Issue of Bearer cheque- Whether liable for TDS U/s 194N
With an aim to widen and deepen tax base & promoting less cash economy, FM Smt. Nirmala Sitharaman presented section 194N with following background:
- Mr. Speaker, Sir, our Government has taken a number of initiatives in the recent past for the promotion of digital payments and less cash economy. To promote digital payments further, I propose to take a slew of measures. To discourage the practice of making business payments in cash, I propose to levy TDS of 2% on cash withdrawal exceeding 1 crore in a year from a bank account.
Originally section 194N has provided for TDS @ 2% on cash withdrawn in excess of 2%. However, Finance Act, 2020 has altogether changed the mode of collecting TDS by providing (a) different tax rates for (b) two different classes of persons. Further, it also prescribes two threshold limits.
Section 194N as amended reads as under:
Payment 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, 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 recipient 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 (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):
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.]
The question now arises is whether issue of bearer cheque also attracts TDS U/S 194N. It is applicable only to Banks; Coop Societies carrying on the business of banking or post office who are responsible for paying in cash.
TDS is applicable on this 3 entities who are 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:
The liability is attracted on “paying cash”. Further, section mentions that the TDS is applicable on cash payment from one or more accounts maintained by the recipient.
Issue of bearer cheque is not withdrawal simplicity though it may results in cash payment by the bank.
In case of bearer cheque, the bank is paying cash is the basic conditions which is getting fulfilled for the purpose of section 194N. However, the other conditions may not be fulfilled namely,
- the recipient may not be the account holder in the same
- Recipient may not be the person owning an account.
For applicability of the any provision, entire applicable section needs to be read as an integral code and not in pieces. Section 194N as a complete piece can make anyone to draw a conclusion that section 194N is not applicable in case of bearer cheque by which cash withdrawal is done by any person other than account holder.
It may be mentioned here that Rule 114E, at S.No. 1(c) requires cash withdrawals for the purpose of specified financial transactions (SFT) as reportable transactions. Similar views has been adopted by the judiciary while interpreting the logic of section 40A(3) which places restrictions on expenditure payment in cash.
Further, Section 194 do mentions about the “aggregate limit of Rs. 20 lakh or One Crore” which may include the withdrawals done pursuant to bearer cheque as well.
However, whether above will equally hold good for section 194N is an issue which only the time will decide. It will be in the interest of all if CBDT suitably clarifies the issue of applicability of TDS in case of bearer chque.
My view:
To be on a safer side, I am of the considered opinion that the TDS will be applicable on payment done by the bank pursuant to bearer cheque. This interpretation is in line with the legislative intent of the FM expressed in the documents placed before parliament.