Income tax experts say there needs to be a provision to deduct tax under Section 194N because the money withdrawn is not income.
In order to discourage cash transactions and move towards a less cash economy, the Finance Act 2019 (No 2) had inserted Section 194N into the Income Tax Act 1961 for withholding withholding tax (TDS) on cash withdrawals exceeding Rs 1 crore. The Union Budget 2020, however, reduced the threshold limit for TDS to Rs 20 lakh for taxpayers who have not filed their ITR in the past three years.
The TDS must therefore be deducted if a sum or a total of sums withdrawn in cash by a person during a particular financial year exceeds:
- Rs 20 lakh (if no ITR has been filed for the previous three AYs), or
- Rs 1 crore (if ITRs have been filed for all or any of the previous three AYs).
Who can deduct the TDS?
According to the Income Tax Department, the TDS is levied by banks (private, public, cooperatives) or post offices. The tax is deducted on any cash payment to any person exceeding Rs 20 lakh or Rs 1 crore (as the case may be) from his account held with such banks or post offices.
TDS deduction rate
TDS will be deducted at the prescribed rates if money is withdrawn in excess of Rs 20 lakh within a financial year. For example, the TDS is 2% on cash withdrawals over Rs 1 crore if the person withdrawing the money has deposited an ITR for one or all three previous AYs, then it will be 2% on cash withdrawals exceeding Rs 20 lakh and 5% on withdrawals exceeding Rs 1 crore if the person withdrawing the money has not deposited an ITR for any of the previous three AYs.
Need for provision to deduct tax under Section 194N
Income tax experts, however, say it is necessary to have a provision to deduct tax under Section 194N because the money withdrawn is not income.
According to Taxmann, Section 194N was introduced by the Finance Act (No. 2) 2019, which was later superseded by a new provision by the Finance Act 2020. This provision requires a deduction of tax from the source (TDS) on the money withdrawn. by a person from his account held at a bank, cooperative bank or post office.
Section 194N is covered by Chapter XVII which concerns the levying and collection of tax. Section 4 and Section 190 contain the enabling provisions for the deduction and collection of tax.
Article 4(1) provides that income tax is levied on the total income of the relevant year. Section 4(2) provides that in respect of income taxable under subsection (1), income tax shall be deducted at source or paid in advance, where so deductible. or payable under any provision of this Act.
Article 190 concerns the deduction/recovery of tax and the payment of withholding tax. Paragraph (1) of the said article provides that: “Notwithstanding the fact that regular taxation in respect of any income must be made in a subsequent tax year, tax on such income shall be payable by withholding or deduction at source or by advance payment or by payment under subsection (1A) of section 192, as the case may be, in accordance with the provisions of this chapter.
This provision expressly provides that the collection and deduction of tax are made on the income of the person assessed. If the amount received cannot be considered income in the hands of the receiver on which tax is payable, no tax can be deducted/collected at source.
“The TDS on cash withdrawals was introduced to promote a cashless economy and discourage cash payments. Section 194N requires the deduction of tax on the amount withdrawn from accounts. However, this contradicts the provisions of Article 4 and Article 190. There is no cash income component withdrawn from a bank account, therefore, the issue of TDS should not arise” , says Naveen Wadhwa, DGM, Taxmann.
The Supreme Court upheld this proposition in CIT v. Eli Lilly & Co. (India) (P.) Ltd.  178 Taxman 505 (SC) that if a particular income does not fall within section 4(1), then the provisions of the TDS cannot come into effect. Madras High Court in Tirunelveli District Central Co-operative Bank Ltd. vs. JCIT  119 taxmann.com 21 (Madras) also held that tax cannot be deducted under Section 194N if the money withdrawn is not income of the account holder.
Thus, “it is expected that the government will make an appropriate amendment to the law to put an end to any possible litigation on this provision”, adds Wadhwa.
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