Crucial Issues on provisions of Section 194N – Cash withdrawals

ARTICLE ON THE PROVISIONS OF SECTION 194N – Cash withdrawals

By

Venkatesh K Pani, BA. LLB (Hons), Advocate

The Finance Bill 2019 has finally been passed with the insertion of section 194N – TDS on cash withdrawals.  A finer reading of the provisions emerge the following:

1.Commencement – From the reading of the preamble, ….After section 194LD of the Income-Tax Act, the following sections shall be inserted with effect from the 1st day of September, 2019, it is clear that the provision comes into force for all cash payments from 1^st September 2019 on wards

1. Applicability – It is applicable to and binding on three categories of persons, being–

A. a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);

B. a co-operative society engaged in carrying on the business of banking; or

C. a post office.

Such person responsible for paying any sum or aggregate of sums in cash in excess of Rs. 1 crore.

The provisions of Section 3 of the Banking Regulation Act 1949 states that “Nothing contained in this Act shall apply to –

A. primary agriculture credit society;

B. a co-operative land mortgage bank and

C. any other co-operative society, except in the manner and to the extent specified in Part V.”

From the above, one can draw an inference that entities falling under (A) and (B) above are not covered since the Banking Regulation Act is not applicable to them and certain co-operative societies falling in (C) above are also excluded. One should have a close reading of Part V of the Act to ascertain whether a co-operative society is excluded or included.

The Board should clarify which of the Coop Societies and Coop Banks required to follow or exempted so as to have clarity in the minds of the entities.  Else, there are going to be enough confusion and inconsistencies between the banks, causing hardship to the public.

2. To whom not applicable – The provisions are not applicable to certain categories of payees including the Government. The Board should clarify what constitutes the Government, who are included and who are excluded since there are several classes of authorities, designated offices, autonomies bodies, societies, Government sponsored schemes, boards, institutions, Government corporations run by the Government and there is no clarity for the public at large and the authorities whether they are exempted or not exempted.

3. Payments to whom – The provision is applicable for the payments made to any person (and such person referred to as the recipient). It is interesting to note that it is applicable for payments made to any person. From one or more accounts maintained by the recipient with it, makes it more clear that the payments made to any person (recipient) from one or more accounts maintained by such person (recipient) shall attract such TDS under 194N. For example, if a bank makes payment to A from the account maintained by A only falls under such scope. If A gives a bearer cheque (uncrossed) in the name of B and B withdraws cash from the account of A, the TDS is not applicable. It is more clear that the account holder and the recipient has to be the same for the applicability of TDS. During the course of business, if the account holder gives cheques for various payments such as salaries, vendor payments etc, which can be drawn across the counter of the bank, and the payments are received by a person other than the account holder, the provisions of 194N are not applicable. The presence of the word “recipient” twice in the language of the section makes it clear that the payment should be made to the account holder himself for the applicability of 194N.

4. From one or more accounts – refers to cash from one or more accounts.  Meaning that cash drawn.  It means that one or more accounts should belong to that person.  A person under sub section 31 of section 2 is defined as:

(31) “person” includes—

 (i)  an individual,

(ii)  a Hindu undivided family,

(iii)  a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;

Such person is capable of having an account with a Bank Coop Society or Post Office.

5. One or more accounts-

For the purposes of this section, cash withdrawn from one or more accounts means, all the accounts from which the cash can be drawn.  They can be Savings Account, Current A/c, Overdraft Account, Escrow account, cash credit account, debit card, credit card, ATM transaction linked to any account, and such cash drawals are mechanised, personalised, automated or otherwise in excess of Rs 1 crore.  Therefore, what is the parameter to be considered is the cash drawn by a person from the respective bank.  Such person is identified with reference to a PAN, Passport, Aadhar or any other KYC document.  Under these circumstances, the banks have to make sure that a customer is identified with one KYC and keep aggregating all cash payments made to him during a previous year.  The parameter is a person and a bank, and the bank should include all branches, all ATMs, all offices, correspondents of the bank as the case may be.  The Banks will have to take care to see that a person is not allotted two customer IDs under core banking, any where banking, which defeats the requirement.

6. Joint accounts – The difficulty arises whether in respect of joint accounts, it is to be clarified by the Board whether each of the parties are entitled to a limit of Rs 1 crore for the purpose of this section. A joint bank account held by more than one person, each individual having the right to deposit and withdraw funds. Bank account in the name of two or more individuals being account owners, jointly (equally) share its concomitant rights and liabilities. Joint holders of an account are regarded in law as “together” making up the ‘owner.’ In the case of joint account either owner may individually exercise full rights to make deposits or withdrawals. Normally the fruits and benefits arising in a joint account and the funds are shared in equal manner and the bank does insist or calls for the sharing ratio.  Opening a joint account is a similar process to opening an individual account. Both need to provide information and identification. As co-owners, both are can operate without the other’s permission. Many a times, joint bank account is opened for the sake of convenience of the account holders say couples or business partners. But in the case of tax deductions from the interest paid, the banks do give credit to the first named person only like in the case of a share held jointly where the dividends are paid to first named person.  Under these circumstances, it is difficult to establish whether the limit of Rs 1 crore is per account or per person. From the language employed in the section, the importance is to be given to the sums paid in cash to any person from one or more accounts maintained by the recipient and the source of cash payment is from one or more accounts maintained.  Hence, the provisions of the section have to be applied per person in the case of joint account.

The question for consideration is whether the cash paid should be necessarily in India or even from foreign branches.  It may be out of place to make the rule work across all branches in the world.

7. Limit of Rs 1 crore – The limit of Rs 1 crore is applicable for all transactions during the previous year. For the financial year 2019-20, for the period already expired till passing the Finance Bill and till 31-8-2019 may have to be ignored.  The limit of Rs 1 crore need to be reckoned for the remaining part of the year commencing from 1^st Sept 2019 and the limit cannot be bifurcated on time proportionate basis for the year 2019-20.

8. In the case of business accounts maintained by companies, LLPs, firms etc., cheques are issued in the names of employees for drawal of cash. The cash is drawn either for the use by the company or for individual payments such as salary, reimbursements, vendor payments.  The difficulty is bound to happen whether TDS is to be deducted in all cases regardless of the person who is the recipient of cash. In the case of individual payments such as salary, reimbursements, vendor payments, it is arguable that the recipient (payee) does not maintain the account with the bank and hence the TDS is not to be applied.

9. Clarifications from the Board – The Board also should specify the standard operating procedure under which how the data gets uploaded to each of the persons PAN in case of deduction. It is also possible that a bank account is owned by a person without PAN, but linked with Aadhar. How should the credit should be given to such person since Aadhar, now is considered as a substitute for PAN for the purposes of the IT Act, 1961.  Unless, the Board comes out with FAQs and detailed clarifications, there are going to be enough confusion, multiple interpretations, inconsistencies between the banks practices, and the public at large will face hardship.

10. Challenges – A big challenge is ahead on the banks and persons on whom the provisions are binding in configuration, reconfiguration of the systems, ATM machines, documents, data capture, data sharing inn a short period of next one month plus and the matter becomes much more complicated under anywhere banking and infrastructure sharing arrangements between the banks and uploading and ensuring the TDS credit reaches right person.

11. Amendment to Section 198 – The provisions of section 198 is amended to state that the sum deducted in accordance with the provisions of section 194N for the purpose of computing the income of an assessee, shall be deemed to be income received. By no stretch of imagination it can be deemed as an income as defined u/s 2(24) of the Income Tax Act 1961. It amounts to paying tax without earning income. It is to be considered, how one can create an income with one self out of ones cash without any external source of income and the same is subject to constitutional validity and litigations and the provision is liable to be struck down. It is indeed a case of TCS since the TDS deducted from ones cash withdrawal is liable to be refunded to him as in the case of TCS on purchase of motor vehicles.

12. There have been many persons who have to make payments to various persons and it always not possible to make cheque payments or to do bank transfer in view of extraordinary circumstances which are more like the circumstances listed in Rule 6DD to the Income Tax Rules, such as payments to farmers for purchase of agriculture, produce payments to village and cottage industries, payments in a village, town or mundi market or payments on a day when and where banks are not working. Such extraordinary circumstances part of business lifeline are human lifeline and have to be considered and the Board should exempt such category of persons by virtue of the powers conferred under the amended section.