1995 (2) TMI 52 - HC - Income Tax

Court upholds constitutionality of Income-tax Act sections, justifies interest levy as compensatory, allows challenge before tax authorities.

The court upheld the constitutional validity of sections 234A, 234B, and 234C of the Income-tax Act, 1961, finding them compensatory rather than penal. ... Advance Tax, Agricultural Income, Natural Justice Issues Involved:1. Constitutional validity of sections 234A, 234B, and 234C of the Income-tax Act, 1961.2. Nature of the levy under sections 234A, 234B, and 234C - whether compensatory or penal.3. Requirement of hearing for the assessee before the imposition of interest.4. Alleged harshness and arbitrariness of the provisions.5. Clubbing of agricultural income with non-agricultural income.Summary:1. Constitutional Validity of Sections 234A, 234B, and 234C:The petitioners challenged the constitutional validity of sections 234A, 234B, and 234C of the Income-tax Act, 1961, asserting that these sections carry an element of penalty without providing an opportunity of being heard. The court held that the provisions are compensatory in nature and not penal. The rate of interest and the period for which it is levied are meant to compensate for the loss of revenue due to delayed payment of taxes by the assessee.2. Nature of the Levy:The court examined the true nature of the levy under sections 234A, 234B, and 234C, determining that they are compensatory and not penal. The interest levied is for the period during which the tax amount was withheld by the assessee, thus compensating the revenue for the delay. The court emphasized that the provisions are intended to offset the loss or prejudice suffered by the revenue and are not punitive.3. Requirement of Hearing:The petitioners argued that the imposition of interest without a hearing violates the principles of natural justice. The court rejected this argument, stating that the provisions of sections 234A, 234B, and 234C are automatic and do not envisage any discretion for the authorities to waive or reduce the interest. The legislative intent is to make the levy of interest automatic upon the occurrence of a default, thus excluding the necessity for a hearing.4. Alleged Harshness and Arbitrariness:The petitioners pointed out hypothetical situations where the provisions could operate harshly and unreasonably. The court held that the validity of a statutory provision cannot be challenged based on extreme or hypothetical cases. The court noted that the legislature has provided a mechanism u/s 119 of the Act, empowering the Central Board of Direct Taxes (CBDT) to issue orders or instructions to mitigate hardship in deserving cases.5. Clubbing of Agricultural Income with Non-Agricultural Income:In specific writ petitions, the petitioners challenged the clubbing of agricultural income with non-agricultural income. The court referred to a Division Bench judgment in K. V. Abdulla v. ITO, which upheld the constitutionality of such clubbing for determining the rate of tax on non-agricultural income. The court found no reason to deviate from this precedent and dismissed the challenge.Conclusion:The court dismissed the writ petitions, upholding the constitutional validity of sections 234A, 234B, and 234C of the Income-tax Act, 1961. The provisions were held to be compensatory in nature, and the automatic levy of interest was found to be justified. The court also upheld the clubbing of agricultural income with non-agricultural income for tax rate determination. The petitioners were allowed to raise relevant grounds before the authorities against the levy or recovery of interest.