Rajasthan HC Issues Notice On PIL Challenging Sec194N of IT Act with respect of TDS On Cash Withdrawals Exceeding Rs. 1 Crore

The Rajasthan High Court in the matter of Abhay Singla S/o Lekhram Singla Vs. The Union Of India issued notice on PIL Challenging Sec 194N of IT Act with respect of TDS On Cash Withdrawals Exceeding ₹1 Crore.

The clause was included by the Finance Act of 2019 and went into force on September 1, 2019. The clause requires the deduction of tax at source at a rate of 2% on cash withdrawals from, for example, a banking firm that exceed Rs. 1 crore in a fiscal year.

The Bench of Acting Chief Justice Manindra Mohan Shrivastava and Justice Sameer Jain noted,

“Issue a notice to the respondents, with a deadline of four weeks. PF must be filed within one week.”

According to the plea,

“The legality of Section 194N, which provides for a 2% TDS on cash withdrawals exceeding Rs.1 crore or Rs.20 lakh, depending on the conditions, is questionable. Because the tax to be deducted at source is on cash withdrawals that are not considered income, the question of deducting any tax at source does not arise. When the transaction is not subject to income tax levy, the issue of deduction of income tax at source with a provision for adjustment against the ultimate tax due cannot be considered valid.”

It was also included in the petition,

“Section 194N provides for deduction of income tax at source on cash withdrawals exceeding Rs.1 Crore, and the said cash withdrawal is not income liable to be taxed under the Income Tax Act, the aforesaid provision of deduction of tax at source with a provision for adjustment of the same against the said person’s ultimate tax liability, in view of the Apex Court’s decisions as well as the basic objective of the Income Tax Act, is clearly ultra vires and unconstitutional.”

It was also mentioned in the plea that applying the Literal Rule of Interpretation on the objective of the Income Tax Act, it is very simply derived that this Act is applicable over the individual’s income. As a result, charging the same on cash withdrawals from bank accounts is fully against the Act and illegal, according to the plea.

Furthermore, it was said in the plea that under the clause, tax can only be deducted or collected at source on the assessee’s income. The appeal further said that cash withdrawal from one or more accounts held with a bank, cooperative society engaged in the business of banking, or a post office does not entail the recipient’s character of income and hence cannot be considered a payment. They are simply returning money that belongs to the recipient on the recipient’s request, according to the appeal.

As a result, the petitioner claimed that cash withdrawals from banks cannot be considered income generated by the recipient because one cannot generate money from himself.

According to the plea,

“According to Section 198 of the Act, tax deducted at source is income received. The preceding section was also altered by the Notice of Amendments to the Finance Bill, 2019, which was introduced in the Lok Sabha on July 18, 2019, by inserting a proviso to Section 198. The new provision itself means to suggest that the tax deducted on cash withdrawal shall not be an assessee’s income and thus plainly shows that the TDS on cash withdrawal is not on income and hence violates Section 190 of the Act.”

The petitioner cited the case of Apeejay Tea Ltd. Anr. v. Union of India, in which the Calcutta High Court issued an interim order prohibiting the pertinent respondents’ authorities from deducting tax at source on the basis of the aforementioned Section 194N provisions. Further reliance was placed on Kanan Devan Hills Plantations Company Pvt. Ltd v. Union of India, in which a writ petition on the same subject was admitted by the Kerala High Court, and an interim stay on deduction of tax at source was imposed under Section 194N of the Income Tax Act.

Furthermore, reliance was put on Bhawani Cotton Mills Ltd. versus State of Punjab, in which the Supreme Court stated that if a person is not liable for payment of tax at any time, collecting a tax from him with the possibility of a return at a later point will not render the original levy legal.

Furthermore, the petitioner relied on Union of India vs. M/S Tata Chemicals Ltd., in which the Supreme Court stated that because there is no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, the government cannot shirk its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. The State, having received the money without right, and having retained and used it, is obligated to make the party whole, just as an individual would do in comparable circumstances, the Supreme Court stated.

The plea went on to say,

“According to Article 265 of the Indian Constitution, “no tax must be levied or collected unless by authority of law.” Furthermore, the Seventh Schedule of the Indian Constitution establishes and specifies the division of powers and functions between the Union and the States. None of the lists in the Seventh Schedule (Union List or Concurrent List) authorise the imposition of a tax on expenditure. As a result, the spending tax is unlawful.”

According to the plea, Section 194N will result in the deduction of massive sums of TDS, resulting in a loss of the business’s working capital.

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