2008 (11) TMI 363 - HC - Income Tax

Deduction of tax at Source-. The petitioner is a civil contractor engaged in construction of bridges with the Department of Railways. The Civil contractor sought quashing of the Show Cause Notice issued on the ground that default in making deposit of the tax deducted at source not being deliberate the disproportionate punishment of disallowing the whole expenditure was discriminatory and violative of article 14 of the constitution of India. Held that- no exception could be taken to incorporation of a provision which excluded the right to seek permissible deduction in the event of failure of the assessee to deduct or to deposit the deducted tax as the proviso to the section relaxed to rigour.the provision could not be held to be harsh as one would get the benefit of deduction even in the subsequent year. The plea that there was genuine justification for not complying with the provision of tax deduction at source was a matter to be examined by the competent authority. There was no inherent lack of jurisdiction in the legislature enacting the provision providing penalty for evasion of statutory liability

Summary

Issues:
Challenge to notice under section 40(a)(ia) of the Income-tax Act, 1961 and constitutionality of the provision.

Analysis:
The petitioner sought to quash a notice requiring them to show cause for not depositing TDS under section 40(a)(ia) of the Income-tax Act, 1961. Additionally, they challenged the constitutionality of the provision as harsh and discriminatory. The petitioner, a civil contractor, argued that the failure to deposit TDS was not deliberate and the penalty of disallowing the whole expenditure was disproportionate and violated Article 14 of the Constitution of India. They cited a Madras High Court order staying penal action on similar grounds. The court noted the provision of section 40(a)(ia) which disallows certain deductions if TDS is not deposited, emphasizing the legislative power to provide for penalties to enforce tax compliance.

The court referenced previous judgments to support the legislative authority to levy taxes and impose penalties for tax evasion. They highlighted that the provision in question allowed for relaxation if TDS was deposited in a subsequent year. The court rejected the argument that the provision was harsh, stating that genuine justifications for non-compliance should be examined by the competent authority. The court upheld the jurisdiction of the Legislature to enact provisions for penalties related to statutory liabilities.

Regarding the contention of discriminatory penalties, the court cited the applicability of Article 14 to taxing statutes but acknowledged greater latitude for the Legislature in fiscal matters. They referenced a Supreme Court case emphasizing judicial self-restraint in tax and economic regulation cases, highlighting the complexity and uncertainty involved. Ultimately, the court dismissed the petition, finding no grounds for interference at that stage. The judgment affirmed the validity of section 40(a)(ia) and upheld the penalty provision for non-deposit of TDS, emphasizing legislative authority in tax matters and the need for judicial self-limitation in such complex regulatory issues.