The constitutional validity and legality of section 194N of the Act were challenged, by way of a writ petition, before Kolkata High Court in the case of Amalgamated Plantations Pvt. Ltd. & Anr.^[1] (“the Petitioner”)

Is Section 194N beyond the legislative competence of the Parliament?

The Petitioner contended that the provisions of section 194N of the Act are beyond the legislative competence of the Parliament.

In this regard, the Petitioner placed reliance on Entry 82 of List I of Schedule VII of the Constitution of India, which empowers the Parliament to enact laws for imposition, collection and levy of tax on ‘income’. It was contended that the Parliament cannot legislate a provision for deduction of tax at source on an amount which is not an ‘income’.

The Petitioner further placed reliance on the decision of the Hon’ble Kerala High Court in the case of Kanan Devan Hills Plantations Company Pvt. Ltd^[1] wherein, on a similar issue, the Kerala HC has admitted the writ petition and granted stay on deduction of tax at source under section 194N of the Act.

Interim Order on Section 194N

The Kolkata HC observed that the afore-mentioned order of Kerala HC has not been further challenged and the said interim order is still existing. It also observed that the Kerala HC, on the same issue, has passed series of orders admitting writ petitions and staying deduction of tax under section 194N of the Act.

Considering the above, the Kolkata HC has passed an interim order restraining the deduction of tax at source under section 194N of the Act till 30 September 2021 and directing that the matter be scheduled for final hearing after a period of eight weeks. In the interim, the Court has also directed that the Revenue authorities (“the Respondent”) and the Petitioner can file affidavit-in-opposition & reply thereof, respectively.

FM Comments:

The interim order of the Kolkata HC restraining the deduction of tax at source under section 194N of the Act is indeed a landmark order. The same should go a long way in deciding the constitutional validity and legality of this controversial provision in the law.

However, in the interim, it would be worthwhile to examine whether the benefit of the above order can be availed by other taxpayers at large.

At this juncture, it is also pertinent to highlight the fact that, although the intention of the legislature was to move towards a digital and cashless economy, one cannot lose sight of the fact that cash withdrawals from banks, by no stretch of imagination, can be considered, as ‘income’ earned by the recipient. As such, the collection of tax on such amounts ought to be treated as violative of the basic principles enshrined under our income-tax law.

If the issue is finally decided against the Revenue authorities, it would be an embarrassing setback vis-à-vis the Government’s significant efforts in moving towards a cashless economy.

Collection of tax on an amount that is not an ‘income’ of the recipient was an extreme step taken by the Government and going forward, more pragmatic approach may be expected to achieve the goal of a cashless and digital economy.