2002 (5) TMI 4 - SC - Income Tax

Constitutionality of restrictions on accepting loans and deposits upheld; Section 269SS valid, penalties limited by Sections 271D and 273B

Asst. Director of Inspection (Investigation) Versus Kumari AB Shanthi & Chamundi Granites (P) Ltd. Versus Deputy Commissioner of Income-Tax And Another

The SC upheld the constitutionality of provisions regulating mode of taking/accepting loans and deposits, rejecting the Article 14 challenge to section ... Constitutional validity of sections 269SS and 271D - Mode of taking or accepting certain loans and deposits - prosecution initiated against the respondent by holding that section 269SS is violative of article 14 of the Constitution - Nature and impact of penalties under Section 276DD and Section 271D - draconian in nature - single judge granted certificate article 134A of the Constitution - HELD THAT:- It is settled law that the heads of legislation given in the list should not be constructed in a narrow or pedantic way. If any Legislature makes any ancillary or subsidiary provision which incidentally transgresses over its jurisdiction for achieving the object of such legislation, it would be a valid piece of legislation. The entries in a legislative list should be given their fullest meaning and the widest amplitude and be held to extend to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in them. It is only when a Legislature which has no power to legislate, or the legislation is camouflaged in such a way as to appear to be within its competence when it knows it is not, then alone it can be said that the legislation so enacted is a colourable legislation and that there is no legislative competence. The law relating to taxation can very well be enacted under entry 82 in List I of the Seventh Schedule. If any legislation which intended to achieve the collection of income-tax and to make it easier and systematic is enacted, such legislation would certainly be within the competence of the Legislature. Therefore, we do not think that section 269SS is either violative of article 14 of the Constitution, or it was enacted without legislative competence. The next contention urged by counsel for the appellant is that original section 276DD is draconian in nature as penalty imposed for violation of section 269SS is imprisonment which may extend to two years and shall also be liable to fine equal to the amount of loan or deposit. This section was subsequently omitted and a new section 271D was enacted. The penalty of imprisonment was deleted in the new section. The new section 271D provides only for fine equal to the amount of loan or deposit taken or accepted. It is important to note that another provision, namely section 273B was also incorporated which provides that notwithstanding anything contained in the provisions of section 271D, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provision if he proves that there was reasonable cause for such failure and if the assessee proves that there was reasonable cause for failure to take a loan otherwise than by account-payee cheque or account-payee demand draft, then the penalty may not be levied. Therefore, undue hardship is very much mitigated by the inclusion of section 273B in the Act. If there was a genuine and bona fide transaction and if for any reason the taxpayer could not get a loan or deposit by account-payee cheque or demand draft for some bona fide reasons, the authority vested with the power to impose penalty has got discretionary power. In that view of the matter, we do not think that section 269SS or 271D or the earlier section 276DD is unconstitutional on the ground that it was draconian or expropriatory in nature. Issues Involved:1. Constitutional validity of Sections 269SS and 271D of the Income-tax Act, 1961.2. Whether Section 269SS violates Article 14 of the Constitution.3. Legislative competence of Parliament to enact Section 269SS.4. Nature and impact of penalties under Section 276DD and Section 271D.Detailed Analysis:1. Constitutional Validity of Sections 269SS and 271D:The judgment addresses the constitutional validity of Sections 269SS and 271D of the Income-tax Act, 1961. Section 269SS was introduced to curb the practice of unaccounted cash being introduced into the books of accounts as loans or deposits. Section 271D imposes penalties for contravention of Section 269SS. The court upheld these sections, stating they were enacted to prevent tax evasion and false explanations for unaccounted money.2. Violation of Article 14:The appellant argued that Section 269SS violates Article 14 of the Constitution as it penalizes only the borrower and not the lender, which they claimed was discriminatory. The court dismissed this argument, stating that the object of Section 269SS is to prevent taxpayers from giving false explanations for unaccounted money. The court reasoned that the borrower is more likely to evade tax by giving false explanations or making false entries, and thus, the classification made by Parliament is valid and has a nexus with the object sought to be achieved.3. Legislative Competence:The appellant contended that Parliament lacked the legislative competence to enact Section 269SS, arguing that loans or deposits are not 'income' under Entry 82 in List I of the Seventh Schedule. The court rejected this contention, emphasizing that legislative entries should be interpreted broadly. The court stated that any ancillary or subsidiary provision that aids in achieving the object of the legislation is valid. The court held that Section 269SS is within Parliament's competence as it relates to the collection of income-tax and preventing tax evasion.4. Nature and Impact of Penalties:The original Section 276DD imposed imprisonment and fines for violations of Section 269SS, which was later replaced by Section 271D, imposing only fines. The court noted that Section 273B provides relief by allowing no penalty if the taxpayer proves there was a reasonable cause for the failure to comply with Section 269SS. This provision mitigates undue hardship by giving discretionary power to the authority imposing the penalty. The court concluded that neither Section 269SS nor Section 271D is unconstitutional or draconian.Conclusion:The court allowed Criminal Appeal No. 601 of 1992, setting aside the impugned judgment, and dismissed Civil Appeal No. 4478 of 2000, upholding the constitutional validity of Sections 269SS and 271D of the Income-tax Act, 1961.