Must I deduct under 194N on cash withdrawals that are not the account holder's income?
No. Section 194N requires a sum to be deducted 'as income-tax', and income-tax is a levy on income — where no income results, there is no levy, and the TDS machinery is not itself a charging provision. The bank must be allowed to lead evidence that the payee bore no tax liability on the sum withdrawn.
Decided by the High Court (Madras High Court (Madurai Bench) — Justice G.R. Swaminathan) on 2020-07-27, reported as (2020) 428 ITR 249 (Mad); 275 Taxman 60; [2020] 119 taxmann.com 21 (Madras); W.P.(MD) Nos. 6102-6125 of 2020. It bears on section 194N, section 201, section 198 of the Income Tax Act 1961, in TDS Defaults and Cash Transaction Limits matters.
This is the answer for a bank or co-operative bank facing s.201 proceedings for not deducting on withdrawals that are pass-through money — here, government welfare disbursements and loan moneys routed through member primary societies to farmers. It also carries a procedural point of general use: notices allowing only a few days to appear were held not to be a reasonable opportunity, and that breach made the writ petitions maintainable despite the alternative remedy.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioners were co-operative societies licensed by the Reserve Bank of India to carry on banking business. Their main account holders were primary co-operative societies, which on-lend to farmers; because most farmers have no bank accounts, the primary societies withdraw cash to make the disbursements. Separately, the Government of Tamil Nadu used the petitioners' and the primary societies' infrastructure to pay Rs 1,000 in cash to every ration cardholder for Pongal, the Tamil Nadu Civil Supplies Corporation being the nodal agency under G.O.(2D) No. 66 dated 26 November 2019. Income-tax Officers surveyed the banks under s.133A(2A), found no deduction under s.194N on cash withdrawals above Rs 1 crore, and issued show cause notices in the first week of March 2020 giving the banks less than a week to appear. Orders under ss.201(1) and 201(1A) treating the banks as assessees in default followed, in some cases on the same day as the enquiry or the next. The banks did not challenge the constitutional validity of s.194N.
The writ petitions were allowed, but the relief was a remand, not a final answer. On maintainability, the Court declined to non-suit the banks for not appealing under s.246A: notices giving them hardly a few days to respond were not a reasonable opportunity, and an order made in breach of natural justice is one of the recognised exceptions to the rule of exhaustion of remedies (paras 11-12). On the merits it held that the primary co-operative societies had acted as business correspondents of the petitioner banks in distributing the Pongal cash, so that part of the transaction fell within the exempting proviso to s.194N and had to be segregated out of the computation (para 14). It further held, reading s.194N with s.201, that because the deduction is a deduction 'as income-tax', if the sum received is not income in the recipient's hands the question of deduction does not arise - but that the deductor cannot decide that for himself; he must establish it in the s.201 enquiry, and if the proviso to s.201(1) is satisfied no liability can be fastened on him (paras 17, 19, 21). Two points went against the banks: the Court refused to accept that transactions before 1 September 2019 must be ignored in counting the Rs 1 crore threshold, holding the threshold is counted from 1 April 2019 for assessment year 2020-21 with the levy operating only from 1 September 2019 (para 20); and it did not fault the Department for issuing the show cause notices at all (para 20). The impugned orders were quashed and the matters remitted to the Assessing Officers to issue fresh hearing notices, to exclude the Pongal cash from the computation, and to let the banks prove that the remaining withdrawals were not income of the member societies; if satisfied, the officers must drop the proceedings, and if not they may pass further orders in accordance with law (para 22).
Three strands. First, natural justice: granting an opportunity cannot be an empty formality, and where surveys were followed by show cause notices, enquiries held for form's sake and orders passed the same or the next day, with enormous civil and financial consequences, the process was not fair compliance (paras 11-12). The Court also observed that the orders were premature on their own terms, since the assessment year shown in them was 2020-21 but the assessments had been made before the previous year ended (para 15). Second, the business correspondent proviso: the banks were a conduit for a State welfare payment, the primary societies passing the cash to ration cardholders under the RBI's business correspondent model, so that part of the transaction is exempt under the proviso to s.194N, and the banks could not have deducted 2% from the Pongal fund without breaching the State Government's mandate; an order that ignores that relevant material is liable to be quashed on that ground alone (para 14). Third, the character of the deduction: s.194N requires a sum to be deducted 'as income-tax' and sits in Chapter XVII on collection and recovery, so read with s.201 the conclusion is that if the sum received is not income in the recipient's hands the question of deduction does not arise; the Court supported that by the Supreme Court's observation in CIT v. Vasisth Chay Vyapar Ltd. that tax is levied on income and cannot be levied where income does not result, and by the Bombay High Court in Rupesh Rashmikant Shah that a TDS provision is not a charging provision (para 17). But the Court accepted the Revenue's point that a deductor cannot make that judgment unilaterally: the place to establish it is the s.201 enquiry, and Hindustan Coca Cola Beverages and CBDT Circular No. 275/201/95-IT(B) mean the demand is not to be enforced once the deductor shows the tax has been paid by the payee (paras 19, 21).
But having regard to the overall scheme of the chapter and particularly, by reading Section 194N along with Section 201 of the Act, one can safely come to the conclusion that if the sum received by the assessee will not be an income at his hands, then, the question of deduction under section 194N of the Act will not arise.
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Handle my notice → Ask a CA on WhatsAppNo. Section 194N requires a sum to be deducted 'as income-tax', and income-tax is a levy on income — where no income results, there is no levy, and the TDS machinery is not itself a charging provision. The bank must be allowed to lead evidence that the payee bore no tax liability on the sum withdrawn. This was decided by the High Court (Madras High Court (Madurai Bench) — Justice G.R. Swaminathan) and bears on section 194N, section 201, section 198 of the Income Tax Act 1961. It is reported as (2020) 428 ITR 249 (Mad); 275 Taxman 60; [2020] 119 taxmann.com 21 (Madras); W.P.(MD) Nos. 6102-6125 of 2020. This is the answer for a bank or co-operative bank facing s.201 proceedings for not deducting on withdrawals that are pass-through money — here, government welfare disbursements and loan moneys routed through member primary societies to farmers. It also carries a procedural point of general use: notices allowing only a few days to appear were held not to be a reasonable opportunity, and that breach made the writ petitions maintainable despite the alternative remedy. If it applies to you, the first step is this: Document the character of each withdrawal — welfare disbursement, loan proceeds for onward disbursement — and ask for the opportunity to lead that evidence before any order.
The petitioners were co-operative societies licensed by the Reserve Bank of India to carry on banking business. Their main account holders were primary co-operative societies, which on-lend to farmers; because most farmers have no bank accounts, the primary societies withdraw cash to make the disbursements. Separately, the Government of Tamil Nadu used the petitioners' and the primary societies' infrastructure to pay Rs 1,000 in cash to every ration cardholder for Pongal, the Tamil Nadu Civil Supplies Corporation being the nodal agency under G.O.(2D) No. 66 dated 26 November 2019. Income-tax Officers surveyed the banks under s.133A(2A), found no deduction under s.194N on cash withdrawals above Rs 1 crore, and issued show cause notices in the first week of March 2020 giving the banks less than a week to appear. Orders under ss.201(1) and 201(1A) treating the banks as assessees in default followed, in some cases on the same day as the enquiry or the next. The banks did not challenge the constitutional validity of s.194N. The matter was decided on 2020-07-27 by the High Court (Madras High Court (Madurai Bench) — Justice G.R. Swaminathan). On those facts the High Court held as follows. The writ petitions were allowed, but the relief was a remand, not a final answer. On maintainability, the Court declined to non-suit the banks for not appealing under s.246A: notices giving them hardly a few days to respond were not a reasonable opportunity, and an order made in breach of natural justice is one of the recognised exceptions to the rule of exhaustion of remedies (paras 11-12). On the merits it held that the primary co-operative societies had acted as business correspondents of the petitioner banks in distributing the Pongal cash, so that part of the transaction fell within the exempting proviso to s.194N and had to be segregated out of the computation (para 14). It further held, reading s.194N with s.201, that because the deduction is a deduction 'as income-tax', if the sum received is not income in the recipient's hands the question of deduction does not arise - but that the deductor cannot decide that for himself; he must establish it in the s.201 enquiry, and if the proviso to s.201(1) is satisfied no liability can be fastened on him (paras 17, 19, 21). Two points went against the banks: the Court refused to accept that transactions before 1 September 2019 must be ignored in counting the Rs 1 crore threshold, holding the threshold is counted from 1 April 2019 for assessment year 2020-21 with the levy operating only from 1 September 2019 (para 20); and it did not fault the Department for issuing the show cause notices at all (para 20). The impugned orders were quashed and the matters remitted to the Assessing Officers to issue fresh hearing notices, to exclude the Pongal cash from the computation, and to let the banks prove that the remaining withdrawals were not income of the member societies; if satisfied, the officers must drop the proceedings, and if not they may pass further orders in accordance with law (para 22).
Three strands. First, natural justice: granting an opportunity cannot be an empty formality, and where surveys were followed by show cause notices, enquiries held for form's sake and orders passed the same or the next day, with enormous civil and financial consequences, the process was not fair compliance (paras 11-12). The Court also observed that the orders were premature on their own terms, since the assessment year shown in them was 2020-21 but the assessments had been made before the previous year ended (para 15). Second, the business correspondent proviso: the banks were a conduit for a State welfare payment, the primary societies passing the cash to ration cardholders under the RBI's business correspondent model, so that part of the transaction is exempt under the proviso to s.194N, and the banks could not have deducted 2% from the Pongal fund without breaching the State Government's mandate; an order that ignores that relevant material is liable to be quashed on that ground alone (para 14). Third, the character of the deduction: s.194N requires a sum to be deducted 'as income-tax' and sits in Chapter XVII on collection and recovery, so read with s.201 the conclusion is that if the sum received is not income in the recipient's hands the question of deduction does not arise; the Court supported that by the Supreme Court's observation in CIT v. Vasisth Chay Vyapar Ltd. that tax is levied on income and cannot be levied where income does not result, and by the Bombay High Court in Rupesh Rashmikant Shah that a TDS provision is not a charging provision (para 17). But the Court accepted the Revenue's point that a deductor cannot make that judgment unilaterally: the place to establish it is the s.201 enquiry, and Hindustan Coca Cola Beverages and CBDT Circular No. 275/201/95-IT(B) mean the demand is not to be enforced once the deductor shows the tax has been paid by the payee (paras 19, 21). In the words reproduced by the source cited on this page: "But having regard to the overall scheme of the chapter and particularly, by reading Section 194N along with Section 201 of the Act, one can safely come to the conclusion that if the sum received by the assessee will not be an income at his hands, then, the question of deduction under section 194N of the Act will not arise." The decision followed or applied CIT v. Vasisth Chay Vyapar Ltd. [2018] 90 taxmann.com 365 / 253 Taxman 401 (SC) - relied on (para 17); Rupesh Rashmikant Shah v. Union of India [2019] 108 taxmann.com 181 / 417 ITR 169 (Bombay) - relied on for the proposition that a TDS provision is not a charging provision (para 17); Hindustan Coca Cola Beverages (P.) Ltd. v. CIT [2007] 163 Taxman 355 / 293 ITR 226 (SC) - relied on (para 19); State of Himachal Pradesh v. Gujarat Ambuja Cement Ltd. [2005] 6 SCC 499 - relied on for the natural justice exception to exhaustion of remedies (para 11); CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 178 Taxman 505 / 312 ITR 225 (SC) - relied on by the petitioners but not applied, being confined to the computation of salaries (para 18).
It was decided by the High Court on 2020-07-27 and is reported as (2020) 428 ITR 249 (Mad); 275 Taxman 60; [2020] 119 taxmann.com 21 (Madras); W.P.(MD) Nos. 6102-6125 of 2020. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 194N, section 201, section 198, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The writ petitions were allowed, but the relief was a remand, not a final answer. On maintainability, the Court declined to non-suit the banks for not appealing under s.246A: notices giving them hardly a few days to respond were not a reasonable opportunity, and an order made in breach of natural justice is one of the recognised exceptions to the rule of exhaustion of remedies (paras 11-12). On the merits it held that the primary co-operative societies had acted as business correspondents of the petitioner banks in distributing the Pongal cash, so that part of the transaction fell within the exempting proviso to s.194N and had to be segregated out of the computation (para 14). It further held, reading s.194N with s.201, that because the deduction is a deduction 'as income-tax', if the sum received is not income in the recipient's hands the question of deduction does not arise - but that the deductor cannot decide that for himself; he must establish it in the s.201 enquiry, and if the proviso to s.201(1) is satisfied no liability can be fastened on him (paras 17, 19, 21). Two points went against the banks: the Court refused to accept that transactions before 1 September 2019 must be ignored in counting the Rs 1 crore threshold, holding the threshold is counted from 1 April 2019 for assessment year 2020-21 with the levy operating only from 1 September 2019 (para 20); and it did not fault the Department for issuing the show cause notices at all (para 20). The impugned orders were quashed and the matters remitted to the Assessing Officers to issue fresh hearing notices, to exclude the Pongal cash from the computation, and to let the banks prove that the remaining withdrawals were not income of the member societies; if satisfied, the officers must drop the proceedings, and if not they may pass further orders in accordance with law (para 22). It arises in TDS Defaults and Cash Transaction Limits matters, on section 194N, section 201, section 198 of the Income Tax Act 1961, and was decided by Madras High Court (Madurai Bench) — Justice G.R. Swaminathan. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the show cause notice gives only a few days, object in writing on that ground and seek reasonable time before the officer proceeds under s.201. Where an order has already been passed on such a notice, take the natural justice ground rather than being deflected by the alternative-remedy objection. Expect the Department to be able to start again after a proper hearing, so build the evidence on the character of the receipts now.
Partly overruled — read this first. Set aside in part on appeal. In Income-tax Officer, TDS v. Thanjavur District Central Co-operative Bank Ltd. [2024] 158 taxmann.com 490 / 465 ITR 286 (Madras), W.A.(MD) Nos. 1095 of 2020 and connected appeals, decided 22 December 2023 (Dr. Anita Sumanth and R. Vijayakumar, JJ.), a Division Bench reversed the conclusion that the cash withdrawals by the societies stand excluded from s.194N by clause (iii) of the third proviso - the business correspondent limb (para 97). It upheld the constitutional validity of s.194N, holding the section fastens no charge and only provides a mechanism for the collection of tax, and clarified that the provision applies only with effect from 1 September 2019 (para 100). But it sustained the single judge's direction that the s.201/201(1A) proceedings be redone, adding only that they be completed within three months in accordance with law and the principles of natural justice, with credit for any tax paid by the societies (paras 98-99). So the natural justice limb of this judgment survives; the business correspondent exemption does not, and must not be pleaded on the strength of this decision in Madras. No later treatment of the Division Bench decision was recorded on the report. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two things this entry previously got wrong. The decisive ground on the Pongal money was the business correspondent proviso to s.194N, not the 'no income, no TDS' proposition; and the relief was a remand to the Assessing Officers with fresh hearing notices, not a final discharge. The Court expressly declined to fault the Department for issuing the show cause notices, and decided the timing limb against the banks, holding that the Rs 1 crore threshold for assessment year 2020-21 is counted from 1 April 2019 even though the levy operates only from 1 September 2019. On appeal a Division Bench in ITO, TDS v. Thanjavur District Central Co-operative Bank Ltd. [2024] 158 taxmann.com 490 / 465 ITR 286 (Madras), 22 December 2023, reversed the business correspondent conclusion and upheld the validity of s.194N, while sustaining the direction that the s.201 proceedings be redone within three months on proper notice. What is left of this judgment in Madras is the natural justice limb and the reading of s.194N with s.201 by which a deductor may show in the s.201 enquiry that the payee bore no liability. The Division Bench judgment that set this one aside in part carries no recorded later treatment on the report consulted, so whether it was carried to the Supreme Court is not established. The separate constitutional challenges to s.194N before the Calcutta, Kerala and Rajasthan High Courts were not traced; the Madras Division Bench upheld validity. The current thresholds and rates in the second proviso to s.194N for a recipient who has not filed returns were not confirmed against the Act. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The writ petitions were allowed, but the relief was a remand, not a final answer. On maintainability, the Court declined to non-suit the banks for not appealing under s.246A: notices giving them hardly a few days to respond were not a reasonable opportunity, and an order made in breach of natural justice is one of the recognised exceptions to the rule of exhaustion of remedies (paras 11-12). On the merits it held that the primary co-operative societies had acted as business correspondents of the petitioner banks in distributing the Pongal cash, so that part of the transaction fell within the exempting proviso to s.194N and had to be segregated out of the computation (para 14). It further held, reading s.194N with s.201, that because the deduction is a deduction 'as income-tax', if the sum received is not income in the recipient's hands the question of deduction does not arise - but that the deductor cannot decide that for himself; he must establish it in the s.201 enquiry, and if the proviso to s.201(1) is satisfied no liability can be fastened on him (paras 17, 19, 21). Two points went against the banks: the Court refused to accept that transactions before 1 September 2019 must be ignored in counting the Rs 1 crore threshold, holding the threshold is counted from 1 April 2019 for assessment year 2020-21 with the levy operating only from 1 September 2019 (para 20); and it did not fault the Department for issuing the show cause notices at all (para 20). The impugned orders were quashed and the matters remitted to the Assessing Officers to issue fresh hearing notices, to exclude the Pongal cash from the computation, and to let the banks prove that the remaining withdrawals were not income of the member societies; if satisfied, the officers must drop the proceedings, and if not they may pass further orders in accordance with law (para 22).
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