Banks Exempted From Deducting Tax At Source While Paying Interest To Statutory Corporations : Supreme Court Reiterates

The Supreme Court has reiterated that Banks are exempted from the mandate of Section 194A of the Income Tax Act, 1961, to deduct tax at the source (TDS), on payment of interest to corporations established by a statute.

In the facts of the present case, the Apex Court held that in terms of the notification dated 22.10.2022 issued by the Central Government, the Union Bank of India (appellant) was exempted from the requirement under Section 194A, Income Tax Act, 1961, to deduct tax at source on payment of interest made to the Agra Development Authority, which is a statutory body constituted under Uttar Pradesh Urban Planning and Development Act, 1973.

A Bench comprising Justices D.Y. Chandrachud and Surya Kant allowed an appeal assailing the order of the Allahabad High Court which held that the appellant bank cannot be absolved from paying penalty for non-deduction of TDS on interest paid to Agra Development Authority, even if the TDS was deducted subsequently and deposited with the Central Government before the closing of the financial year.

Factual Background

The Union Bank of India, the assessee, have several fixed deposits of the Agra Development Authority. It did not deduct tax at source (TDS) and deposit the same with the Central Government for the financial years 2012-2013 and 2013-12014. As a result of this, penalties amounting to Rs. 6,84,167 and Rs. 13,23,794 were imposed in terms of Section 271C of the Income Tax Act, 1961 ("Act") for the respective assessment years. The CIT (Appeals) deleted the penalty for 2013-14, but affirmed the one for 2012-13. Both the bank and the revenue preferred appeals before the Income Tax Appellate Tribunal, Agra. The Tribunal dismissed the appeal of the bank and allowed that of the revenue, reviving the penalty for the assessment year 2013-14. The bank approached the High Court. The issue before the High Court was - whether the Union Bank of India was required under Section 194A, Income Tax Act, 1961, to deduct tax at source on payment of interest made to the Agra Development Authority, which is a statutory body constituted under UP Urban Planning and Development Act, 1973? The bank argued that the tax was subsequently deducted and deposited, that too, before the close of the financial year. The High Court answered the issue framed against the bank and stated that subsequent deduction would not absolve the bank from penalty. It held -

"...deduction of tax at source on interest income before close of the financial year concerned as provided under Section 194 A (4) of the Act would not absolve the assessee Bank from penalty for not deducting the tax at source from the interest income of the Agra Development Authority at the time of credit of the said income in its account and that there was no reasonable cause on part of the assessee Bank for not deducting tax at source on the interest income of the Agra Development Authority so as to permit any benefit of exemption from penalty as envisaged under Section 273 B of the Act."

Section 194A of the Act provides that any person who is responsible for paying to a resident any income by way of interest shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash/cheque or draft whichever is earlier deduct income tax thereon at the rates in force. It reads as under -

"194 A (1) Any person, not being any individual Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force."

The High Court had noted that the expression 'at the time of credit of such income to the account of the payee' was material as it casts an obligation on the person who pays the interest to deduct income tax at the time of credit of income.

Main contention of the appellant

Advocate, Mr. O.P. Gaggar, appearing on behalf of the bank, stated that Section 194A(3)(iii)(f) of the Act provided exemption to the deduction of TDS in case of the income credited and paid to such institution, association or body as notified by the Central Government. He submitted that by a notification dated 22.10.1970, the following have been notified under the exempted category -

"(i) any corporation established by a Central, State or Provincial Act;

(ii) any company in which all the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a Corporation owned by that Bank; and

(iii) any undertaking or body, including a society registered under the Societies Registration Act, 1860 (21 of 1860), financed wholly by the Government."

Additional Solicitor General, Balbir Singh appearing for the revenue opposed such submissions.

Decision of the Supreme Court

The Court noted that the issue was squarely covered by the judgment of the Apex Court in Commissioner of Income Tax (TDS) Kanpur And Anr. v. Canara Bank (2018) 9 SCC 322, wherein the applicability of the notification dated 22.10.1970 in relation to payments made by Canara Bank to the New Okhla Industrial Development Authority ("NOIDA") was considered.

Canara Bank judgment

The Apex Court had noted that NOIDA, which is constituted under Section 3 of the Uttar Pradesh Industrial Area Development Act 1976 would be covered by '(i) any corporation established by a Central, State or Provincial Act' of the notification dated 22.10.1970. The contention raised before the Court in Canara Bank (supra) was that NOIDA had been established 'under an Act' and not 'by an Act' as was the requirement of the notification. Referring to Dalco Engineering Private Limited v. Satish Prabhakar Padhye And Ors. (2010) 4 SCC 378, the Court had observed that State Bank of India Act, 1955 and the Life Insurance Corporation Act, 1956 are enactments which itself establishes the corporation and thus the corporation is established 'by an Act'; whereas the State Financial Corporation Act, 1951 provides for establishment of various Financial corporations by notification to be issued by the State Government. In such a scenario, the Court noted that the Financial Corporations are considered to be established 'by or under an Act'. However, the emphasis should also be on the term 'established' which refers to coming into existence by virtue of an enactment. The term refers to a statutory corporation, which is 'established by or under an Act' as contrasted from a non­-statutory corporation which is 'governed by an Act'. The Court noted that NOIDA was established by Uttar Pradesh Industrial Area Development Act, 1976. The composition of the Authority is also provided in Section 3 of the statute itself and therefore NOIDA can be said to have been constituted 'by the Act'.

In the present case, the Apex Court held that the principal applied in Canara Bank would extend to the Agra Development Authority constituted 'by the Uttar Pradesh Urban Planning and Development Act, 1973'.

Case Name: Union Bank of India v.Additional Commissioner of Income Tax (TDS) Kanpur

Citation: 2022 LiveLaw (SC) 278

Case No. and Date: Civil Appeal Nos. 1861- 1862 of 2022 | 7 Mar 2022

Corum: Justices D.Y. Chandrachud and Surya Kant

Headnotes

Section 194A(1) of the Income Tax Act, 1961 - any person who is responsible for paying to a resident any income by way of interest shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash/cheque or draft whichever is earlier deduct income tax thereon at the rates in force - the Union Bank of India did not deduct TDS at source while paying interest to Agra Development Authority, but subsequently deducted and deposited the same within the financial year.

Section 194A(3)(iii)(f) of the Income Tax Act, 1961 - provided for exemption from mandate of Section 194A(1), inter alia, for paying interest to such corporations as notified by the Central Government - Central Government vide notification dated 22.10.1970 notified corporation established by a statute for the purpose of exemption - Applying the same principle as in Commissioner of Income Tax (TDS) Kanpur And Anr. v. Canara Bank (2018) 9 SCC 322, the Apex Court permitted Agra Development Authority to be considered as a corporation established by a statute - Therefore, Union Bank of India was eligible for the exemption.

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