The Karnataka High Court has ruled that a bank cannot unilaterally create a lien over a customer’s bank account for recovery of Tax Deducted at Source (TDS) allegedly payable on cash withdrawals under Section 194N of the Income Tax Act, 1961. The Court held that the statutory responsibility to deduct TDS under Section 194N rests with the banking company making the cash payment and not with the customer maintaining the account.
The judgment was delivered by Justice M.G.S. Kamal in Raitha Seva Sahakara Sangha Niyamita v. The Union of India, Writ Petition No. 3419 of 2023 (GM-RES).
Background of the Case
The petitioner, Raitha Seva Sahakara Sangha Niyamita, is a Primary Agriculture Credit Cooperative Society providing credit facilities to small and marginal farmers. It maintained a current account with Bank of Baroda and had annual transactions of approximately ₹44 crore.
On September 1, 2020, Bank of Baroda marked a lien of approximately ₹31.51 lakh on the society’s current account towards alleged TDS liability arising from cash withdrawals.
According to the bank’s response before the Banking Ombudsman, the society had withdrawn approximately ₹6.30 crore in cash between April 8 and August 27, 2020. The bank stated that the society had not furnished its income-tax returns for the preceding three years and accordingly calculated TDS at 5% on the cash withdrawals.
As the account allegedly did not have sufficient funds to recover the calculated TDS, the bank created a lien for approximately ₹31.50 lakh, effectively restricting the society from freely operating its account.
The society challenged the action before the Karnataka High Court, contending that it was merely the recipient of cash from its own bank account and was not the person responsible for deducting TDS under Section 194N.
Responsibility Under Section 194N Lies With the Bank
The principal issue before the Court was whether the bank had the statutory authority to place a lien on the society’s account for an amount representing TDS under Section 194N.
Section 194N provides for deduction of tax at source on certain cash withdrawals exceeding the prescribed threshold. The Court examined the language of the provision and concluded that the obligation to deduct the prescribed amount is imposed upon the person carrying on the business of banking who makes the cash payment.
The Court observed that, in the present case, Bank of Baroda was the entity responsible for deducting the amount contemplated under Section 194N.
Therefore, the customer could not be treated as the person statutorily responsible for making the TDS deduction.
No Statutory Power to Create Lien
The Court also considered Section 271C of the Income Tax Act, which deals with consequences for failure to deduct tax at source.
According to the Court, the provision contemplated proceedings against the person or entity responsible for deducting TDS. There was nothing in the relevant provisions indicating that the cooperative society itself was responsible for deducting tax under Section 194N or that its bank account could be subjected to a lien for this purpose.
Importantly, Bank of Baroda had admitted before the Banking Ombudsman that it had not received any order from the Income Tax Department directing it to place a lien on the society’s account.
The Court therefore found that the bank had not demonstrated any statutory authority enabling it to freeze or encumber the customer’s funds merely because it had computed a TDS liability.
Karnataka High Court’s Decision
The Court categorically held that Bank of Baroda had no statutory authority to create a lien over the amount lying in the current account of the cooperative society.
The bank was directed to release the lien and permit the society to operate its account, including withdrawing the funds lying therein.
The society had undertaken to furnish its income-tax returns for the relevant three years, and the Court directed it to submit those returns to the bank within 30 days from receipt of the certified copy of the order.
However, the Court clarified that this direction should not be interpreted as recognising any authority in the bank to create such a lien.
The judgment also preserved the powers of the Income Tax Department. If the tax authorities considered that any action was warranted under the Income Tax Act, the judgment would not prevent them from taking such action in accordance with law.
Key Takeaway for Banks and Taxpayers
The ruling is significant for taxpayers, cooperative societies and other entities making substantial cash withdrawals. It reinforces the principle that a statutory TDS obligation must be discharged by the person specifically identified under the Income Tax Act.
A bank cannot automatically convert its obligation to deduct TDS into a unilateral power to freeze or create a lien over the customer’s account, particularly in the absence of an order or direction from the competent tax authority.
The judgment also highlights the distinction between deduction of TDS under Section 194N and recovery of a tax demand from a taxpayer. A bank’s statutory obligation to deduct tax does not, by itself, confer unrestricted authority to appropriate or block the customer’s funds.
Case Details
Case: Raitha Seva Sahakara Sangha Niyamita v. The Union of India
Court: Karnataka High Court
Case No.: Writ Petition No. 3419 of 2023 (GM-RES)
Judge: Justice M.G.S. Kamal
Subject: Section 194N, Income Tax Act, 1961 – TDS on Cash Withdrawals
Key Ruling: Bank cannot create a lien on a customer’s account merely for recovery of TDS under Section 194N without statutory authority.