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2024 (3) TMI 215
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....tor General Assisted by Mr.K.Govindarajan 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 C....
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....d a flow chart to illustrate the manner in which the funds 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 rel....
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....initiated by the Department to survey the Head office of the petitioner in April, 2020 to ascertain compliance with the provisions of Section 194 N. The requirement 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 disbursa....
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....sals amount to income in the hands of the societies, there is no legal justification for the insertion of Section 194 N, given its placement in Chapter XVIIB which the petitioner 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 ....
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.... 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- 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 pr....
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....igital payments and discouraging cash transactions, the Finance Bill provided for the deduction of tax at source on cash withdrawals. The provision is introduced thus: TDS on cash withdrawal to discourage cash transactions In order to further discourage 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. ....
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....iscouraging cash payments and bringing in an economy that is robust and cashless, as far as possible. There is, according to them, no merit in the challenge now mounted as Section 194N satisfies all statutory prescriptions. 36. They emphasize on the fact that the inspection conducted in the premises of the Co-operative Banks have revealed that the modus operandi of the 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 unsu....
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.... of India (2017) 88 taxmann.com 256 by a Division Bench of the Andhra Pradesh High Court. considered a challenge to a Circular issued by the Commissioner of Income Tax (TDS) directing the District Collector to deduct tax at source from out of the compensation payable under the 2013 Land Acquisition Act. 44. The interplay between Section 194LA of the Act and Section 96 of the Central 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 'a....
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.... Act, 1961 such as "sum", "income" and "amount" and the sections in which they are used. The tabular statement is as follows (page 431): Word Used Provision in Chapter XVII Sum 191 [Direct Payment] 194C [Payments to Contractors 194IA [Transfer of Immovable Property] 194J [Fees for professional or technical services] 194L [Acquisition of Capital Asset] 194LA [Acquisition of certain Immovable 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 Compa....
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....ith Section 206 C of the Act were challenged as ultravires the Constitution and beyond legislative competence. The matter had travelled from the Andhra Pradesh High Court which had read down the provisions of Section 44AC. Dissatisfied, appeals had been filed before the Hon'ble Supreme Court at the instance of the Revenue. 57. Section 44AC had been inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.06.1988. The former was a special provision which provided for a presumptive basis for computation of profits and gains from the business of trading in certain goods. Section 206 C stated 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 wer....
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....ces that had occasioned the insertion of those two provisions. At paragraph 19 of the judgment, the Court reiterated the position that Sections 44AC and 206C only provide for a mechanism for collection of tax. They did not fasten any charge per se. The mere fact that the deduction/collection was provided for at a flat rate of deduction even prior to assessment would not alter this position. 65. The power of the Legislature to tax is set out under Article 265 of the Constitution and such power is wide, subject to the conditions and tests that have been laid out over the years to provide for reasonable restrictions in this 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, ....
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....hence the Banks cannot take the argument that the entirety of the disbursements constitute only Pongal gifts. The particulars have been culled from the records available with the Department either by way of returns filed by the societies or assessment proceedings in their cases. 73. Legislature has provided for a situation where a payee, on the ground that the receipt is not amenable to tax, could seek and obtain a certificate from the Assessing Officer under Section 197 of the Act. 74. Such a certificate may be sought only in stipulated situations, i.e., in case of payments under the provisions of Sections 192, 193, 194, 194A, 194C, 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 bei....
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....ed the concerned authority in that regard. 79. Conversely, it is the Bank which insists/maintains that their income is not taxable. The incorrectness are impropriety of this argument is also seen from the fact that the sources of revenue to a Cooperative Society are many and the taxability or otherwise of their income is a matter of regular assessment. In fact, many of the recipient societies have filed returns of income offering some portion of their income to tax and claiming exemption in respect of the balance. 80. The respondents have produced sample orders of assessment in the cases of 5 PACCS, Kalkulam Cooperative Credit Society Ltd. No.949 dated 08.09.2022, Thazhakudy Primary Agricultural Cooperative 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 ....
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.... under the proviso extracted below: 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 cooperative 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 authorization issued 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. ....
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....ion, 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 hampers and cash support of Rs. 1000/- to all rice card holders. The Tamil Nadu Civil Supplies Corporation that was appointed as a nodal agency for distribution of the cash support was to coordinate with the Cooperative Societies for the distribution. 91. The State had placed the amount to be disbursed with the Writ Petitioners for onward disbursal to the Societies and thereafter to the members. Learned Judge thus concludes that the societies had acted as business correspondents for the Writ Petitioners and that such model was in line with the policy of the Reserve Bank of India. He thus concludes that as far as the withdrawals relating 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,....
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....he 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. 99. 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. 100. Learned Judge has made an observation at paragraph 20 of the order 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. 101. Before we part, we refer to the provisions of Section 198 of the Act and the impact that it has on the issue under consideration. Section 198 reads thus: Tax Deducted is income received. 198. All sums deducted in accordance with the foregoing provisions of th....