TAX DEDUCTED AT SOURCE UNDER SECTION 194N OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

 Obligation to deduct tax

Section 194N of the Income Tax Act, 1961(‘Act’ for short) makes it obligatory for the banking company, a co-operative Society or a Post Office, if they pay a sum more than Rs.1 crore in aggregate to any person who may receive such amount during the previous year from one or more accounts maintained by the recipient, in cash, is required to deduct tax at prescribed rate on such amount.

The provisions of this section came into effect from 01.09.2019 (Financial year 2019 - 2020).

Threshold Limit and Rate of tax

 Tax has to be deducted at source if a sum or aggregate of sum withdrawn in cash by a person in a particular Financial Year (‘FY’ for short) exceeds-

• Rs. 20 lakh [if no Income Tax Return (‘ITR’ for short) has been filed for all the three previous AYs] - @ 5%, or
• Rs. 1 crore (if ITRs have been filed for all or any one of three previous AYs) - @ 2%. For the Co-operative Societies the limit is fixed @ Rs.3 crores with effect from 01.04.2023.

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 point as above shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification. 

Non applicability

The provisions of Section 194N shall not be applicable for the cash withdrawal made by the following persons-

• Central or state government;
• Private or public sector bank;
• Any cooperative bank;
• Post office;
• Business correspondent of any bank;
• White label ATM operator of any bank;
• Central government specified commission agents or traders operating under Agriculture Produce Market Committee for making payment to the farmers on account of purchase of agriculture produce;
• Authorized dealers and its franchise agent and sub-agent and Full-Fledged Money Changer licensed by RBI and its franchise agents;
• Any other person notified by the Government in consultation with RBI.

Case laws

In TIRUNELVELI DISTRICT CENTRAL COOPERATIVE BANK LIMITED VERSUS THE JOINT COMMISSIONER OF INCOME TAX (TDS) AND THE INCOME TAX OFFICER, TIRUNELVELI. - 2020 (8) TMI 728 - MADRAS HIGH COURT  the writ petitioners are Societies registered under the Tamil Nadu Co-operative Societies Act, 1983.  They had failed to comply with the terms of Section 194N of the Act and that the explanation given by them was not satisfactory.  The petitioners contended that the provisions of Section 194N came into effect from 01.09.2019.  Therefore the transactions done before 01.09.2019 could not be considered for the purposes of section 194N.  The Central Board of Direct Taxes had issued a clarification that the provision having come into effect from 01.09.2019 any cash withdrawal prior to the said date will not be subjected to TDS.

The High Court observed that since the threshold of Rs. 1 crore is with respect to the previous year, with reference to the assessment year 2020-2021, the cash withdrawal for triggering Section 194N of the Act shall be counted from 01.04.2019. The writ petitioners have not questioned the validity of the provision.   To calculate the threshold limit of Rs.1 crore, the transactions that had taken place with effect from 01.04.2019 will have to be taken into account, but actual levy of tax will be on the cash withdrawals that had taken place with effect from 01.09.2019.

The High Court further observed that the department need not wait till the time limit for the assessees to file their returns for the assessment year gets over. It is open to the department to initiate action against the deductors, who have failed to act as per the requirements under Section 194N of the Act, as they are also deemed assessees. But then, when the enquiry is conducted, it is open to the noticees, who are to be treated as assessees in default to place materials before the Assessing Officer that the amounts received by the recipients do not represent income at their hands. If by then, the assessees had also filed their returns and the case falls under the proviso to Section 201(1) of the Act, the writ petitioners who have failed to deduct cannot be fastened with any liability. 

The High Court held that there is no fault on the respondents for having issued show cause notices to the writ petitioners for not having complied with Section 194N of the Act. But then, the enquiry could have been held only after the commencement of the assessment year and not in the previous year itself.   Since the Assessing Officers have not taken into account the entire scheme of the Act and had proceeded at breakneck speed, the High Court quashed the impugned order. The High Court remitted the matter to the file of the respective jurisdictional Assessing Officers.

In M/S. DINDIGUL CENTRAL CO-OPERATIVE BANK LIMITED VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX - 2020 (9) TMI 200 - MADRAS HIGH COURT, the Department issued a notice to the petitioner alleging that the petitioner had not complied with the requirements of Section 194N of the Act. The respondent had passed as many as thirty orders on 11.03.2020 and 12.03.2020, confirming the demands set out in the show cause notices. Aggrieved by the same, the petitioner filed petitions under Section 154 of the Act on 23.03.2020.

 This Writ Petition has been filed for directing the respondent to take up those petitions and pass orders thereon. The High Court observed that since the petitioner himself has not challenged the orders passed by the respondent, it would not be proper for the Court to quash the same.  However, the respondent is directed to dispose of the petitions filed by the petitioner under Section 154 of the Act in the light of the order dated 27.07.2020 passed by me in W.P. (MD).No.6102 of 2020 etc batch. Such an order will be passed by the respondent within a period of twelve weeks from the date of receipt of a copy of this order. The Department is restrained from giving effect to the order that is sought to be rectified by the petitioner herein till the rectification proceedings are concluded.

In S.N. 299 MOLASI PRIMARY AGRICULTURAL CO-OPERATIVE CREDIT SOCIETY LTD. REP. BY ITS SECRETARY, S. SURESHKUMAR, S. 1290 PUDUPULIAMPATTI PRIMARY AGRICULTURAL CO-OPERATIVE CREDIT SOCIETY LTD. REP. BY ITS SECRETARY S. MARIMUTHU AND OTHERS VERSUS THE INCOME TAX OFFICER, THE GENERAL MANAGER - 2022 (11) TMI 1213 - MADRAS HIGH COURT, a batch of writ petitions have been filed  by Primary Agricultural Cooperative Credit Societies.  They challenge Circulars issued by the District Central Cooperative Banks, Salem, Kancheepuram and Kumbakonam, bearing Na.Ka.No.2416/95/Accts. dated 16.03.2021, Na.Ka.1545/2006-07/P.13 dated 29.03.2021 and Na.Ka.No.2727/2020-B3, dated 07.01.2022 respectively.    The impugned Circulars refer to the statutory mandate of Section 194N of the Act providing for deduction of tax on cash withdrawal. The provisions of Section 194N coming under Chapter XVII dealing with ‘collection and recovery – deduction at source’ provides for deduction of an amount equal to 2% of any cash withdrawal made by persons from-

1. a banking company to which the Banking Regulation Act, 1949;
2. a co-operative society engaged in carrying on the business of banking; or
3. a post office.

The petitioners contended that there should be no deduction at all that could be effected from the withdrawals made by them from the banks. The petitioner societies are intermediaries between the bank and agriculturists, who are beneficiaries of the withdrawals made by the petitioners.  In most instances, the amounts have been sanctioned by the State and the petitioner societies are mere conduits or facilitators. Thus, deduction of tax, in such a situation, would greatly prejudice the ultimate beneficiaries of the loans who are farmers and small traders.   In the present case, the withdrawals do not constitute income of the petitioner and hence such liability would not arise.  The petitioners sought for exemption from the provisions of Section 194N.

The High Court held that an avenue provided for a recipient falling outside the scope of the exceptions, to seek exemption from the application of Section 194N and hence, if at all the petitioners believe that they qualify for the exemption, they may seek redressal under the in-built statutory mechanism provided as above, if they so choose.  The Department told that the  Central Government for tax purposes is Finance Minister of India is that authority for this purpose.  Any request may be in the name of the Finance Minister with copy to CIT ITA CBDT North Block who would process such requests.’ The High Court directed the petitioners to approach the competent authority in the Government seeking relief from the application of Section 194N of the Act.

The High Court dismissed the writ petition challenging the impugned circular.