Court upholds constitutionality of Income-tax Act provision on cash transactions; penalty deemed reasonable

The court upheld the constitutional validity of Section 269SS of the Income-tax Act, 1961, which prohibits certain cash transactions exceeding a specified limit. The penalty imposed under Section 271D for non-compliance was deemed reasonable to prevent tax evasion. The court rejected claims of hostile discrimination between borrowers and lenders, affirming the legislative competence to enact such provisions. Despite arguments of potential hardship, the court emphasized the availability of relief under Section 273B for genuine cases. The appeals were dismissed, confirming the validity of the provisions and allowing an appeal on the penalty within a specified timeframe.

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Issues Involved:
1. Constitutional validity of Section 269SS of the Income-tax Act, 1961.
2. Levy of penalty u/s 271D for infraction of Section 269SS.
3. Alleged hostile discrimination between borrower and lender.
4. Legislative competence of Parliament under Entry 82 of the Union List.
5. Reasonableness and potential hardship caused by Section 269SS.

Summary:

1. Constitutional Validity of Section 269SS:
The court upheld the vires of Section 269SS of the Income-tax Act, 1961, which prohibits taking or accepting loans or deposits of Rs. 20,000 or more otherwise than by an account payee cheque or bank draft. The appellant's contention that Section 269SS is arbitrary, unreasonable, and violative of Article 14 of the Constitution was rejected. The court noted that the classification between borrower and lender is based on intelligible differentia and has a rational nexus to the objective of preventing tax evasion.

2. Levy of Penalty u/s 271D:
The appellant was penalized u/s 271D for borrowing sums in cash exceeding the limit prescribed by Section 269SS. The court held that the penalty provisions are a reasonable restriction to curb tax evasion and do not suffer from any constitutional infirmity. The penalty imposed was equal to the amount borrowed, and the court allowed the appellant to file an appeal on the merits of the penalty within an extended period.

3. Hostile Discrimination Allegation:
The appellant argued that Section 269SS creates hostile discrimination against the borrower vis-a-vis the lender. The court disagreed, stating that the borrower is in a better position to evade tax by introducing fictitious entries in the books of account. The classification made by the Legislature is based on intelligible differentia and is not discriminatory or violative of Article 14.

4. Legislative Competence under Entry 82:
The appellant contended that Section 269SS is ultra vires the Income-tax Act as Entry 82 of the Union List provides for taxing income only. The court rejected this argument, stating that the legislative competence includes the authority to enact provisions to prevent tax evasion. Section 269SS is a machinery provision to ensure the prevention of tax evasion, which is incidental and ancillary to taxing income under Entry 82.

5. Reasonableness and Hardship:
The appellant argued that Section 269SS imposes undue hardship on borrowers. The court noted that Section 273B provides relief by allowing no penalty to be imposed if there is a reasonable cause for the failure to comply with Section 269SS. This provision mitigates undue hardship and ensures that genuine and bona fide transactions are not penalized.

Conclusion:
The appeals were dismissed, and the constitutional validity of Section 269SS was upheld. The appellant was directed to file an appeal on the merits of the penalty within two weeks from the date of the judgment, without objection to the limitation. The court emphasized that Sections 269SS and 271D, read with Section 273B, ensure that the provisions are reasonable and not arbitrary.

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