TDS on Cash Withdrawals 194N–Clarifications Required On Crucial Issues

THE FINANCE ACT, 2020, received the assent of the President on the 27th March, 2020 substituted the following in place of the existing provisions of section 194N, which was introduced as a deterrent for cash transactions.

1.0 STATUTORY PROVISION

For section 194N of the Income-tax Act, the following section shall be substituted with effect from the 1st day of July, 2020, namely:—

‘‘194N. 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, 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 recepient 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;

(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 Setllement Systems Act, 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.

2.0 AMENDMENTS ON RATES

The change being:

S. No.	Person (Recipient) who has:	Exemption Rs	Till 30-6-2020	From 1-7-2020
1	Filed the returns of income for all of the three assessment years relevant to the three previous years cash withdrawals exceeding 1 cr	1 cr	2%	2%
2.	Not Filed the returns of income for all of the three assessment years relevant to the three previous years:	1 Cr till 30.06.2020 and 20 lakhs wef 01.07.2020
	Cash withdrawals from 20 Lakhs to 1 Cr		2%	2%
	Cash withdrawals exceeding 1 cr		2%	5%

3.0 FILING OF IT RETURNS

What is important is that the person being bank etc.,  is required to call for the proof of filing the returns of income for all the 3 assessment years relevant to the 3 previous years. It is not clear whether ITR V could be a sufficient proof or ITR itself is required to be submitted. Whether the dash board of IT returns in CPC login portal disclosing the returns filed and its status could not a be sufficient proof of filing the returns.  The software technology in the banks and the IT Portal disclosing filed status, if inter linked, can minimize the task of human intervention of submission of the ITRs and the correspondence/communication in this regard.

4.0 THREE ASSESSMENT YEARS RELEVANT TO THE THREE PREVIOUS YEARS

With regard to filing the returns of income for all the 3 assessment years, for cash withdrawals after 1-4-2020, the IT returns of 3 assessment years relevant to 3 previous years refers to:

1. AY 2020-21 for the previous year 1-4-2019 to 31-3-2020.

2. AY 2019-20 for the previous year 1-4-2018 to 31-3-2019.

3. AY 2018-19 for the previous year 1-4-2017 to 31-3-2018.

It must be noted that the ITRs for the AY 2020-21 are required to be filed u/s 139(1) over the staggered periods for different classes of persons going upto 30-11-2020. The time required to file the returns of income under section 139(1) have not expired till the due date and hence the person is unable to furnish for the AY 2020-21. Thus, he can only satisfy for two previous years but not three previous years as stated in the law.

The banker as the case maybe should be aware of the due dates under section 139(1) and their subsequent extensions for different class of assessees (for all the three previous years) in order to comply with the requirement of different TDS rates.

It may also so happen that the returns are validly filed under section 139(1) for some years but not all the three years. In such cases, the recipient is liable for higher rates.

It may also happen that where the returns of income are filed but the ITR V verification is not completed because of which the ITRs become invalid. Such class of people again are put to hardship of higher TDS rates.

In respect of the returns which subsequently become defective returns under section 139(9) meaning that they are never deemed to have been filed again are put to hardship.

In respect of the returns under section 153A of the Act, overrides the provisions of Section 139(1) and hence the compliance in filing under section 153A takes care of such situations and the bankers must be knowledgeable enough of such special returns.

The Board should clarify in order to remove ambiguity in the minds of bankers who are not expected to be experts in examination of these tax matters.

With the varied complexities as explained above, there is going to be enough ambiguity causing harassment causing hardship to different people.

Of late, the bankers also check the ITRs through the online portal to examine the veracity of the documents submitted by the account holders.

This type of verification of documents etc., can happen through human interface but cannot happen when cash withdrawals are done from ATM machines and other technological ways.

4.0 NATURE OF AMENDMENT

The plain reading of the amendment to section 194N is the following section shall be substituted with effect from the 1st day of July, 2020, namely:—…

It means that the existing provision is entirely substituted with the new provision taking effect from 01/07/2020, repealing the earlier provision.

The amendment should have been by way of insertion rather than substitution.

5.0 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 or Rs 20 lakhs as amended.

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 are 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.

6. 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.

The Board has clarified the following categories of recipients who are exempted from the purview of section 194N:

SL NO.	CATEGORY OF PAYEES	NOTIFICATION NO.
1.	Payment in cash made to the following persons shall not be subject to TDS under section 194N: ─ Cash Replenishment Agencies (CRA’s); and ─ Franchise agents of White Label Automated Teller Machine Operators (WLATMO’s) maintaining a separate bank account from which withdrawal is made only for the purposes of replenishing cash in the Automated Teller Machines (ATM’s) operated by such WLATMO’s.	Notification No. 68/2019/F. No. 370142/12/2019-TPL dated 18 September 2019
2.	Relaxation from the provisions of section 194N granted to the registered commission agent or trader, operating under Agriculture Produce Market Committee (APMC) of the concerned state.	Notification No. 70/2019/F. No. 370142/12/2019-TPL dated 20 September 2019
3.	The following entities are exempt from application of section 194N ─ the authorised dealer and its franchise agent and sub-agent; and ─ RBI-licensed Full-Fledged Money Changer (FFMC) and its franchise agent;	Notification No. 80/2019/F. No. 370142/12/2019-TPL (Part 2) dated 15 October 2019

The government heard the submissions of key stakeholders and granted relief from time to time to the above cases where significant amount of cash is handled due to the peculiar nature of business carried out by the entities in India.

7.0  CLARIFICATION ON APPLICABILITY OF TAX DEDUCTION AT SOURCE ON CASH WITHDRAWALS:

Taking clue from the above clarification issued by the Board, we can conclude that the old rate of 2% will prevail till 30-6-2020 and new rates from 1-7-2020.  Since, the threshold of Rs. 1 crore is with respect to the previous year, calculation of amount of cash withdrawal for triggering deduction under section 194N of the Act shall be counted from 1st April.

8.0. 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 to third parties 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.

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.

9.0 PRESUMPTION OF ACCOUNT HOLDER BEING RECIPIENT –

The law assumes that the account holder and the recipients are always the same, but not always true given the practical situations.

10. 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 mechanized, personalized, automated or otherwise in excess of the limits. 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 the 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.

With the merging of many nationalized banks into 4 mega banks and with the merger of small banks into bigger banks, the task becomes more difficult since each bank would have had different customer ID and KYC linked to it.

11. 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.

12. 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.

13. TDS CREDIT

Tax deducted u/s 194N is not deemed to be income received in view of second proviso to Sec 198 given hereunder.

[Provided further that the sum deducted in accordance with the provisions of section 194N for the purpose of computing the income of an assessee, shall not be deemed to be income received.] w.e.f. 1-9-2019.

Credit for tax deducted at source for the purposes of section 199 is covered under Rule 37 BA.

Sub-Rule (3A) of Rule 37BA provides that notwithstanding anything contained in sub-rule (1), sub-rule (2) or sub-rule (3), for the purposes of section 194N, credit for tax deducted at source shall be given to the person from whose account tax is deducted and paid to the Central Government account for the assessment year relevant to the previous year in which such tax deduction is made.

Clarifications on certain areas are still awaited that could bring tax certainty and in the context of ease of doing business in India.