Bank Cannot Mark Lien On Cooperative Society Account For TDS On Cash Withdrawals: Karnataka High Court

The Karnataka High Court has recently held that Bank of Baroda had no statutory authority to create a lien over a cooperative society's current account for collection of TDS on cash withdrawals.

It held that the responsibility to deduct the tax under Section 194N of the Income Tax Act rested on the bank.

Justice M.G.S. Kamal observed that Section 194N placed the responsibility for deducting the prescribed tax on the banking company making the payment.

“Perusal of the aforesaid provision indicate that it is the responsibility of a person carrying on the business of Banking Company as provided under Banking Regulation Act, 1949, to deduct an amount equal to two percent of the aggregate amount paid in cash exceeding Rupees One Crore during the previous year,” the court observed.

“For the purpose of present case, it is respondent No.5-Bank, which is required to deduct the amount as required under the aforesaid provision under Section 194N of the Act.”, it added.

The case concerned Raitha Seva Sahakara Sangha Niyamita, a Primary Agriculture Credit Cooperative Society providing credit facilities to small and marginal farmers. The society maintained a current account with Bank of Baroda, with annual transactions of about Rs.44 crore.

On September 1, 2020, Bank of Baroda created a lien of Rs.31.51 lakh on the society's current account towards TDS under the Income Tax Act. The society approached the high court after the bank did not respond to its request to defreeze the account.

The society contended that it was merely a customer operating its account and withdrawing money from the bank. It argued that it was not making the payment under Section 194N and, therefore, was not responsible for deducting the tax at source.

The bank's explanation to the Banking Ombudsman stated that the society had withdrawn Rs.6.30 crore in cash between April 8 and August 27, 2020. It said the society had not furnished its last three years' income-tax returns. The bank therefore computed TDS at 5% on the cash withdrawals, amounting to Rs.31.50 lakh.

The bank further stated that the society had not maintained sufficient balance in the account for collection of the TDS amount. It therefore said the system had marked a lien for Rs.31.50 lakh, preventing the society from withdrawing the balance.

The court also examined Section 271C of the Income Tax Act, which provides for a penalty for failure to deduct tax at source. It observed that the provision contemplated proceedings against the person or entity responsible for the deduction.

The court found that the provisions did not indicate that the customer was responsible for deducting the tax at source. Nor did they contemplate the imposition of any penalty on the society for such failure.

The bank had also confirmed to the Banking Ombudsman that it had not received any order from the Income Tax authorities directing it to place a lien on the account.

In response to the Ombudsman's query, the bank stated, “No, as per the Income tax rules, Bank has computed the TDS on cash withdrawal.”

The court noted that the bank's response did not indicate any power under which it had created the lien. It also recorded that the Income Tax authorities had neither taken any action nor issued any direction to the bank in relation to the lien.

“Respondent No.5-Bank had no statutory authority to create a lien over the amount lying in the current account of the petitioner-Society,” the court held.

Counsel for the society told the court that the society would furnish its income-tax returns for the relevant three years to the bank. The court directed the society to furnish the returns within 30 days from the date of receiving the certified copy of the order.

Bank of Baroda was directed to release the lien and allow the society to operate the account. This included permitting the society to withdraw the amount lying in it.

The court clarified that this direction was issued because the bank had expressed the requirement for the society to furnish its income-tax returns. It made clear that the direction could not be construed as recognising any authority in the bank to create the lien.

The court also clarified that its order would not prevent the Income Tax authorities from taking any action contemplated under the Income Tax Act. This would apply if the situation warranted such action.

For Petitioner: Advocate Pallava R.

For Respondent: Madanan Pillai R., CGC for R1, E.I. Sanmathi, For R2 and R3 and P. Chithra Nirmala, Advocate for R4 and R5