2021 (3) TMI 80 - HC - Income Tax

Reinstatement of Section 206AA: Tax Law Interpretation Emphasizes Legislative Competence Over Hardship and Equity.

The HC quashed the Single Judge's order, allowing the appeal and reinstating the applicability of Section 206AA of the Income Tax Act, 1961, to ... Constitutional validity of Section 206AA - Requirement to furnish Permanent Account Number (PAN) - Applicability for the person having non-taxable income - Single Judge while dealing with a challenge to the constitutional validity of Section 206AA held that it is inapplicable to the persons whose income is less than taxable limit as per Finance Act, 1991 and the Banking and Financial Institutions shall not invariably insist upon Permanent Account Number (PAN) from small investors like respondent Nos.1 to 3 as well as from persons who intend to open an account in a Bank or Financial Institution HELD THAT:- Section 206AA of the Act is enacted as a measure to prevent the tax evasion. The Government of India is trying to eliminate circulation of unaccounted money and is intending to set up a database which contains and monitor all the transactions which take place in India. In order to gather the information for the aforesaid database, the appellants are insisting on furnishing of Permanent Account Number in all the transactions. The contention of the petitioner that Section 206AA of the Act takes away the benefit conferred by Sections 139A(1)(i) and 197A of the Act is misplaced. Section 139A(1)(i) of the Act provides that a person shall apply for allotment of Permanent Account Number if his total income or total income of any other person in respect of which he is assessable under the Act during the Previous Year exceeded the maximum amount which is not chargeable to income tax. Section 139(1)(i) is not absolute and apart from persons mentioned in the aforesaid clause, there are number of instances in Section 139A itself where persons are required to obtain Permanent Account Number even if they do not fulfill the conditions mentioned in Section 139A(1)(i) of the Act. For instance, a person is required to obtain Permanent Account Number if turnover of his business is exceeded ₹ 5 Lakhs irrespective of the fact whether his total income exceeded maximum amount chargeable to tax or not. Conclusion recorded by the learned Single Judge that the persons whose total income do not exceed maximum amount and are not chargeable to tax need not obtain Permanent Account Number to the exclusion of others cannot be upheld. Single Judge has neither recorded a finding that the parliament do not have the legislative competence to enact Section 206AA of the Act nor has not recorded a finding that the aforesaid provision is violative of fundamental rights. The Principle of reading down a provision can be applied for the limited purpose of making a particular provision workable and to bring it in harmony with the other provisions of the statute and has to be used keeping in view the scheme of the Act and to fulfill its purposes [See: 'CALCUTTA GUJ. EDUCATION SOCIETY & ANR. VS. CALCUTTA MUNICIPAL CORPORATION & ORS.' 2003 (8) TMI 476 - SUPREME COURT]. In the fact situation of the case, since, the provision was either not unworkable nor was inconsistent with other provisions of the Act, therefore, the learned Single Judge could not have applied the principle of reading down merely on the basis of hardship or equity which are not relevant in interpretation of the law relating to taxation. The impugned order passed by the learned Single Judge cannot be sustained in the eye of law Issues:Validity of order on constitutional validity of Section 206AA of the Income Tax Act, 1961.Analysis:The appellants challenged the order passed by the learned Single Judge regarding the constitutional validity of Section 206AA of the Income Tax Act, 1961. The Single Judge had read down Section 206AA, stating it does not apply to persons with income below the taxable limit. The respondents, small investors, argued that the provision caused undue hardship as they did not have income exceeding the taxable limit. The appellants contended that the Section aims to prevent tax evasion and insisted on the necessity of furnishing Permanent Account Numbers for all transactions. The Single Judge held that Section 206AA contradicted Section 139A and should not apply to those below the taxable limit. The appellants appealed this decision, arguing that equity and hardship are irrelevant in tax laws and the provision should not be read down, as it is not unconstitutional.The High Court emphasized that the constitutional validity of a provision should be tested based on legislative competence and fundamental rights violations. The Court cited legal precedents stating that hardship and equity are not relevant in tax law interpretation when the language used by the Legislature is clear. The rationale behind Section 206AA is to prevent tax evasion and create a database to monitor transactions in India. The Court noted that Section 139A requires obtaining a Permanent Account Number in various instances, not solely based on income exceeding the taxable limit. Thus, the Single Judge's conclusion that those below the taxable limit need not obtain a Permanent Account Number was deemed incorrect. The Court highlighted that the Single Judge did not find the legislative competence or violation of fundamental rights in enacting Section 206AA. The principle of reading down a provision should only be applied to make it workable and harmonious with other statutes, not based on hardship or equity, which are irrelevant in tax law interpretation.Consequently, the High Court quashed the Single Judge's order, stating it could not be sustained in law. The appeal was allowed, overturning the decision regarding the applicability of Section 206AA to persons below the taxable limit.