J&K State Rural Roads Development Agency’s Term Deposits Interest Exempted from TDS as is Wholly Financed by Central Govt: Jammu & Kashmir HC [Read Order]

In a recent ruling, the Jammu and Kashmir High Court held that the interest accrued from the Term Deposits by the J&K State Rural Roads Development Agency (JKSRRDA) is exempted from Tax Deduction at Source (TDS) under Section 194A(3)(iii)(f) of Income Tax Act, 1961 as the agency is wholly financed by the Central Government.

The bench of Justice Sanjeev Kumar and Justice Puneet Gupta clarified that JKSRRDA being a body wholly financed by the Government was covered by S.O 3489 dated 27.10.1970 and, therefore, no separate notification in the official Gazette was required to be issued by the Central Government to include JKSRRDA specifically within the ambit of exemption provided under Section 194A (3)(iii)(f) of the Income Tax Act.

The department filed the appeal before the High Court against the order of the Income Tax Appellate Tribunal (ITAT).

The Assessing Officer (AO) noticed that the respondent-Bank, The Jammu and Kashmir Bank Ltd. (assessee) was not deducting tax at source under Section 194A of the Income Tax  Act on interest paid/accrued on Term Deposit Accounts under Saving Bank Account of the JKSRRDA. Thus, the AO made the addition.

On appeal by the assessee, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition made by the Assessing Officer by holding that no tax was required to be deducted by the assessee in respect of JKSRRDA being a Society covered by Notification No.3489 dated 22.10.1970.

Feeling aggrieved by the order of CIT (A), the Assessing Authority filed an appeal before ITAT, Amritsar Bench. The ITAT, Amritsar Bench vide its order confirmed the order of CIT(A) which order of ITAT is called in question by the Commissioner of Income Tax (TDS-I) in this appeal.

The bench considered the opinion that the substantial question of law, as proposed by the appellant, was not only misconceived, but does not arise out of the pleadings and the controversy that is raised for determination in this appeal.

Further, Indisputably, JKSRRDA is a Society registered under the Act of 1998 and has been appointed as a nodal agency of the Government of Jammu and Kashmir for implementation of Pradhan Mantri Gram Sadak Yojana [‘PMGSY’].

As per the Memorandum of Understanding of Banking arrangements of the funds released by the Government of India under PMGSY, entered on 05.04.2005 between the National Rural Road Development Authority [‘NRRDA’], JKSRRDA and the J&K Bank Ltd., the entire funds received from the Government of India through NRRDA are deposited in an account called “Programme Fund/Account” maintained with the Moving Secretariat Branch of Jammu and Kashmir Bank Ltd.

In the financial year 2008-09, the Fixed Deposit Receipts (FDRs) yielded an interest amount of Rs. 12,59,50,261/-. However, the assessee failed to deduct tax at source, as required by Section 194A of the Income Tax Act. Consequently, the Assessing Authority raised a demand under Section 201(1) due to the assessee's failure to make the required deductions at source when disbursing the interest from the FDRs.

The High Court observed that order passed by the Assessing Authority dated 18.03.2013 in respect of assessment year 2009-10 raising a demand of Rs.2,11,19,843/- on account of failure of the assessee/Bank to deduct tax at source under Section 194A of the Act on the interest income accrued on the Term Deposit Accounts of the JKSRRDA was legally and factually flawed for the following two reasons:

1. JKSRRDA is a body wholly financed by the Central Government for implementation of PMGSY and, therefore, exempt from TDS in terms of Notification No.3489 dated 22.10.1970 issued by the Central Government under Section 194A(3)(iii)(f) of the income Tax Act; and
2. that the interest income accrued on Term Deposit Accounts under the Saving Bank Account of the JKSRRDA was the income of the Government of India and, therefore, exempt from TDS in terms of Section 196 of the Act.

While upholding the decision of the CIT(A) and ITAT, the high court dismissed the appeal.

To Read the full text of the Order CLICK HERE

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