2020 (3) TMI 608 - HC - Income Tax

Court validates constitutionality of Section 234E penalty under Income Tax Act, emphasizing compensatory purpose

The court upheld the constitutionality of Section 234E of the Income Tax Act, 1961, dismissing challenges that it imposed an unreasonable penalty. The ... Fee for default in furnishing statements u/s 234E - delay in furnishing TDS statements / returns - Challenging the vires of Section 234E - HELD THAT:- It is well settled that if it is a charge for service rendered by the commercial agency and the amount of fee levied is based on the expenses incurred by the Government rendering the fee. Unlike the tax which is compulsory extraction of money, enforceable by law and not in return of any services rendered. The distinction between the tax and the fee is that tax is levied as a part of common burden while fee is payment for a special benefit of privilege. Fee confers some advantage and is a return of consideration for services rendered. Revenue is right in contending that Section 234 (E) of the Act is not a penalty. Penalty is levied under Section 271 (H) and is not automatic. Penalty is levied only when tax is deducted at source along with interest fee is not deposited and statement is not filed within one year. If the above two conditions are satisfied, then penalty is not leviable. On the other hand, Section 234 (E) of the Act is only a late fee at the rate of ₹ 200/- per day. As held in the judgments relied above, Section 234 (E) of the Act is purely compensatory and is a special benefit to the advantage of the assessee as well for belatedly filing the TDS statement. The revenue is right in contending that Section 234 (E) of the Act is meant to ensure that assessee files the statement in time, so that the Department can clear the returns of the persons connected with the assessee, i.e., from whom tax has been deducted at source without any delay and accurately with increasing or overloading the burden of the department. A provision can be held unconstitutional only when the legislature was incompetent to bring out the legislation or that it offends some provision of the Constitution or when it is manifestly arbitrary. . The Parliament is competent to pass legislation on Taxes in Income under Entry 82 of the List I to the Seventh Schedule. Section 234E is not violative of any of the other provisions of Income Tax Act or the Constitution of India. Nothing has been shown as to how the Section is manifestly arbitrary for it to be struck down. Since the levy is constitutional, the challenge to the demand notices also fail. Issues Involved:1. Challenge to the vires (constitutionality) of Section 234E of the Income Tax Act, 1961.2. Challenge to the demand notices raised under Section 234E along with Sections 220(2) and 201(1)(A) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Challenge to the Vires of Section 234E of the Income Tax Act, 1961:The petitioners challenged Section 234E, arguing that it imposes a penalty disguised as a fee for default in furnishing TDS statements. They contended that the provision is unreasonable and violates Article 19(1)(g) of the Constitution of India. The petitioners claimed that the fee under Section 234E does not correlate to any service rendered and is not a compensatory or regulatory fee. They also argued that the provision is a transformation of the earlier penalty provision under Section 272A(2)(k) and that it imposes an undue burden on businesses.The revenue defended Section 234E, stating that it ensures timely filing of TDS statements, which is crucial for the efficient processing of income tax returns and refunds. They argued that the fee regularizes late filing and is not punitive but compensatory for the additional burden on the department due to delayed submissions.The court referred to the judgments of the Bombay High Court in Rashmikant Kundalia v. Union of India and the Delhi High Court in Biswajit Das v. Union of India, which upheld the constitutionality of Section 234E. The court agreed with these judgments, stating that the fee under Section 234E is compensatory and not punitive. The court emphasized that the fee is for the additional service provided by the department due to late filing and does not violate any constitutional provisions.2. Challenge to the Demand Notices Raised Under Section 234E Along with Sections 220(2) and 201(1)(A) of the Income Tax Act, 1961:The petitioners also challenged the demand notices issued under Section 234E along with Sections 220(2) and 201(1)(A). They argued that the demand notices were arbitrary and lacked a proper basis.The revenue contended that the demand notices were issued in accordance with the provisions of the Income Tax Act and were necessary to ensure compliance with the filing requirements. They argued that the fee under Section 234E is a late fee for delayed filing and is distinct from the penalty provisions under Section 271H.The court upheld the validity of the demand notices, stating that since Section 234E is constitutional, the demand notices issued under this provision are also valid. The court emphasized that the fee under Section 234E is meant to ensure timely filing of TDS statements and is necessary for the efficient functioning of the tax administration system.Conclusion:The court dismissed the petitions challenging the vires of Section 234E and the demand notices issued under this provision. The court held that Section 234E is constitutional and serves a compensatory purpose for the additional burden on the department due to delayed filing of TDS statements. The demand notices issued under Section 234E were also upheld as valid. The court emphasized the importance of timely filing of TDS statements for the efficient processing of income tax returns and refunds.