1996 (2) TMI 32 - HC - Income Tax

Supreme Court Halts Tax Collection Surcharge on Contractors

The Supreme Court stayed cases challenging the constitutional validity of Section 206C of the Income-tax Act, 1961. Despite the pending challenge, ... Collection at source under section 206C - Constitutional validity of collection-at-source provisions - Right to refund of tax collected pending final adjudication - Interim relief and balance of convenience - Limitation on collection of surcharge under Finance Act, 1995 to buyers who are domestic companiesCollection at source under section 206C - Right to refund of tax collected pending final adjudication - Interim relief and balance of convenience - Whether the respondents should be restrained from collecting income-tax at the rate of 15% under section 206C pending final adjudication of the constitutional challenge. - HELD THAT: - The court declined to adjudicate the constitutional validity of section 206C, observing that the challenge to the earlier formulation is pending before the Supreme Court. The petitioners remain entitled to seek refund of any collections ultimately found not to be due, and the statutory scheme under Chapter XVII provides for refund with interest if, on assessment, no taxable income is proved. The court concluded that there is no irreparable injury warranting interim relief denying collection, and that the balance of convenience favours permitting collection in accordance with the legislative mandate until the apex court gives its final pronouncement.Petitioner must deposit income-tax at the rate of 15% in terms of condition No. 9 of the agreement until the Supreme Court pronounces finally on the matter.Limitation on collection of surcharge under Finance Act, 1995 to buyers who are domestic companies - Collection at source under section 206C - Whether respondents may collect the surcharge (10% as referred in condition No. 9) in addition to the 15% income-tax from the petitioner and other buyers who are not domestic companies. - HELD THAT: - Section 206C itself authorises collection of income-tax at the specified rates but does not provide for collection of any surcharge. The court relied on sub-section (6) of section 2 of the Finance Act, 1995, which permits increasing the collection in cases under section 206C by a surcharge only where the buyer is a domestic company. The petitioner is not a company; accordingly, the contractual condition attempting to collect surcharge from such persons is not tenable.Respondents are restrained from collecting any surcharge under condition No. 9 from persons other than domestic companies.Final Conclusion: Writ petition allowed in part: petitioner must deposit income-tax at 15% in terms of the agreement until the Supreme Court decides the constitutional challenge; respondents are restrained from collecting surcharge except where the buyer is a domestic company; no costs. Issues:Challenge to the constitutional validity of Section 206C of the Income-tax Act, 1961 regarding the collection of income tax and surcharge on bid amounts payable by forest contractors.Analysis:The petitioner, a forest contractor, challenged the collection of income tax at 15% and a surcharge at 10% on bid amounts payable by them under Section 206C of the Income-tax Act, 1961. The provision requires sellers to collect tax at source from buyers of specified goods. The Supreme Court stayed cases challenging the validity of Section 206C pending before various High Courts. Despite the pending challenge, Parliament deleted Section 44AC and amended Section 206C, maintaining the same tax collection scheme. The court refrained from ruling on the constitutional validity but noted that contractors could claim refunds if taxes were collected in excess.The court clarified that under Section 206C, only income tax at 15% could be collected, not a surcharge. The Finance Act, 1995, allowed a surcharge only for domestic companies. As the petitioner was not a company, the collection of a 10% surcharge was deemed inappropriate. Thus, the court restrained the respondents from collecting a surcharge from non-domestic companies. The petitioner was directed to deposit income tax as per the agreement but exempted from the surcharge collection, except for domestic companies. The court allowed the petition in part, pending the final decision of the Supreme Court on the matter.In conclusion, the court acknowledged the legislative mandate for tax collection under Section 206C but emphasized the right of contractors to claim refunds if taxes were over-collected. The judgment balanced the interests of the parties by allowing the collection of income tax while restraining the collection of a surcharge from non-domestic companies. The decision highlighted the importance of awaiting the Supreme Court's final ruling on the constitutional validity of Section 206C.