2001 PLP 2200 (PTD)

Reliance is placed on the judgment given by the Madras High Court in K.R.M.V. Ponnuswamy Nadar Sons (Firm) v. Union of India (1992) 196 ITR

431. If a loan is taken, and repaid and then again taken and it is for the number of the transactions undergone penalty is provided for each of them resulting in confiscatory provisions. It is also stated that the penalty amount could not be mandatory but could only be maximum as held in State of Madhya Pradesh v. Bharat Heavy Electricals (1998) 99 ELT

33. I have considered over the matter. At the time of moving the amendment in the Income‑tax Act by the Finance Act, 1984, the following notes on clauses were given (see (1984) 146 ITR (St.) 162): "22 Unaccounted cash found iii the course of searches carried out by the Income‑tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able, to get confirmatory letters from such persons in support of their explanation.

23. With a view to circumventing this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Bill seeks to make a new provision in the Income‑tax Act, debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan, or deposit or the aggregate amount of such loan and deposit is Rs.10,000 or more. This prohibition will also apply in cases where on 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), and the amount or the aggregate amount remaining unpaid is Rs.10,000 or more. The proposed prohibition would also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken, is Rs.10,000 or more.

24. The proposed prohibition will, however, not apply to any loan or, deposit taken or accepted from, or any loan or deposit taken or accepted by the following, namely: (a) Government; (b) any banking company, post office savings bank or any cooperative bank; (c) any corporation established by a Central, State or Provincial Act; (d) any Government company as defined in section 617 of the Companies Act, 1956; (e) 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.

25. For the purposes of the proposed provisions, the expression 'banking company' shall have the meaning assigned to it in clause (a) of the Explanation to section 40A(8) of the Income‑tax Act and the expression 'cooperative bank' shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949. The expression 'loan or deposit', for the purposes of the proposed provision, would mean loan or deposit of money.

26. If a person without reasonable cause or excuse takes or accepts any loan or deposit in contravention of the aforesaid provisions, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to a fine equal to the amount of such loan or deposit.

27. The proposed provisions will take effect from 1st April, 1984, but as stated above, the prohibition contained therein shall apply only in relation to any loan or deposit taken or accepted after 30th June, 1984." The Gujarat High Court in the case of Sukhdev Rathi v. Union of India (1995) 211 ITR 157 has held the provisions of section 269SS valid and came to the conclusion that the transaction of loan or deposit involves two persons, a borrower and a lender, and both can be similarly situated so far as the transaction of borrowing or deposit is concerned, when it comes to evasion of tax, it cannot be said that they are similarly situated. The decision of the Madras High Court in the case of Kumari A.B. Shanthi v. Assistant Director of Inspection, Investigation (1992) 197 ITR 330 was dissented from and it was observed as follows (page 162): "A 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 false 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 said to be equal integral parts, when we view them from the angle of tax evasion, we find that they cannot be regarded as equals 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 devices, for curbing which the provisions have been made in Chapter XX‑B by inserting section 269SS and other sections. In our opinion, the classification made by the Legis lature is based on intelligible differentia and for that reason cannot be said to be discriminatory or in any manner violative of Article 14 of the Constitution. This classification has obviously a rational nexus sought to be achieved by the provisions. Even learned counsel for the petitioner could not seriously challenge that the prohibition contained in section 269SS, if it is otherwise valid, is not likely to achieve the object for which the said provision is made. If the mode of taking or extracting loans or deposits is checked in this manner, it would certainly, to some extent, achieve the object of evasion of tax because the transactions of loans and deposits which are not genuine and which formerly could be passed off as genuine would now be less as a result of the prohibition contained in the section." Relying on the decision of the Madras High Court in K.R.M.V. Ponnuswamy Nadar Sons (Firm) (1992) 196 ITR 431, the validity of section 269SS was upheld. In Tripura Goods Transport Association v. Commissioner of Taxes (1999) 112 STC 609; AIR 1999 SC 719, requirement under, section 38B of the Tripura Sales Tax Act for transporter operating its transport business relating to taxable goods in Tripura to obtain certificate of registration from the Commissioner of Taxes was held as within the legislative competence. It was observed that if such an obligation is not cast on such transporters then any dealer under a false name, can despatch his taxable goods to another person through a transporter escaping his sales tax liability on such goods. It cannot be denied that some such dealers and transporters do indulge in such illegal practices. The judgments relied on by learned counsel for the petitioner have no relevance. Section 269SS has placed restriction in not taking any loans or deposits otherwise than by way of an account payee cheque. It is only reasonable restriction and does not take away the right of any person event to take the loan from other person in the manner prescribed under law. It is the mode prescribed under the section which is to ensure prevention of evasion of tax to avoid fictitious entries to be made in the books of account without there being any actual transaction. There is no infirmity in the enactment of such a provision since it carried out its object of prevention of evasion of tax and plug possible loopholes. The lender and borrower constitute different class. For the reason because the borrower has been trade liable it cannot be construed that there is violation of Article 14 of the Constitution. It is only in the case of the borrower who can need adjustment by book entries only to avoid tax. The loan may be genuine and in a particular case reasonable hardship might be created to the borrower by such provision. But the ultimate aim of the section is to prevent evasion of tax. Section 269SS to prevent evasion of tax is ancillary and incidental to the main power to levy the tax. The contention that if the loan is taken again and again and repaid it tray result in levy of penalty more than the loan once taken and, therefore, confiscator, has also no substance because the Legislature intended to check the transactions which are beyond the prescribed limit and they should be only through account payee cheque. If any contravention is made action could be taken under section 271‑D. The provisions of sections 269-SS and 271‑D are reasonable restrictions in accordance with the power which are with Parliament and as such cannot be considered violative of Articles 14 and 19 of the Constitution of India. The writ petitions, therefore, having no force are dismissed. In respect of merit, the petitioner may file the appeal within four weeks from today, and if the appeal is filed within the aforesaid period, no objection regarding limitation would be taken. M.B.A./258/C Petitions dismissed.