2025 (4) TMI 922 - HC - Income Tax

Tax Deduction Rules Upheld: Credit Society Challenge Rejected, Section 194N Confirmed as Legally Binding for Financial Transactions

A 1160 Manjanaickanpatti Primary Agricultural Cooperative Credit Society Limited Versus The Deputy Commissioner of Income Tax, The Managing Director/ Joint Registrar, Dindigul

The SC ruled against a cooperative credit society's challenge to tax deduction provisions. The court upheld Section 194N's applicability, rejecting claims ... Entitlement to Exemption to cooperative societies engaged in banking activities from the purview of Section 194N - petitioner emphasizes that deducting 2% TDS on loans would severely impact the society's financial sustainability, jeopardizing its purpose of serving marginalized agrarian members - petitioner's claim for exemption under Section 80P(2) - HELD THAT:- Section 194N of the Income Tax Act, 1961 applies to the petitioner's transactions, including loans and subsidies, irrespective of the cooperative society's nature. This Court is of the view that the legal provisions and amendments are clear and no exemption applies in this case as claimed by the learned Senior Counsel for the petitioner. The respondents have followed the procedures properly and passed the impugned orders in accordance with law. This Court distinguishes the precedents cited by the learned Senior Counsel for the petitioner, noting that the factual circumstances of those cases differ from the present case. Therefore, this Court upholds the actions of the respondents, including the deduction of TDS as lawful and procedurally correct. WP dismissed. ISSUES PRESENTED and CONSIDEREDThe primary legal issues considered by the Court are: Whether the petitioner, a cooperative credit society, is exempt from the provisions of Section 194N of the Income Tax Act, 1961, which mandates tax deduction at source (TDS) on certain transactions. Whether the respondents violated principles of natural justice by not issuing notices or conducting inspections before passing the impugned orders. Whether the petitioner's claim for exemption under Section 80P(2) of the Income Tax Act, 1961, is valid. Whether the actions of the respondents in passing the impugned orders were lawful and procedurally correct.ISSUE-WISE DETAILED ANALYSIS1. Exemption from Section 194N of the Income Tax Act, 1961Relevant legal framework and precedents: Section 194N of the Income Tax Act, 1961, mandates TDS on cash withdrawals exceeding a specified limit. The petitioner argued that cooperative societies engaged in banking activities are exempt from this provision due to an amendment effective from 01.09.2009. The petitioner also cited a Supreme Court decision affirming exemptions under Section 80P(2) for cooperative credit societies.Court's interpretation and reasoning: The Court found that Section 194N applies to the petitioner's transactions, including loans and subsidies, regardless of the cooperative society's nature. The Court emphasized that the legal provisions and amendments are clear and do not provide the claimed exemption in this case.Application of law to facts: The Court applied Section 194N to the petitioner's transactions and determined that the exemption claimed was not applicable, thereby upholding the respondents' actions.Treatment of competing arguments: The Court distinguished the precedents cited by the petitioner, noting that the factual circumstances of those cases differed from the present case.2. Alleged Violation of Principles of Natural JusticeRelevant legal framework and precedents: Principles of natural justice require that parties be given notice and an opportunity to be heard before any adverse action is taken.Court's interpretation and reasoning: The Court found that the respondents followed the proper procedures in passing the impugned orders and that there was no violation of natural justice principles.Key evidence and findings: The Court noted that the respondents acted in accordance with the law and did not find any procedural irregularities in their actions.3. Exemption under Section 80P(2) of the Income Tax Act, 1961Relevant legal framework and precedents: Section 80P(2) provides tax exemptions for certain income of cooperative societies.Court's interpretation and reasoning: The Court held that the petitioner's activities fall within the scope of TDS provisions and do not qualify for the claimed exemptions under Section 80P(2).Application of law to facts: The Court applied the relevant sections of the Income Tax Act and determined that the petitioner's claim for exemption was not valid.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: The Court stated, 'Section 194N of the Income Tax Act, 1961 applies to the petitioner's transactions, including loans and subsidies, irrespective of the cooperative society's nature.'Core principles established: The Court reinforced the applicability of Section 194N to cooperative societies and clarified the non-applicability of the claimed exemptions under the current legal framework.Final determinations on each issue: The Court dismissed the writ petition, upholding the actions of the respondents as lawful and procedurally correct, and determined that the challenge to the impugned orders lacked merit.