To discourage cash transactions and move towards a less-cash economy, a new Section 194N was inserted in the Income-Tax Act. This provision requires a bank and post office to deduct tax at 2% from the amount withdrawn in cash from any account (saving or current account) in excess of Rs 1 crore during the year.
However, if a person has not filed a return of income for all of the three assessment years immediately preceding the previous year in which cash is withdrawn, and the due date for filing the return under section 139(1) has expired, the tax shall be deducted:
(a) At the rate of 2% of the sum, if the aggregate of the amount withdrawn exceeds Rs 20 lakh but does not exceed Rs 1 crore;
(b) At the rate of 5% of the sum, if the aggregate of the amount withdrawn exceeds Rs 1 crore.
The deduction of tax from cash withdrawal has faced many practical challenges by the banks and recipients. It is recommended that the government makes changes to this provision. Some of the critical issues related to section 194N are discussed below:
TDS is not levied on income
Section 194N is covered under Chapter XVII which relates to the collection and recovery of tax. Section 4 and Section 190 contain the enabling provisions for deduction and recovery of tax.
Section 4(1) provides that income-tax shall be levied in respect of the total income of the relevant year. Section 4(2) provides that in respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.
Section 190 relates to the deduction/collection of tax and payment of advance tax. Sub-section (1) of the said section provides that:
“Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the provisions of this Chapter.”
This provision explicitly provides that the collection and deduction of tax shall be made in respect of the income of the assessee. If the amount received could not be categorised as income in the hands of the receiver on which tax is leviable, no tax can be deducted/collected at source.
Section 194N requires deduction of tax from the amount withdrawn from the accounts. However, it contradicts with provisions of Section 4 and Section 190. There is no income component in cash withdrawn from a bank account. Thus, the question of TDS should not arise. Thus, it is recommended that the Govt. should make a suitable amendment to end any possible litigation on this provision.
TDS in case of joint accounts
Section 194N does not clarify whether each party is entitled to the threshold limit in the case of a joint account.
A joint bank account is held by more than one person, and each owner individually exercises full rights to make deposits or withdrawals. The funds and benefits accruing in a joint account are shared equally, and the bank does insist on any sharing ratio.
Under these circumstances, it isn’t easy to establish whether the threshold limit is per account or person. The Govt. must clarify this issue in the upcoming budget.
Cash withdrawal with bearer cheque
In the case of business accounts maintained by companies, LLPs, firms etc., bearer cheques are issued for making payment. The cash is drawn directly by the person to whom the cheque is given towards salary, reimbursements, vendor payments, etc. The difficulty is bound to happen whether TDS is to be deducted in all cases regardless of the person who is the recipient of the cash.
In the case of payments such as salary, reimbursements, vendor payments, it is arguable that the recipient does not maintain the account with the bank. Hence, the TDS provisions cannot be applied.
The law assumes that the account holder and the recipients are always the same, but it is not always true.
TDS in case of accounts in multiple bank accounts
Section 194N takes care of the situation in which cash is withdrawn from one or more accounts maintained with the same bank. However, it doesn’t consider the situation where a person maintains accounts in multiple banks. Thus, the provisions can be exploited by staggering the cash withdrawal from multiple banks. The provision should be applied person wise and not bank-wise.
(By CA Naveen Wadhwa, DGM, Taxmann, and CA Rahul Singh, Manager, Taxmann)
from The Financial Express https://ift.tt/WIgTZJw9O
