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

The assessee is a cooperative society engaged in carrying on the business of Banking. A survey u/s. 133A(2A) of the Act was conducted and it was found that the assessee has not deducted TDS u/s 194N of the Act on the cash withdrawal exceeding Rs. 1 Crore made by the Primary Agricultural Cooperative Societies (PACCS). The A.O therefore treated the assessee in default u/s. 201 of the Act in respect of TDS of Rs. 8,33,159/- and raised the demand of Rs.8,67,723/- including interest u/s. 201(1A) of the Act of Rs.35,564/-. On appeal, the Ld. Addl. CIT(A) dismissed the appeal rejecting assessee’s arguments that withdrawal was made by the PACCS towards amounts disbursed as Pongal grant by the Tamil Nadu State Government and that the assessee has acted only as an agent. The Ld. Addl. CIT(A) also rejected the arguments that the assessee acted as only an agent, and the CBDT Notification No.70/2019 dated 20.09.2019, which is applicable in the case of commission agent or trader operating under APMC for making payment to farmers is equally applicable to the assessee.

The Ld. Authorized Representative (AR) of the assessee submitted that the assessee has not deducted TDS in respect of cash payments exceeding one crore rupees during the previous year as per The Coimbatore District Central Co-op. Bank Ltd.

The Ld. Departmental Representative (DR), has relied on the orders of lower authorities and argued that TDS provisions u/s 194N is applicable in the case of assessee as the cash payment is not covered by any of the exceptions provided in the proviso.

We have heard the rival submissions, and perused the materials available on record. The assessee is a co-operative society engaged The Coimbatore District Central Co-op. Bank Ltd.

We find that the division bench of Hon’ble Madras High Court in the case of Income Tax Officer , TDS vs Thanjavuar District Central Co-operative Bank Ld , reported in [2024] 465 ITR 286 (Madras) had occasion to examine the provision of section 194N of the Act in The Coimbatore District Central Co-op. Bank Ltd.

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.

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.

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.

In the result, the appeal filed by the assessee is dismissed.