Director of Inspection Investigation Vs. Kum. A.B. Shanthi  Insc 245 (3 May 2002)
Sethi & K.G. Balakrishnan K.G. Balakrishnan, J.
Appeal (civil) 4478 of 2000
both these appeals, the constitutional validity of Sections 269SS and 271D of
the Income Tax Act, 1961 (for short, "the Act"), is challenged. In
Criminal Appeal No. 601 of 1992, the learned Single Judge of the Madras High
Court quashed the prosecution initiated against the respondent by holding that
Section 269SS is violative of Article 14 of the Constitution and, therefore,
the prosecution initiated against the respondent was not legal. The learned
Single Judge granted certificate under Article 134A of the Constitution and the
present appeal has been filed by the Department.
Appeal No. 4478 of 2000, the appellant had challenged the constitutional
validity of Sections 269SS and 271D of the Act before the High Court. The
learned Single Judge dismissed the writ petition. Thereupon the appellant filed
an appeal before the Division Bench. The Division Bench in Writ Appeal No. 5447
of 1999 affirmed the order of the learned Single Judge. The judgment of the
Division Bench is now challenged before us in this appeal.
269SS was inserted in the Income Tax Act by Finance Act 1984 with effect from
1.4.1984, but the same was made operative from 1.7.1984. The Income Tax
Department, in course of searches carried out by them from time to time
recovered large amounts of unaccounted cash from certain tax payers and often
the tax payers gave explanation for their unaccounted cash to the effect that
they had borrowed loans or received deposits made by other persons.
it was noticed, that the unaccounted income was also brought into the books of
accounts in the form of loans and deposits and later they would obtain
confirmatory letters from other persons in support of their explanation.
Department was not able to unearth the source of such unaccounted cash.
in order to plug the loopholes and to put an end to the practice of giving
false and spurious explanation by tax payers, a new provision was inserted in
the Income Tax Act debarring persons from taking or accepting from any other
person any loan or deposit otherwise than by account-payee cheque or
account-payee bank draft, if the amount of such loan or deposit or the
aggregate amount of such loan or deposit is Rs.10,000/- or more. The amount of
Rs.10,000/- was later revised as Rs.20,000/- with effect from 1.4.1989.
269SS of the Act 1981 reads as follows:
269SS. Mode of taking or accepting certain loans and deposits No person shall,
after the 30th day of June, 1984, take or accept from any other person
(hereafter in this section referred to as the depositor) any loan or deposit
otherwise than by an account payee cheque or account payee bank draft, if
amount of such loan or deposit or the aggregate amount of such loan and
the date of taking or accepting such loan or deposit, any loan or deposit taken
or accepted earlier by such person from the depositor is remaining unpaid
(whether repayment has fallen due or not), the amount or the aggregate amount
remaining unpaid; or
amount or the aggregate amount referred to in clause (a) together with the
amount or the aggregate amount referred to in clause (b), is twenty thousand
rupees or more:
that the provisions of this section shall not apply to any loan or deposit
taken or accepted from, or any loan or deposit taken or accepted by---
Any banking company, post office savings bank or cooperative bank;
Any corporation established by a Central, State or Provincial Act;
Any Government company as defined in section 617 of the Companies Act, 1956 (1
Such other institution, association or body or class of institutions,
associations or bodies which the Central Government may, for reasons to be
recorded in writing, notify in this behalf in the Official Gazette:
further that the provisions of this section shall not apply to any loan or
deposit where the person from whom the loan or deposit is taken or accepted and
the person by whom the loan or deposit is taken or accepted are both having
agricultural income and neither of them has any income chargeable to tax under
Explanation----For the purposes of this section
"banking company" means a company to which the Banking Regulation
Act, 1949 (10 of 1949) applies and includes any bank or banking institution
referred to in section 51 of that Act;
"co-operative bank" shall have the meaning assigned to it in Part V
of the Banking Regulation Act, 1949 (10 of 1949);
"loan or deposit" means loan or deposit of money." Section 276DD
was inserted in the Act by the Finance Act, 1984 which came into effect from
1.4.1984 and which reads as under :
276DD. Failure to comply with the provisions of section 269SS --- If a person
takes or accepts any loan or deposit in contravention of the provisions of
section 269SS, he shall be punishable with imprisonment for a term which may
extend to two years and shall also be liable to fine equal to the amount of
such loan or deposit.".
Section 271D, which is the penal clause in the Act which provides for
imposition of penalty for failure to comply with the provisions of Section
269SS was introduced with effect from 1.4.1989 omitting Section 276DD with
effect from the same date. In the original Section 276DD, in case of imposition
of punishment, the term of imprisonment was also prescribed which could extend
to two years. But, subsequently, by the introduction of Section 271D, the
punishment of imprisonment was taken away and the failure to comply with the
provisions of Section 269SS could only be visited with a penalty of fine equal
to the amount of loan or deposit to be taken or accepted.
271D as incorporated with effect from 1.4.1989 reads as follows :
Penalty for failure to comply with the provisions of section 269SS ---
a person repays any deposit referred to in section 269T otherwise than in accordance
with the provisions of that section, he shall be liable to pay, by way of
penalty, a sum equal to the amount of the deposit so repaid.
penalty imposable under sub-section (1) shall be imposed by the Deputy
Commissioner." The main attack against Section 269SS of the Act is made on
the basis that it violates Article 14 of the Constitution. The contention of
the appellant's counsel in civil appeal is that taking a loan or receiving a
deposit is a single transaction wherein a lender and borrower are involved and
by the impugned Section the borrower alone is sought to be penalized and the
lender is allowed to go scot-free. It is contended that if the intention of the
Legislature is to unearth black money, it is really the black money of the lender
that is involved in the transaction and, therefore, the policy behind the
enactment to find fault with the borrower is illegal and violative of Article
14 of the Constitution vis--vis the lender. It is also contended that
classification made by Parliament is an artificial one and has no nexus with
the objects sought to be achieved by the enactment.
contention of the appellant's counsel has no force. The object of introducing
Section 269SS is to ensure that a tax payer is not allowed to give false explanation
for his unaccounted money, or if he has given some false entries in his
accounts, he shall not escape by giving false explanation for the same. During
search and seizures, unaccounted money is unearthed and the tax payer would
usually give the explanation that he had borrowed or received deposits from his
relatives or friends and it is easy for the so-called lender also to manipulate
his records later to suit the plea of the tax-payer. The main object of Section
269SS was to curb this menace. As regards the tax legislations, it is a policy
matter, and it is for the Parliament to decide in which manner the legislation
should be made. Of course, it should stand the test of constitutional validity.
Constitution Bench of this Court in S.K. Dutta, ITO vs. Lawrence Singh Ingty 68
(1968) ITR 272 held :
is not in dispute that taxation laws must also pass the test of article 14.
That has been laid down by this Court in Moopil Nair vs. State of Kerala (1961) 3 SCR 77. But as observed by
this court in East India Tobacco Co. v. State of Andhra Pradesh (1963) 1 SCR
404, in deciding whether the taxation law is discriminatory or not it is
necessary to bear in mind that the State has a wide discretion in selecting
persons or objects it will tax, and that a statute is not open to attack on the
ground that it taxes some person or objects and not others; it is only when
within the range of its selection, the law operates unequally, and that cannot
be justified on the basis of any valid classification, that it would be violative
of article 14. It is well settled that a State does not have to tax everything
in order to tax something. It is allowed to pick and choose districts, objects,
persons, methods and even rates for taxation if it does so reasonably."
The above dictum applies in full force as regards the present case. The object
sought to be achieved was to eradicate the evil practice of making of false
entries in the account books and later giving explanation for the same. To a
great extent, the problem could be solved by the impugned provision.
very same provision was earlier challenged in another writ petition before the
High Court of Madras and the Division Bench of the Madras High Court had upheld
the constitutional validity of Section 269SS in K.R.M.V. Ponnuswamy Nadar Sons
vs. Union of India 196 (1992) ITR 431 (Madras) decided on Sept.
11, 1989. Despite this
decision of the Division Bench, the learned Single Judge quashed the
proceedings initiated against the respondent under Section 269SS of the Income
Division Bench of the Gujarat High Court in Sukhdev Rathi vs. Union of India
211 (1995) ITR 157 (Guj.) also upheld the constitutional validity of Section
269SS. Speaking for the Bench, Acting Chief Justice G.T. Nanavati (as he then
was) held :
borrower by adopting the device of giving a false explanation or making false
entries or by obtaining confirmatory letters is found evading payment of tax.
Thus, the borrower as a class is found to be indulging in such practices. By
making such false entries or by giving explanations or by creating false
evidence, it is the borrower who was found to be evading payment of tax. In the
case of a lender, we fail to appreciate how while lending money by not making
payment by a cheque or a draft, he would evade payment of income tax.
Therefore, though the transaction of loan can be regarded as a single
transaction, and the borrower and the lender can be said to be equal integral
parts, when we view them from the angle of tax evasion, we find that they
cannot be regarded as equal or similarly situated. Compared to the class
consisting of lenders, the class consisting of borrowers can be said to be in a
position to evade tax by adopting the device, for curbing which provisions have
been made in Chapter XX-B by inserting Section 269SS and other sections."
In view of the aforesaid circumstances, we do not think that Section 269SS is,
in any way, violative of Article 14 of the Constitution and consequently
quashing of the proceedings by the learned Single Judge of the Madras High
Court for this reason is not legally sustainable.
contention urged by the appellant's counsel in Civil Appeal No.4478 of 2000 is
that the Parliament had no legislative competence to enact Section 269SS. The
source of power for enactment of Section 269SS is traceable to Entry 82 in List
I of the 7th Schedule and this according to the appellant's counsel can relate
only to tax on income other than agricultural income and the expression
"income" in that Entry has to be interpreted according to its natural
and grammatical meaning and if that be so, the Union has no legislative power
to enact Section 269SS.
82 in List I of the 7th Schedule reads as follows :
on income other than agricultural income." The contention of the
appellant's counsel is that the amount which is received as loan or deposit
need not necessarily be the "Income" of the tax payer and, therefore,
any legislation made by treating the loan or deposit as "income" is
not a valid constitutional legislation. It is settled law that the heads of
legislation given in the list should not be constructed in a narrow or pedantic
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 7th 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.
Union of India vs. A. Sanyasi Rao & Ors., 219 (1996) ITR 330, Section 44AC
and 206C of the Income Tax Act were challenged. It was held by this Court :
heads of legislation in the lists should not be construed in a narrow and
pedantic sense, but should be given a large and liberal interpretation. The
word "income" occurring in entry 82 in List I of the Seventh Schedule
to the Constitution should be construed liberally and in a very wide manner and
the power to legislate will take in all incidental and ancillary matters
including the authorization to make provision to prevent evasion of tax, in any
suitable manner." When the principle in a statute is challenged on the
ground of colourable legislation, what has to be proved to the satisfaction of
the Court is that though the Act ostensibly is within the legislative
competence of the legislature in question, in substance and in reality, it
covers a field which is outside its legislative competence [See : Jaora Sugar
Mills (P) Ltd. vs. State of M.P., AIR 1966 SC 416].
the above principle, it cannot be said that Section 269SS was enacted in
respect of a subject which is outside the scope of the Income Tax Act or that
this Section relates to a topic not within the competence of the legislature.
Court in P.N. Krishna Lal vs. Govt. of Kerala 1995 Supp. (2) SCC 187 held :
entry in the Seventh Schedule to the Constitution is not a power given to the
legislature but is a field of its legislation. The legislature derives its
power under Article 246 and other related articles in the Constitution. The
language of an entry should be given the widest meaning fairly capable to meet
the need of the Government envisaged by the Constitution. Each general word
should extend to all ancillary or subsidiary matters which can fairly and
reasonably be comprehended within it. When the vires of an enactment is
impugned, there is an initial presumption of its constitutionality. If there exists
any difficulty in ascertaining the limits of the legislative power, it must be
resolved, as far as possible, in favour of the legislature, putting the most
liberal construction on the legislative entry so that it is intra vires. Narrow
interpretation should be avoided and the construction to be adopted must be
beneficial and cover the amplitude of the power. The broad liberal spirit
should inspire those whose duty it is to interpret the Constitution to find out
whether the impugned Act is relatable to one or the other entries in the
relevant list. The allocation of the subjects of the entries in the respective
lists is not done by way of a scientific or logical definitions but it is a
mere enumeration of broad and comprehensive categories.
we do not think that Section 269SS is either violative of Article 14 of the
Constitution, or it was enacted without legislative competence.
next contention urged by the 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.
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 assesee
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 tax payer 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.
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 exproprietory in nature.
view of the foregoing, Criminal Appeal No. 601 of 1992 is allowed and the
impugned judgment is set aside. Civil Appeal No. 4478 of 2000 is without any
merit and dismissed, however, without costs.
Sethi ) J
Balakrishnan ) May 3, 2002.