A Brief Overview of Section 194N of Income Tax Act, 1961

In order the discourage the cash transactions and encourage the digital economy, the Hon. Finance Minister Smt. Nirmala Sitharaman ji had introduced a new section 194N in the Income Tax Act, 1961 through the Finance Bill, 2019 presented at the Union Budget, 2019 on 5^th July, 2019. Let us have a brief overview on the section.

The section reads as follows –

“Payments 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, 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:

Provided that nothing contained in this sub-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);

(v)                such other person or class of persons, which the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.

Let us discuss this section here.

Ø Applicable to whom?

The section is applicable to the following persons (let us term it as payer) –

i.             A Bank – either public sector, private sector, cooperative bank or even a branch of a foreign bank in India.

ii.            A cooperative society engaged in banking business – Any cooperative society not being a bank but engaged in banking business.

iii.           A post office.

Ø Who is recipient?

Recipient is any person to whom the payer pays an amount from one or more accounts maintained with it by such person.

Ø Applicable when?

The section is applicable when the payer is responsible to pay the recipient an amount, or aggregate of amounts during a previous year, in excess of one crore rupees in cash. So, when the payer pays an amount of more than one crore rupees in cash, either a single amount of aggregate of all amounts during the previous year (or for simple understanding the financial year), the provisions of this section shall be applicable.

Ø Responsibility of Payer

When the section becomes applicable, the payer shall be responsible to deduct an amount of 2% from the amount paid to the recipient in excess of one crore rupees. When during the entire year the amount paid in cash to the recipient by the payer exceeds one crore rupees, on each such amount paid in excess of one crore rupees, the payer shall deduct a sum of 2% from such payment. Such amount shall be deposited to the credit of central government and shall be reported in TDS return whereby the recipient shall get the credit of the tax so deducted.

This section is unlike other TDS provisions where, on applicability, tax is deducted on entire amount of payment. Under this section, tax shall not be deducted on one crore rupees. It shall be deducted on amount in excess of one crore rupees. For example, if a person withdraws one crore and fifty lakh rupees from a bank, tax shall be deducted on fifty lakh rupees and not on entire amount withdrawn.

Ø Effective date of applicability

As mentioned in the Finance Act, 2019 this section shall be effective w.e.f. 1^st September, 2019. Any amount paid by the payer to the recipient on or after 1^st September, 2019 shall be eligible for TDS if it satisfies all other conditions as mentioned above.

Ø Exempted recipients

Following recipients are exempted from the provisions of this section. When the payer pays an amount to following recipients, it is not required to deduct any tax on cash payments.

i.             The Government

ii.            Any banking company or cooperative society engaged in banking business or post office

iii.           Any banking correspondent

iv.          Any white label ATM operator of a banking company or cooperative bank engaged in banking business

v.           Such other person or class of persons as may be notified by the Central Government by way of notification

Let us now discuss some issues related to the applicability of the section

Ø Applicability for the financial year 2019-2020

The section becomes effective from 1^st September, 2019, i.e. in mid of the year. There were lot of confusions about the applicability of the section for the F.Y. 2019-2020. However, the Income Tax Department has issued a clarification dated 30^th August, 2019 whereby it has clarified the applicability of the provisions.

Accordingly, the tax deduction shall be applicable on cash payments post 1^st September, 2019 but the limit of one crore rupees shall be counted with effect from 1^st April, 2019. Following table shall clarify the applicability of this section under various circumstances.

Amount withdrawn till 31st August, 2019	Amount withdrawn after 31st August, 2019	Total Amount Withdrawn during FY 2019-2020	Date of Crossing of One Crore Rupees	Date of Applicability of TDS	Amount on which tax is deducted
50,00,000	70,00,000	1,20,00,000	15th Oct.	15th Oct.	20,00,000
1,50,00,000	1,50,00,000	3,00,00,000	18th Jul.	1st Sep.	1,50,00,000
80,00,000	15,00,000	95,00,000	-	N. A.	Nil
2,50,00,000	1,00,000	2,51,00,000	25th Jun.	1st Sep.	1,00,000
1,00,000	5,00,00,000	5,01,00,000	12th Nov.	12th Nov.	4,01,00,000

The above illustrations are given for understanding purposes.

Ø Applicability – per bank or per person?

There is a concern regarding applicability of section 194N that whether it is applicable per bank or per person across all banks. The reading of the section clearly poses responsibility on a banking company. The limit of one crore rupees is applicable to each bank irrespective of accounts maintained with it. So, if a person withdraws ninety lakh rupees each from 3 different banks during a financial year, the provisions of this section shall not be applicable as the limit of one crore rupees not been completed in any of the banks.

Ø What if bearer cheque is issued to any other person?

The section speaks of an amount paid to ‘a recipient’ during the previous year. Recipient according to the section is a person who maintains one or more accounts with the banking company, cooperative society or the post office. In case a person issues a bearer cheque to another person, the person to whom the bearer cheque is issued doesn’t come in the meaning of recipient as per the section. So, the doubt remains about applicability of section for bearer cheque issued to third person.

Other provisions of Act shall be applicable such as 40A(3), 269T, etc. However, in case any bearer cheque is paid to an agriculturist of primary producer who are exceptions to section 40A(3) vide rule 6DD, whether such amount shall be eligible for TDS or not. Lets hope for a clarification from the Income Tax Department.

In my opinion, tax shall be deducted even if a bearer cheque is issued to a third person.

Ø Credit of Tax Deducted under this section

There is a fear amongst assessees regarding the treatment of the tax deducted by the banks on applicability of this section. There is no need to worry as this amount shall be eligible as tax credit while filing of return of income of person whose tax is so deducted.

This is in fact a good move by the Central Government to reduce the cash economy and promote the digital economy. However, even if the Government is promoting the digital economy and has introduced this section to discourage the cash withdrawals and accordingly cash payments, this section is going to adversely affect few sectors of the business community.

Especially, the agricultural commodity market where payments are allowed to be made in cash to farmers and cash payment is prominent mode of payments. The assessees in the Agriculture Produce Market Committee who have thin margins ranging from 1-2% shall now have 2% of their payments blocked as TDS.

Also, the businesses which are predominantly dependent on seasonal or temporary daily labour that require daily payments of labour to be met in cash, shall also face a hardship as considerable sum of money shall be blocked by the TDS credit.

Hopefully, the Government takes concern of this situation and comes up with some exemption or solution for the hardship faced by this sector.

Disclaimer:

The content of this hand-book is based on the interpretation of the author and is subject to difference of opinion with others. Care has been taken with respect to correctness the legal provisions mentioned herein. However, any errors or omissions are unintentional. The contents of the handbook should not be taken as opinion of the author for entering into any transaction.