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Tuesday, 10 July 2018 15:31

Non Deduction of TDS u/s 194A by Canara Bank to NOIDA : Assessee in Default : Supreme Court of India

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Whether TDS to be deducted under Section 194A on Interest payment by Canara Bank to Noida? - Held No


This Court having already laid down in  Dalco Engineering (supra)   that   establishment   of   various   financial   corporations under State Financial Corporation Act, 1951 is establishment of a Corporation by an Act or under an Act. 

We are of the view that the above ratio fully covers the present case and we have no doubt that the Authority have been established by the 1976 Act   and   it   is   clearly   covered   by   the   Notification  22.10.1970. It is further relevant to note that composition of the Authority is statutorily provided by Section 3 of 1976 Act itself,   hence,   there   is   no   denying   that   Authority   has   been constituted by Act itself.

Leave granted.

2. These appeals question the Division Bench judgment dated 04.04.2016   of   the   Allahabad   High   Court,   by   which   judgment Income   Tax   Appeals   filed   by   the   Revenue   has   been   dismissed affirming the order of the Income Tax Appellate Tribunal.  The common   questions   of   facts   and   law   are   involved   in   these appeals and it is sufficient to refer the facts and pleadings in   Civil   Appeal   No....   2018   arising   out   of   SLP(C)   3168   of 2017,   Commissioner   of   Income   Tax(TDS),   Kanpur   and   Anr.   vs. Canara   Bank   wherein   the   judgment   of   the   High   Court   dated 04.04.2016 in ITA No. 64 of 2016 has been questioned.

3. The New Okhla Industrial Development Authority   (NOIDA), hereinafter referred to as “Authority” has been constituted by Notification dated 17.04.1976 issued under Section 3 of the Uttar   Pradesh   Industrial   Area   Development   Act,   1976 hereinafter   referred   to   as   “1976   Act”.     The   Canara   Bank, respondent   No.   3   is   the   banker   of   the   Authority.   The respondent   Bank   made   a   payment   of   Rupees   Twenty   Crores   Ten Lakhs as interest to Authority in form of FDs/Deposits for the financial   year   2005­06.   The   Canara   Bank,   however,   did   not deduct tax at source under Section 194A of the Income Tax Act, 1961 hereinafter referred to as “IT Act, 1961”.

4. Notices were issued by the appellant to Canara Bank asking for information pertaining to interest paid to the Authority on its deposits. Notices were also issued by the appellant to the Bank for showing cause for not deducting tax at source. A writ petition had been filed by the NOIDA being Writ Petition No.1338/2005 challenging the notices issued to the Authority as   well   as   its   bankers.     Assessment   proceeding   could   not proceed due to certain interim directions passed by the High Court   in   the   above   writ   petition.   The   writ   petition   was ultimately dismissed by the High Court on 28.02.2011 holding that the Authority is not a local authority within the meaning of   Section   10(20)   of   IT   Act,   1961   and   its     income   is   not exempt from tax.   The Assessing Officer thereafter proceeded to   pass   an   order   under   Section   201(1)/201(1A)   read   with Section 194A of the IT Act, 1961 dated 28.02.2013.

5. Income Tax Authority held that the respondent Bank is assessee in default. The default was computed and demand notice as per Section 156 of the IT Act, 1961 was issued. Penalty proceeding was also separately initiated. The Canara Bank   aggrieved   by   the   order   of   the   Assessing   Officer   dated 28.02.2013 filed an appeal before the Commissioner of Income Tax (Appeals). Before   the Commissioner, the bank relied on Notification dated 22.10.1970 issued under Section 194A(3) (iii)(f) of the IT Act, 1961. The Appellate Authority vide its judgment dated 02.12.2013 allowed the appeal setting aside the order of the Assessing Officer.  The Revenue aggrieved by the judgment of the Appellate Authority filed an appeal before the   Income   Tax   Appellate   Tribunal.     The   Tribunal   also   held that payment of interests by the banks to the State Industrial Development Authority does not require any deduction at source in terms of Section 194A(3)(iii)(f).

6. The Revenue aggrieved by the order of the Tribunal filed an appeal under Section 260A of the Act before the High Court.

The Division Bench of the High Court vide its judgment dated 04.04.2016 has dismissed the appeal. The Division Bench came to the following conclusions while dismissing the appeal: 

"We have, therefore, no manner of doubt from a reading   of   the   provisions   of   the   Industrial Area Development Act that the NOIDA has been constituted   by   the   State   Act   and,   therefore, entitled   to   exemption   of   payment   of   tax   at source under section 194­A(1) of the Act.

The   decision   of   the   Division   Bench   of   this Court   in   New   Okhla   Industrial   Development Authority (supra), on which reliance has been placed by learned counsel for the appellants, would, therefore, not come to the aid of the appellants as it was restricted to the issue as to whether NOIDA would be a local authority or   not   and   did   not   deal   with   the   issue involved   in   this   appeal   as   to   whether   the NOIDA is a Corporation established by a State Act.

We   therefore,   answer   the   question   of   law framed by us in negative and hold that NOIDA is a Corporation established by Uttar Pradesh Industrial Area Development Act, 1976. ”

7. Shri K. Radhakrishnan, learned senior advocate appearing for the appellants challenging the Division Bench judgment of the High Court contends that Authority is not entitled for the benefit of Notification dated 22.10.1970 issued under Section 194A   (3)(iii)(f).   It   is   submitted   that   under   the   above notification only a Corporation established by Central, State or Provincial Act  is entitled for the benefit.  Authority is not a Corporation established by the State Act rather Authority is a Corporation which is established under 1976 Act. He submitted that there is a vast difference between a body  established  by an  Act  and  a  body  established  under an Act.   The   provisions   of   Section   194A   have     to   be   strictly construed and benefit can be extended only when a body falls expressly within the benefit of exemption. In the exceptions carved out under Section 194A(3) there is homogeneity in the group.  The legislature when used a word with a limitation the same   has   to   be   read   in   the   entire phrase and only such corporations are entitled for the exemption which are established by a Central, State or Provincial Act.   It is submitted that words have to be construed, in accordance with the   intention   and   use of the word as per the Notification dated 22.10.1970, normally indicate that for purposes of claiming exemption the corporation has to be established by a Central, State or Provincial Act. The corporations established under an Act fall in a different category and are not entitled for exemption.  He has submitted that CIT Appeals, Income Tax Tribunal as well as High Court erred in not correctly construing the Notification dated 22.10.1970 and had wrongly extended benefit under Section 194(3)(iii)(f). 

8. Learned senior counsel appearing for the different banks have refuted the above submissions of learned senior counsel for the appellants. It is submitted that Section 3 of 1976 Act provides   that   “the   State   Government   may   by  notification, constitute  for  the  purpose  of  this  Act, an  authority  to be called   (Name   of   the   area)   Industrial   Development   Authority, for   any   Industrial   Development   Area”.   It   is   submitted   that Authority   is   established   under   the   1976   Act.   Referring   to provisions of State Bank of India Act, 1955, Life Insurance Corporation of India Act, 1956, it is submitted that statute provides for establishing of the corporation by virtue of a notification by the Central Government. It is submitted that in similar manners Authority has been established by issuing a notification,   hence,   Authority   has   to   be   treated   as established by the 1976 Act.  Alternatively, it is submitted that   the   legislature   has   used   the   words   “by   and   under” interchangeably which is clear from the provisions of Section 194A(3)(iii)(c) and Section 194A((3)(iii)(d). In the Section 194A(3)(iii),   itself  differentiation   in   “by   and   under”   has been done away, with that the Authority established by 1976 Act is clearly covered by the Notification dated 22.10.1970. The   Notification   dated   17.04.1976   establishing   Authority fulfills the mandate of “by” hence it is clearly entitled for the benefit of the Section 194A(3)(iii).

9. Learned counsel for the parties have placed reliance on various judgments of this Court, which shall be referred to while considering the submissions in detail.

10. We have considered the submissions of the learned counsel for the parties and perused the record. Present set of appeals relates to Section 194A of the IT Act, 1961. It is useful to extract provisions of 194A which is to the following effect:

"194A.   Interest   other   than   “Interest   on securities”.­(1)   Any   person,   not   being   an individual or a 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   income­tax   thereon   at   the rates in force: 

[Provided   that   an   individual   or   a   Hindu undivided   family,   whose   total   sales,   gross receipts   or   turnover   from   the   business   or profession   carried   on   by   him   exceed   the monetary limits specified under clause (a) or clause   (b)   of   section   44AB   during   the financial   year   immediately   preceding   the financial   year   in   which   such   interest   is credited   or   paid,   shall   be   liable   to   deduct income­tax under this section.]

[Explanation.­For   the   purposes   of   this section, where any income by way of interest as   aforesaid   is   credited   to   any   account, whether   called   “Interest   payable   account”   or “Suspense   account”   or   by   any   other   name,   in the books of account of the person liable to pay   such   income,   such   crediting   shall   be deemed   to   be   credit   of   such   income   to   the account   of   the   payee   and   the   provisions   of this section shall apply accordingly.]

(3)   The   provisions   of   sub­section   (1)   shall not apply ­ 

(a)   any   banking   company   to   which   the Banking Regulation Act, 1949 (10 of 1949), applies,   or   any   co­operative   society engaged   in   carrying   on   the   business   of banking   (including   a   co­operative   land mortgage bank), or 

(b) any financial corporation established by   or   under   a   Central,   State   or Provincial Act, or

(c)   the   Life   Insurance   Corporation   of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or

(d)   the   Unit   Trust   of   India   established under   the   Unit   Trust   of   India   Act,   1963 (52 of 1963), or

(e)   any   company   or   co­operative   society carrying on the business of insurance, or

(f) such other institution, association or body   [or   class   of   institutions, associations or bodies] which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette;”

11. In   the   present   case   notification   on   which   reliance   has been placed by the respondent is Notification dated 22.10.1970 issued under Section 194A(3)(iii)(f), hence, it is necessary to refer to the entire Notification dated 22.10.1970 which is to the following effect:

24. This   Court   further   elaborating   the   expression   held   that when the expression used is “established by or under the Act”, the emphasize should be on the word “established” in addition to the words “by or under”.  It is useful to refer to what has been said in paragraph Nos. 21 and 22 of the judgment which is to the following effect: 

“21.   Where   the   definition   of   “establishment” uses the term “a corporation  established  by or under   an   Act”,   the   emphasis   should   be   on   the word “established” in addition to the words “by or   under”.   The   word   “established”   refers   to coming   into   existence   by   virtue   of   an enactment.   It   does   not   refer   to   a   company, which,   when   it   comes   into   existence,   is governed   in   accordance   with   the   provisions   of the   Companies   Act.   But   then,   what   is   the difference   between   “established  by  a   Central Act” and “established under a Central Act”?

22.   The   difference   is   best   explained   by   some illustrations.   A   corporation   is   established   by an   Act,   where   the   Act   itself   establishes   the corporation. For example, Section 3 of the State Bank of India Act, 1955 provides that a bank to be   called   State   Bank   of   India   shall   be constituted to carry on the business of banking. Section 3 of the Life Insurance Corporation Act, 1956 provides that

3.  Establishment   and   incorporation   of   Life Insurance Corporation of India.—(1) With effect from such date as the Central Government may, by notification   in   the   Official   Gazette,   appoint, there shall be established a Corporation called the Life Insurance Corporation of India.

State   Bank   of   India   and   Life   Insurance Corporation   of   India   are   two   examples   of corporations established by “a Central Act”.”

25. This Court has also referred to provisions of The State Financial   Corporations   Act,   1951   which   provides   for establishment of various financial corporations under the Act. It is useful to refer to definition of financial corporation as contained in Section 2(b) which is to the following effect:

“2(b)   Financial   Corporation   means   a   Financial Corporation   established   under   Section   3   and includes   a   Joint   Financial   Corporation established under Section 3A;”

26. Section   3   deals   with   establishment   of   State   Financial Corporation which provides as follows:

“3.   Establishment   of   State   Financial Corporations.: (1) The State Government may, by notification in the Official Gazette, establish a   Financial   Corporation   for   the   State   under such   name   as   may   be   specified   in   the notification.

(2)   The   Financial   Corporation   shall   be   a   body corporate by the name notified under sub­section (1),   having   perpetual   succession   and   a   common seal, with power, subject to the provisions of this   Act,   to   [acquire,   hold   and   dispose   of] property and shall by the said name sue and be sued. ”

27. This   Court   clearly   in   above   case,  Dalco   Engineering (supra)  has   held   that   such   Financial   Corporations   are established by an Act or under an Act. In paragraph No. 23 of the judgment following has been held:

“23.  We   may  next  refer  to  The   State   Financial Corporations   Act,   1951   which   provides   for establishment of various financial corporations under that Act. Section 3 of that Act relates to establishment   of   State   Financial   Corporations and provides that “the State Government may, by notification in the Official Gazette, establish a financial corporation for the State under such name   as   may   be   specified   in   the   notification” and such financial corporation shall be a body corporate   by   the   name   notified.   Thus,   a   State Financial   Corporation   is   established   under   a Central Act. Therefore, when the words “by and under   an   Act”   are   preceded  by   the   words “established”, it is clear that the reference is to a corporation established, that it is brought into existence, by an Act or under an Act. In short,   the   term   refers   to   a   statutory corporation   as   contrasted   from   a  non­statutory corporation incorporated or registered under the Companies Act.”

28. Now, we revert back to the provisions of 1976, Act. The very preamble of that Act reads “an Act to provide for the Constitution of an Authority for the development of certain areas in the State into industrial and urban township and for masses connected through with”.

29. Thus, the Act itself provides for constitution of an authority. Section 2(b) of the 1976 Act defines Authority as authority constituted under Section 3 of the Act. Section 3 which is very relevant for the present case is as follows: 

“3.   (1)   The State Government may, by notification, constitute for the purposes of this Act, An authority to be called (Name of the area) Industrial Development Authority, for any industrial development area. 

(2) The Authority shall be a body corporate.

(3) The Authority shall consist of the following

31. This Court having already laid down in  Dalco Engineering (supra)   that   establishment   of   various   financial   corporations under State Financial Corporation Act, 1951 is establishment of a Corporation by an Act or under an Act. We are of the view that the above ratio fully covers the present case and we have no doubt that the Authority have been established by the 1976 Act   and   it   is   clearly   covered   by   the   Notification   dated 22.10.1970. It is further relevant to note that composition of the Authority is statutorily provided by Section 3 of 1976 Act itself,   hence,   there   is   no   denying   that   Authority   has   been constituted by Act itself.

32.  In view of what has been said above, we are of the view that   High   Court   did   not   commit   any   error   in   dismissing   the appeal filed by the Revenue. In result, all the appeals are dismissed.

Cases Referred to

1. RaiBahadur Seth Teomal Vs. The Commissioner of Income Tax,[1959] 36 ITR 9(SC)

2. Kanji Mal & Sons vs. C.I.T. (1982) 138 ITR 391 (Del)

3. Grindlays Bank vs. Income Tax Officer AIR 1980 656 (SC)

4. Budhia Swain and Ors.Vs. GopinathDev and Ors.(1999) 4 SCC 396

5. MahalliramRamniranjan Das vs. CIT (1985) 156 ITR 885

6. Guduthur Bros. vs. ITO (1960) 40 ITR 298 (SC)


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Additional Info

  • Order Date: Monday, 02 July 2018
  • Court: Supreme Court
  • Section: 194A, 201
  • Favouring: Assessee
Read 23 times Last modified on Tuesday, 02 April 2019 16:37
Deepak Kumar

A Post Graduate and Chartered Accountant Deepak Sinha is a member of Taxpundit's core team. An analytical, result oriented professional with more than 10 years of combined experience in industry and consultancy.

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