No section 194N TDS if cash withdrawn isn’t income of account holder: Madras HC

Sharing case law posted by Taxmann.

Tirunelveli District Central Co-operative Bank Ltd. v. JCIT - [2020] 119 taxmann.com 21 (Madras)

Assessee was a society licensed by the RBI to carry on banking business. The main account holders of assessee-society were various Primary Co-operative societies which provide loans and advances. Assessee granted loan to the member societies. The member-Societies withdraw cash from their accounts for making cash disbursements of loans granted to farmers as most of the farmers did not have bank accounts.

Income-tax Officer (ITO) conducted survey proceedings at the business premises of assessee and found that assessee was not deducting TDS under section 194N. Based on data gathered during the survey, show cause notices were issued to assessee. He called assessee to explain why an order should not be passed under section 201(1) and 201(1A) to recover the default amount with interest from them.

Assessee contended that by reading section 194N along with section 201, one can safely conclude that if sum received by assessee will not be an income at his hands, question of deduction under section 194N will not arise. The Bombay HC in case of Rashmikant Shah v. Union of India [2019] 108 taxmann.com 181 (Bombay) has held that the provision of TDS is not a charging provision. It only makes deduction of tax at source on payment which is income in hands of payee. If the payee has no liability to pay tax on such income. Liability to deduct TDS in the hands of the payer cannot be fastened.

On writ, Madras HC held that AO failed to take into account the entire scheme of the Act and proceeded at breakneck speed. Thus, the matter was remitted back to AO for issuing fresh notice to assessee. Assessee was, at liberty, to bring on record the returns filed by member societies who had withdrawn cash beyond the ceiling limit of Rs. 1 crore.

It was open to assessee to establish before AO that the sums withdrawn by the member societies do not represent income at their hands. If AO was satisfied that the amount withdrawn did not represent income at their hands, he will drop further action. If he is not so satisfied, it was open to him to pass further orders in accordance with the law.