Calcutta High Court: Stay on TDS collection on cash withdrawals
Tax Exemption

The Calcutta High Court, on 8th July 2021, passed a landmark interim order restraining the income tax department from collecting tax deduction at source (TDS) on cash withdrawals (Section 194N) till 30th September 2021. 

Section 194N of the Income Tax Act mandates tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore from a banking company, at the rate of two per cent. 

The Apeejay Tea Ltd. filed the writ petition and other petitioners challenging the constitutional validity and legality of section 194N, which was inserted by the Finance Act 2019 and became effective from 1st September 2019 and substituted by the Finance Act 2020. 

The petitioner submits that the levy of TDS under section 194N of the Income Tax Act is out of the legislative competence of the Parliament. Entry 82 of List I of Seventh Schedule of the Indian constitution allows the Parliament to make laws for imposition, collection, and levy of tax on “income”. Hence, the Parliament cannot make provision for tax deduction at source on the amount which is indeed not income.

The petitioner has challenged the impugned legislation on several grounds. Petitioner has placed reliance on the orders of Kerala High Court passed in Kanan Devan Hills Plantations Company Pvt. Ltd. Versus Union of India, involving the same issue. The Kerala High Court has granted interim stay of deduction of tax at source under section 194N of the Income Tax Act.

The court allows the respondents to seek instructions as to whether the order mentioned above of the Kerala High Court was further challenged or not. The learned Additional Solicitor General submits that no further appeal has been filed against the order, and the said interim order is still existing.  

Justice Md. Nizamuddin restrains the income tax authorities from deducting tax at source on cash withdrawals (Section 194N) till 30th September 2021. The matter will appear for final hearing after eight weeks.

For any clarifications/feedback on the topic, don’t hesitate to get in touch with the writer at namita.shah@cleartax.in

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