Finance Act, 2019 has inserted a Provision by inserting a New Section 194N which laid down responsibility/liability on Banks, Co-op. Society, Post office for deduction of Tax at source 02% on payment of any sum in cash exceeding the specified limit. In my opinion this provision is most debatable and liable to be challenged in court of law.

Therefore, first of all I am giving hereunder the reasons as stated in Memorandum explaining Finance Bill with respect to insertion and need of Section 194N and then full Provision of Section 194N to understand the whole issue :-


TDS on cash withdrawal to discourage cash transactions

In order to further discourage cash transactions and move towards less cash economy, it is proposed to insert a new section 194N in the Act to provide for levy of TDS at the rate of two per cent on cash payments in excess of one crore rupees in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient. It is proposed to exempt payment made to certain recipients, such as the Government, banking company, cooperative society engaged in carrying on the business of banking, post office, banking correspondents and white label ATM operators, who are involved in the handling of substantial amounts of cash as a part of their business operation, from the application of this provision.

It is proposed to empower the Central Government to exempt other recipients, through a notification in the official Gazette in consultation with the Reserve Bank of India.

This amendment will take effect from 1st September. 2019.  [Clause 46]

B. Now the new inserted Section 194N which is as under :‑

Every person, being,–

(i) 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);

(ii) a co-operative society engaged in carrying on the business of banking; or

(iii) a post office,

who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of sum exceeding one crore rupees, as income-tax:

Provided that nothing contained in this sub-section shall apply to any payment made to,–

(i) the Government;

(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;

(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934;

(iv)any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007;

(v) such other person or class of persons, which the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.’.

Now let us first we discuss the major points of Memorandum Explaining Finance Bill, 2019 and also of Section 194N which have direct nexus in our discussion, then I proceed for final conclusion.

Memorandum Explaining Finance Bill, 2019 says “To discourage cash transactions and move towards less cash economy , a new provision inserted so as to provide for levy of TDS at the rate of two per cent on cash payments  by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient  Section 194N provides that Every specified persons responsible for paying any sum exceeding specified aggregate amount to any person  (herein referred to as the recipient) from an account maintained by the recipient deduct TDS @2% as income tax.

From the above it is clear that any specified person viz Bank etc. has to deduct Tax at source 02% whenever cash withdrawal from bank account exceeds the limits specified in Section 194N. For Deduction of Tax at source it is essential that the amount on which TDS provision made applicable by statute should contains income element and if no income element is involved then TDS provisions cannot invoked on such payments. In support of the same I am giving hereunder following points :‑


Charge of income-tax.

4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and ?[subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year [***] of every person :

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) 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,


There are two judgments of Hon’ble Supreme Court which is contains supreme court opinion about TDS Provisions :‑

1. IN THE CASE OF Commissioner of Income tax, New Delhi v. Eli Lilly & Co. (India) (P.) Ltd. in CIVIL APPEAL NOS. 5114 OF 2007 AND OTHERS [2009] 178 Taxman 505 (SC) ON MARCH 25, 2009 has stated following facts in its judgment which has direct and important nexus to our discussion with respect to Provision relating to Tax Deducted at source

The purpose of TDS provisions in Chapter XVII-B is to see that the sum which is chargeable under section 4 for levy and collection of income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to a non-resident The said TDS provisions are meant for tentative deduction of income-tax subject to regular assessment Section 4 is the charging section. Under section 4(1), total income for the previous year is chargeable to tax. Section 4(2), inter alia, provides that in respect of income chargeable under sub­section(1), income-tax shall be deducted at source whether it is so deductible under any provision of the 1961 Act which, inter alia, brings in the TDS provisions contained in Chapter XVII-B. In fact, if a particular income falls outside section 4(1), then TDS provisions cannot come in.

2. In another judgment – The argument that where the entire payment does not have the character of income, there is no need for tax deduction at source was negatived by the Supreme Court in Transmission Corporation of A P Ltd. v. CIT (1999) 239 ITR 587 (SC). This implies that if any payment has any element of income then only TDS Provisions come into play else not.


in Latest judgment of Bombay High Court in writ petition of Shri Rupesh Rashmikant Shah Vs Union of India & Ors. Hon’ble High court in its decision under Point No. 57 stated that The question of deduction of tax at source would arise only if the payment is in the nature of income of the payee”




The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.


For quick and efficient collection of taxes, the Income-tax Law has incorporated a system of deduction of tax at the point of generation of income. This system is called as “Tax Deducted at Source”, commonly known as TDS. Under this system tax is deducted at the origin of the income. Tax is deducted by the payer and is remitted to the Government by the payer on behalf of the payee.

The word used every where is “PAYMENT”. In Section 192 “Payment of Salary”. Section 192A ” Payment of taxable  accumulated balance of Provident Fund”. So here payment means ‘Payments of income” and if any payment which does  not constitute element of income. TDS provisions can not be  invoked on such payments.


Under the scheme of tax deduction at source (TDS), person responsible for making payment of income, covered by the scheme, are responsible to deduct tax at source and deposit the same to the Government’s treasury within the stipulated time.

4. AS PER WIKIPEDIA : Objectives of Tax Deducted at Source

* To enable the salaried people to pay the tax as they earn every month. This helps the salaried persons in paying the tax in easy installments and avoids the burden of a lump sum payment.

* To collect the tax at the time of payment of income to various assesses such as contractors, professionals etc.

* Government requires funds throughout the year. Hence, advance tax and tax deducted at source help the government to get funds throughout the year and run the government smoothly.


In view of above facts, Now A VALID DEBATE can be started whether it can be said that cash withdrawal from bank account by the account holder bears any income element of the recipient so that a valid TDS Provision can be brought in statute?

Based on the Judgment of Hon’ble Supreme Court it can be answered that the Section 194N can validly be challenged in Court of law as the said section is against the basic Spirit of TDS Provisions because an account holder whenever withdraw his own money from his account question of element of income never arises at all. And as there is no element of income involved in withdrawal of own money from own bank account question of TDS does not arise at all and if any steps is taken to collect TDS can be held illegal .

However someone can argue that whatever has been deposited in bank is sourced from Income as well tax paid or tax borne money like Sale or receipt of service but here it cannot be forgot that for certain type of payments law already have TDS mechanism through various Sections under Part-B of Chapter XVII like TDS on Salary, Interest, Rent, Contract Payment, Commission, lottery income, Dividend, Professional Fees etc. So these deposits which have income element are very well covered under existing TDS Provisions.

Now the Section 194N is open for challenge and discussion between intellectual of Law and need more lights if anyone wants to say on this issue.

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Location: INDORE, Madhya Pradesh, IN
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One Comment

  1. PRADEEP S says:

    Nice Post. Yes your view is right. More a simple logic, A person earns monthly salary of say INR 50 Lakhs. TDS 192B is complied, this salary is deposited in His Bank Account, suppose he withdrews via cash in excess of 1crore, again TDS u/s 194N ? Won’t it be double taxation ?? Just merely because Govt want to digitize Money System. Why still accept Cash in Government Departments, and even Govt running TASMAC ? Ask People to pay only through Electronic mode. A lot of corruption, Bribe can be reduced.

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