The Rajasthan High Court, Jaipur has recently issued notice in a public interest litigation challenging the constitutionality of Section 194N of the Income Tax Act, 1961.
The provision was inserted by the Finance Act, 2019 and became effective from September 1, 2019. The provision mandates the deduction of tax at source at the rate of 2% on cash withdrawals from, inter alia, a banking company exceeding Rs. 1 crore in a financial year.
The Bench of Acting Chief Justice Manindra Mohan Shrivastava and Justice Sameer Jain, observed,
"Issue notice to the respondents, returnable within four weeks. PF be filed within one week."
The plea stated,
"The validity of Section 194N providing for 2% TDS on cash withdrawals exceeding Rs. 1 crore or Rs. 20 Lakh as per their respective conditions is doubtful. Since tax to be deducted at source is on cash withdrawals which shall not be treated as income, the question of deduction of any tax at source does not arise. When the transaction is not liable to levy of income tax, the question of deduction of income tax at source with a provision for adjustment of the same against the ultimate tax liability cannot be said to be legal."
It was also added in the plea,
"Section 194N provides for deduction of income tax at source on cash withdrawal 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 ultimate tax liability of the said person, in view of the decisions of the Apex Court as well as basic objective of the Income Tax Act, is clearly ultra vires and unconstitutional."
It was also stated in the plea that in common parlance 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 Income of the individual. So, charging the same on the Cash Withdrawal from Bank Account is completely against the Act and illegal in nature, added the plea.
Moreover, it was mentioned in the plea that as per the provision, tax can be deducted or collected at source only on the income of the assessee. The plea also stated that cash withdrawal from one or more accounts maintained with a bank, cooperative society engaged in the business of banking or a post office, does not involve the character of income of the recipient and hence cannot be said to be a payment. They are merely returning the money, which belongs to the recipient, on demand of the recipient, added the plea.
Hence, the petitioner alleged that cash withdrawal from banks cannot under any stretch of imagination be treated as the income generated by the recipient as one cannot make income from himself.
The plea stated,
"Section 198 of the Act states that the tax deducted at source is income received. The above section was also amended by the Notice of Amendments to Finance Bill, 2019 as introduced in the Lok Sabha on 18 July 2019 by adding a proviso to Section 198. The added provision itself intends to mean that the tax deducted on withdrawal of cash shall not be the income of an assessee and hence clearly shows that the TDS on withdrawal of cash is not on income and therefore is in violation of Section 190 of the Act."
The petitioner relied on the case of Apeejay Tea Ltd. Anr. v. Union of India, wherein Calcutta High Court granted an interim order restraining the concerned respondents authorities from deducting tax on source on the basis of the aforesaid provisions of Section 194N.Further reliance on Kanan Devan Hills Plantations Company Pvt. Ltd v. Union of India wherein a writ petition had been admitted by Kerala High Court on the same issue and accordingly an interim stay on deduction of tax on source under Section 194N of the Income Tax Act was imposed.
In addition to this, reliance was also placed on Bhawani Cotton Mills Ltd. vs State of Punjab, where while dealing with the levy of purchase tax, Supreme Court held that if a person is not liable for payment of tax at all at any time, the collection of a tax from him with a possible contingency of refund at a later stage will not make the original levy valid.
Additionally, petitioner also relied on Union of India vs. M/S Tata Chemicals Ltd., where Supreme Court observed that since there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, the government cannot shrug off 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 bound to make the party good, just as an individual would be under similar circumstances, added the Apex court.
Further, the plea added,
"Article 265 of the Constitution of India states that "no tax shall be levied or collected except by authority of law." Further, Seventh Schedule of the Constitution of India defines and specifies the allocation of powers and functions between the Union and the States. None of the lists (Union List or Concurrent List) of the Seventh Schedule empowers the levy of tax on expenditure. Hence, the expenditure tax is unconstitutional.
The plea alleged that Section 194N will lead to deduction of huge amounts of TDS and it will result in loss in Working Capital of the Business.
Case Title: Abhay Singla v. Union of India
