Constitutional validity of Section 234F; Writ in Madras High Court

Writ in Madras High Court : Constitutional validity of Section 234F: Chances of survival

Presently the Madras High Court is seized of an application for Writ, challenging the constitutionality of Section 234F of the Income Tax (IT) Act, 1961, which prescribes a fee for delay in filing IT Returns. If the Madras High Court decides to go with the judgment of the Bombay High Court then the chances of the survival of the writ are very low. The Bombay High Court had an occasion to adjudicate the constitutional validity of Section 234E which provides a fees for late filing of TDS Returns. By its Order dated 06-02-15 the Hon’ble High Court dismissed the Writ on the ground that there is a clear quid pro quo and also an element of service involved in consideration of the late fees on late filing of TDS Returns. (Rashmikanth Kundalia and another v. Union of India and Others (Bombay High Court) in W.P.No.771/2014 disposed of on 06.02.2015)

Before discussing the issue of late fees u/s 234F, let us consider the reasons of the order of the Hon’ble Bombay High court which will throw light on the chances of survival of the present writ against section 234F.

Grounds raised in the application for writ against section 234E

1. Section 234E is ultra vires and violative of Article 14 of the Constitution of India and therefore deserves to be struck down by this Court.

2. Fee could be levied only for a service that was rendered. Fees is known in the commercial and legal world to be a recompense of some service or some special service performed, and it cannot be collected for any dis-service or default. The Legislature has not stated what is the nature of service being provided for filing the return belatedly.

3. Provisions of section 234E are extremely onerous inasmuch as the Assessing Officer is not vested with any power to condone the delay in filing the TDS return/statements belatedly and there is also no provision of Appeal against any arbitrary order passed by the Assessing Officer under section 234E of the Act.

Counter arguments as provided by the Hon’ble High Court:

Undoubtedly, delay in furnishing of TDS return/statements has a cascading effect.

1. TDS Statement is very crucial because based on it only the credit is given for TDS to the assessees. In the absence of it the grievance of the deductee would be multiplied in as much as instead of issuing a refund to the assessee infructuous demands could be raised.

2. Timely processing of income tax returns is not possible. Hence non-filing of the TDS return/statements by the deductor in a timely manner has multitude effects eroding the credibility of an efficient tax administration system.

3. This was not a penal provision but a fee for late submission of TDS statements which creates additional work for the department by revising the assessment orders and in case of any refund, interest has to be paid by the Department for no fault of its own.

4. Delayed refunds results into a cash flow crunch, especially for business entities.

5. The fee under section 234E is levied to address this additional work burden forced upon the Department by the deductor by not furnishing the information in time which he is statutorily bound to furnish within the prescribed time.

6. The delay leads to an additional work burden upon the Department and in order to compensate for it a fee is sought to be levied and therefore it is not punitive in nature but a fee which is a fixed charge for the extra service which the Department has to provide due to the late filing of the TDS statements.

7. The fee is for a privilege and a special service to the deductor allowing him to file the Return beyond the time

The Hon’ble High Court then explained that in a similar matter under West Bengal Value Added Tax Act, 2003 the Calcutta High Court held:

(a) In case of levying tax there is no quid pro quo between the Tax payer and the State. But element of quid pro quo is a must in case of imposing Fee. By virtue of impugned amendment, a dealer is entitled to get service indirectly from the authority upon payment of late fee. His irregular filing of return is regularised upon payment of late fee without being suffered from penal consequences which cannot be categorised as nothing but special service. Thus, there exists quid pro quo in imposing late fee.

(b) In this context it is pertinent to mention here that though a fee must be co-related to the services rendered, such relationship need not be mathematical one even casual co-relationship in all that is necessary.

The Hon’ble High Court then went on to quote from the Oder of the Hon’ble Supreme Court in (2005) 2 SCC 345. In that order the SC removed all the doubts on this issue. It held that much ice has melted in the Himalayas after the rendering of the earlier judgments as there was a sea change in the judicial thinking as to the difference between a tax and a fee since then.

“it was held that the traditional concept of quid pro quo in a fee has undergone considerable transformation. So far as the regulatory fee is concerned, the service to be rendered is not a condition precedent and the same does not lose the character of a fee provided the fee so charged is not excessive. It was not necessary that service to be rendered by the collecting authority should be confined to the contributories alone. The levy does not cease to be a fee merely because there is an element of compulsion or coerciveness present in it, nor is it a postulate of a fee that it must have a direct relation to the actual service rendered by the authority to each individual who obtains the benefit of the service. Quid pro quo in the strict sense was not always a sine qua non for a fee. All that is necessary is that there should be a reasonable relationship between the levy of fee and the services rendered. It was observed that it was not necessary to establish that those who pay the fee must receive direct or special benefit or advantage of the services rendered for which the fee was being paid. It was held that if one who is liable to pay, receives general benefit from the authority levying the fee, the element of service required for collecting the fee is satisfied.”

On the question of constitutional validity, the Hon’ble Bombay High Court quoted from the order of the Hon’ble SC.

“It is now well settled that even though this Court exercising jurisdiction under Article 226 of the Constitution of India has the power to declare a statute (or any provision thereof) as unconstitutional, it should exercise great restraint before exercising such a power. Really speaking, there is only one ground for declaring an act of the legislature as invalid, and that is if it clearly violates some provision of the Constitution of India in so evident a manner so as to leave no manner of doubt.

Before declaring a statute to be unconstitutional, the Court must be absolutely sure that there can be no manner of doubt that it violates the provisions of the constitution of India.

If two views are possible, one making the statute constitutional and the other making it unconstitutional, the former view must always be preferred. The Court must therefore make every effort to uphold the constitutional validity of a statute, even if it requires giving the statutory provision a strained meaning, or a narrower or wider meaning, than what appears on the face of it. It is only when all efforts to do so fail should the Court declare a statute to be unconstitutional.

It is equally well settled that a statute relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, freedom of religion etc. As regards economic and other regulatory legislation it is imperative that the Court exercises judicial restraint and grants greater latitude to the legislature whilst judging the constitutional validity of such a statute. This is for the simple reason that the Court does not consists of economic and administrative experts and has no expertise in these matters and in this age of specialisation when policies have to be laid down with great care after consulting the specialists in the field, it will be wholly unwise for the court to encroach into the domain of the executive or legislative (sic legislature) and try to enforce its own views and perceptions.”

Bombay High Court: “We are therefore clearly of the view that the fee sought to be levied under section 234E of the Income Tax Act, 1961 is not in the guise of a tax that is sought to be levied on the deductor. We also do not find the provisions of section 234E as being onerous on the ground that the section does not empower the Assessing Officer to condone the delay in late filing of the TDS return/statements, or that no appeal is provided for from an arbitrary order passed under section 234E. It must be noted that a right of appeal is not a matter of right but is a creature of the statute, and if the Legislature deems it fit not to provide a remedy of appeal, so be it. Even in such a scenario it is not as if the aggrieved party is left remediless. Such aggrieved person can always approach this Court in its extra ordinary equitable jurisdiction under Article 226 / 227 of the Constitution of India, as the case may be.

We therefore cannot agree with the argument of the Petitioners that simply because no remedy of appeal is provided for, the provisions of section 234E are onerous. Similarly, on the same parity of reasoning, we find the argument regarding condonation of delay also to be wholly without any merit.

Therefore even looking at it from the perspective as set out in the aforesaid judgment, we are of the clear view that Section 234E of the Income Tax Act, 1961 does not violate any provision of the Constitution and is therefore intra vires, Constitution of India. Writ Petition is hereby dismissed.”

Sec 234F is almost pari materia with section 234E and the same grounds have been raised in this petition as were raised in the petition against section 234E before the Hon’ble Bombay High Court. Thus the fate of the application for writ may be decided along the lines adopted by the Hon’ble Bombay High Court.

(1) Penalty disguised as “Fee”. No Quid Pro Quo. Constitutional Validity

“There is no element of quid pro quo, sans any service rendered, it is illogical, irrational and liable to be held unconstitutional. In the absence of any work or service given by the Department to the taxpayer, No fees ought to be collected from the taxpayer.”

Unless the Hon’ble Madras High Court decides to take different reasoning from the reasoning of the Hon’ble Bombay High Court as discussed at lengths above then this ground may not survive.

(2) Violation of Natural Justice

An opportunity to be heard is given in cases where any Penal provision is sought be applied against any person. The section is of the nature of fees and not penalty. In case of delayed filing of Returns the amount to be charged is defined as Fees, having quid pro quo involving an indirect element of service which is already known to the assessee. It is an indirect agreement of service to be provided by the Department in case of default of sec 234F.

(3) Section 234F attracted even if tax liabilities are discharged

Simply by making the payment of the Tax, No one can be said to have discharged his liability. The liability is said to be discharged only when the tax paid is adjusted against the assessed tax and tax can be assessed only when you file the returns and the same is processed by the department.

(4) Classification of taxpayers under Section 234F is arbitrary

The late fees proposed to be levied at different amounts is a Policy Decision of the Government and the Courts generally do not interfere in such policy decisions. This discrimination is already there in the Act where it has provided different rates of tax on different persons depending upon the amount of Income. The rates are 0%, 5%, 15% 20% 30% etc. Such classification does not violate the right to equality under Article 14 of the Constitution.

(5) No exemption for Senior Citizens, Differently-Abled

It is again a policy decision of the Government to provide different types of relief to different aged persons. It is a Social Welfare Measure and the same is not compulsory and binding for the Government. But definitely the section is unfair towards senior citizen and super senior citizen. In case of a senior citizen, the tax payable on an income of Rs. 5.01 Lakhs is Rs. 10500/- whereas the late fees (for filing after 31^st December) is Rs. 10000/. This is almost 100% of the tax liability. Similarly in case of a super senior citizen, the tax payable on an income of Rs. 5.01 Lakhs is Rs. 206/- whereas the late fees (for filing after 31^st December) is Rs. 10000/-.Clearly marginal relief must be provided to the super senior citizen.

(6) Exemption from income to Charitable Organisation Sec 11

It is once again a policy decision of the Government whether or not to provide any exemption to any charitable trust and it is right of the government to provide a time limit within which the Return must be filed by the Trust in order to avail the exemption.

(7) The ground of inordinate delay in activating the ITRs in the e-portal from the side of the Government may be a reason for the government to waive the levy of the Fees by suitability extending the Due date but it is certainly not a ground for declaring the law itself as unconstitutional.

(8) Deletion of section 271F: Penalty for late filing of returns:

With the introduction of section 234F, the legislature deleted section 271F which provided for levy of penalty for delayed filing of the returns. Since it was a penalty, it was not automatic and it could be levied only after following the principles of natural justice i.e after hearing the defaulter.

However there was no reason for the legislature to delete the section 271F. It could still levy penalty for delayed filing of returns because section 271F and section 234F operated under different circumstances. The late fees under section 234F, as per the views of the legislature, is in return of a service and has a clear quid pro quo whereas the penalty under section 271F was meant to be levied for violation of the provisions of the Act.

The legislature perhaps thought that it could lead to a situation of double taxation and the principles of “Double Jeopardy” i.e. punishing the assessee twice for the same offence, may be applicable and therefore section 271F was deleted.

That the legislature decided to delete the section 271F after introduction of section 234F clearly indicates the view of the legislature that section 234F is a mere replication and replacement of section 271F and that being so, it must be of the nature of penalty disguised as Late Fees.

Disclaimer: The views offered by the Author are his personal views meant for academic interest only. Before proceedings on the above views the readers are advised to take a professional opinion.

E- Filing Of Income Tax Return- Procedure