Section 194N TDS Provisions on Cash Transactions

1. WHO IS RESPONSIBLE TO DEDUCT TAX U/S 194N?

Every person, being,—

(i) a banking company to which the Banking Regulation Act, 1949 (10 of 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 one or more accounts (savings/current )maintained by the recipient with it .

2. WHO IS THE PAYEE?

TDS deduction on cash withdrawal u/s 194N is applicable to all taxpayers, including

• An Individual
• A Hindu Undivided Family (HUF)
• A Company
• A partnership firm or an LLP
• A local authority
• An Association of Person (AOPs) or
• Body of Individuals (BOIs)

3. ARE THERE ANY EXEMPTIONS TO TDS ON CASH WITHDRAWAL U/S 194N?

No tax shall be deducted if amount is withdrawn from the bank or post office by following recipients:

1. Central or State Government

2. Banks

3. Co-op. Banks

4. Post Office

5. Banking correspondents

6. White label ATM operators

7. Other persons notified by the Govt. in consultation with the RBI

 Such other person or class of persons as notified by Central Government

a) Cash Replenishment Agencies (CRA’s) and franchise agents of White Label Automated Teller Machine Operators (WLATMO’s)

b) Commission agent or trader, operating under Agriculture Produce Market Committee (APMC), and registered under any Law relating to Agriculture Produce Market

c) The authorized dealer and its franchise agent and sub-agent and Full-Fledged Money Changer (FFMC) licensed by the RBI and its franchise agent.

4. WHEN TO DEDUCT TDS UNDER SECTION 194N?

 At the time of payment of such sum

5. RATE & THRESHOLD LIMIT OF TDS UNDER SECTION 194N

(i) If an individual receiving the money has filed income tax return for any of the three yearsimmediately preceding the year, then TDS to be deducted is an amount equal to 2% of withdrawal sum exceeding one crore rupees

(ii) If an individual receiving the money has not filed income tax return for all the three years, for which the time limit of filing return of income under Section 139(1) has expired, immediately preceding the year, then the TDS is 2% on the cash payments/withdrawals of more than Rs 20 lakh and up to Rs 1 crore, and 5% for withdrawal exceeding Rs 1 crore. (Amendment w.e.f 01.07.2020).

• It is to be noted that there is a difference of opinion regarding the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit to file return of income u/s 139(1) has expired, immediately preceding the previous year in which the payment of the sum is made to him. In this connection, it is to be noted that the expiry of time limit u/s 139(1) is the cutoff date for the previous year in which the amount is withdrawn from the bank. It means that if the date of return u/s 139(1) has not expired, then that assessment year is not to be taken in account. In this connection, it is to be noted that the correct way to interpret this would be to first consider date of payment i.e. date on which cash withdrawal is proposed to be made and then check for the three preceding assessment years where the due date for filing tax return under section 139(1) has expired. It means that in the year of cash withdrawal from the bank, the income tax return for the preceding previous year shall not be considered till the expiry of time limit u/s 139(1) or such extended time by the Central Board of Direct Taxes.

Example: For cash withdrawals before 31 July 2021, return filing compliance to be seen for F.Y. 2017-18, 2018-19 & 2019-20. If the assessee has filed any one return out of the three returns, the first proviso to section 194N would not be applicable. It is irrelevant whether the return is filed in time or not. For cash withdrawals from 1 Aug 2021, the return filing status for F.Y. 2018-19, 2019-20 and 2020-21 is to be analyzed. [Note: The above due dates are only for illustrative purpose and actual extended dates are not considered]

Now a question arises that proviso uses the words ‘for which the time limit of filing return of income under sub-section (1) of section 139 has expired’. Whether these words require that only Return of Income filed under section 139(1) shall be considered and not Return of Income filed under section 139(4)? The answer to that is No. This is for the reason that the section nowhere states that the Return of Income for the previous years is to be filed under 139(1) of the Act. In this context, it is to be noted that the phrase ‘for which the time limit of filing return of income under sub-section (1) of section 139 has expired’ is used to determine the three preceding previous years which should be considered to examine the Return filing status. The Act does not cast any obligation regarding the return to be filed before the due date u/s 139(1). Hence, return filed u/s 139(4) shall also be considered for the purpose of provision of sec 194N. Suppose for the A.Y. 2021-22, the time to file the return u/s 139(1) is 30 September 2021. A person filed return on 15 October 2021. The return filed after the due date shall also be considered. The returns for preceding previous years which have been filed u/s 139(4) will also be considered for the purposes of Sec 194N.

Illustration: Mr. Dheeraj has made the following withdrawals during the financial year 2021-22 He has not furnished his return of income for the previous year-2017-18, 2018- 19, 2019-20 and the due date for filing of return is already expired.

The recipient cannot apply for lower deduction certificate u/s 197 and cannot furnish form No. 15G/15H.

6. HOW 194N SHOULD BE APPLIED IN CASE OF CASH WITHDRAWALS INVOLVING JOINT ACCOUNTS?

This is a grey area where there could be multiple view-points. Let’s consider an example: Husband and wife has individual accounts in a Bank. They also have a joint account in the same bank. Let’s say they have withdrawn upto 92 lakhs from their individual accounts in cash. Now, the husband intends to withdraw Rs. 11 lakhs from their joint account in cash.

In this case, one might argue that only 50% of cash withdrawal should be attributed towards husband and TDS may not be required, but this may not be appropriate. Whether Rs. 11 lakhs cash withdrawal is made by husband or wife, the limit should be treated as breached. This is so because both persons (in this case) are responsible for the operation of the account and qua each recipient the limit is reckoned from all accounts maintained in the bank. Even the banking software must be attuned to detect cash withdrawals breaching the specified threshold by duly considering cash withdrawals even in the joint accounts.

7. IS THIS SECTION APPLICABLE TO NON-RESIDENT?

The section applies to cash withdrawals made by resident as well as Non-resident. Therefore, if a NRI withdraws an amount of ₹ 150 lakhs on 15.02.2020 from his NRE Account maintained in India, the bank shall deduct TDS of ₹1,00,000.

8. APPLICABILITY OF SECTION WHEN AMOUNT IS WITHDRAWN FROM ONE OR MORE ACCOUNT MAINTAINED WITH SAME BANK/COOPERATIVE BANK?

As Section 194N has been inserted in Income-tax Act with effect from 01-09 2019, the tax shall be required to be deducted only after the said date. However, for the purpose of calculation of threshold limit of ₹ 1 crore, the aggregate amount of cash withdrawn from one or more accounts during the previous year shall be considered.

9. APPLICABILITY OF SECTION WHEN AMOUNT IS WITHDRAWN FROM DIFFERENT BRANCHES OF SAME BANK?

The limit of Rs 1 crore has to be seen for cash withdrawals made from all branches of a bank.

Illustration– ABC LTD has withdrawn cash from following branches of Bank of India during the financial year on :–

> In this case the bank shall deduct TDS on 01.10.2020 at the rate of 2% on ₹50,00,000/- (1.50 crores –1 crore) i.e.₹1,00,000/- from the payment of ₹80,00,000/-.

Similarly bank shall deduct TDS on 01.12.2020 at the rate of 2% on ₹90,00,000/- i.e.₹1,80,000/- from the payment of ₹90,00,000/-.

10. APPLICABILITY OF SECTION WHEN AMOUNT IS WITHDRAWN FROM DIFFERENT BANKS?

The cash withdrawals from two different banks shall not be aggregated for the limit of ₹ 1 Crore.

Illustration–

 ABC LTD has withdrawn cash from following Banks during the financial year on –

In this case neither of the banks is liable to deduct TDS under Section 194N.

11. WHETHER TDS IS APPLICABLE FOR CASH WITHDRAWALS MADE BY CHARITABLE INSTITUTIONS, CLUBS, AOPS, TRUSTS, RESIDENT WELFARE ASSOCIATIONS, ETC. FROM ITS BANK ACCOUNTS?

If cash withdrawals exceed the prescribed threshold, it is applicable in case of all persons in general. However, exceptions are clearly defined in the third proviso. TDS is not applicable in case of the Government, Co-operative society engaged in banking business, business correspondent or ATM operator of a banking company or co-operative society engaged in carrying on the business of banking and other notified persons. This means 194N is applicable in all other cases including Charitable Institutions, Clubs, AOPs, Trusts, Resident Welfare Associations, etc.

Summary Table

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POINTS TO BE NOTED

Tax deducted u/s 194N is not considered as deemed receipt of income.

POINTS WHICH NEEDS CLARIFICATION BY CBDT

1) IS TDS DEDUCTIBLE ON AMOUNT WITHDRAWN IN EXCESS OF 1 CRORE OR ON THE ENTIRE AMOUNT IF THE WITHDRAWALS EXCEED 1 CRORE?

Substituted provisions by the Act No. 12 of 2020, w.e.f. 1-7-2020.

Payment of certain amounts in cash.

194N. Every person, being,

(i) a banking company to which the Banking Regulation Act, 1949 (10 of 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, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of such sum, of sum exceeding one crore rupees, as income-tax:

Prior to its substitution, section 194N read as under :

“194N. Payment of certain amounts in cash.—Every person, being,—

(i) a banking company to which the Banking Regulation Act, 1949 (10 of 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 one or more accounts 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:

It is to be noted that from the reading of the aforesaid provisions we see that the words “ of the sum exceeding one crore rupees” is missing in the new substituted law, which may lead to the interpretation that the TDS will be deductible on the entire amount if it exceeds 1 crore. For example if amount withdrawn is 1.20 crore then it could imply that TDS is deductible on 1.20 crore. However after discussion with many professionals ,it was concluded that practically even now the TDS is being deducted only on 20 lacs. It remains to be seen of the Income Tax department takes a different view.

2) IS SEC 194N APPLICABLE TO CASH WITHDRAWAL ONLY THROUGH SELF CHEQUE OR UNDER BEARER CHEQUE AS WELL?

A simple reading of the Act may lead to a conclusion that Sec 194N The payment made by any payer from the accounts maintained by the taxpayer will only attract TDS under Section 194N. For instance, if a bank makes a cash payment of more than Rs 1 crore in an FY to its account holder (i.e any taxpayer) from the account maintained by him, then the bank will have to deduct TDS. But, if the taxpayer gives a bearer cheque (uncrossed) in the name of a person, say Mr A, and he withdraws cash from the individual’s account, then will the TDS will not be deducted. From practical understanding and reading the intention of legislature it seems that any withdrawal from the account by the holder or anyone else will be liable for TDS u/s 194N

This is another debatable area. If one were to consider the intention behind the introduction of section 194N, (promoting digital economy and discouraging cash transactions) then TDS must also be applied on cash withdrawals by use of bearer cheques provided it breaches the threshold. However, the fundamental questions is – whether issue of bearer cheque is same as Cash withdrawal?

As the name itself suggests a bearer cheque is payable to the bearer of the cheque. A bearer could be any person other than the holder of the account.

A ‘cheque’ is defined under the Negotiable Instruments Act, as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. The fact that an instrument in writing separately recognized as ‘cheque’ is employed to direct the banker to disburse the amount, it must be treated differently than a mere cash withdrawal or a self-cheque.

Closer examination of the provisions of section 194N reveals that the focus is not on the type of instrument used to withdraw the funds, the emphasis is on whether cash is paid out of the account held by the person or not. Although withdrawal by bearer cheque is not same as cash withdrawal simpliciter, it culminates in payment of cash by the banker from the account maintained by the account holder. TDS is on “aggregate of sums, in cash, in excess of one crore rupees”. There is no distinction based on the instrument employed for withdrawal. It is concluded that TDS is applicable on issue of bearer cheques as well.

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Tax Deducted At Source Provisions on Cash Transactions

194N. Every person, being,—

(i) a banking company to which the Banking Regulation Act, 1949 (10 of 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, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of such sum, as income-tax:

Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—

(i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and

(ii) the deduction shall be—

(a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or

(b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:

Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first proviso shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.

Provided also that nothing contained in this 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 (2 of 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 (51 of 2007):

Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.

(Republished with amendments)

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