Friday, July 1, 2011

THE PROVISIONS OF SECTION 206AA(1) OF I. T. ACT, 1961 ARE ULTRA VIRES THE CONSTITUTION

THE PROVISIONS OF SECTION 206AA(1) OF I. T. ACT, 1961 ARE ULTRA VIRES THE CONSTITUTION-BEING DISCRIMINATORY

In order to strengthen permanent account number (PAN) mechanism, the Finance (No.2) Act, 2009 inserted section 206AA in the Income-tax Act, 1961 which came into effect from 01-04-2010. This section makes certain provisions relating to collection and recovery of tax to enforce certain requirements in relation to PAN. Sub-section (1) of the newly inserted section prescribes certain punitive rates to be imposed in case a deductee (i.e., a person from whose income tax is deducted at source) who fails to furnish his PAN to the deductor (i.e., to the person deducting such TDS). In this article, the author illustrates by giving examples that the quantum of penalty and/or the penal consequence is not equal in case of the various defaulting deductee and so, on the grounds of discrimination, the provisions of section 206AA(1) are ultra vires the Constitution.

Introduction

Section 206AA of the Income-tax Act, 1961 was introduced by the Finance (No. 2) Act, 2009 and it came into effect from 1-4-2010. This section makes certain provisions relating to collection and recovery of tax to enforce certain requirements in relation to permanent account number (PAN). This section has come into force with effect from 1-4-2010 and it is reproduced below for ready reference:

"206AA. [Requirement to furnish Permanent Account Number. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—

(i) at the rate specified in the relevant provision of this Act; or

(ii) at the rate or rates in force; or

(iii) at the rate of twenty per cent.

(2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration.

(3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1).

(4) No certificate under section 197 shall be granted unless the application made under that section contains the Permanent Account Number of the applicant.

(5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.

(6) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly.]"

The Legislative Intent behind introducing the section

The purpose behind introducing section 206AA(1) has been stated in the Memorandum explaining the provision of the Finance (No. 2) Bill, 2009 as under :

"d. Improving compliance with provisions of quoting PAN through the TDS regime. - Statutory provisions mandating quoting of Permanent Account Number (PAN) of deductees in Tax Deduction at Source (TDS) statements exist since 2001 duly backed by penal provisions. The process of allotment of PAN has been streamlined so that over 75 lakh PANs are being allotted every year. Publicity campaigns for quoting PAN are being run since the last three years. The average time of allotment of PAN has come down to 10 calendar days. Therefore, non-availability of PAN has ceased to be an impediment. In a number of cases, the non-quoting of PAN's by deductees is creating problems in the processing of return of income and in granting credit for tax deducted at source, leading to delays in issue of refunds."

In order to strengthen the PAN mechanism, it is proposed to make amendments in the Income-tax Act to provide that any person whose receipts are subject to deduction of tax at source i.e., the deductee, shall mandatorily furnish his PAN to the deductor, failing which the deductor shall deduct tax at source at higher of the following rates

(i) the rate prescribed in the Act;

(ii) at the rate in force, i.e., the rate mentioned in the Finance Act; or at the rate of 20%.

Provisions Explained

From above, it is clear that the object of section 206AA(1) is to (a) ensure compliance with the PAN mechanism; (b) address problems associated with non-quoting (and not non-obtaining) of PAN, like processing of returns, claiming credit for TDS and granting of refund; and (c) ensure that the assessees do not give reasons like non-issuance of PAN as a reason for not furnishing it, keeping in mind that the PAN allotment machinery has been fully strengthened and streamlined.

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The sub-section (1) of section 206AA requires any person (hereinafter referred to as the 'deductee'), receiving any sum, income or amount which is liable to tax deduction at source (TDS in short), to furnish his PAN to the person responsible to deduct tax at source (hereinafter referred to as the 'deductor'). In case the deductee fails to furnish his PAN, the deductor is liable to deduct tax on the sum, income or amount ('income' in short) payable to the deductee, at a rate which is higher of:

(i) the rate specified in the Act;

(ii) the rate or rates in force; or

(iii) 20%.

The Provisions are discriminatory

It is clear from the aforesaid sub-section that it prescribes a rate of TDS by way of a punitive measure in case of default by a deductee in furnishing his PAN to the deductor. In cases where the rate specified in the Act and/or the rate/rates in force is less than 20%, the rate of TDS otherwise applicable would be enhanced up to 20% as a punitive measure. But where the rate specified in the Act and/or the rate or rates in force is more than 20%, this sub-section will be of no consequence and as such higher rates would not be further enhanced. In this way, all the defaulting deductees do not bear the same consequences. Given below are some examples in respect of same:

l Example 1

The sub-section discriminates between (a) the defaulting deductees in whose cases the rates of TDS are more than 20%; and (b) those in whose cases the rates of TDS are less. The defaulting deductees in whose case the rates of TDS are more than 20% there is no penal consequence and they are subjected to same rate of TDS in spite of section 206AA. There is no rationale for such a discriminatory treatment and, for this reason, the provisions of this sub-section are ultra vires the Constitution.

l Example 2

In following cases, rates of TDS in case of non-residents are lower than 20% :

Sl. No. Nature of payment Rate of TDS (exc: surcharge, cess, etc.)
1 Section 194LB – Payment by way of interest by infrastructure debt fund 5%
2 Section 195 – Income by way of long-term gains referred to in section 115E 10%
3 Section 195 – Income by way of short-term gains under section 111A 15%
4 Section 195 – Royalty where the agreement is made on or after June 1, 2005 10%
5 Section 195 – Fee for technical services where the agreement is made on or after June 1, 2005 10%
6 Section 196B – Income from Units 10%
7 Section 196C – Income from foreign currency bonds or GDR 10%

Apart from above, it is also observed that wherever the rates are lower than 20%, the same are sought to be enhanced to 20%. In this way, among various defaulting deductees, for the same nature of offence, someone is subject to higher penalty than the other. For example, in cases where rate of TDS is 5%, it is increased by four times and where it is 10%, it is twice the normal rate of TDS. Thus, for similar offences, the quantum of penalty in the shape of punitive rate is not equal in case of all the defaulting deductees and for this reason also, the provision of sub-section (1) is discriminatory and ultra vires the Constitution.

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It may be observed that wherever the rates are lower than 20%, the same are sought to be enhanced to 20%. In this way, among various defaulting deductees, for the same nature of offence, someone is subject to higher penalty than the other. For example, in cases where rate of TDS is 1%, it is increased by twenty times and where it is 10%, it is twice the normal rate of TDS. Thus, for similar offences, the quantum of penalty in the shape of punitive rate is not equal in case of all the defaulting deductees and, for this reason also, the provisions of sub-section (1) are discriminatory and ultra vires the Constitution.

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