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Deduction of Tax at Source under Section 194N Restrained

The Kolkata High Court has passed an interim order restraining the deduction of tax at source under section 194N of the Income Tax Act till 30 September 2021 and directed that the matter be scheduled for final hearing after a period of eight weeks. The constitutional validity and legality of section 194N of the Act were challenged, by way of a writ petition, before Kolkata High Court in the case of Amalgamated Plantations Pvt. Ltd. & Anr.[1]

Section 194N – In Brief

The Finance Act, 2019 had inserted Section 194N under the Income-tax Act, 1961 (“the Act”), with effect from 1 September 2019, which mandates the deduction of tax at source at the rate of 2% on cash withdrawals from, inter alia, a banking company, on an amount exceeding INR 1 crore during the relevant tax year. The intention of introducing such provision under the Act was to discourage cash transactions and move towards cashless economy.

The Finance Act, 2020 substituted the above provisions to expand its scope. The revised threshold limit and rate of tax under section 194N of the Act have been summarised as follows:

Aggregate cash withdrawals in a tax year Rate of TDS
ITR of last 3 years filed ITR of last 3 years not filed
Up to INR 20 lakhs NIL NIL
Exceeds INR 20 Lakhs up to INR 1 crore NIL 2%
Exceeds INR 1 crore 2% 5%

The constitutional validity and legality of section 194N of the Act were challenged, by way of a writ petition, before Kolkata High Court in the case of Amalgamated Plantations Pvt. Ltd. & Anr.[1] (“the Petitioner”)


Is Section 194N beyond the legislative competence of the Parliament?


The Petitioner contended that the provisions of section 194N of the Act are beyond the legislative competence of the Parliament.

In this regard, the Petitioner placed reliance on Entry 82 of List I of Schedule VII of the Constitution of India, which empowers the Parliament to enact laws for imposition, collection and levy of tax on ‘income’. It was contended that the Parliament cannot legislate a provision for deduction of tax at source on an amount which is not an ‘income’.

The Petitioner further placed reliance on the decision of the Hon’ble Kerala High Court in the case of Kanan Devan Hills Plantations Company Pvt. Ltd[1] wherein, on a similar issue, the Kerala HC has admitted the writ petition and granted stay on deduction of tax at source under section 194N of the Act.

 

Interim Order on Section 194N

The Kolkata HC observed that the afore-mentioned order of Kerala HC has not been further challenged and the said interim order is still existing. It also observed that the Kerala HC, on the same issue, has passed series of orders admitting writ petitions and staying deduction of tax under section 194N of the Act.

Considering the above, the Kolkata HC has passed an interim order restraining the deduction of tax at source under section 194N of the Act till 30 September 2021 and directing that the matter be scheduled for final hearing after a period of eight weeks. In the interim, the Court has also directed that the Revenue authorities (“the Respondent”) and the Petitioner can file affidavit-in-opposition & reply thereof, respectively.

 

FM Comments:

The interim order of the Kolkata HC restraining the deduction of tax at source under section 194N of the Act is indeed a landmark order. The same should go a long way in deciding the constitutional validity and legality of this controversial provision in the law.

However, in the interim, it would be worthwhile to examine whether the benefit of the above order can be availed by other taxpayers at large.

At this juncture, it is also pertinent to highlight the fact that, although the intention of the legislature was to move towards a digital and cashless economy, one cannot lose sight of the fact that cash withdrawals from banks, by no stretch of imagination, can be considered, as ‘income’ earned by the recipient. As such, the collection of tax on such amounts ought to be treated as violative of the basic principles enshrined under our income-tax law.

If the issue is finally decided against the Revenue authorities, it would be an embarrassing setback vis-à-vis the Government’s significant efforts in moving towards a cashless economy.

Collection of tax on an amount that is not an ‘income’ of the recipient was an extreme step taken by the Government and going forward, more pragmatic approach may be expected to achieve the goal of a cashless and digital economy.

References:

[1] WPA 10826 of 2021

[2] WP (C) No. 1658 of 2020 dated 13/08/2020

Image Credits: Photo by Mathieu Stern on Unsplash

The Finance Act 2020 had expanded the scope of Section 194N, which earlier mandated the deduction of tax at source for cash withdrawals above a certain limit, by revising the threshold. The section has been challenged as ultra-vires. 

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Income-tax Residency Circular - Circular No 2 of 2021

For Financial Year 2019-2020 – Circular 11 of 2020

Considering the exceptional circumstances caused by pandemic, Central Board of Direct Taxes (‘CBDT’) had issued Circular No 11 of 2020 dated 8th May 2020 to address the genuine hardship faced by stranded Individual during the F.Y. 2019-20. In this Circular, the CBDT had clarified that the forced stay in India due to Covid-19 between 22nd March 2020 to 31st March 2020 or due to quarantine will not be considered for the purpose of determining the residential status of an Individual in India.
For Financial Year 2020-2021 – Circular 2 of 2021 Similarly, based on several representations received by the CBDT for relaxation in determination of residential status for the Previous Year (P.Y) 2020-21, the matter was examined by the Board and a Circular has now been issued with following observations / explanations:
  •  CBDT has observed that as per the domestic tax laws, an individual needs to satisfy a minimum number of days stay in India in order to qualify as an Indian resident. Generally, an individual becomes a resident in India only if he/she has stayed in India for 182 days or more and hence any forced short stay will not result in Indian residency. Further, even in exceptional case if an individual becomes resident, he/she will most likely become “not ordinarily resident” and hence his/her foreign income shall not be taxable unless it is derived from business controlled in or profession set up in India.
  • CBDT has observed that most of the countries have the condition of stay of 182 days or more for determining residency. If a general relaxation of 182 days is provided, there may be possibilities of double non-residency and eventually the individual might end up not paying tax in any country.
  • Similar condition of stay in India, generally 182 days or more, is also present in Double tax Avoidance Agreement (DTAA) under the employment Article, in order to tax income from Salaries, where the said employment is exercised in India. CBDT has highlighted that even if an Individual qualifies as a resident of two countries, he/she can still avail the DTAA benefit by applying “Tie-breaker rule”. In the event of non-applicability of Tie-breaker rule, the individual can apply for Mutual Agreement Procedure benefit to resolve the residency issue.
  • CBDT has also highlighted that even in a case of Double taxation, a resident Indian is also entitled to claim credit of taxes paid in other country, in accordance with Rule 128 of the Income tax Rules, 1962.
  • CBDT has also observed that a similar view has been adopted by the Organisation for Economic Co-operation and Development (OECD) that DTAAs contain the necessary provisions to deal with the cases of dual residency arising due to COVID – 19 cases. Also, globally, there have been very few countries that have provided relief in this regard.

Hence, after detailed examination and explanation as provided above, CBDT has endorsed the view taken by OECD and most other countries that in light of the domestic tax law read with relevant DTAA’s, there does not appear a possibility of double taxation of Income.

Accordingly, if any individual even after considering DTAA relief faces Double taxation issues, then such individuals can apply electronically to the Principal Chief Commissioner of Income tax (PCIT) in Form – NR up to 31st March 2021, which can then be examined by the CBDT on a case-to-case basis.

Our Comments:
This Circular is rather academic in its entire narrative and provides limited relief as it is deals only with respect to a generic kind of residency situations. The Circular does not per se attempt to address specific issues such as non-treaty country situation taxability. Similarly, the taxability of employees who became Indian residents due to their evacuation to home country from no-tax jurisdictions (eg. UAE etc) during the pandemic, thus making their foreign income exposed to tax in India. The Circular is also silent on the risk of exposures vis-à-vis “Permanent Establishment (PE)” or “Place of Effective Management (POEM)” that may be triggered in India due to presence of Key personnel of Multinational Companies (MNC) exercising their duties during the pandemic months, while being forced to be present in India.

It would help if the CBDT were to bring out a more detailed Frequently Asked Questions (FAQ) quickly to deal with the unanswered questions/situations.
This article provides a summary of the Circular addressing the issue of residential status in light of travel restrictions due to COVID.

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