TDS Collection U/S 194N Income Tax Act Sub Judice: Kerala High Court Stays Demand Notice Issued To State Co-operative Bank

The Kerala High Court on Friday stayed the demand notice issued by the Deputy Commissioner of Income Tax asking the State Co-operative Bank to pay the outstanding amount for the financial year 2019-20 in a plea moved by the said Bank.

Justice Bechu Kurian Thomas issued the interim order considering that the matter relating to the collection of Tax Deduction at Source (TDS) on interests by the Co-operative Banks is sub-judice before the Court. 

The Primary Agricultural Credit Societies (PACS) and Urban Co-operative Banks (UCBS) are Class A members of the petitioner, the Kerala State Co-operative Bank Ltd. 

The PACS and other societies are classified as co-operative societies under Rule 15 of the Kerala Co-operative Societies Rules, 1969 and they receive interest income for the deposits they maintain. The PACS maintain their accounts mainly with the petitioner.

Under Section 194A of the Income Tax Act, any person responsible for paying any income to a resident by way of interest is bound to deduct TDS thereon at the rates in force. Therefore, based on the interest income, PACS are liable to deduct TDS on said interest income. However, many of the Co-operative Credit Societies including PACS filed several petitions before the Court contending that the interest paid by them to their members is outside the purview of the provisions pertaining to TDS.

Further, Section 194N was introduced into the Act through Finance Act, 2019 which mandates that all the withdrawals from the Banking Companies, Co-operative Banks and Post Offices beyond the limit of one crore rupees a year would attract TDS at the rate of 2%. Therefore, PACS were required to deduct a 2% TDS from the interests earned on the deposits when such deposits were withdrawn from the financial year 2019-20 onwards.

The amended Section 194N came into effect from 01-07- 2020.

Faced with this situation, several co-operative societies including various PACS filed numerous petitions between 2020-2022 challenging the incorporation and applicability of Section 194N to the co-operative societies. In most of these petitions, notices issued by the petitioner demanding recovery of TDS from the co-operative societies have been stayed.

Meanwhile, the Deputy Commissioner, Income Tax (TDS) issued a demand notice against the petitioner demanding to pay the outstanding amount of Rs. 9,75,53,596/-, purportedly raised under Section 201(1) and 201(1A) of the Act for the financial year 2019-20. 

Advocate B.G. Harindranath appearing for the petitioner submitted that the said amount is actually due from the PACS and other societies many of whom have obtained a stay against collection of TDS proceedings under Section 194N.

Therefore, at present, the PACS are not deducting the TDS and providing the amount to the petitioner. In such a scenario, the petitioner cannot be made liable to pay the amount as demanded in the demand notice, since that would cause undue prejudice to the petitioner.

In the event, the counsel argued that if the petitioner is made to pay the amount, it will cause irreparable injury and loss to them.

It was also argued that since the matter relating to the deduction of TDS on interests by the Co-operative Banks is sub-judice, the respondents cannot serve demand notice to that effect. In fact, it was pointed out that in some petitions, the constitutionality of Section 194N itself has been challenged.

Further, since the respondents are a party to the proceedings instituted by PACS, it was contended that they were fully aware of the fact that the issue of TDS collection by PACS is sub-judice before this Court.

By staying the proceedings of deducting TDS, the applicability of Section 194N of the Act is itself stayed, argued the petitioner. 

For these reasons, it was argued that the demand notice could not have been issued by the respondents and that by doing so, they have completely erred and tried to indirectly flout the orders of the Court. It has also been contended that by sending the demand notice, the respondents deliberately attempted to take undue advantage of the petitioner. 

The petitioner accordingly prays that the impugned demand notice be quashed by the Court. 

In the event the respondents take coercive steps in pursuance of the notice, the petitioner would be put to irreparable injury and loss. Therefore, they also prayed that interim relief may be granted to them. 

Case Title: Kerala State Co-operative Bank Ltd. v. Union of India & Anr.

Click Here To Read/Download The Interim Order