Double trouble: PMC Bank asked to deduct TDS on notional interest paid

CBDT asks lender to deduct tax at source on notional interest paid

Mumbai-based PMC Bank, which has defaulted on payments to its depositors, is facing double trouble. The Income Tax Department has asked the bank to deduct tax at source on interest paid on deposits, and submit it in the March quarter. 

The bank defaulted on repayments on deposits of Rs 9,000 crore last year and since then it is crediting interest to the deposit holders’ accounts to avoid law and order problems. 

PMC Bank collapsed last year because it lent a sizeable portion of its assets to real estate firm HDIL, which has collapsed since.

“The bank has no money left to pay interest but it is crediting notional interest to deposit holders’ accounts to maintain peace. But the tax department’s instruction has shocked the bank’ officials,” said a source close to the development. 

In the December quarter, the bank paid Rs 7 crore as tax deducted at source (TDS) from its coffers, and is now left with only Rs 200 crore.

A source said soon after the Reserve Bank of India (RBI) appointed an administrator for the bank in September last year, the bank had sought exemption in payment/deduction of tax on interest on deposits. The Mumbai TDS department rejected this request in January this year. In December last year, functionaries of the TDS department visited the bank to verify whether the TDS dues had been paid. 

The bank, which has stopped earning from its operations, decided to credit the notional interest to the depositors’ accounts in the hope of some financial bailout from the Central government. But no bailout has come the bank’s way.

“After the scam, the bank is left with only Rs 200 crore in its account. Now the tax department is taking out money from this kitty, citing TDS. Instead of getting a bailout, the bank is losing more money,” said the source.

The RBI told the Bombay High Court in November last year the failed bank had used special codes to hide hundreds of dummy loan accounts of HDIL. Only the top management of the bank, including its directors, had access to HDIL’s accounts.  

Investigations later found symbiotic relations between HDIL and PMC Bank with top bank officials holding stake in HDIL and having financial dealings. 

Waryam Singh, former chairman of PMC Bank and former director of HDIL, held 1.91 per cent in Housing Development Infrastructure Ltd (HDIL) till September 2017, just a few months before the real estate company was sent to bankruptcy court by the lenders in 2018. HDIL, which was once among top developers and the darling of global investors on stock markets, faced severe liquidity challenges due to mounting debt, delay in getting cash from customers, dwindling launches, and delays in Mumbai airport projects.

The bank’s deposit holders took to the streets to protest against the bank. Later HDIL promoters and Singh were arrested. The Enforcement Directorate is also investigating the case.

The government in the Budget this year has increased the threshold of deposit holder insurance to Rs 5 lakh, which would be paid on their deposits if PMC Bank goes into liquidation.