ITAT Panaji Clarifies: Section 194N TDS on Cash Withdrawal Cannot Be Taxed as Interest Income

Background and Context

The Panaji Bench of the Income Tax Appellate Tribunal (“ITAT Panaji”) in the case of Ch Kittur Taluk Prathmik Shala Shivshak Kiyat Pattin Sahakar Sangh NY Vs ITO (ITA No. 299/PAN/2026, order dated 21/08/2026, AY 2021-22) examined an important issue arising from mismatch of data appearing in departmental systems.

The Assessing Officer had treated a sum of approximately ₹10.91 lakh as bank interest income allegedly received from Canara Bank, primarily relying on system-generated information. The assessee, an Association of Persons (AOP) claiming deduction under Section 80P(2)(a)(i), maintained that no such interest income had actually accrued and that the relevant entry pertained to Section 194N/Section 194NF TDS on cash withdrawals, not to TDS on interest under Section 194A.

ITAT Panaji ultimately allowed the appeal, deleted the entire addition of ₹10,90,787 and held that the amount in question did not represent interest income.

Facts of the Case

Status of the Assessee and Return of Income

  • The assessee is an Association of Persons (AOP).
  • For Assessment Year 2021-22, it filed its return of income on 10.03.2022.
  • The return declared Nil income, after claiming deduction of ₹35,20,360 under Section 80P(2)(a)(i) of the Income Tax Act 1961 in respect of income from eligible activities.

Scrutiny Assessment and Addition Made

  1. The case was selected for scrutiny through the CASS mechanism.
  2. Statutory notices were duly issued and served under the provisions governing regular assessment.
  3. During the course of assessment, the Assessing Officer noticed from the available system information that the assessee purportedly had interest income from Canara Bank of ₹10,97,787.
  4. The Assessing Officer treated this sum as interest income and brought it to tax, effectively reducing the benefit of deduction claimed under Section 80P(2)(a)(i).
  5. The assessment was framed under Section 143(3) read with Section 144B.

First Appeal and CIT(A) Findings

The assessee challenged this addition before the National Faceless Appeal Centre, Delhi (CIT(A)), contending that:

  • The sum considered as interest income was wrongly inferred from the database.
  • The amount was in fact related to TDS deducted on cash withdrawals under Section 194N/Section 194NF, not under Section 194A.
  • Consequently, there was no taxable interest income from Canara Bank corresponding to the impugned figure.

Despite these submissions, the CIT(A) confirmed the addition, accepting the Assessing Officer’s view that the assessee had earned interest from a nationalised bank and that such interest would not be eligible for deduction under Section 80P(2)(a)(i) following certain judicial precedents.

Grounds Raised Before ITAT Panaji

Before the Tribunal, the assessee challenged not only the disallowance under Section 80P(2)(a)(i) but also several related legal and factual aspects. The core themes of the grounds included: