2021 (7) TMI 468 - HC - Income Tax

TDS u/s 194N on cash withdrawal - constitutional validity and legality of Section 194N - Deduction of tax at source at the rate of 2% on cash withdrawals from, inter alia, a banking company exceeding ₹ 1 crore in a financial year - HELD THAT - On earlier occasion opportunity was given to the respondents to seek instruction as to whether the aforesaid order of the Kerala High Court has been further challenged or not to which Additional Solicitor General has submitted on instruction that no further appeal has been filed against the said order and the said interim order is still existing. It has also been submitted that series of orders have been passed by the Hon ble Kerala High Court on the same issue admitting the writ petition and staying deduction of tax on source under Section 194N of the Income Tax Act, 1961. Considering these facts, we are inclined to grant an interim order restraining the respondents authorities concerned from deducting tax on source on the basis of the aforesaid provisions of Section 194N till 30 th September, 2021.

Summary

Issues:
Challenge to the constitutional validity and legality of Section 194N of the Income Tax Act, 1961.

Analysis:
The petitioner challenged the constitutional validity and legality of Section 194N of the Income Tax Act, 1961, which mandates a 2% tax deduction on cash withdrawals exceeding ?1 crore in a financial year. The petitioner argued that this provision goes beyond the legislative competence of the Parliament as it pertains to taxing "income," and the amount subject to deduction is not income. The petitioner's grounds for challenge were deemed substantial and warrant consideration by the Court.

The petitioner cited unreported decisions of the Kerala High Court on the same issue, including an order granting an interim stay on tax deduction under Section 194N. The Court noted that no further appeal had been filed against the Kerala High Court's order, and the interim stay remained in effect. Given these circumstances, the Court decided to grant an interim order restraining tax deduction under Section 194N until September 30, 2021.

The respondents were directed to file an affidavit-in-opposition within four weeks, with the petitioner given two weeks to respond. The matter was scheduled for final hearing after eight weeks, allowing both parties to present their arguments comprehensively before the Court for a final adjudication on the constitutional validity and legality of Section 194N of the Income Tax Act, 1961.