1. A new section 194N (‘said Section’) is proposed to be inserted in the Income-tax Act, 1961 (‘the Act’) Vide Finance bill 2019. Said section provides for withholding of tax by the payer Banks, Co-opt societies and Post offices engaged in banking activities (hereinafter referred as ‘bank/s’) while paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year.
2. The Question which arises here is, WHETHER SUCH PROVISION IS VALID AS PER THE SCHEME OF INCOME TAX ACT?
3. Before arriving at the conclusion, let’s check out the basic agenda or intention behind bringing the provisions of TDS in the law of Income-tax.
3.1 Primary intention to bring the provisions of TDS is to serve two purposes namely
– Advance collection of tax on income of payee
– Reporting of income of the payee/deductee
That is, a withholding tax is an income tax to be paid to the government by the payer of the income. The tax is thus withheld or deducted from the income due to the recipient.
4. Various provisions of the Act clearly state that tax has to be deducted on the income part of the assessee. Let’s go through the relevant sections of the Act,
4.1 Section 4 of the Act provides that income tax shall be deducted on the income chargeable to tax, (section is reproduced as under)
‘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.’
4.2 Section 190 of the Act, which is a section under the chapter XVII ‘Collection and Recovery of Tax’, enabling withholding of taxes on income is reproduced as under
‘Deduction at source and advance payment.
190. (1) 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.
(2) Nothing in this section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of section 4.’
4.3 Section 198 of the Act sates that tax deducted is the income received, (section is reproduced as under)
‘Tax deducted is income received.
198. All sums deducted in accordance with the foregoing provisions of this Chapter shall, for the purpose of computing the income of an assessee, be deemed to be income received :
Provided that the sum being the tax paid, under sub-section (1A) of section 192 for the purpose of computing the income of an assessee, shall not be deemed to be income received.’
4.4 Section 199 of the Act states that tax deducted shall be treated as payment of tax on behalf of the person from whose income tax is deducted, (section is reproduced as under)
‘Credit for tax deducted.
199. (1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be.
(3) _ _’
5. Therefore, from perusal of above highlighted provisions of the Act it is clear that TAX CAN BE WITHHELD ONLY ON THE INCOME OF THE RECIPIENT.
6. Now, coming on the proposal to insert new section 194N which provides for withholding of tax at the rate of 2% on payment of any sum in cash exceeding Rs. 1 crore in a year.
6.1 The aspect which needs to be considered is whether the amount or sum paid by bank to the account holder is the income earned by the account holder from the bank?
6.2 The obvious answer to this question is NO (except interest payments or similar kind of incomes).
6.3 Bank is an institute to accept deposits and repay the same on demand. The payment made by the bank is of that sum which was either deposited by the account holder himself or received by him in his account from someone else. That is to say, such payment made by the bank is not the income generated by the account holder from the bank.
7. Further, three more aspects which needs to be considered are that,
7.1 the provisos of section 198 clearly states that the tax deducted is income received. Therefore, the 2% amount withheld by the bank would then become income of the recipient.
7.2 also, there is no amendment in proviso to section 198 where they could have stated that tax deducted and paid u/s 194N shall not be deemed to be the income received.
7.3 Further Finance Act 2019 (2) provides for an amendment in subsection (1) to section 197 of the Act, by inserting section 194M. Thus enabling deductee assessee to seek certificate for lower rate of TDS in case of payment u/s 194M. But there is no such amendment with regard to section 194N. Which means government itself is aware that such payments by the banks are not forming part of income of the recipient, and even then they have brought TDS provisions on such payments.
8. Accordingly, the said section providing for withholding of tax on such payments by the banks, in my opinion, is not valid as per the scheme of the Act since tax is to be withheld only in case the payment made is an income of the recipient which is chargeable to tax. Here, the payment made by the bank is not the income generated through bank but is mere transfer of funds.