Applicability of TDS provision if amount of recipient is not chargeable to tax
Section 194N was introduced by FA-2019 which requires TDS on cash withdrawals.
The validity of section 194N has been upheld as there were questions that section 194N is required on an amount withdrawn from a bank which necessarily will not be the income of the assessee. It was decided by Madurai bench of Madras High court in the case of Tirunelveli District Central Co-operative Bank Ltd. v. Joint Commissioner of Income Tax (TDS) dt. 27.07.2020.
In this case, the petitioner here is a co-operative society registered with the Reserve Bank of India and providing banking service to it’s member. The members societies uses the above banking services to distribute loan to farmers and since most farmers don’t even have bank account, same is done by withdrawing case from bank. The above bank also helps government in distributing assistance and gift to ration card holders during the festival of pongal in form of cash.
The TDS survey was conducted by jurisdictional officer of Income tax department and it was found that the bank was deducting tax u/s 194N on such cash withdrawal. The jurisdictional authority were of the opinion that they had failed to comply with the provisions of Section 194N of the Act and asked assessee to explain in writing as to why an order should not be passed under section 201(1) and 201(1A) of the Act to recover the default amount with interest from them?
Assessee bank replied that the transaction entered above are out of the purview of Section 194N of the Act. However, departmental officer were of the view that member co-operative societies were not bank and hence the amount withdrawn by them were liable for TDS u/s 194N by bank and since TDS was not deducted on such amount, it was in default and hence department had right to recover the amount in default along with interest. It was also contended that the question here is not whether the amount withdrawn is the income of member societies or not. The question here is that going by the schema of section 194N, bank was liable to deduct TDS on same which was not done. The writ petitioners had not challenged the constitutional validity of Section 194N of the Act. Therefore, this Court ought to apply the provision as such.
Assessee contended that the transaction done by member societies were outside the purview of 194N, further the transaction were entered before the date from which 194N was effective.
Also, the amount withdrawn by member societies would not constitute as income in their hand and hence as per the scheme of tax deduction same should not be liable for deduction of income tax.
The Hon’ble High court held that there is an exception in section 194N whereby any transaction between banks and its business corespondents would not be covered under this section and the major transaction of the bank was its business corespondent and hence same was outside the purview of section 194N.
It was also urged to the Hon’ble High court to ignore the nature of transaction as mentioned in section 198 of the Income Tax act by taking into consideration the object behind incorporation of section 194N which is to promote digital transaction.
Hon’ble High court is of the opinion that it agreed with the schema and objective of section 194N and the fact that section 198 states that the sum deducted in accordance with Section 194N of the Act for the purpose of computing the income of an assessee should not be deemed to be the income received.
However, since section 194N falls under Chapter XVII which deals with deduction and recovery of tax one can reasonably come to the conclusion on combine reading of section 194N and 201 that if the sum received by the assessee will not be an income at his hands, then, the question of deduction under section 194N of the Act will not arise.
Recently, the Hon’ble Supreme Court in a recent decision reported in Commissioner of Income-tax v. M/s. Vasisth Chay Vyapar Limited [2019] 13 SCC 747 observed that income tax is levied on income. If income does not result at all, there cannot be levy of tax.
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