Calcutta High Court restrains Income Tax department from collecting TDS till September 30

The Calcutta High Court has restrained the Income Tax Department from collecting Tax Deduction at Source (TDS) under Section 194N of the Income Tax Act, 1961, till September 30.

Petitioner Apeejay Tea Ltd had challenged the constitutional validity and legality of Section 194N of the Income Tax Act, 1961, which mandates the deduction of tax at source at the rate of two percent on cash withdrawals from a banking company exceeding Rs one crore in a financial year. Section 194N was inserted by the Finance Act, 2019 and became effective from September 1, 2019 and has been substituted by the Finance Act, 2020, mentioned the plea.

The Single-Judge Bench of Justice Md Nizamuddin on July 8 observed that the petitioner has challenged the legislation on several grounds, which have some substance and require consideration for final adjudication by the High Court.

The petitioner further submitted that Section 194N of the said Act is beyond the legislative competence of Parliament under Entry 82 of List I of Schedule VII to the Constitution, as Entry 82 allows the Parliament to enact laws for imposition, collection and levy of tax on 'income' and that the Parliament cannot legislate a provision stipulating the deduction of tax at source from an amount, which is admittedly not income.

The petitioner relied on several unreported decisions of the Kerala High Court involving same issue, including the order passed on August 13, 2020 in Kanan Devan Hills Plantations Company Pvt Ltd vs Union of India (2020), where the High Court had admitted the petition and granted interim stay of deduction of tax on source under Section 194N of the Income Tax Act, 1961.

Counsel for the petitioner Avra Mazumdar also submitted that a series of orders have been passed by the Kerala High Court on the issue, admitting the petitions and staying deduction of tax on source under Section 194N of the Income Tax Act, 1961.

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On an earlier occasion, opportunity was given to the respondents to seek instruction as to whether the order of the Kerala High Court has been further challenged or not, to which the Additional Solicitor General had submitted on instruction that no further appeal has been filed against the said order and the said interim order is still existing.

"Considering these facts, I am 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 September 30. Respondents are directed to file affidavit-in opposition within four weeks from date. Petitioner to file reply thereto, if any, within two weeks thereafter. Matter to appear for final hearing after eight weeks," ordered the Court.