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2024 (3) TMI 215
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....jan Deputy Solicitor General of India R1, R2 and R7 and Mr.M.Ashok Kumar - R1 and Mr.N.Dilipkumar - R3 JUDGMENT ( Judgment of the Court was made by DR. ANITA SUMANTH, J. ) W.P.No.18138 of 2020 has been filed by Madurai District Cooperative Central Bank Limited seeking a declaration that Section 194N of the Income Tax Act, 1961 (in short 'Act'), inserted vide Finance Act, 2019 is illegal, arbitrary, infringes the fundamental rights under Article 14 and 19(i)(g) and is unenforceable and unconstitutional. The batch of Writ Appeals challenges an order passed by the Writ Court disposing Writ Petitions filed by the District Central Cooperative Banks challenging orders passed u/s 201/201(1A) of the Act. 2. Since the vires of the Section has been challenged, it would be appropriate to deal with the Writ Petition first before proceeding to deal with the batch of Writ Appeals. The submissions of the petitioner, as advanced by Mr.R.Sivaraman, learned counsel appearing for the petitioner are as follows. 3. The petitioner holds a licence to carry on banking business issued by the Reserve Bank of India (RBI). It maintains the accounts of 254 Cooperative Societies (both savings as well as ....
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....ds flow from the State to the beneficiaries/end consumer. 9. While this is so, Section 194N came to be introduced in the Act vide Finance Act, 2019, with effect from 01.09.2019. The Section, as it stood then and as relevant for the purpose of this Writ Petition, reads as follows: "194N- Every person, being, - (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); (ii) a co-operative society engaged in carrying on the business of banking; or (iii) a post office, who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of such sum, as income-tax: Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-....
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....nt under the provision is for 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. The threshold has been increased to Rs.3.00 crores, vide Finance Act, 2023 with effect from 01.04.2023. 11. The information gathered at the time of survey revealed that the petitioner was not compliant with the mandate under Section 194N and a show cause notice came to be issued on 28.02.2020 calling for an explanation as to why an order under Section 201(1) and interest under Section 201(1A) of the Act not be passed. 12. The 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. 13. That apart, the cash withdrawals were necessitated on account of the exigencies faced by the Cooperative Societies to make disbursals to their members who did not have bank accounts. Despite the explanation tendered an order came to be passed raising a demand upon the petitioner as proposed. The or....
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.... states 'is eccentric', when compared with the other provisions under that Chapter. 20. The petitioner refers to the Banking Cash Transaction Tax (BCTT) introduced vide Finance Act, 2005 as an anti-tax evasion measure, specifically to monitor cash transactions. In 2009, the provision was deleted, the Legislature being of the view that there were other enactments/provisions that addressed the same need. Thus while Section 194 N is evidently an anti-tax avoidance measure, its placement in a Chapter dealing with Deduction of Tax at Source is misconceived. 21. The object and reasons would clearly reveal that it is nothing but an anti-tax avoidance measure which seeks to impose a condition of adoption of digital payments by the citizens. Such a provision cannot be justified on the anvil of Article 265 of the Constitution of India under which Article alone the Legislature has the authority to levy a tax. 22. Thus, a provision in a taxing Statute which correlates neither to the levy nor collection of tax is a mere aberration which cannot be countenanced. The petitioner submits that the modus operandi followed by the State and District Cooperative Societies take note of the realities of....
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....espondent of a banking company or co- operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934); (iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007): Provided also 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 provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.]" 29. The petitioner would claim that the societies are entitled to exemption in terms of clause (i) of the proviso above as they constitute an extended arm of the State/are quasi-Government bodies as their control and management vests substantially with the State as well. Thus, even assuming that the vires of Section 194 N is upheld, the dem....
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....rage cash transactions and move towards less cash economy, it is proposed to insert a new section 194N in the Act to provide for levy of TDS at the rate of two per cent 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 an account maintained by the recipient. It is proposed to exempt payment made to certain recipients, such as the Government, banking company, cooperative society engaged in carrying on the business of banking, post office, banking correspondents and white label ATM operators, who are involved in the handling of substantial amounts of cash as a part of their business operation, from the application of this provision. It is proposed to empower the Central Government to exempt other recipients, through a notification in the official Gazette in consultation with the Reserve Bank of India. This amendment will take effect from 1st September, 2019. 34. A press release had been issued clarifying the applicability of the provision in the following terms: Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Del....
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.... transactions involving the Banks, societies and the beneficiaries were fraught with irregularities. Cash withdrawals, in general, and those in issue in the case of the Banks and societies specifically, contained several discrepancies and were a source of income that escaped the tax net. 37. The rival contentions have been heard in detail. We straightaway address the main plan of attack which is that there is no component of taxable income in the amount withdrawn in cash. Learned counsel for the petitioner would be at pains to point out that the amount withdrawn was only for onward distribution among farmers and other beneficiaries of Schemes promulgated by the State and financial institutions. 38. However, and in effect, 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 char....
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.... Act 30 of 2013, which is the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (in short '2013 Central Act') was considered. In that context, one of the contentions decided by the Court revolving around the usage of the term 'sum' to make a deduction. 45. Despite the use of the word 'sum', the submission was that what should be taxed was only income and not receipt or sum of money. This contention was accepted by the Court bearing in mind the positioning of Section 194 LA in Chapter XVII of the Act, the object and scheme of that Chapter and the expressions used within that Chapter itself. 46. The Court examined the tax deduction provisions in detail, observing that the provisions used the expressions any 'sum', 'income', 'payment', and 'amount'. At paragraph 36, the Division Bench has listed out in a table, the specific term used in each provision. 47. Chapter XVII is itself divided into two parts A- General Provisions and B - Provisions relating to deduction at source. The context and setting of Part B is derived from the provisions of Part A, which are Sections 190 and 191. Section 190 states that notwithstanding that r....
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....movable Property] 195 [Other Sums] 196 [Payable to Government, Reserve Bank or certain corporations] Income 190, 193 [Interest on Securities] 194-I [Rent], 194A [Other Interest] 194B [Winnings from Lottery] 194BB [Winnings from Horse Race] 194D [Insurance Commission] 194D A [Payments for Life Insurance] 194E [Payment to non-resident sportsmen] 194G [Commission on Sale of Lottery Ticket] 194H [Commission/Brokerage] 194K [Income in respect of Units] 194LB [Interest from Infrastructure Debt Fund] 194LBA [Units of a business trust] 194LBB [Units of an Investment Fund] 194LC [Interest from an Indian Company] 194LD [Interest on Certain Bonds and Government Securities] 195 [Other Sums] 196A [Units of Non Residents] 196B [Units] 196C [Foreign Currency Bonds or shares of Indian company] 196D [FIIs from securities] Amount 192(1) [Salary] 192A [Accumulated Balance to Employee] 194 [Dividends] 194EE [National Savings Scheme] 194F [Repurchase of Units by Mutual Fund or UTI] 51. Thus, nothing would turn specifically on the terminology used in the provision as the terminology is not fixed but varies from one provision to....
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....ated that every person who was a seller referred to in Section 44AC shall collect from the buyer of the specified goods, a sum equal to the percentage specified in that provision of such amount as income tax on the income comprised therein. 58. The reason for insertion of the provisions was the manifold problems that the State was facing in assessing and recovering tax in the case of persons who dealt with specified commodities, specifically, country liquor, timber and forest produce among others. These persons typically do not maintain accounts or, if they did, the accounts were incomplete. 59. The businesses carried on were also not long standing. As a result, there was evasion of tax in these lines of businesses which the Government wanted to plug. Challenge to these provisions had come up before several Courts and the legislative competence of the Parliament to enact the provisions, i.e, Sections 44AC and 206C, had been upheld by all the Courts, i.e., Andhra Pradesh, Kerala, Himachal Pradesh, Orissa, Punjab and Haryana and Patna. 60. The decision of the Andhra Pradesh had been carried in appeal by the revenue and the submissions made by the counsel on behalf of the revenue h....
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....his regard. Article 265 states that no, tax shall be levied or collected except by 'authority of law'. What constitutes such 'authority' and what vests such power in the State would depend on the levy itself. 66. In deciding whether the levy is intra or ultra vires, the circumstances in which such levy has been introduced, the overall features of the levy as well as the attendant circumstances leading to the same, will have to be considered. It is a matter of common knowledge and we take judicial notice of the parallel economy prevalent in the Country fueled by, among other factors, cash transactions. 67. There have been several measures over the years to discourage and limit cash transactions both under the Income Tax Act as well as other enactments. The challenge is now restricted to the modus operandi that the provision follows, as one hardly question the legitimacy of the move to discourage cash transactions, perse. We find that the object of Section 194N, as a measure to reduce cash transactions and gravitate towards an economy which is run in a transparent and accountable fashion, is laudable. 68. The requirement of the deductor under Chapter XVII is to deduct/collect from....
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...., 194D, 194G, 194, 194H, 194I, 194J, 194K, 194LA, 194LBB, 194LBC, 194M 194O and 195. Section 194 N is not part of the list and hence there is no avenue available for an assessee/payee to approach the Department seeking a certificate of deduction at 'nil/lower rate' in the case of cash withdrawals. 75. The non-inclusion aligns with the scheme of the Act, seen in the context of the objects and reasons for the insertion of Section 194 N. The consequence is that tax is liable to be deducted at the rate stipulated under Section 194N without there being any avenue for the recipient to approach the concerned authority for a certificate under Section 197. 76. Instead, an alternate method has been provided and Section 194 N provides for the Central Government, in consultation with the Reserve Bank of India, to issue a Notification in the Official Gazette stipulating those recipients in whose cases the rigour of Section 194N would not apply, or would apply at a reduced rate. 77. A CBDT Notification bearing No.70 of 2019 dated 20.09.2019 has been issued in this regard reading thus : MINISTRY OF FINANCE ( Department of Revenue ) ( CENTRAL BOARD OF DIRECT TAXES ) NOTIFICATION New D....
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....ooperative Society Ltd. dated 30.08.2022, Neyyoor PACCS Ltd. No.398 dated 23.08.2022, NN Thickanamcode PACCS Ltd. Dated 29.09.2022 and Thalakulam- Eraniel PACCS Ltd. Dated 28.09.2022, all for assessment year 2021. 81. A perusal of these orders of assessment reflects significant demands raised on all those Societies. In the case of Kalkulam Society, it had earned interest income of Rs.42,82,025/-, from deposits with the Kanyakumari District Central Cooperative Bank. The income has been brought to tax disallowing the deduction claimed under Section 80P. Importantly, no return of income had been filed at the first instance. 82. In the case of Thazhakudi Society, return of income had been filed. The total interest income earned by that society was a sum of Rs. 3,17,82,458/- which included interest received on loss and advances, interest on jewel loans and interest from Cooperative Banks. In the case of Neyyoor Society, a return of income had been filed and substantial interest income was shown. 83. In Thickanamcode Society, no return was filed and neither had the books of accounts been audited under Section 44AB. It had deposits amounting to a sum of Rs.6,25,99,617/- and a tax deman....
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....d by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51of 2007): Provided also 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 provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification. 17. There is thus, an avenue provided for a recipient falling outside the scope of the exceptions, to seek exemption from the application of Section 194N and hence, if at all the petitioners believe that they qualify for the exemption, they may seek redressal under the in-built statutory mechanism provided as above, if they so choose. 18. To a query from the Court, as to who would constitute the specific authority before whom such prayer was to be made, the respondents have reported written instructions from the Commissioner of Income Tax (TDS), Coimbatore stating thus: 'As per business allocation rule, Central Government for tax purposes is Finance Minister of India. Hence, any request may be in the name of the Finance Minister with copy to CIT ITA CBDT North Block w....
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....ting to the Pongal gift were concerned, there was no necessity to deduct tax at source and to that extent Section 194 N would not apply. 92. He goes on to state that as the assessment years in question were 2021, the impugned orders passed in the case of Writ Petitioners had been pre-maturely made. In addition, he states that if there had been compliance by the recipients of tax payments, there was no necessity to tax the payer, relying on the judgment of the Hon'ble Supreme Court Commissioner of Income Tax V. Vasisth Chay Vaipar Ltd. 410 ITR 244 to the effect that if interest does not result in any income at all, there could be no levy of tax. 93. This is a settled position seen from the judgment in Hindustan Coca Cola Beverage (P) Ltd. V. Commissioner of Income Tax (2007) 163 Taxman 355 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 t....