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Judgment
Pratap Singh, J.—The accused in E.O.CC. No. 207 of 1988 on the file of the Additional Chief Metropolitan Magistrate, Economic offences
Egmore, Madras, has filed this petition u/s 482, Criminal Procedure Code, 1973, praying to call for the records in the aforesaid case and quash
the same.
The respondent has filed the complaint against the petitioner arraying her as accused u/s 276DD of Income Tax Act, 1961, for failure to comply
with the provisions of section 269SS of the Income Tax Act, 1961. The allegations in it are briefly as follows :
The accused is a cine actress. The All India Anna D. M. K. Party, Madras, granted a loan of Rs. 4,65,000 to the accused as per the entry
made in their ledger folio on April 17, 1986. The said loan amount was received by the accused on April 18, 1986. She has admitted the same in
her sworn statement given before the Assistant Director of Inspection (Investigation) Madras - 600 034, on April 23, 1986. As per section 269SS
of the Income Tax Act, 1961, no person shall after June 30, 1984, take or accept from any other person any loan or deposit otherwise than by an
account payee cheque or account payee bank draft if the amount of loan is Rs. 10,000 or more. As the said loan received by the accused
exceeded Rs. 10,000 and it was taken otherwise than by an account payee cheque or bank draft, the accused has violated section 269SS of the
Income Tax Act, 1961, and, therefore, she is liable to be punished u/s 276DD and hence the complaint.
Mr. N. C. Raghavachari, learned senior counsel appearing for the petitioner submitted :
(i) The transaction was not a borrowing made by the petitioner but it was the payment made against future performances and hence it will not fail
within the ambit of section 269SS of Income Tax Act, 1961 (which I shall hereafter refer to as the ""income tax Act"").
(ii) The sworn statement dated April 23, 1986, referred to in the complaint was a wrong statement and it was obtained by compulsion and it is
violative of article 20(3) of the Constitution and hence it should not be acted upon.
(iii) Section 269SS is violative of article 14 of the Constitution.
(iv) The punishment provided in section 276DD of the Income Tax Act, 1961, is draconian is nature and hence it has been repealed subsequently.
Per contra, Mr. K. Ramasamy, learned counsel appearing for the respondent, submitted that it was only a borrowing made by the petitioner,
that the statement given by the petitioner was not a wrong statement and that it was not obtained by compulsion. He further submitted that section
269SS of the Income Tax Act, 1961, is not violative of article 14 of the Constitution and section 276DD is not draconian in nature and the repeal
thereof would not affect the prosecution. I have carefully considered the submission made by rival counsel.
Regarding Points Nos. 1 and 2 urged by Mr. N. C. Raghavachari, it is yet to be established in evidence that it was not a borrowing but payment
against future performances and that the statement given by the petitioner was obtained by compulsion and that if contained wrong particulars.
Establishment of these facts will arise only at the time of the trial. That stage has not yet come. So, these two points cannot be considered at the
threshold.
Regarding the third point, Mr. N. C. Raghavachari, submitted that the transaction of loan is a single transaction consisting of lending by one
person and borrowing by another person and, while so, the borrower alone is put under the obligation of taking the loan amount only by an
account payee cheque or account payee bank draft if the amount of loan is Rs. 10,000 or more by virtue of section 269SS of the Income Tax Act,
1961, and contravention thereof is made punishable u/s 276DD of the Act and it imposes a very severe punishment of imprisonment for a term
which may extend to two years and the borrower shall also be liable to fine equal to the amount of such loan, whereas the lender is not place under
any such obligation or subjected to any penalty for contravention thereof and that this is a hostile discrimination violating article 14 of the
Constitution. He further submitted that, in a transaction of loan, the lender will be the dominant party and the borrower who is in need of money
and seeks a loan would not be the party to command the nature of payment and, if we take that factor into consideration it would further
demonstrate that the discrimination is very unfair harsh and ex facie discriminatory. Mr. K. Ramasamy, repelled this contention by stating that
borrowers are a class by themselves and that no discrimination was shown amongst the borrowers. He would further submit that the object 269SS
of the Income Tax, 1961, was curb black money and there is reasonable nexus between the purposes of legislation and classification.
In order to appreciate the respective contentions, the relevant provisions of the Income Tax Act, 1961, need extraction and the law laid down
by the apex court and the High Courts regarding the cases wherein violation of article 14 of the Constitution are complained of need be referred to.
Section 269SS of the Income Tax Act, 1961 reads thus :
269SS. Mode of taking or accepting certain loans and deposits. - No persons shall, after the 30th day of June, 1984, take of accept from any
other person (hereafter in this section referred to as ''the depositor''), any loan or deposit otherwise than by a account payee cheque of account
payee bank draft if, -
(a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or
(b) 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) the amount or the aggregate amount remaining unpaid (whether repayment has fallen
due or not) the amount of the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with amount or the aggregate amount referred to in clause (b), is ten
thousand rupees or more :
Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted
by, -
(a) Government;
(b) any banking company, post office savings bank or co-operative 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 (1 of 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.
Section 276DD reads as follows :
276DD. Failure to comply with the provisions of section 269SS. - If a person without reasonable cause or excuse, takes or accepts any loan or
deposit in contravention of the provisions of section 269SS, he shall be punishable with imprisonment for a term which may extend to two years
and shall also be liable to fine equal to the amount of such loan or deposit.
By a reading of the above, it is clear that failure to follow the procedure as stipulated in section 269SS would entail punishment u/s 276DD. It
is further clear that only the borrower is put under an obligation to take a loan by an account payee cheque of account payee bank draft, if it is for
Rs. 10,000 or more u/s 269SS and if he violates the said provision, he would be made liable for the penalty provided in section 276DD. Before
considering further whether it would amount to ex facie harsh and hostile discrimination inasmuch as the lender was not brought within its fold, I
shall refer to the rulings of the apex court and the High Court touching on this point.
Before going into the merits of the rival contentions, at the outset I shall refer to the ruling relied upon Mr. N. C. Raghavachari to show that in a
proceeding u/s 482, Criminal Procedure Code, this aspect of the can be considered. In Rayala Corpn. (P.) Ltd. v. Director of Enforcement, AIR
1970 SC 494, in a proceeding u/s 561A of the Code of Criminal Procedure (old Code), it was contended that section 23(1)(b) of the Foreign
Exchange Regulation Act is ultra view article 14 of the Constitution on certain grounds. On merits, that the contention was not accepted. The point
is that the vires of section 23(1)(b) of the said Act were questioned as offending article 14 of the Constitution in a proceeding u/s 561A of the (old
Code) Criminal Procedure Code and considered. Mr. K. Ramasamy, learned counsel appearing for the responded did not dispute the proposition
that, in a proceeding u/s 482, Criminal Procedure Code, this aspect can be considered.
In Income Tax Officer, Shillong and Others Vs. R. Takin Roy Rymbai and Others, , the apex court has held that a taxation law cannot claim
immunity from the equality clause in article 14 of the Constitution and has to pass, like any other law, the equality test of that article. The apex court
has laid as follows (at page 88) :
While it is true that law cannot claim immunity from the equality clause in article 14 of the Constitution and has to pass the any other law the
equality test of that article, it must be remembered that the state has, in view of the intrinsic complexity of fiscal adjustments of diverse elements a
considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence, the legislature has ample freedom to
select and classify persons, districts goods properties, income and objects which it would tax and which it would not tax. So long as the
classification made within this wide and flexible range by a taxing statute does no transgress the fundamental principles underlying the doctrine of
equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others
and not others. Nor is the mere fact that a tax falls more heavily on some in the same category, by itself a ground to render the law invalid. It is only
when, within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a
violation of article 14.
In T.S. Natraj Vs. Union of India and Others, , the Karnataka High Court has held that the provision for compulsory audit by a chartered
accountant is a provision to prevent evasion of tax and facilitate administration and it is not violative of article 14 or 19(1) of the Constitution and
the provisions are valid. In that case, the validity of section 44AB of the Income Tax Act, 1961, was challenged by the Income Tax practitioners.
Section 44AB provides for compulsory statutory audit of accounts of certain class of persons carrying on business or profession by chartered
accountants who are on the Register of Members maintained by the Institute of Chartered Accountants of India (Institute) established and
functioning from July 1, 1949, under the Chartered Accountants Act of 1949. On the ground that the said exclusive right or privilege conferred on
chartered accountants has affected their interests, and hence section 44AB is violative of the fundamental rights guaranteed to them by articles 14
and 19(1)(g) of the Constitution, it was challenged. It was held that section 44AB is a reasonable provision and that furthers the object and
purpose of the Act and is not violative of article 14 of the Constitution. It has held that Income Tax practitioners who belong to a separate class
cannot themselves with the class of chartered accountants who have special qualifications and expertise to do the job or auditing more efficiently.
On that finding of fact it was held that there is no violation of article 14 of the Constitution. The learned judges had considered a catena of cases
and has deduced the proposition as follows (at page 104) :
The classification must not be arbitrary but must be rational that is to say it must not only be based on some qualities or characteristics which
are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable
relation of the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded
on an intelligible differentia which distinguishes those that are grouped together from others, and (2) that that differentia must have a rational relation
to the object sought to be achieved by the Act.
The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a
nexus between them. In short, while article 14 forbids class discrimination by conferring privileges or imposing liabilities upon persons arbitrarily
selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be
imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned.
In K.S. Muthukali Chettiar Vs. Inspecting Assistant Commissioner of Income Tax and Others, , the Karnataka High Court had considered the
concept of article 14 of the Constitution. The learned judge has stated as follows (at pages 481) :
In order to appreciate the contentions, it is necessary to bear in mind the concept of article 14.
Article 14 provides :
''The State shall not deny to any person equality before the law or the equal protection of the laws within the territory or India.''
The two expressions ''equality before the law'' and equal protection of the laws'' may mean different things, but the entire concept is, however,
fundamentally the same; that is, ''like should be similarly treated. As different persons should be treated differently, the law has evolved a theory of
reasonable classification but not class legislation. This has been well established by a string of decisions of the Supreme Court from Chiranjit Lal
Chowdhuri Vs. The Union of India (UOI) and Others, , to the R.K. Garg and Others Vs. Union of India (UOI) and Others, .
In Anandji Haridas and Co. (P.) Ltd. Vs. S.P. Kushare, S.T.O. Nagpur and Others, it was held that to be a valid classification the same must
not only be founded on an intelligible differentia which distinguishes persons and things that are grouped together from others left out of the group
but that differentia must have a reasonable relation to the object sought to be achieved. It was further held that the State can by a classification
determine who should be regarded as a class for the purpose of legislation and in relation to a law enacted on particular subject, but the
classification must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be attained and
cannot be made arbitrarily and without any substantial basis.
In State of Andhra Pradesh and Another Vs. Nalla Raja Reddy and Others, , the apex court has laid down as follows (at page 1468) :
A statutory provision may offend article 14 of the Constitution both by finding differences where they are none and by making no differences
where there is one. Decided cases laid down two tests to ascertain whether a classification is permissible or not, viz., (i) the classification must be
founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and
(ii) that the differentia must have a rational relation to the object sought to be achieved by them statute in question. The said principles have been
applied by this court to taxing statutes.
In Shashikant Laxman Kale v. Union of India : [1990]185ITR104(SC) , the apex court has held that there is a clear distinction between
legislative intention and the purpose or object of the legislation. While the purpose or object of the legislation is to provide a remedy for the
malady, the legislative intention relates to the meaning or exposition of the remedy as enacted. Wile dealing with the validity of a classification, the
rational nexus of the differentia on which the classification is based has to exist with the purpose or object of the legislation so determined. For
determining the purpose or object of the legislation, it is permissible to look into the circumstances which prevailed at the time when the law was
passed and which necessitated the passing of that law.
From the above, the following principles emerge :
(i) A taxation law cannot claim immunity from the equality clause in article 14 of the Constitution and has to pass like any other law, the equality
test of that article. It is only when, within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid
classification that there would be violation of article 14.
(ii) Article 14 does not forbid reasonable classification of persons objects and transactions by the Legislature for the purpose of attaining a specific
end. What is necessary in order to pass the test to permissible classification under article 14 is that the classification must not be ""arbitrary, artificial
pr evasive"" but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by
the Legislature.
(iii) The entire concept of article 14 is fundamentally the same, viz., ''like should be treated alike''.
(iv) The classification must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be
attained and cannot be made arbitrarily and without any substantial basis. While dealing with the validity of a classification, the rational nexus of the
differentia on which the classification is based has to exist with the purpose or object of the legislation so determined.
Mr. K. Ramasamy, learned counsel appearing for the respondent submitted that the object of section 269SS was to curb the circulation of
black money and put an effective check upon it. In such a case, if the object was to bring in a transaction of loan in regular accounts by making it
obligation to evidence the transaction of loan of Rs. 10,000 or more only by means of an account payee cheque or by an account payee draft,
such an obligation should be imposed not only on the borrower but also must be imposed on the lender. The transaction of loan is a single
transaction. It is the giving of money by the lender and as well the taking of money by borrower. These two ingredients are to be necessarily
present in a transaction of loan. While so, only the taker of a loan, viz., the borrower, is put under obligation by not taking the loan except by way
of an account payee cheque or an account payee draft, if the loan was for Rs. 10,000 or more. No such obligation was cast on the lender who is
an integral part of a loan transaction. This differentia looks all the more hostile, harsh and discriminatory when we take into account the normal
circumstance that the borrower would be at the mercy of the lender. Ordinarily, he cannot dictate terms to the lender as to the manner in which he
should advance the loan amount to him. While so, leaving the lender out of the purview of section 269SS and placing the borrower alone within the
ambit of the same would amount to a classification which is not a rational one. It is not based on any intelligible differentia which distinguishes those
that are grouped together from others, viz., the lenders. Furthermore, the differentia does not have a rational relation to the object sought to be
achieved by this provision. The principle that ""like should be treated alike"" has been very clearly and grossly violated. The fundamental principle
that those who are similarly situated should be similarly treated has not been followed. It has transgressed the fundamental principle underlying the
doctrine of equality. When the lender and borrower stand on the same footing in a transaction of loan, to some extent the borrower on a worse
footing, the borrower alone was placed under an obligation, leaving the lender out of the scope of the section and furthermore non-compliance of
section 269SS is made punishable under 276DD of the Income Tax Act, which provides a very stringent punishment, viz., imprisonment for a
period up to two years and fine equivalent to the amount of the borrowing. While so, it clearly infringes article 14 of the Constitution and hence is
ultra vires.
Mr. K. Ramasamy submitted that no distinction was made amongst the borrowers and that lenders are a class by themselves. I am unable to
accept this argument for the simple reason that what is intended to be dealt with is a transaction of loan and a transaction of loan cannot exist
without a lender and both lender and borrower are integral parts of a single transaction of loan. Considering the object of the section, as has been
stated by Mr. K. Ramasamy, this contention would not hold good.
In W.P. No. 3919 of 1985 K.R.M.V. Ponnuswamy Nadar Sons (Firm) and Others Vs. Union of India and Others, ) and batch of writ
petitions, a Division Bench of this court had occasion to consider the question as to whether section 269SS is unconstitutional. The only ground
taken by the petitioners for attacking section 269SS as unconstitutional was that section 269SS imposes an obligation on the part of a person who,
should he accept a loan or deposit over and above Rs. 10,000 otherwise than by an account payee cheque or account payee bank draft, will be
punishable u/s 276DD and this does not even provide a reasonable cause and straightaway a punishment is sought to be imposed and, therefore,
the said section is draconian in its nature. This argument was repelled by the advocate appearing for the Income Tax Department who stated that
section 276AA provides for reasonable cause and even otherwise the power to prosecute has been conferred upon the highest functionary of the
Income Tax Department u/s 279 and there are sufficient safeguards and one cannot say that section 269SS is draconian in nature or arbitrary in
character. Section 278AA provides that, notwithstanding anything contained in section 276DD, no person shall be punished for any failure referred
to in the said provision if he proves that there was reasonable cause for such failure. Section 279 provides that a person can be proceeded against
for an offence u/s 276DD only at the instance of the Chief Commissioner or Commissioner. So, it was held that there was provision of reasonable
cause and that there was safeguard against unjustifiable prosecution and so the contention put forth for the petitioner does not hold good. The point
now taken before me, viz., that section 269SS is violative of article 14, was not taken in those batch of writ petitions nor was that aspect touched
upon. The petitioner herein was not party in those writ proceedings. So the ruling rendered in that batch of writ petitions will not be a bar for
consideration of the present contention put forth before me.
Mr. K. Ramasamy made a faint plea that the lender also is covered by the penal provision, viz., section 276DD. I have no hesitation to reject
this contention because, on a plain reading of that section, it would be obvious that only a borrower, viz., a taker of a loan is made liable. The giver
of the loan, viz., the lender is not brought within section 276DD.
Mr. K. Ramasamy relied upon [1990] 184 ITR 141. In it, the constitutional validity of clause (10C) of section 10 of the Income Tax Act,
1961, was considered. The employees of a private sector undertaking challenged the constitutional validity of the said clause (10C) which provides
that any payment received by an employee of a public sector company at the time of his voluntary retirement in accordance with any scheme which
the Government may, having regard to the economic viability of such company and other relevant circumstances, provide in this behalf, shall not be
included in his total income for the purposes of Income Tax on the ground of discrimination, arbitrariness and lack of nexus with the object since an
employee of a private sector company who was similarly placed and who gets a benefit under similar circumstances was denied that benefit. The
apex court has observed that they see no reason why insertion of clause (10C) in section 10 cannot also be described as an incentive for growth
and modernisation being a measure for improvement of the public sector and obviously, the incentive given thereby is to the employees of the
public sector companies to resort more readily to the voluntary retirement scheme which would enable improvement of the public sector by
streamlining its staff. The learned judges had further observed that keeping in view the true object of the impugned enactment, there is no doubt
that employees of the private sector who are left out of the ambit of the impugned provision do not fall in the same class as employees of the public
sector and the benefit or the fallout of the provision being available only to public sector employees cannot render the classification invalid or
arbitrary. Thus, on the facts of the case, it was found that the classification is quite valid, in view of the avowed object of that enactment. The case
before me stands on an entirely different footing. The transaction concerned is a loan of which the two limbs are the lender and borrower and one
is left out for no obvious reason. So this ruling would not be relevant to the facts of the case before me.
Mr. K. Ramasamy further relied upon T. S. Nataraj v. Union of India (S. L. P. Civil Nos. 9828 and 9838 of 1985) in which the SLP against
the judgment of the Karnataka High Court which was reported in T.S. Natraj Vs. Union of India and Others, , referred to supra, was dismissed by
the apex court, holding that there was no discrimination against the petitioners. He further relied upon the judgment of the apex court had dismissed
several appeals by various assessees against judgment of High Courts holding that section 40A(3) of the Income Tax Act, 1961, and rule 6DD of
the Income Tax Rules, 1962, had to be read together, and so read, the provisions (which provide that any payment made by an assessee in excess
of Rs. 2,500, which was not by a crossed cheque or demand draft would not be allowed as deduction in computing his income) were not ultra
vires and did not curtail the freedom of trade or business of the assessee. This ruling does not have any relevancy to the facts of the case before
me.
The fourth plea put forth by Mr. N. C. Raghavachari, viz., that the punishment provided in section 276DD is draconian in nature is to be
negatived in view of the finding in the batch of writ petitions, viz., W. P. No. 3919 of 1985 and others (see K.R.M.V. Ponnuswamy Nadar Sons
(Firm) and Others Vs. Union of India and Others, , which I have referred to supra, where this question was raised and negatived.
In view of my acceptance of point No. 3 put forth by Mr. N. C. Raghavachari, the prosecution against the petitioner is quashed and this
petition is allowed accordingly.
Mr. K. Ramasamy, learned counsel appearing for the respondent, makes an oral application under article 134A of the Constitution for a
certificate under article 132(1) stating that the case involves a substantial question of law as to the interpretation of the Constitution. For hearing in
this regard, post on April 22, 1992. 28. Mr. K. Ramasamy, learned counsel appearing for the respondent, makes an oral application under article
134A of the Constitution for a certificate under article 132(1) stating that the case involves a substantial question of law as to the interpretation of
the Constitution. For hearing in this regard, post on April 22, 1992. 29. Mr. K. Ramasamy states that this is the first time it is held that section
269SS of the Income Tax Act, 1961, is violative of article 14 of the Constitution and hence ultra vires and that this involves a substantial question
of law as to the interpretation of the Constitution. I accept his submission and grant the request made by him in his oral application and hereby
grant the certificate under article 134A of the Constitution.