M/S. THE COIMBATORE DISTRICT CENTRAL CO-OP. BANK LTD.,COIMBATORE vs. ITO, TDS WARD-2,, COIMBATORE

The order of the Writ Court allowing the Writ Petitions proceeds on the basis that the orders under section 201/201(1A) were passed pre-maturely and in violation of the principles of natural justice. The arguments advanced by the Writ Petitioners were very similar to those advanced before us. They had contended that the withdrawals by the Societies do not constitute income in their hands and therefore, there was no question of any liability to taxation in that regard.

We have rejected that argument and the same conclusion is reiterated at this juncture. The Writ Court has proceeded on the basis of an argument that was, in fact, not advanced by the Writ Petitioners, holding them to be 'business correspondents' of the Cooperative Societies in disbursal of the Pongal gifts to the banks.

This is based on a Government Order in G.O.2d No. 66, Cooperation, 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.

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.

He goes on to state that as the assessment years in question were 2021, the impugned orders passed in the case of Writ The Coimbatore District Central Co-op. Bank Ltd. :- 6 -: 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 CIT v. Vasisth Chay Vyapar Ltd. [2018] 90 taxmann.com 365/253 Taxman 401/410 ITR 244 (SC) to the effect that if interest does not result in any income at all, there could be no levy of tax.

This is a settled position seen from the judgment in Hindustan Coca Cola Beverage (P) Ltd. v. CIT [2007] 163 Taxman 355/293 ITR 226 (SC) 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 the payer for non-deduction of tax at source.

The conclusion of the learned Judge to the effect that the Societies have acted as business correspondents of the Writ Petitioners does not find any support from the records or from any material produced by them to that effect. True, as far as the mode of disbursal of the amounts under various schemes are concerned, the network of distribution is clearly established and to that extent, there may be a loose categorization of the parties as being engaged in various limbs of the same transaction.

However, the term 'business correspondents' assumes importance for the reason that it is one of the exclusions set out under the third proviso of Section 194 N which contains certain exclusions from the applicability of that Section.

The third proviso to Section 194N has been extracted elsewhere in this order, and states that any 'business correspondent' of a banking company or cooperative societies engaged in carrying on the business of banking in accordance with the guidelines issued by the RBI will stand excluded from the rigour of Section 194N. None of the respondents pursue this line of argument before us now.

Thus, the conclusion of the Writ Court to the effect that the transactions at issue, being cash withdrawals by the Societies, stand excluded from the purview of Section 194N by virtue of clause (iii) of the third proviso is reversed.

That apart, the respondents do not express any serious objection in revisiting the proceedings under section 201/201(1A). Thus, while sustaining the direction to the respondents to re-do the The Coimbatore District Central Co-op. Bank Ltd. :- 7 -: 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.

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.

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 01-9-2019 only as the provisions of Section 194N have been inserted with effect from that date.

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:

Section 198 provides for the grossing up of income, clarifying that the amounts deducted under Chapter XVII shall be deemed to be income in the computation of income of an assessee. The second proviso to Section 198 inserted by Finance No. 2 Act 2019, with effect from 1-9-2019, states that the sum deducted in accordance with the provisions of Section 194N shall not be deemed to be income received for the purpose of computing the income of the assessee.

In our view, this only provides an amplification to the effect that even though deduction of tax is to be compulsorily effected, it shall not lead to any conclusion that the amount deducted constitutes The Coimbatore District Central Co-op. Bank Ltd. :- 8 -: income of the recipient, who is free to seek refund of the same by filing a return of income.” As the issue is squarely covered by the decision of the Hon’ble Jurisdictional High Court, supra, against the assessee, we uphold the order of the Ld. Addl. CIT(A) in confirming the order of ITO (TDS) .