New law comes with new set of controversy and issue. One such controversy is with regard to section 194N. Section 194N is a newly introduced section which provides for deduction of Tax at Source if the cash withdrawal by the account holder exceeds Rs. 1 Cr.

The question revolves around the applicability of Section 194N to the credit co-operative society from two angles:

1. Cash withdrawals by credit co-operative society from its bank account with other bank- Whether the bank will do TDS on cash withdrawn by the society?
2. Cash withdrawals by the customer from their account maintained with credit co-operative. Whether credit cooperative society is required to do TDS in such cases?

Section 194N reads as under:

Payment of certain amounts in cash.

194N. Every person, being,

 (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

 (ii) a co-operative society engaged in carrying on the business of banking; or

(iii) a post office,

who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deducts an amount equal to two per cent of sum exceeding one crore rupees, as income-tax:

Provided that nothing contained in this sub-section shall apply to any payment made to,

 (i) the Government;

 (ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;

 (iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934);

(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007);

(v) such other person or class of persons, which the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.]

Above reading will convey that certain payment are outside the net of TDS U/s 194N & no tax is required to be done if cash withdrawal from bank or post office is made by the following recipients:

1. Central or State Government
2. Banks
3. Co-op. Banks
4. Post Office
5. Banking correspondents
6. White label ATM operators
7. Other persons notified by the Govt. in consultation with the RBI.

Further, to overcome the difficulty of giving credit to the deductee, the section is 199 is also amended to provide that (a) TDS done in accordance with the provisions of section 194N shall be admissible as credit towards tax while filing income tax return (b) No TDS required to be done on payment by APMC transactions.

Question arises as to whether TDS is required on the transactions of credit cooperative society which are engaged in the business of banking?

There are lot of credit co-operative societies in the country, whether state, district or multi-state, which are engaged in the business of banking even though they don’t have banking license or have a clearing house facility.

The issue becomes all the more interesting when one finds that the word “Banking” is not defined in the Income Tax Act, 1961. One needs to take recourse to section 5(b) of the Banking Regulation Act to know the meaning of the term “Banking”.

“Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheques, draft, order or otherwise.

“Withdrawable by cheques, draft, order or otherwise” is very relevant for knowing if it’s a banking activity or not.

Credit co-operative credit society don’t have the facility of issue of cheques or drafts and are never the part of any payment and settlement system of RBI which is necessary to be considered as bank in India.

The term “banking” becomes all the more relevant for the first time when the co-operative banks who were earlier eligible for deduction u/s 80P, were excluded from the deduction. Almost all the judiciary have concluded that that the credit co-operative societies were not covered by exclusions and it is only those entities which have a banking license will be covered by exclusions. Resultantly, section 80P deduction is allowed to all the credit co-operative societies. However, all these judgments were specific to the amendment wherein registration under the banking regulation Act was specifically referred to and so all those judgments may not be of much relevance in the present context.

Though credit co-operative societies render services which are similar to the services normally offered by co-operative banks i.e., accepting deposits from the members and lending it to the members, yet it is not same for the reason that it don’t have clearing house facilities and don’t have any registration of RBI.

If credit society is treated as engaged into the business of “banking” then Cash withdrawals by credit co-operative society from its bank account with other banks will be subject to TDS.

However, if credit society is treated as not engaged into the business of “banking” then it will have to do TDS on cash withdrawn by the customer from their account maintained with credit co-operative.

In short, either one way or the other way, the credit co-operative societies are going to be impacted by section 194N, either as a payer or as a recipient. However, the issue is going to be full of controversy. Unless and until the word “Banking” is clarified by the CBDT the issue will remain disputable and full of litigation. CBDT need to come out with the clarification to avoid any litigation & disputes with regard to its interpretation.