In order to discourage cash transactions and move towards less cash economy, the Finance (No. 2) Act, 2019 had inserted Section 194N in the Income Tax Act,1961 for tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore. The Union Budget 2020, however, reduced the threshold limit for TDS to Rs 20 lakh for taxpayers who have not filed their ITRs for the past three years.
TDS, thus, has to be deducted if a sum or aggregate of sum withdrawn in cash by a person in a particular Financial Year exceeds:
- Rs 20 lakh (if no ITR has been filed for all the three previous AYs), or
- Rs 1 crore (if ITRs have been filed for all or any one of three previous AYs).
Who can deduct TDS?
According to the Income Tax Department, TDS is deducted by banks (private, public, co-operative) or post offices. The tax is deducted when making any cash payment to any person in excess of Rs 20 lakh or Rs 1 crore (as the case may be) from his/her account maintained with such banks or post offices.
Rate of TDS Deduction
TDS will be deducted at prescribed rates if cash is withdrawn in excess of Rs 20 lakh during a financial year. For instance, TDS is 2% in case of cash withdrawals in excess of Rs 1 crore if the person withdrawing the cash has filed ITR for any or all three previous AYs, while it will be 2% on cash withdrawals exceeding Rs 20 lakh and 5% on withdrawals exceeding Rs 1 crore if the person withdrawing the cash has not filed ITR for any of the preceding three AYs.
Need for an enabling provision to deduct tax under Section 194N
Income tax experts, however, say that there is need for an enabling provision to deduct tax under Section 194N as cash withdrawn is not an income.
Accordig to Taxmann, Section 194N was introduced by the Finance (No. 2) Act, 2019, which was subsequently substituted with a new provision by the Finance Act, 2020. This provision requires deduction of tax at source (TDS) from the cash withdrawn by a person from his account maintained with a bank, co-operative bank or a post office.
Section 194N is covered under Chapter XVII which relates to the collection and recovery of tax. Section 4 and Section 190 contain the enabling provisions for deduction and recovery of tax.
Section 4(1) provides that income tax shall be levied in respect of total income of the relevant year. Section 4(2) provides that 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.
Section 190 relates to the deduction/collection of tax and payment of advance tax. Sub-section (1) of the said section provides that: “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.”
This provision explicitly provides that the collection and deduction of tax shall be made in respect of the income of the assessee. If the amount received could not be categorised as income in the hands of the receiver on which tax is leviable, no tax can be deducted/collected at source.
“TDS on cash withdrawal was introduced to promote a cash-less economy and discourage payments in cash. Section 194N requires deduction of tax from the amount withdrawn from the accounts. However, it contradicts with provisions of Section 4 and Section 190. There is no income component in cash withdrawn from a bank account, thus, the question of TDS should not arise,” says Naveen Wadhwa, DGM, Taxmann.
The Supreme Court has affirmed this proposition in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd.  178 Taxman 505 (SC) that if a particular income falls outside section 4(1), then TDS provisions cannot come in. The Madras High Court in the case of Tirunelveli District Central Co-operative Bank Ltd. v. JCIT  119 taxmann.com 21 (Madras) has also held that tax cannot be deducted under Section 194N if cash withdrawn is not an income of the account holder.
Thus, “it is expected that the government may bring a suitable amendment under the law to end any possible litigation on this provision,” adds Wadhwa.