The Financial Act of 2019 had been implemented from 1st September 2019. According to one of its provisions, the Income Tax Department is empowered to collect the Tax Deducted at Source at the rate of 2% inter alia if a banking company exceeds Rs/- 1 crore in a financial year. Recently, the constitutional validity of the provision has been challenged by a petition before the Hon’ble single bench of Hon’ble Calcutta High Court under Hon’ble Justice Mohammad Nizamuddin. The Hon’ble Court, on Thursday, has passed the notice that the Tax Deducted at Source under section 194 of the Income Tax Act, 1961, will not be collected under the provision until the 30th of September 2021.
The petition on which the order has been issued questions the constitutional validity of the provision as the legislative capacity of the parliament to levy taxes is being questioned. According to Entry 82, List I of Schedule VII of the Indian constitution, the parliament is allowed to impose collection or levy of taxes on income. Therefore, legislating a provision that deducts the tax at a source that is not income, will be beyond its legislative capacity.
Citing the Hon’ble Kerala High Court judgement in the famous case of Kanan Devan Hills Plantations Company Pvt. Ltd versus. Union of India, the Hon’ble court addressed the current problem. In the stated case, a writ petition had been filed against a provision empowering the deduction of tax at source under section 194 of the Income Tax Act, 1961 and an interim stay had been imposed on the same. The Hon’ble court has asked the Solicitor General to observe that the judgement in the above-stated example had not been challenged further and the stay had been implemented. Following the precedent, a stay on all deduction of taxes under the provision under challenge has been imposed till 30th September.
The Hon’ble court has directed the state to file a counter affidavit in its defense of the provision under the Financial Act of 2019 to justify its collection of taxes and the legislative powers of the parliament on the enactment of taxation provisions at source inter alia. The petitioner has also been asked to submit a response within one week. The Hon’ble court has been adjourned till the next hearing after eight weeks. The final verdict is yet awaited.