Bank not liable to deduct TDS on Interest to NOIDA on FDs: SC [Read Judgment]

Agency Commission - Canara Bank - Taxscan

Upholding the Allahabad High Court favoring the NOIDA and Banks, the Supreme Court held that the Canara Bank cannot be treated as assessee-in-default by the income tax department for non-deduction of TDS on the interest earned on FDs of NOIDA.

A bench comprising Justice A K Sikri and Justice Ashok Bhushan pointed out that though NOIDA is not a “local authority”, it is a “corporation established by the Act” and so payments to it are not liable to TDS u/s 194A of the Income Tax Act.

The Canara Bank 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 2005-06. The Canara Bank, however, did not deduct tax at source under Section 194A of the Income Tax Act, 1961.

On appeal, the ITAT deleted the penalty imposed as the assessee not only had a reasonable cause for not deducting tax at source but also as NOIDA was exempt for payment of tax at source.

Aggrieved by the order, the department appealed to the High Court. The division bench of the Court has held that NOIDA is a corporation established by the U.P. Industrial Development Act, 1976, therefore, is exempt from payment of tax at source. It further noted that Section 273 B of the Act provides that no penalty shall be imposable on the assessee for the failure referred to in Section 271 C of the Act if he proves that there was reasonable cause for the failure.

Examining the provisions of the State Financial Corporations Act, 1951, the bench noted that the establishment of Corporation in both the enactments is by a notification by State Government.

“In the present case, notification has been issued in exercise of the power of Section 3, the Authority has been constituted,” the bench said.

“This Court has already laid down in Dalco Engineering (supra) that establishment of various financial corporations under State Financial Corporation Act, 1951 is an 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 has 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.”

“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,” the bench said.

There was a major controversy on the issue which started in 2013 when the Income Tax department imposed a tax liability on the banks for non-deduction of TDS on the interest income on fixed deposit receipts (FDRs) of NOIDA.

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