2024 (3) TMI 215 - HC - Income Tax

TDS u/s 194N - Constitutional validity of TDS on cash withdrawal from Bank exceeding a certain threshold - cash withdrawals by the Societies - default under Section 201(1) - deduction of tax at the rate of 2% from aggregate payment of sums to the recipient in excess of a sum of Rs.1.00 crore during that financial year in question - petitioner adopted the stand before the authorities that Section 194N was itself not valid and in any event, would not be applicable to its case, since some of the cash withdrawals noticed by the authorities had been prior to 01.09.2019 when the provision had been inserted. HELD THAT - Section 194 N operates as a charge of tax on the amount withdrawn in cash, which is unsustainable as there could be no charging provision other than Sections 4 or 5 of the Income Tax Act. It has been pointed out that the very placement of Section 194N in Chapter XVII B would show that it is not a charging provision, and several cases have been cited to establish that the sections under Chapter XVII B are only machinery provisions, not intended to fasten any charge. Nothing would turn specifically on the terminology used in the provision as the terminology is not fixed but varies from one provision to the other. Moreover, the use of the terminology itself is an aid in the construction of the statutory provision and the object for which it has been inserted. Thus the fact that Section 194N uses the word sum does not advance the petitioner s case to any extent. While not going into the specifics of the assessment, what is clear is that the Societies have been assessed to income tax by the Department and, in some cases, have challenged those orders. It is thus premature and also incorrect for the petitioner to state that the amounts withdrawn by the societies do not constitute taxable income in the absence of any material/record to indicate the same. Challenge to the constitutionality of Section 194 N is rejected. Writ Petitions filed by the District Central Cooperative Banks challenging orders under Section 201 and 201(1A) for non-deduction of tax at source under Section 194N - This is a settled position seen from the judgment in Hindustan Coca Cola Beverage (P) Ltd. V. Commissioner of Income Tax 2007 (8) TMI 12 - SUPREME COURT to the effect that what is liable for deduction is only a portion of the tax on income. Taking note of certain Circulars issued by the Central Board of Direct Taxes, the Hon ble Supreme Court held that such deduction was not intended to unjustly enrich the Department. Hence, in those cases where the payer was able to establish that the payee has met the tax demand, no consequences would lie on the payer for non-deduction of tax at source. The conclusion of the learned Judge to the effect that the Societies have acted as business correspondents of the Writ Petitioners does not find any support from the records or from any material produced by them to that effect. True, as far as the mode of disbursal of the amounts under various schemes are concerned, the network of distribution is clearly established and to that extent, there may be a loose categorization of the parties as being engaged in various limbs of the same transaction. The term business correspondents assumes importance for the reason that it is one of the exclusions set out under the third proviso of Section 194 N which contains certain exclusions from the applicability of that Section. The third proviso to Section 194N has been extracted elsewhere in this order, and states that any 'business correspondent' of a banking company or cooperative societies engaged in carrying on the business of banking in accordance with the guidelines issued by the RBI will stand excluded from the rigour of Section 194N. None of the respondents pursue this line of argument before us now. Thus, the conclusion of the Writ Court to the effect that the transactions at issue, being cash withdrawals by the Societies, stand excluded from the purview of Section 194N by virtue of clause (iii) of the third proviso is reversed. That apart, the respondents do not express any serious objection in revisiting the proceedings under Section 201/201(1A). Thus, while sustaining the direction to the respondents to re-do the assessments, we add only that such proceedings must be completed within a period of three (3) months from date of receipt of a copy of this order in accordance with law and in line with the principles of natural justice. Needless to say, any payment of tax made by the Cooperative Societies will be given credit to in finalizing the proceedings under Section 201(1). Interest under Section 201(1A) will run from the due date of deduction till date of passing of order as per statute. Learned Judge has made an observation to the effect that the validity of the provision has not been questioned. In fact, it is and, under this order has been upheld as well. We clarify that the applicability of the provision is with effect from 01.09.2019 only as the provisions of Section 194N have been inserted with effect from that date. Section 198 provides for the grossing up of income, clarifying that the amounts deducted under Chapter XVII shall be deemed to be income in the computation of income of an assessee. The second proviso to Section 198 inserted by Finance No.2 Act 2019, with effect from 01.09.2019, states that the sum deducted in accordance with the provisions of Section 194N shall not be deemed to be income received for the purpose of computing the income of the assessee. In our view, this only provides an amplification to the effect that even though deduction of tax is to be compulsorily effected, it shall not lead to any conclusion that the amount deducted constitutes income of the recipient, who is free to seek refund of the same by filing a return of income. Writ Petition is dismissed

Summary

Issues Involved:
1. Constitutionality of Section 194N of the Income Tax Act, 1961.
2. Applicability of Section 194N to Cooperative Societies.
3. Validity of the orders under Section 201/201(1A) of the Income Tax Act, 1961.

Summary:

1. Constitutionality of Section 194N:
The petitioner challenged the constitutionality of Section 194N, asserting that it is illegal, arbitrary, and infringes fundamental rights under Articles 14 and 19(i)(g) of the Constitution. The petitioner argued that the provision is not a charging provision but a machinery provision, and it is unreasonable as it does not relate to income. The court rejected the challenge, stating that Section 194N is a measure to discourage cash transactions and promote digital payments, which is a legitimate legislative objective. The court upheld the constitutionality of Section 194N, emphasizing that it is a valid provision under Article 265 of the Constitution.

2. Applicability of Section 194N to Cooperative Societies:
The petitioner contended that the cash withdrawals by Cooperative Societies do not constitute income and thus should not be subject to TDS under Section 194N. The court noted that the Societies are income tax assessees with taxable income from various sources and are required to file returns. The court found that the withdrawals by the Societies are not solely for onward distribution to beneficiaries under government schemes, and there is no material evidence to support the claim that the withdrawals are non-taxable. The court held that Section 194N applies to Cooperative Societies, and they are not exempt from its provisions.

3. Validity of the Orders under Section 201/201(1A):
The Writ Appeals challenged the orders passed under Section 201/201(1A) for non-deduction of tax at source under Section 194N. The court upheld the provisions of Section 194N and emphasized that the orders under Section 201/201(1A) were not premature and did not violate principles of natural justice. The court directed the respondents to re-do the assessments within three months, ensuring compliance with the principles of natural justice. The court clarified that any payment of tax made by the Cooperative Societies would be credited in finalizing the proceedings under Section 201(1), and interest under Section 201(1A) would run from the due date of deduction till the date of passing the order.

Conclusion:
The court dismissed the Writ Petition challenging the constitutionality of Section 194N and disposed of the Writ Appeals, directing the re-assessment of the orders under Section 201/201(1A) within three months. The court upheld the applicability of Section 194N to Cooperative Societies and emphasized that the provision aims to discourage cash transactions and promote digital payments.