Madras HC Upheld Constitutional Validity of Sec. 194N; Said It Is a Worthy Move to Reduce Cash Transactions

Case Details: Income Tax Officer vs. Thanjavur District Central Co-operative Bank Ltd. - [2024] 158 taxmann.com 490 (Madras)

Judiciary and Counsel Details

• • Anita Sumanth & R. Vijayakumar, JJ.
  • AR.L. Sundaresan & N. Dilipkumar for the Appellant.
  • S. Ravikannan, K. Govindarajan, M. Ashok Kumar & N. Dilipkumar for the Respondent.

Facts of the Case

The instant writ petition was filed before the Madras High Court seeking a declaration that Section 194N of the Income Tax Act, 1961 is unlawful, arbitrary, violates fundamental rights under Articles 14 and 19(i)(g), and is unenforceable and unconstitutional.

Petitioner contended that the deductor under Chapter XVII is required to deduct/collect from any payments made to a deductee. Such a requirement is only in cases where the receipt or some portion constitutes taxable income. Since the cash withdrawal is not taxable, the question of deduction/collection does not arise.

High Court Held

The High Court held that the contention that Section 194N was a charge of tax on the amount withdrawn in cash was unsustainable as there could be no charging provision other than Sections 4 or 5 of the Income Tax Act. It was pointed out that the very placement of Section 194N in Chapter XVIIB would show that it was not a charging provision, and several cases have been cited to establish that the sections under Chapter XVII B are only machinery provisions, not intended to fasten any charge.

The power of the Legislature to tax is set out under Article 265 of the Constitution, and such power is wide, subject to the conditions and tests that have been laid out over the years to provide for reasonable restrictions in this regard. Article 265 states that no tax shall be levied or collected except by ‘authority of law’. What constitutes such ‘authority’ and what vests such power in the State would depend on the levy itself.

In deciding whether the levy is intra or ultra vires, the circumstances in which such levy has been introduced, the overall features of the levy as well as the attendant circumstances leading to the same, will have to be considered.

There have been several measures over the years to discourage and limit cash transactions, both under the Income Tax Act and other enactments. The challenge is now restricted to the modus operandi that the provision follows, as one hardly questions the legitimacy of the move to discourage cash transactions. We find that the object of Section 194N, as a measure to reduce cash transactions and gravitate towards an economy which is run in a transparent and accountable fashion, is laudable.

Further, the Legislature has provided for a situation where a payee, on the ground that the receipt is not amenable to tax, could seek and obtain a certificate from the Assessing Officer under Section 197. Such a certificate may be sought only in stipulated situations. Section 194N is not part of the list.

However, an alternative method is available under Section 194N, allowing the Central Government, in consultation with the Reserve Bank of India, to issue a Gazette Notification specifying recipients exempted or subject to a reduced rate under this section. Thus, the recipient is not left remediless.

Accordingly, the writ petition was dismissed.