20% TDS deduction is contrary to S.139A & discriminatory

Karnataka High Court Rulings: Section 206AA of the Income Tax Act, which provides for furnishing a permanent account number, is contrary to Section 139A and discriminatory and therefore, read down from the statute for those persons, whose income is less than the taxable limit [A. Kowsalya & Others v. Union of India & Others (W.P 12780-12782/2010)]

Facts:

Smt. A.Kowsalya, Smt Parvathamma, Smt. Sarvamangala (the petitioners), were small investors. They deposited their savings with financial institutions, viz, M/s Shriram Transport Finance Co Ltd and M/s Shriram City Union Finance Ltd (FIs) for earning interest income. They did not have any other income apart from the investment income. Further, they did not have income exceeding the taxable limit. In order to enable FIs not to deduct  tax at source, they filed Form 15G as required under Section 197 A of the Income tax Act (Act). However, FIs informed the petitioners that, in view of section 206AA of the Act Form 15G could not be accepted unless they  communicate their Permanent Account Number (PAN).

Section 206AA of the Act, has made it mandatory even for the persons who do not have assessable income to obtain PAN. In absence of such compliance, tax would be deducted at source as specified. The grievance of petitioners was that, they being individual small investors were not assessed to tax and such provision caused great hardship and inconvenience. The petitioners filed a writ petition with Karnataka High Court (HC) praying that Section 206AA of the Act should be strike down as it is arbitrary and has violated Article 14 of Indian constitution.

Observation and Judgment of Hon’ble HC:

– The very intent of Section 206AA is to make it conditional for every person who wishes to have a transaction in the bank or financial institution including small investors/depositors, invariably to have a PAN. This runs contrary to what has been contemplated under Section 139A of the Act. It is not in dispute that the, persons whose income is below the taxable limit need not have a PAN and also they need not furnish income tax declaration/returns.

– Under the Finance Act, it is made clear that a person whose income is less than the taxable limit is not taxable. Such small investors who come forward to invest their savings from earnings as security for their future, by virture of the present section 206AA of the Act, necessarily have to give their PAN.

– The poor and illiterate/uneducated persons are finding it difficult rather to approach the various government departments particularly the Income Tax Department go get their PAN.  It may not be necessary for such persons whose income is below the taxable limit to obtain PAN. The condition to invariably go for a PAN on such small depositors would cause hindrance and discourage such small investors to come forward to invest their money.

– Section 139A of the Act stands the scrutiny of Article 14 of the Constitution for reasonableness.  Section 206AA, which is contrary to section 139A, appears to be discriminatory as if it is over riding Section 139A.

– Though the intention of the Legislature is to bring the maximum persons under the net of income tax, when necessarily it provides for exemption up to taxable limit, it may not insist such persons whose income is below the taxable limit to compulsorily go for PAN. If any mischief of avoiding of tax or any other act of concealing the income is detected, that could be taken care of by penal provisions.

– In that view of the specific provision i.e. Section 139A of the Act,  Section 206AA of the Act is read down from the Statute for whose income is less than the taxable limit.

– The banking and financial institutions shall not invariably insist upon PAN from such small investors like the petitioners as well as from persons who intend to open an account in the bank or financial institution.

– However, it is made clear that Section 206AA of the Act would of course, be made applicable to persons, whose income is above the taxable limit.

Our View:

This is a welcome  judgement from Hon’ble Karnataka High Court relieving small individual investors whose income is below taxable limit from the hardship of obtaining and furnishing PAN in order to rescue their interest income from being subjected to tax deduction at source.

An individual does not need to file return of income under Section 139 of the Act if his total income is below taxable limit. Section 139A exempts the person whose total income is below taxable limit from obtaining PAN. Further, no deduction of tax is to be made, if the aforesaid person files declaration in the prescribed form (Form 15G) with the banks and financial institutions in which he/she has deposited money. The introduction of Section 206AA compelled the banks and financial institutions to insist their customers to furnish PAN. This caused unnecessary hardship to senior citizens, small business-women and poor illiterate people whose income was below taxable limit to obtain PAN and furnish the same to banks.

The High Court has rightly held that the overriding provisions of Section 206AA being in conflict with the provisions of Section 139A are arbitrary and discriminatory in light of Article 14 of the Indian constitution.

It is to be further noted that provisions of Section 206AA are also in contrast with Section 90 (2) of the Act. The legislature through Section 90 of the Act has empowered the Central Government to enter into an agreement with the Government of any country outside India for avoidance of double taxation (DTAA). Further, Section 90(2) provides that, if the provisions of such DTAA are applicable to a non-resident taxpayer, then the same would apply if they are more beneficial as compared to the provisions of the Act. In the event of non-obtaining PAN by the non-resident taxpayer, tax would be deducted at source at the penal rate as prescribed in Section 206AA, which might be higher than the DTAA rate. Thus, the provisions of Section 206AA unilaterally restrict the non-resident taxpayer from obtaining bilateral treaty benefits. This judgment may help to those non- resident investors especially, who are not required to file tax return once the tax is deducted at source at the prescribed rate as per other provisions of the Act.

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Authored By

Vispi T. Patel & Associates

Chartered Accountants

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