No TDS under section 194N if Cash Withdrawal is not Income

The petitioners were registered under the Tamil Nadu Co-operative Societies Act, 1983. They’ve been granted a license by the Reserve Bank of India to carry on their sale.

There was a survey that was conducted and headed by the jurisdictional Income Tax Officer at the premise of the writ petitioners. Grounded on the inquiry it was found that the writ petitioners weren’t deducting duty as required under Section 194N of the Act. Several show-cause notices were issued to the petitioner based on the data gathered during the inspection procedure.

The response of the writ petitioners wasn’t satisfactory to the jurisdictional authorities. They were of the view that those various Co-operative Societies are account holders of the writ petitioners herein. The account holders aren’t carrying on the business of banking. Therefore, the writ petitioner-Banks were obliged to have deducted tax when the cash withdrawals exceeded the prescribed limit of Rupees 1 crore. The writ petitioners failed to do so. Since the deductor Banks defaulted in complying with the provisions of the statutory provisions, they were deemed to be the assessees in default.

The main issue that arose between the court was whether the petitioners are liable to deduct income tax under section 194N on withdrawals of cash amounts above Rs. 1 crore from the account holders?

The learned counsel appearing for the writ pleaders contended that having regard to the overall object and scheme of the Act, the transactions in question fall outside the horizon of Section 194N of the Income Tax Act.

Section 194N of the Act was brought into force with effect from1-9-2019 and thus can not have a retrospective operation by taking into account the deals that had taken place indeed before the said date.

It was further contended that the sums withdrawn by the member- Societies don’t constitute income at their hands and therefore, the question of liability to pay or deduct the income tax would not arise.

Further, the orders by the jurisdictional authorities have been passed prematurely and without giving reasonable opportunity to the writ petitioners.

The respondent contended that there was no violation of the principles of natural justice and all the facts were sourced during the survey proceedings. The question of maintainability of the writ petition was indeed raised and the optional statutory remedy of appeal under section 246A of the Income Tax Act was brought to the notice of the Court.

The major argument from the respondent side was that having regard to the object behind the objectification of Section 194N of the Act, the nature of the transaction becomes immaterial. Even if the sum received by the member- Societies didn’t constitute income at their hands still the writ petitioner-Banks had an obligation to deduct at the prescribed rates. Section 198 of the Act states that the amount deducted as per Section 194N of the Act would not be included as an income at the hands of the assessee.

The Court decided the maintainability of the writ petition Natural justice isn’t only about affording an opportunity, but also, giving reasonable time to the notices to prepare their defense. This has violated the principles of natural justice and hence the writ petition was held to be maintainable.

It was held that the exempting proviso to Section 194N of the Act also includes business correspondents of the Co-operative Societies engaged in carrying on the business of banking petitioners had acted as a conduit between the Government and the end recipients. The Government had placed this welfare fund at the hands of the petitioner-Banks, who in turn credited the same in the Saving Bank accounts of the member- Societies, who after withdrawing the same, distributed to the end recipients, namely, rice cardholders. Thus, the Primary Co-operative Societies had acted as business correspondents for the writ petitioner-Banks. In the case on hand, the Primary Cooperative Societies had acted as business correspondents to pass on the cash benefit as dictated by the State Government, this part of the sale between the pleaders and their member- Societies would qualify for impunity under the proviso to Section 194N of the Act and the writ petitioner-Banks aren’t needed to deduct income tax at the rate of 2 from the Pongal gift fund even if it had breached the ceiling limit of Rupees One Crore.

On the fact that the assessments have been made before the previous year ended on31.03.2020, it was held that the department need not wait till the time limit for the assessees to file their returns for the assessment year gets over. It’s open to the department to initiate action against the deductors, who have failed to act as per the conditions under section 194N of the Act, as they’re also deemed, assessees.

On the matter of non-deduction of tax (TDS) on cash withdrawals under section 194N, the Court held that since the threshold of One Crore Rupees is concerning the former time, concerning the assessment time 2020-2021, the cash withdrawal for actuating Section 194N of the Act shall be counted from1-4-2019 and to calculate the threshold limit of One Crore rupees, the deals that had taken place with effect from1-4-2019 will have to be taken into account, but the actual tax of tax will be on the cash withdrawals that had taken place with effect from1-9-2019.

Eventually, it was held that the Assessing Officers haven’t taken into account the entire scheme of the Act and proceeded at breakneck speed and thus the orders of the authorities have been quashed.

The Hon’ble Madras High Court summed by concluding that if the sum received by the assessee won’t be an income at his hands, then, the question of deduction under Section 194N on cash withdrawals won’t arise. It was further held that if the amounts received (cash withdrawals) by the recipients don’t represent income at their hands and 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 ( tax on cash withdrawals under section 194N) can not be fastened with any liability. It should be noted that the validity of the provisions of section 194N has not been questioned in this case.

It should be remembered that the writ petitioners haven’t challenged the constitutional validity of Section 194N of the Income Tax Act. The main issue before the Hon’ble Court was whether the petitioners were required to deduct tax under section 194N on cash withdrawals over the threshold limit ofRs. 1 crore during the previous year 2019-20 since the cash withdrawals don’t constitute income in the hands of the recipients. It was held that if the cash withdrawals don’t constitute income in the hands of the recipient then there’s no obligation to deduct TDS on cash withdrawals even if cash withdrawals exceed the threshold limit.

It may please be noted that Section 194N prescribing TDS on cash withdrawals was introduced from0 1.09.2019 by the Finance (No. 2) Act, 2019. This section is further modified by the Finance Act, 2020 to furnish for a lower threshold limit and higher TDS rate for non-filers of income Tax Return.