Section 269SS and 276DD struck down for violating Article 14 by penalizing only loan borrowers, not lenders

The HC held that section 269SS of the Income-tax Act, 1961, read with section 276DD, is unconstitutional as it violates article 14. In a loan transaction, both lender and borrower are integral participants; however, the statute imposed a penal obligation only on the borrower to accept loans of Rs. 10,000 or more by account payee cheque or draft, leaving the lender outside its ambit. This differential treatment lacked intelligible differentia and rational nexus with the object of the provision, rendering the classification arbitrary and hostile. Consequently, section 269SS, insofar as it singularly targeted borrowers with stringent punishment under section 276DD, was declared ultra vires, and the prosecution was quashed.

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Issues Involved:
1. Nature of the transaction under section 269SS of the Income-tax Act, 1961.
2. Validity of the sworn statement under article 20(3) of the Constitution.
3. Constitutionality of section 269SS under article 14 of the Constitution.
4. Nature of the punishment under section 276DD of the Income-tax Act, 1961.

Summary:

1. Nature of the Transaction:
The petitioner, a cine actress, received a loan of Rs. 4,65,000 from a political party, which was not through an account payee cheque or bank draft, thus allegedly violating section 269SS of the Income-tax Act, 1961. The defense argued that the transaction was a payment for future performances and not a loan, which would exclude it from the ambit of section 269SS. The court held that this issue needs to be established through evidence during the trial and cannot be decided at the preliminary stage.

2. Validity of the Sworn Statement:
The petitioner contended that her sworn statement admitting the receipt of the loan was obtained under compulsion, violating article 20(3) of the Constitution. The court ruled that the validity of this statement should be determined during the trial, and it cannot be dismissed at the threshold.

3. Constitutionality of Section 269SS:
The petitioner argued that section 269SS is discriminatory and violates article 14 of the Constitution because it imposes an obligation only on the borrower to take loans through account payee cheques or drafts, while the lender is not subjected to any such obligation. The court agreed, stating that the classification is not rational and does not have a reasonable relation to the object of curbing black money. The court found that this differential treatment between the borrower and lender violates the principle of equality, rendering section 269SS ultra vires.

4. Nature of the Punishment under Section 276DD:
The petitioner claimed that the punishment under section 276DD is draconian. The court referred to a previous ruling in a batch of writ petitions (W. P. No. 3919 of 1985) which had already addressed and negated this argument, stating that there are sufficient safeguards against unjustifiable prosecution.

Conclusion:
The court quashed the prosecution against the petitioner based on the finding that section 269SS is violative of article 14 of the Constitution. An oral application for a certificate under article 134A was granted, acknowledging that this case involves a substantial question of law regarding the interpretation of the Constitution.

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