Section 234E (of Income Tax Act, 1961) Upheld as Constitutional

Get the full picture - access the original judgement of the court order here

Case Name:

Dr. Amrit Lal Mangal Vs. Union of India (High Court of Punjab & Haryana)

CWP No. 6255 of 2014

Date: 14th August 2015

Key Takeaways:

• Constitutional Validity: Section 234E (of Income Tax Act, 1961) is intra vires, meaning it is within the powers of the Constitution.
• Nature of the Fee: The fee is not punitive but compensatory, covering the additional administrative burden caused by late TDS filings.
• Judicial Restraint: Courts should exercise restraint in economic legislation, granting latitude to legislative decisions unless they clearly violate constitutional provisions.

Issue

Is Section 234E (of Income Tax Act, 1961), which imposes a fee for late filing of TDS statements, unconstitutional?

Facts

The petitioners filed a writ petition challenging Section 234E (of Income Tax Act, 1961), arguing it was unconstitutional. They contended that the fee was punitive and violated principles of natural justice as it did not allow for a hearing before imposition. The respondents defended the section, stating it was a necessary fee for additional administrative work due to late filings.

Arguments

• Petitioners: Argued that the fee was punitive and violated natural justice principles, as there was no provision for a hearing or appeal.
• Respondents: Claimed the fee was compensatory, not punitive, and necessary for managing the additional workload from late TDS filings. They emphasized the legislative competence to impose such a fee.

Key Legal Precedents

• Rashmikant Kundalia vs. Union of India: The Bombay High Court upheld Section 234E (of Income Tax Act, 1961), stating it was a fee, not a tax, and necessary for administrative efficiency.
• Lakshminirman Bangalore Pvt. Ltd. vs. Deputy Commissioner of Income Tax: The Karnataka High Court also upheld the section, reinforcing its constitutionality.

Judgement

The court dismissed the petition, affirming that Section 234E (of Income Tax Act, 1961) is constitutional. It ruled that the fee is not punitive but compensatory, addressing the administrative burden of late TDS filings. The court emphasized judicial restraint in economic legislation, supporting the legislative intent behind the provision.

FAQs

Q1: What is Section 234E (of Income Tax Act, 1961) about?

A1: It imposes a fee for late filing of TDS statements to cover additional administrative work.

Q2: Why was the fee challenged?

A2: Petitioners argued it was punitive and violated natural justice as it didn’t allow for a hearing or appeal.

Q3: What did the court decide?

A3: The court upheld the section as constitutional, stating it is a compensatory fee, not a punitive tax.

Q4: Can the fee be appealed?

A4: The court noted that while no statutory appeal is provided, parties can seek judicial review under Articles 226/227 of the Constitution.

1. In this writ petition filed under Articles 226/227 of the Constitution of India, the petitioners have prayed for issuance of a writ in the nature of certiorari for quashing the provisions of Section 234E (of Income Tax Act, 1961) (in short “the Act”) as incorporated vide Finance Act, 2012. Further, prayer has been made for quashing the assessment orders (Annexure P-2 Colly) passed under Section 200A (of Income Tax Act, 1961) read with Section 234E (of Income Tax Act, 1961) whereby late filing fee under Section 234E (of Income Tax Act, 1961) has been levied upon the petitioners.

2. Briefly stated, the facts necessary for adjudication of the instant petition as narrated therein may be noticed. The petitioners are challenging the vires of Section 234E (of Income Tax Act, 1961) inserted vide Finance Act, 2012 w.e.f. 1.7.2012. Under Section 200(3) (of Income Tax Act, 1961) read with Rule 31A (of Income Tax Rules, 1962) (hereinafter referred to as “1962 Rules”), the duty has been cast upon the person deducting the tax at source to furnish return of the tax so deducted in the manner prescribed. Section 200A (of Income Tax Act, 1961) deals with the processing of statement of tax deducted at source. The scope of this Section did not cover the levy of fee under Section 234E (of Income Tax Act, 1961). In the year 2012-13, the petitioners filed their Tax Deducted at Source (TDS) returns (Annexure P-1 Colly) with the respondents as per Section 200 (of Income Tax Act, 1961) with some delay. The respondents without issuing any show cause

notice and without affording an opportunity of hearing to the petitioners

passed the orders (Annexure P-2 Colly) under Section 200A (of Income Tax Act, 1961)

by levying late filing fee amounting to ` 46,400/- upon petitioner No.1, `

24,000/- upon petitioner No.2, ` 26,400/- upon petitioner No.3 and `

32,650/- upon petitioner No.4 under Section 234E (of Income Tax Act, 1961). Hence, the

present writ petition.

3. Upon notice of motion having been issued, respondents No.1 to 3 contested the writ petition by filing a written statement. It was pleaded that the provision of Section 234E (of Income Tax Act, 1961) is intra vires inasmuch as Article 265 of the Constitution of India mandates that no tax shall be levied or collected except by the authority of law. The tax proposed to be levied must be with the legislative competence of the legislatures imposing the tax. However, there is no such allegation in the writ petition that the said provision has been enacted without there beingany legislative competence of the legislature imposing the tax. The petitioners while challenging the provision of Section 234E (of Income Tax Act, 1961) that the fee could be levied only for rendering of service but they have lost sight of the fact that the tax is a compulsory exaction made under the enactment. The word 'Tax' includes all money raised by the taxation including the tax levied by Union and State Legislatures, rates and other charges, levied by local authorities under the statutory powers. The fee is being imposed on a late filer of the TDS statements because the late filing has serious consequences wherein the credibility of a tax administration is at stake and the common taxpayer faces hardship. The other averments made in the writ petition were denied and a prayer for dismissal of the same was made. The petitioners controverted the averments made in the written statement by filing replication and reiterated that of the averments made in the writ petition.

4. Learned counsel for the petitioners, inter alia, submitted that

the fee cannot be equated with the tax and is always charged for

rendering services. It was further submitted that the provision is violative

of principles of natural justice as no opportunity of being heard is

provided before demand of fee under Section 234E (of Income Tax Act, 1961) can be

raised. In other words, no power has been conferred on the Assessing

Officer to condone the delay and even no remedy of appeal has been

provided to challenge the imposition of such fee. In support of the said

contentions, learned counsel for the petitioners has placed reliance upon

the following judgments:-

(i) Jindal Stainless Ltd. and another v. State

of Haryana and others, AIR 2006 SC 2550;

(ii) Rajesh Kumar and others v. D.C.I.T. and

others, AIR 2007 SC 181;

(iii) Sahara India (Firm), Lucknow Versus

Commissioner of Income Tax, Central – I

and another, (2008) 14 SCC 151;

(iv) Bidhannagar (Salt Lake) Welfare

Association v. Central Valuation Board and

others, AIR 2007 SC 2276;

(v) Raja Jagannath Baksh Singh Versus State

of U.P. and another, AIR 1962 SC 1563;

(vi) Hardeo Motor Transport v. State of M.P. and

others, AIR 2007 SC 839;

(vii) M/s MSK Projects(I) (JV) Ltd. Versus State

of Rajasthan and another, AIR 2011 SC

2979; and

(viii) Commissioner of Income Tax, New Delhi v.

M/s Eli Lilli and Company (India) P. Ltd.,

AIR 2009 SC(Supp) 333.

5. On the other land, learned counsel for the respondents

submitted that the issue is no longer res integra and the vires of Section

234E of the Act have been upheld by the Bombay High Court in

Rashmikant Kundalia and another v. Union of India and others

(2015) 373 ITR 268 (Bom) and also by the Karnataka High Court in M/s

Lakshminirman Bangalore Pvt. Ltd. v. The Deputy Commissioner of

Income Tax, Ghaziabad and another, Writ Petition No. 26589 of 2014

decided on 12.6.2015.

6. After hearing learned counsel for parties, we do not find any

substance in contentions of learned counsel for the petitioners.

7. It would be advantageous to refer to Section 234E (of Income Tax Act, 1961)

of the Act incorporated vide Finance Act, 2012 with effect from

1

s t

July, 2012, which reads as under:-

“Section 234E (of Income Tax Act, 1961)- Fee for defaults in furnishing

statements, in the following terms:-

(1) Without prejudice to the provisions of

the Act, where a person fails to deliver or

cause to be delivered a statement within the

time prescribed in sub-section (3) of section

200 or the proviso to sub-section (3) of

section 206C (of Income Tax Act, 1961), he shall be liable to pay, by

way of fee, a sum of two hundred rupees for

every day during which the failure continues.

(2) The amount of fee referred to in sub-

section (1) shall not exceed the amount of tax

deductible or collectible, as the case may be.

(3) The amount of fee referred to in sub-

section (1) shall be paid before delivering or

causing to be delivered a statement in

accordance with sub-section (3) of section

200 or the proviso to sub-section (3) of

section 206C (of Income Tax Act, 1961).

(4) The provisions of this section shall apply

to a statement referred to in sub-section (3)

of section 200 (of Income Tax Act, 1961) or the proviso to sub-section

(3) of section 206C (of Income Tax Act, 1961) which is to be delivered or

caused to be delivered for tax deducted at

source or tax collected at source, as the case

may be, on or after the 1st day of July, 2012.”

8. According to sub-section (1), a person is liable to

pay a sum of ` 200/- per day by way of fee in case he defaults

to deliver or cause to be delivered a statement within the time

prescribed in Section 200(3) (of Income Tax Act, 1961) or the proviso to Section 206C (of Income Tax Act, 1961)

(3). Sub-section (2) of Section 234E (of Income Tax Act, 1961) prescribes the

maximum amount of fee under Section 234E(1) (of Income Tax Act, 1961) which shall

not exceed the amount of tax deductible or collectible as the

case may be. A mandate has been laid down under sub-

section (3) whereby it has been stipulated that the amount of

fee under Section 234E(1) (of Income Tax Act, 1961) shall be paid before delivering or

causing to be delivered a statement in accordance with

Section 200(3) (of Income Tax Act, 1961) or the proviso to Sector 206C(3). Section 234E (of Income Tax Act, 1961)

(4) enacts whereby these provisions shall apply to statement

referred to in Section 200(3) (of Income Tax Act, 1961) or the proviso to Section 206C(3) (of Income Tax Act, 1961)

which is to be delivered or caused to be delivered for tax

deducted at source or the tax collected at source, as the case

may be after 1.7.2012.

9. It would also be expedient to notice the legislative

intent in enacting Section 234E (of Income Tax Act, 1961). The respondents

in their written statement have enumerated the purpose of

introducing this provision in the following words:-

“As per the existing provisions of the Act, a

person responsible for deduction of tax (‘the

deductor’) is required to furnish periodical

TDS statement (quarterly) containing the

details of deduction of tax made during the

quarter by the prescribed due date. It was

noticed that a substantial number of the

deductors were not furnishing their TDS

statement within the prescribed due date.

Delay in furnishing of TDS statement resulted

in delay in granting of credit of TDS to the

person on whose behalf tax was deducted

(‘the deductee’) and consequently led to delay

in issue of refunds to the deductee or raising

of infructuous demand against the deductee.

Timely furnishing of TDS statement is sine

qua non for processing of income-tax return of

the assessee having TDS claim because

credit for tax deducted on behalf of the

deductee is granted to him only on the basis

of information furnished by the deductor in the

TDS statement. Before insertion of section

234E in the Act, a penalty of ` 100 per day

was leviable for delay in furnishing of TDS

statement. The said penalty was not proved to

be effective in reducing or eliminating defaults

relating to late furnishing of TDS statement.

This was mainly because the TDS statements

were processed in the computerized

environment and it was not practical to levy

penalty for delay in furnishing of TDS

statement in such automated environment.

Therefore, in order to provide effective

deterrence against delay in furnishing of TDS

statement, the Finance Act, 2012 inserted

Section 234E (of Income Tax Act, 1961) in the Act to provide for levy of

fee of ` 200 per day for late furnishing of TDS

statement from the due date of furnishing of

TDS statement to the date of furnishing of

TDS statement. It has also been provided

that the total amount of fee shall not exceed

the total amount of tax deductible during the

period for which the TDS statement is

delayed. Further, the Finance Act, 2012 has

also inserted Section 271H (of Income Tax Act, 1961) in the Act which

provides for penalty ranging from ` 10,000/- to

` 1,00,000/- for late filing of TDS statement.

Sub-section (3) of Section 271H (of Income Tax Act, 1961) provides that

no penalty under Section 271H (of Income Tax Act, 1961) shall be levied

if the deductor furnishes the TDS statement

before the expiry of one year from the

prescribed due date along with the fee

payable under section 234E (of Income Tax Act, 1961). Therefore, a

privilege has been provided to the deductor to

the effect that the deductor shall not be liable

to pay penalty for late furnishing of TDS

statement, if he pays the requisite fee and file

the TDS statement within the extended period

of one year.”

10. It further gives reason to demonstrate that the

provision relates to collection of a fee and not tax. The

relevant portion of the reply reads thus:-

“That the marginal heading of section 234E (of Income Tax Act, 1961)

reads – ‘Fee for defaults in furnishing

statements’. The title per se indicates that

the section is regarding collection of fee. This

is not a penal provision, but a fee for defaults

in furnishing statements in TDS. The late

submission of TDS statement creates

additional work for the Income-tax

department. The department has to revise the

assessment order already passed in the case

of the deductee for determining his correct tax

liability in the light of belated information

furnished by the deductor. Moreover, in case

of income-tax return having refund claim, the

department has to pay extra interest due to

delay in determining the correct amount of

refund for want of information of tax deducted

which result in delay of issue of refund. The

fee under section 234E (of Income Tax Act, 1961) is levied to address

this additional work burden forced upon the

department by the deductor by not furnishing

the information in time which he statutorily is

bound to furnish within the prescribed time.

The fee levied u/s 234E (of Income Tax Act, 1961) is not of penal nature

but merely on account for the additional work

burden and monetary loss due to payment of

extra interest suffered by the department due

to late filing of TDS statement by the

deductor.”

11. A challenge was laid before the Division Bench of

Bombay High Court to the vires of Section 234E (of Income Tax Act, 1961) in

Rashmikant Kundalia's case (supra) on similar grounds.

While elaborately discussing the contentions of the parties,

the said provision was held to be intravires. It was concluded

that Section 234E (of Income Tax Act, 1961) is not punitive and is in the

nature of fees and not a tax. It is levied as a fixed charge for

the extra services which are required to be provided by the

department to the deductee. If the TDS statement is filed

within time by the deductor then there is no additional work

which arises for the department whereas in case of default in

timely filing of TDS statement, the department is to undertake

extra work of revising the assessment of the deductee. It was

noticed as under:-

“18. We are therefore clearly of the view that

the fee sought to be levied under section

234E of the Income Tax Act, 1961 is not in the

guise of a tax that is sought to be levied on

the deductor. We also do not find the

provisions of section 234E (of Income Tax Act, 1961) as being onerous

on the ground that the section does not

empower the Assessing Officer to condone the

delay in late filing of the TDS

return/statements, or that no appeal is

provided for from an arbitrary order passed

under section 234E (of Income Tax Act, 1961). It must be noted that a

right of appeal is not a matter of right but is a

creature of the statute, and if the Legislature

deems it fit not to provide a remedy of appeal,

so be it. Even in such a scenario it is not as if

the aggrieved party is left remediless. Such

aggrieved person can always approach this

Court in its extra ordinary equitable

jurisdiction under Article 226 / 227 of the

Constitution of India, as the case may be. We

therefore cannot agree with the argument of

the Petitioners that simply because no remedy

of appeal is provided for, the provisions of

section 234E (of Income Tax Act, 1961) are onerous. Similarly, on the

same parity of reasoning, we find the

argument regarding condonation of delay also

to be wholly without any merit.

Further, the provision of Section 234E (of Income Tax Act, 1961)

was held to be constitutionally valid with the following

observations:-

“It is equally well settled that a statute relating

to economic activities should be viewed with

greater latitude than laws touching civil rights

such as freedom of speech, freedom of

religion etc. As regards economic and other

regulatory legislation it is imperative that the

Court exercises judicial restraint and grants

greater latitude to the legislature whilst

judging the constitutional validity of such a

statute. This is for the simple reason that the

Court does not consists of economic and

administrative experts and has no expertise in

these matters.

These well settled principles have been

very succinctly set out in the judgment of the

Supreme Court in the case of Government of

Andhra Pradesh and Others versus P. Laxmi

Devi [2008] 4 SCC 720, and more particularly,

paragraphs 46, 67, 68, 78, 79 and 80 thereof,

which read thus:-

“46. In our opinion, there is one and only

one ground for declaring an Act of the

legislature (or a provision in the Act) to

be invalid, and that is if it clearly violates

some provision of the Constitution in so

evident a manner as to leave no manner

of doubt. This violation can, of course,

be in different ways e.g. if a State

Legislature makes a law which only

Parliament can make under List I to the

Seventh Schedule, in which case it will

violate Article 246(1) of the Constitution,

or the law violates some specific

provision of the Constitution (other than

the directive principles). But before

declaring the statute to be

unconstitutional, the court must be

absolutely sure that there can be no

manner of doubt that it violates a

provision of the Constitution. If two views

are possible, one making the statute

constitutional and the other making it

unconstitutional, the former view must

always be preferred. Also, the court must

make every effort to uphold the

constitutional validity of a statute, even if

that requires giving a strained

construction or narrowing down its scope

vide Rt. Rev. Msgr. Mark Netto v.State of

Kerala [(1979) 1 SCC 23 : AIR 1979 SC

83] SCC para 6 : AIR paragraph 6. Also,

it is none of the concern of the court

whether the legislation in its opinion is

wise or unwise.

67. Hence if two views are possible,

one making the provision in the statute

constitutional, and the other making it

unconstitutional, the former should be

preferred vide Kedar Nath Singh v. State

of Bihar [AIR 1962 SC 955]. Also, if it is

necessary to uphold the constitutionality

of a statute to construe its general words

narrowly or widely, the court should do

so vide G.P. Singh's Principles of

Statutory Interpretation, 9th Edn., 2004,

p. 497. Thus the word “property” in the

Hindu Women's Right to Property Act,

1937 was construed by the Federal Court

in Hindu Women's Rights to Property

Act, 1937, In re AIR 1941 FC 72 to mean

“property other than agricultural land”,

otherwise the Act would have become

unconstitutional.

68. The court must, therefore, make

every effort to uphold the constitutional

validity of a statute, even if that requires

giving the statutory provision a strained

meaning, or narrower or wider meaning,

than what appears on the face of it. It is

only when all efforts to do so fail should

the court declare a statute to be

unconstitutional. 78. In para 8 of the

Constitution Bench decision in R.K. Garg

case R.K. Garg v. Union of India, (1981)

4 SCC 675 : 1982 SCC (Tax) 30; [1982]

133 ITR 239 (SC) it was observed (as

quoted above) that laws relating to

economic activities should be viewed

with greater latitude than laws touching

civil rights such as freedom of speech,

freedom of religion, etc. Thus, the

Constitution Bench decision in R.K. Garg

case [(1981) 4 SCC 675 : 1982 SCC

(Tax) 30; [1982] 133 ITR 239 (SC) is an

authority for the proposition which has

been stated herein, namely, when a law

of the legislature encroaches on the

civil rights and civil liberties of the

people mentioned in Part III of the

Constitution (the fundamental rights),

such as freedom of speech, freedom of

movement, equality before law, liberty,

freedom of religion, etc., the Court will

not grant such latitude to the legislature

as in the case of economic measures,

but will carefully scrutinise whether the

legislation on these subjects is violative

of the rights and liberties of the citizens,

and its approach must be to uphold

those rights and liberties, for which it

may sometimes even have to declare a

statute to be unconstitutional.

79. Some scholars regarded it a

paradox in the judgments of Holmes, J.

(who, as we have already stated above,

was a disciple of Thayer) that while he

urged tolerance and deference to

legislative judgment in broad areas of

law-making challenged as

unconstitutional, he seemed willing to

reverse the presumption of

constitutionality when laws inhibiting civil

liberties were before the court.

80. However, we find no paradox at all.

As regards economic and other

regulatory legislation judicial restraint

must be observed by the court and

greater latitude must be given to the

legislature while adjudging the

constitutionality of the statute because

the court does not consist of economic

or administrative experts. It has no

expertise in these matters, and in this

age of specialisation when policies have

to be laid down with great care after

consulting the specialists in the field, it

will be wholly unwise for the court to

encroach into the domain of the

executive or legislative (sic legislature)

and try to enforce its own views and

perceptions.”

Therefore even looking at it from the

perspective as set out in the aforesaid

judgment, we are of the clear view that

Section 234E (of Income Tax Act, 1961)

does not violate any provision of the

Constitution and is therefore intra vires,

Constitution of India.”

12. The Karnataka High Court in Lakshminirman

Bangalore Pvt. Ltd's case (supra), in view of the aforesaid

enunciation, had held Section 234E (of Income Tax Act, 1961) to be valid with

the under noted conclusion:-

“24. Thus, view from any angle it cannot be

held that Section 234E (of Income Tax Act, 1961),

1961 suffers from any vices for being declared

to be ultra vires of the Constitution. In other

words it has to be held that the impunged

Section i.e., 234E of the Income Tax Act, 1961

is intra vires of the Constitution.”

13. With reference to the judgments relied upon by

learned counsel for the petitioners, suffice it to notice that the

principles of law enunciated therein are well recognized but in

view of pronouncements of Bombay High Court in

Rashmikant Kundalia's case (supra) and Karnataka High

Court in Lakshminirman Bangalore Pvt. Ltd's case (supra),

with which we express our concurrence where Section 234E (of Income Tax Act, 1961) of

the Act has been held to be intra vires, no benefit can be

derived by the petitioners from such enunciations. Further, all

the pronouncments relied upon by the petitioners are prior to

incorporation of Section 234E (of Income Tax Act, 1961) by the Finance Act,

2012 with effect from 1.7.2012.

14. In view of the above, we find that the provisions of

Section 234E (of Income Tax Act, 1961) are neither ultra vires nor

unconstitutional and, thus, finding no merit in the instant writ

petition, the same is hereby dismissed.

(AJAY KUMAR MITTAL)

JUDGE

(RAMENDRA JAIN)

JUDGE

August 14, 2015