Calcutta High Court Stays TDS Collection Under Section 194N Income Tax Act Till Sep 30

The Calcutta High Court on Thursday passed an interim order restraining the Income Tax Department from collecting Tax Deduction at Source (TDS) under section 194N of the Income Tax Act, 1961.

Justice Md. Nizamuddin was adjudicating upon a plea challenging the constitutional validity of the provision which was inserted by the Finance Act, 2019 and became effective from September 1, 2019. The provision mandates the deduction of tax at source at the rate of 2% on cash withdrawals from, inter alia, a banking company exceeding Rs 1 crore in a financial year.

In the instant case, the petitioner had challenged the constitutional validity of the provision on the ground that the levy is beyond the legislative competence of the Parliament. Entry 82 of List I of Schedule VII of the Constitution allows the Parliament to enact laws for imposition, collection, and levy of tax on "income". As a result, the Parliament cannot legislate a provision stipulating the deduction of tax at source from an amount which is admittedly not 'income'.

The Court also placed reliance on the Kerala High Court judgement in Kanan Devan Hills Plantations Company Pvt. Ltd v. Union of India wherein a writ petition had been admitted on the same issue and accordingly an interim stay on deduction of tax on source under Section 194N of the Income Tax Act was imposed. The Court further opined,

"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 learned 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."

Accordingly, an interim stay was imposed on the respondent authorities restraining them from deducting tax on source on the basis of the aforesaid provisions till September 30, 2021.

The State was directed to file a counter affidavit within four weeks subsequent to which the petitioner was ordered to file a reply within two weeks.

The matter has been listed for final hearing after eight weeks.

Case Title: Apeejay Tea Ltd. Anr. v. Union of India & Ors

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