given insufficient time to respond to the show cause notices, which did not provide a reasonable opportunity to prepare their defense. The court emphasized that granting an opportunity must be more than a formality and must include reasonable time for preparation.

3. Maintainability of writ petitions:
Despite the availability of an alternative remedy of appeal under Section 246A of the Act, the court held that the writ petitions were maintainable due to the violation of natural justice principles. The court cited the Supreme Court's decision in State of Himachal Pradesh vs. Gujarat Ambuja Cement Limited, which allows exceptions to the doctrine of exhaustion of statutory remedies when there is a violation of natural justice.

4. Interpretation of "Previous Year" under Section 194N:
Section 194N applies to cash withdrawals exceeding one crore rupees "during the previous year." The court clarified that the term "previous year" refers to the financial year immediately preceding the assessment year. The transactions in question occurred between 01.04.2019 and 31.03.2020, making the assessment year 2020-2021. The court noted that the assessments were prematurely made before the end of the previous year.

5. Exemption for business correspondents under Section 194N:
The court acknowledged that the Primary Co-operative Societies acted as business correspondents for the petitioner-Banks, particularly in distributing welfare funds for the Pongal festival. This activity qualifies for exemption under the proviso to Section 194N. Therefore, the portion of transactions related to the Pongal gift fund should be excluded from the TDS requirement.

6. Timing and procedure of the assessment orders under Section 201:
The court found that the assessment orders under Section 201 were issued hastily and prematurely. The orders should have been made only after the commencement of the assessment year. The court emphasized that the deductor could present evidence during the enquiry to demonstrate that the sums withdrawn did not represent income, thereby falling under the proviso to Section 201(1).

7. Retrospective application of Section 194N:
The court upheld the department's stance that while the threshold limit of one crore rupees should be calculated from 01.04.2019, the actual levy of TDS applies only to transactions from 01.09.2019. This interpretation does not constitute retrospective application of the law.

Conclusion:
The court quashed the impugned orders and remitted the matters to the respective jurisdictional Assessing Officers. The Assessing Officers were directed to issue fresh hearing notices and exclude the Pongal cash gift from the computation. The petitioners were allowed to present evidence showing that the sums withdrawn did not represent income. If satisfied, the Assessing Officers should drop further action; otherwise, they may proceed in accordance with the law. The writ petitions were allowed with no costs, and connected miscellaneous petitions were closed.

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