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TMI Blog2024 (3) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... alid 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 HELD THAT:- Section 194 N operates as a charge of tax on the amount withdrawn in cash, which is unsustainable as there could be no charging provision other than Sections 4 or 5 of the Income Tax Act.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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment Banks (LDB) and Milk Producers Cooperative Societies (MPCS). 4. All account holders are registered under the provisions of the Tamil Nadu Cooperative Societies Act, 1963 (in short TNCS Act ), engaged wholly in the business of providing loans and advances to third parties. According to the petitioner, when a loan is sought by a member of the Societies, the petitioner disburses the amount by crediting the same through electronic transfer to the loan account maintained by the Bank. The funds are then transferred to the current account of the particular Societies for onward transmission to the Farmers. 5. Those members who have bank accounts are granted the loans through banking channels. Since a significant number of the members do not have bank accounts, the Societies withdraw cash from their accounts for making cash disbursement of loans. Thus, the fact that the societies make substantial cash withdrawals is not in dispute. 6. The State and other institutions such as NABARD use the infrastructure of the petitioner and similar co-operative banks at the District and State level, as well as the Cooperative Societies to disburse/distribute gifts on special occasions as well as off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the modification that- (i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and (ii) the deduction shall be- (a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or (b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year: Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification: Provided also that nothing contained in this section shall apply to any payment made to- (i) the Government; (ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office; (iii) any business correspondent of a banking company or co- oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s advanced are the there is no element of income in the amounts withdrawn by the societies, and both the petitioner and the Cooperative Societies merely act as agents for the financial aid/gifts by the State and other Institutions. Such transactions do not attract the rigour of Section 194 N requiring the deduction of tax at source. 15. The petitioner argues that the provision is arbitrary and violative of the fundamental rights guaranteed by the Constitution. The right to make cash withdrawals is not an event/eventuality which can be regulated by the authorities, which is what Section 194 N seeks to do. 16. The avowed object and reasons behind the insertion of Section 194 N is to encourage payments made through digital mode and to curb cash transactions. This could hardly be a reason for moderation of tax/collection. Chapter XVII B provides for those situations where tax is to be deducted at source from receipts that constitute income in the hands of the recipient. 17. Section 194 N has, however, been inserted with the object of encouraging digital payments and curbing cash transactions. This does not constitute a legitimate reason for such insertion. The test of a valid provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Persons in the lowest ranks of society who do not have the facility of a bank account cannot be forced to operate only through banking channels which would be illegal in a welfare economy. 24. As an example, the petitioner cites the MPCS that function at the village level. Each MPCS is enrolled with hundreds of small and marginal farmers who supply milk to the MPCS on a daily basis. The District level Milk Union releases payment to the MPCS on a weekly basis through the bank accounts of the petitioner branches. The MPCS then withdraws cash from the banks and distribute the payment to the farmers on a weekly basis. 25. The withdrawals do not constitute income in the hands of the MPCS and thus subjecting the same to tax deduction at 2% would have a ripple effect on the amount that reaches the hands of the farmer, as the entirety of their earnings for a year would be below the taxable limit. That apart, agricultural income is in any way exempted from the ambit of income tax. 26. The petitioner refers to Rule 37BA(3A) of the Income Tax Rules, 1962 (in short Rules ), which allows credit for tax deducted at source to be given to the person from whom such tax is deducted. Thus, this supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Joint Venture V. State of H.P. and others ((2000) 3 SCC 319 to bring home its plea that the impugned provision is contrary to the constitutional mandate and liable to struck down. 31. Mr.ARL.Sundaresan and Mr.Dilip Kumar appear for the Revenue and their submissions are as follows. Firstly they draw attention to the object and reasons for the introduction of the impugned provision, which is to discourage cash transactions and usher in an economy that is transparent. 32. To this end, our attention is drawn to the speech of the Hon ble Finance Minister while presenting the Union Budget for the year 2019-2020. The promotion of digital payments has been articulated thus: Digital Payments 126. Mr. Speaker, Sir, our Government has taken a number of initiatives in the recent past for the promotion of digital payments and less cash economy. To promote digital payments further, I propose to take a slew of measures. To discourage the practice of making business payments in cash, I propose to levy TDS of 2% on cash withdrawal exceeding ? 1 crore in a year from a bank account. Further, there are low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain Debit cards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 'Act'), to provide for levy of tax deduction at source (TDS) @2% on cash payments in excess of one crore rupees in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from one or more accounts maintained with it by the recipient. The above section shall come into effect from 1st September, 2019. Since the section provided that the person responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year to deduct income tax @2% on cash payment in excess of rupees one crore, queries were received from the general public through social media on the applicability of this section on withdrawal of cash from 01.04.2019 to 31.08.2019. The CBDT, having considered the concerns of the people, hereby clarifies that section 194N inserted in the Act, is to come into effect from 1st September, 2019. Hence, any cash withdrawal prior to 1st September, 2019 will not be subjected to the TDS under section 194N of the Act. However, since the threshold of Rs. 1 crore is with respect to the previous year, calculation of amount of cash withdrawal for triggering deduction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es relating to works contracts purporting to represent tax payable towards transfer of goods involved in works contract. 40. The High Court dismissed the Writ Petition holding the view that the amount from which there had to be a deduction would constitute valuable consideration, payable for the transfer of property in goods and not the entire value or consideration for the works contract. The decision of the High Court was reversed by the Hon ble Supreme Court holding that the power to deduct was arbitrary, since it related to a sum in a transaction that might not be liable to sales tax at all. 41. Learned counsel for the petitioner would attempt to draw a parallel between that judgement and the present case arguing that the amounts withdrawn by the societies did not constitute income in their hands. This argument is clearly misconceived. The petitioner cannot with certainty, assert to the nature of the receipt in the hands of the society and this is a matter of assessment in the hands of the latter. In this regard, reference may also be had to the discussion in this order while disposing the writ appeals filed by the revenue that touch upon this issue in a more detailed fashion. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 4. 48. Section 191 provides for a direct payment and states that in the case of any income in respect of which a provision is not made for deduction of income tax and where such deduction of tax has not been made, income tax shall be payable by the assessee directly. That is the context in which one should understand the subsequent provisions contained in Part B of Chapter XVII, which is that a mandatory deduction of tax at source and payment in advance is provided in respect of those situations enumerated in Part B and this is without prejudice to the question of charge of tax which remains fastened on Section 4 only as per Section 190(2). 49. It is for this reason that Courts have consistently held that the deduction/collection of tax provided under Chapter XVII is not as a charging measure itself, but only as a collection measure to further the object of ease of recovery, as an aid in planning and in pursuance of certain designated objects. 50. V.Ramasubramaniam J. has, in the case of C.Nandakumar (supra) taken the pains of tabulating those instances in Part B of Chapter XVII where the words any sum income , payment , and amount have been used variably as follows: 36. In s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 96 of the 2013 Central Act. On this question, the Division Bench held adverse to the Revenue, since the 2013 Central Act intended to put in place welfare provisions and a fiscal enactment could not be seen to make inroads into the same. 53. In the case of Rupesh Rashmikant Shah V. Union of India (2019) 108 taxmann.com 181 the Bombay High Court has reiterated that the provision in Chapter XVII B are not charging provisions and deduction of tax is to be effected only if the receipt constitutes income in the hands of the payee. 54. There are instances where statutory provisions have been introduced as measures to facilitate expansion of tax base, conversion to virtual modes of compliance, assessment and appeals and measures to bring about transparency in the fiscal economy. The petitioner thus accedes to the position that a fiscal enactment could also legitimately be deployed as a vehicle for achievement of social objectives but only argues that the placement of Section 194 N in Chapter XVII is fatal to its cause. 55. Chapter XVII deals with a range of situations relating to tax deduction/collection. The requirement for tax deduction is itself based on the need to ensure recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the machinery provisions and the objects for insertion of the impugned provision are clear from the Budget speech of the Hon'ble Finance Minister, the object and reasons and the explanatory Circulars issued by the Central Board of Direct Taxes. 62. Detailed analysis of the banking systems and the modes and methodology used for conduct of business had revealed large scale evasion of taxes by the use of cash. Several measures have been put in place to reduce the impact of cash transactions on the economy. The present measure is one such, where the payer is required to deduct tax at source from the cash withdrawals made by an assessee at a flat rate. 63. Such deductions are not final and are subject to assessment or refund, if the payee/drawee is able to establish that the withdrawal was not subject to tax at all. The practical experience and study made by the respondents is what has culminated in the enactment of the impugned provision and such power in indeed available in the hands of the Legislature is of great magnitude. 64. In the case of A.Sanyasi Rao (supra), the object in enacting Sections 44AC and 206 C was specifically noticed as being an aid to the State to collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e holders of permanent account numbers, are expected to file returns and have taxable income from various sources. 70. While the argument of the petitioner is that the entirety of the amount disbursed is only for onward distribution towards various Government schemes, there is nothing available on record to establish so. One of the arguments put forth in the batch of writ appeals is that a significant portion of the amounts disbursed constitute Pongal gifts and the bank was merely acting as an pass-through, to handover the amounts to the societies for onward distribution to the beneficiaries. 71. Since the gifts are not taxable in the hands of the beneficiaries, the argument was that there was no requirement to deduct tax at source. Had there been a correlation between the disbursals and utilization of the funds, there would be some merit in the petitioner s argument. The purpose of withdrawal is however admittedly unknown to the Bank and unascertainable at the time of withdrawal. Thus, it is not for the Bank to put forth an argument in relation to the utilization of the funds withdrawn. 72. Mr.Dilip Kumar has filed a chart containing the break-up of the withdrawal and the Pongal g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany or co-operative society or post office his account number through which he wishes to withdraw cash in excess of rupees one crore in the previous year along with his Permanent Account Number (PAN) and the details of the previous year and has certified to the banking company or co-operative society or post office that the withdrawal of cash from the account in excess of rupees one crore during the previous year is for the purpose of making payments to the farmers on account of purchase of agriculture produce and the banking company or cooperative society or post office has ensured that the PAN quoted is correct and the commission agent or trader is registered with the APMC, and for this purpose necessary evidences have been collected and placed on record. 2. The notification shall be deemed to have come into force with effect from the 1st day of September, 2019. 78. The recipient is thus not left remediless. An adequate and efficacious remedy has been provided to enable a recipient to approach the Central Government seeking exemption in this regard. If at all the Societies were of the view that they are entitled to such exemption, it is for them to have approached the concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in the absence of any material/record to indicate the same. 85. One of us (Dr.Anita Sumanth,J) has, while dismissing the challenge to certain Circulars issued by the State/District Cooperative Banks informing the Societies of the provisions of Section 194N and advising them of the provisions of tax deduction at source, had dismissed those Writ Petitions, permitted the respective assessees to approach the concerned authority for exemption. The operative portion of that order is extracted below: 15. The 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. 16. The intention is clear, that compliance with the requirement of Section 194 N is non-negotiable except in line with the specific exceptions stipulated under the proviso extracted below: Provided also that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 194N. We have upheld the provisions of Section 194N and with this, it becomes incumbent upon the Writ Petitioners to have complied with the provision in full. 88. The order of the Writ Court allowing the Writ Petitions proceeds on the basis that the orders under Section 201/201(1A) were passed pre-maturely and in violation of the principles of natural justice. The arguments advanced by the Writ Petitioners were very similar to those advanced before us. They had contended that the withdrawals by the Societies do not constitute income in their hands and therefore, there was no question of any liability to taxation in that regard. 89. We have rejected that argument and the same conclusion is reiterated at this juncture. The Writ Court has proceeded on the basis of an argument that was, in fact, not advanced by the Writ Petitioners, holding them to be business correspondents of the Cooperative Societies in disbursal of the Pongal gifts to the banks. 90. This is based on a Government Order in G.O.2d No.66, Cooperation, Food and Consumer Protection (D1) Department dated 26.11.2019, whereunder, the Government of Tamil Nadu had sanctioned a sum of Rs.2363 crores towards Pongal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 96. 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. 97. 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. 98. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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