A Public Interest Litigation (PIL) has been filed under Article 32 to challenge the constitutionality of the Tax Deducted at Source (TDS) system. The petitioner argues that TDS imposes unreasonable administrative and financial burdens on deductors, who must navigate complex procedures without adequate compensation or training. This effectively shifts sovereign responsibilities onto private entities, violating Articles 14, 19, and 21 of the Constitution. Ill-equipped assessees face significant costs, penalties, and prosecution for unintentional errors, exacerbating inequality and causing undue hardship, especially for small taxpayers and economically weaker groups. Additionally, the lack of compensation for performing these sovereign functions amounts to forced labor, contravening Article 23.
The PIL highlights the disproportionate treatment between government officials and TDS assessees, noting that officials are not penalized for similar lapses. It also criticizes the inequitable treatment of small earners, who often lose refunds due to compliance costs. The petitioner calls for reforms, including automated tax systems and alternatives like the Annual Information Return, to reduce the burden on private citizens. The plea emphasizes the need for a fairer system that adheres to constitutional principles and ensures equitable treatment for all stakeholders.
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IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
WRIT PETITION (CIVIL) NO…………….OF 2024
(UNDER ARTICLE 32 OF THE CONSTITUTION OF INDIA)
IN THE MATTER OF:
Ashwini Kumar Upadhyay Vs. Union Of India & Others
SYNOPSIS AND LIST OF DATES
Petitioner is filing this writ petition as a PIL under Article 32 to declare that the Tax Deducted at Source (TDS) system is manifestly arbitrary, irrational and against Articles 14, 19 and 21 of the Constitution hence void and inoperative.
The Tax Deducted at Source (TDS) system, governed by 39 Sections, 28 Rules and 41 Forms under the Income Tax Act, mandates assessees (the deductors) to collect tax at the time of making payments to payees. These payments include salaries, contractual fees, rents, commissions, and other taxable sums. While TDS ensures steady revenue inflow for the government, it imposes substantial administrative and financial obligations on the assessees.
These obligations include determining applicable TDS rates across various provisions, deducting taxes before payments or credits, depositing taxes with the government treasury within specified timeframes, issuing TDS certificates to deductees, filing returns and ensuring compliance with frequent legal amendments and defending against assessments, penalties, and prosecutions in cases of inadvertent non-compliance.
The regulatory and procedural framework surrounding TDS is excessively technical, often requiring specialized legal and financial expertise, which most assessees lack. The result is an unjust shifting of sovereign responsibilities from the Government to private citizens without adequate compensation, resources, or legal safeguards.
TDS system disproportionately burdens assessees with significant administrative expenses ie salaries for employees managing TDS compliance professional fees for chartered accountants & tax consultants. The office space, utilities & operational costs related to compliance can amount to 10%20% of the total tax collected by the deductor, for which no compensation is paid. Additionally, non-compliance, even if unintentional, invites heavy penalties, interest, and prosecution under Sec. 201 and 276B of the Income Tax Act.
Illiterate or economically weaker assessees, who lack the capacity to navigate technical framework, suffer undue hardship and harassment, undermining the constitutional guarantee of equality before the law under Article 14. This amounts to an indirect tax burden imposed on TDS assessees, which lacks explicit legislative sanction, making it unconstitutional and against public interest.
The imposition of tax collection duties on TDS assessees constitutes forced labour under Article 23(1), which prohibits any form of coerced labour. In Peoples Union for Democratic Rights v. Union of India (1982), the Supreme Court held that forced labour encompasses not just physical coercion but also economic or legal coercion.
Assessees are coerced through penalties and prosecution where they face punitive consequences for lapses in performing TDS duties, which are sovereign functions. The Government does not lack the resources to. directly collect taxes through its tax department still, it transfers the responsibility to TDS assessees without remuneration.
The relationship between the. Government (as the principal) and TDS assessees (as agents) mirrors the traditional principal-agent legal framework under common law. The principal bears the risk of errors, omissions, or lapses committed by the agent while acting within the scope of their duties.
In the TDS system, however, assessees are unfairly held liable for interest, penalties, and prosecution even when the deductee has fully paid the tax liability through other means (advance tax, self-assessment, or regular assessment).
Errors in TDS compliance arise due to legal complexity hence, the imposition of such liabilities, including imprisonment, is arbitrary & irrational, especially considering that Assessing Officers (AOs) and other government employees tasked with tax collection are not subjected to equivalent penalties for errors in their duties. The Government is the ultimate beneficiary of TDS compliance and should assume responsibility for lapses or inaccuracies. This disparity violates the principles of natural justice and proportionality.
TDS regime adversely impacts small earners and those below the taxable threshold, as tax is often deducted at source despite their incomes being non-taxable. This creates a system where small taxpayers are forced to file refund claims for excess TDS. It is economically unviable for many due to the cost of professional assistance and repeated visits to tax offices, which can lead to harassment and loss of time.
Many taxpayers, especially in rural and economically weaker sections, forgo their rightful refunds, resulting in unwarranted enrichment of the Government. This practice violates the constitutional principles of fairness, equity, and public interest, as it disproportionately exploits the most vulnerable segments of society.
The Government can achieve efficient tax collection without imposing undue hardship on citizens. Viable alternatives include strengthening the Annual Information Return (AIR) system and requiring detailed reports of taxable payments exceeding specified thresholds which would allow the tax department to identify tax defaulters.
Shifting to a monthly advance tax system, instead of the quarterly schedule, would ensure regular revenue flow while reducing the compliance burden on TDS assessees. Enhancing automated systems and direct tax recovery mechanisms, leveraging technology and data analytics can improve compliance with regulations.
Breach of Principal-Agent Doctrine: Under the common law doctrine, a Principal (Government) is primarily responsible for the actions of its Agent (TDS assessee) performed within the • scope of agency. The imposition of penalties, interest, or prosecution on TDS assessees for lapses committed while performing a sovereign function on behalf of the Government contravenes this principle. The Supreme Court, in State of Rajasthan v. Basant Nahata (2005 AIR 3401), observed that statutory powers delegated to private entities must not result in inequitable treatment or disproportionate liabilities.
Proportionality of Punishment: Imposing penalties and prosecution on TDS assessees even when the taxpayer has fulfilled their tax liability violates the doctrine of proportionality. The Court in Om Kumar v. UaI (2001 2 5CC 386) held that penalties or restrictions imposed by law must not be disproportionate to the nature of the Offense.
Penalties, interest and compliance costs imposed on TDS assessees unduly affects small businesses and individual assessees, undermining right to livelihood- Article 21. TDS assessees are penalized even in situations where the ultimate taxpayer has discharged their full tax liability through other means. This results in a form of double jeopardy, where the tax dues are collected by the Government but penalties are still imposed on the collecting agent. Prosecution of TDS assessees under Section 276B for unintentional lapses not only creates environment of fear and discourages voluntary compliance but also violates Articles 14, 19, 21. Hence, this PIL.
1. Petitioner is filing this writ petition as a PIL under Article 32 to declare that the Tax Deducted at Source (TDS) system is manifestly arbitrary, irrational and against Articles 14, 19, 21 of the Constitution, hence void and inoperative.
2. The Tax Deducted at Source (TDS) system, governed by 39 Sections, 28 Rules and 41 Forms under the Income Tax Act, mandates assessees (the deductors) to collect tax at the time of making payments to payees. These payments include salaries, contractual fees, rents, commissions, and other taxable sums. While TDS ensures steady revenue inflow for the government, it imposes substantial administrative and financial obligations on the assessees.
3. These obligations include determining applicable TDS rates across various provisions, deducting taxes before payments or credits, depositing taxes with the government treasury within specified timeframes, issuing TDS certificates to deductees, filing returns and ensuring compliance with frequent legal amendments and defending against assessments, penalties, and prosecutions in cases of inadvertent non-compliance.
4. The regulatory and procedural framework surrounding TDS is excessively technical, often requiring specialized legal and financial expertise, which most assessees lack. The result is an unjust shifting of sovereign responsibilities from the Government to private citizens without adequate compensation, resources, or legal safeguards. Minor errors in the form of correct name, account details, pan number and sometimes even spacing results into TDS being deposited at the end of assessor but not reflected in the account of assessee, thereby the legally receivable amount to the assessee is kept in loop and withheld from him, till the errors are discovered and rectified.
5. TDS system disproportionately burdens assessees with significant administrative expenses such as salaries for employees managing TDS compliance and professional fees for chartered accountants or tax consultants. The office space, utilities & operational costs related to compliance can amount to 10%-20% of the total tax collected by the deductor, for which no compensation is paid. Additionally, non-compliance, even if unintentional, invites heavy penalties, interest, and prosecution under Sections 201 and 276B of the Income Tax Act.
6. Illiterate or economically weaker assessees, who lack the capacity to navigate technical framework, suffer undue hardship and harassment, undermining the constitutional guarantee of equality before the law under Article 14. This amounts to an indirect tax burden imposed on TDS assessees, which lacks explicit legislative sanction, making it unconstitutional and against public interest.
7. The imposition of tax collection duties on TDS assessees constitutes forced labour under Article 23(1) of the Constitution, which prohibits any form of coerced labour. In Peoples Union for Democratic Rights v. Union of India (1982), the Supreme Court held that forced labour encompasses not just physical coercion but also economic or legal coercion.
8. Assessees are coerced through penalties and prosecution where they face punitive consequences for lapses in performing TDS duties, which are sovereign functions. The Government does not lack the resources to directly collect taxes through its tax department still, it transfers the responsibility to TDS assessees without remuneration.
9. The relationship between the Government (as the principal) and TDS assessees (as agents) mirrors the traditional principal-agent legal framework under common law. The principal bears the risk of errors, omissions, or lapses committed by the agent while acting within the scope of their duties.
10. In the TDS system, however, assessees are unfairly held liable for interest, penalties, and prosecution even when the deductee has fully paid the tax liability through other means (advance tax, self-assessment, or regular assessment).
11. Errors in compliance are inadvertent or arise due to the complexity of legal provisions. The imposition of such liabilities, including imprisonment, is disproportionate and unreasonable, especially considering that Assessing Officers (A0s) and other government employees tasked with tax collection are not subjected to equivalent penalties for errors in their duties. The Government is the ultimate beneficiary of TDS compliance and should assume responsibility for lapses or inaccuracies. This disparity violates the principles of natural justice and proportionality.
12. The TDS regime adversely impacts small earners and those below the taxable threshold, as tax is often deducted at source despite their incomes being non-taxable. This creates a system where small taxpayers are forced to file refund claims for excess TDS. It is economically unviable for many due to the cost of professional assistance and repeated visits to tax offices, which can lead to harassment and loss of time.
13. Many taxpayers, especially in rural and economically weaker sections, forgo their rightful refunds, resulting in unwarranted enrichment of the Government. This practice violates the constitutional principles of fairness, equity, and public interest, as it disproportionately exploits the most vulnerable segments of society.
14. The Government can achieve efficient tax collection without imposing undue hardship on citizens. Viable alternatives include strengthening the Annual Information Return (AIR) system and requiring detailed reports of taxable payments exceeding specified thresholds which would allow the tax department to identify tax defaulters.
15. Shifting to a monthly advance tax system, instead of the quarterly schedule, would ensure regular revenue flow while reducing the compliance burden on –MS assessees. Enhancing automated systems and direct tax recovery mechanisms, leveraging technology and data analytics can improve compliance with regulations.
16. PIL is for the benefit of TDS assessees who have become a cog in the financial machinery of the country. No heed is paid to the illogical work system where private entities are bound to stricter regulations than the government officials. The transfer of sovereign duty on private entities without compensating them for the same is arbitrary and against the fundamental principles of the constitution.
17. The TDS system violates Article 14 by imposing onerous compliance obligations exclusively on private individuals and entities, while exempting government officials performing similar functions. It discriminates against ill-equipped untrained assessees, particularly in rural and small-scale sectors, who lack the resources to comply with the regime. It fails to provide equal protection of laws, as TDS assessees are disproportionately penalized compared to other agents of the Government, such as Assessing Officers. This discriminatory treatment undermines the constitutional principle of equality guaranteed under Article 14.
18. Present petition is for the benefit of TDS assessees who have become a cog in the financial machinery of the country. No heed is paid to the illogical work system where private entities are bound to stricter regulations than the government officials. The transfer of sovereign duty on private. entities without compensating them for the same is arbitrary and against the fundamental principles of the constitution.
19. The concept of withholding tax was first introduced during British rule under the Income Tax Act 1922. This act, modeled after British tax laws, provided for tax to be deducted at the source from specific payments like salaries. The system was imposed as a method of ensuring tax compliance in an economy where direct tax collection was a challenge. It aimed to capture taxes at the point of payment to secure consistent revenue during a time of economic instability.
20. Post-independence, the Government of India replaced the 1922 Act with the Income Tax Act of 1961, which remains the backbone of the current taxation system. TDS (Tax Deducted at Source) was formally institutionalized under Chapter XVII-B of the 1961 Act. TDS was applied to salaries, interest on securities, and dividends. The goal was to widen the tax base by deducting tax at the point of generation of income, thereby ensuring higher compliance. TDS became a vital tool for the government to monitor and regulate income, reducing reliance on voluntary tax filings by individuals and businesses.
21.The 1980s and 1990s saw a significant expansion in the scope of TDS. It was extended to cover payments • such as Professional fees, Rent, Commissions and Payments to contractors. The economic reforms of the early 1990s, driven by the liberalization policies, necessitated more robust tax collection mechanisms. TDS deductions were linked to income thresholds to reduce the burden on smaller taxpayers, reflecting a more equitable approach.
22. The early 2000s witnessed the digitization of TDS processes with the introduction of the Online Tax Accounting System (OLTAS). Taxpayers and deductors could now access TDS records online, significantly improving transparency and reducing errors. New categories of income and transactions were brought under the TDS umbrella, such as: Lottery winnings, Insurance commissions, non-salary payments to non-residents.
23.The government mandated the use of the Permanent Account Number (PAN)for TDS transactions, helping to streamline the identification of taxpayers and reduce fraudulent claims. The launch of the TRACES (TDS Reconciliation Analysis and Correction Enabling System) portal allowed deductors and taxpayers to file TDS returns electronically, Download TDS certificates (Form 16/16A), Reconcile discrepancies in TDS deductions and deposits. For Tax collecting, Government has 2 Agencies, viz. Government appointed Assessment Officers (AO) and TDS Officers (TDSO) — both hereinafter referred to as A0,. and the Private Citizens. Persons who are liable to deduct and collect Tax at the source while making or crediting certain payments of the expenses specified in the Tax Laws are called TDS Assessees. Both help the Government to assess and collect tax from the Assessees.
24.AOs are paid remuneration/salary and other perquisites. TDS Assessees are not paid anything i.e. they work Gratuitously & Free of Cost. Though AOs are highly qualified (most of them are IAS / IRS officers), they are still provided intensive training on various provisions of the Act. On the other hand, TDS Assessees are mostly unqualified and are not provided any training. If AOs commit any error/lapse/mistake in collecting tax by way of under assessment or allowing disallowable expenses or not taxing taxable income, they are not liable to any punishment whatsoever. But TDS Assessees are not only made liable to pay interest and penalty but are also subject to disallowances for payments made without deducting Tax.
25. A0s are empowered to rectify the errors and slips committed by them, whereas TDS Assessees do not have any such powers. AOs have power to recover the under-assessed tax dues through rectification, but TDS Assessees do not have such authority. All these show that there is substantial and unjust discrimination between 2 agencies, directly infringing / violating the provisions of Article 14 of the Constitution.
26. Article 23 of the Constitution of India prohibits any kind of Forced Labour on the Citizens of India. This provision is rooted in the understanding that compelling individuals to work without fair compensation is a violation of their fundamental rights and an affront to human dign3ity. Non-payment of any compensation to TDS Assessees for performing the Sovereign Function of the Central / State Governments is nothing but a form of Bonded Labour. Bonded labor placed individuals under the absolute control of their owners, who exploited them without due pay, often giving only the bare minimum in food or shelter. Despite legal advancements, a modern and alarming parallel can be drawn with the treatment of TDS assessees under the existing tax system.
27.TDS assessees are private entities responsible for performing the sovereign function of tax deduction and submission on behalf of the Central or State Government. However, they do so without any compensation, operating under what feels like forced compliance. While no remuneration is offered, these assessees are mandated to bear the responsibility and severe consequences imposed for any lapses arising in tax deduction at source. This includes the threat of penalties, interest, and even prosecution—a mechanism that effectively compels them to perform a critical state function without pay, and under a looming fear of punishment. The similarities are extremely evident and immediate action needs to be taken.
28. The role of Assessing Officers (AOs) in the tax ecosystem is critical, as they are entrusted with the responsibility of ensuring compliance with tax laws and safeguarding the interests of the exchequer. However, concerns have been raised about how some AOs exercise their authority, particularly in the context of their interactions with TDS assessees. Instead of fostering a cooperative environment, certain AOs are perceived as wielding their powers oppressively, creating undue fear and stress among TDS assessees.
29. AOs possess significant powers during the assessment and survey processes, including the authority, to scrutinize records, impose penalties, and levy interest on defaults or technical lapses. While these powers are meant to enforce compliance, their misuse can lead to what many perceive as “tax terrorism.” When AOs focus excessively on punitive measures rather than providing guidance, they risk alienating assessees and undermining trust in the system. Instead of serving as facilitators of compliance, such actions can paint AOs as authoritarian figures who exploit their positions to extract revenue, often by leveraging minor procedural errors. On the other hand, TDS assessees perform a vital function in monitoring and collecting tax revenue at the source, ensuring timely inflow to government coffers. This role requires meticulous compliance with numerous rules and regulations, which can often be complex and technical.
30. What TDS assessees truly need is fair and just treatment, including clear guidance, streamlined compliance processes, and the opportunity to rectify genuine mistakes without fear of excessive penalties or harassment. The tax department must ensure that AOs balance their enforcement powers with empathy and a commitment to justice. A collaborative approach, where AOs work alongside TDS assessees to promote compliance and address lapses constructively, would not only improve revenue collection but also restore trust and dignity in the tax administration system.
31. The Act mandates deduction and collection of taxes at source through a comprehensive framework spanning 39 sections, 28 rules, and 41 forms. While TDS serves as an effective mechanism to ensure advance tax collection, the procedural complexity & administrative responsibilities associated with compliance have created an unjust system where private entities, termed TDS assessees, are compelled to bear significant financial and operational burdens. This results in an unauthorized and unconstitutional imposition of costs, effectively amounting to an indirect levy on private entities, which violates principles of equity, justice, and fairness.
32. The framework imposes disproportionate costs on TDS assessees for performing a sovereign function, namely, tax collection on behalf of the Government, without providing any reimbursement, tax credit, or recognition of such expenses. PIL seeks redressal of these issues through the intervention of the Hon’ble Court. The duties of TDS assessees extend far beyond the mere act of tax deduction or collection. Their compliance obligations include Determination of Applicability and Tax Rate, Deduction, Collection and Deposit of the tax collected, Issuance of Certificates Filing of TDS Returns and Attending Assessment Proceedings.
33. To fulfill these obligations, TDS assessees incur significant expenses, including salaries for staff dedicated to TDS compliance as well as professional fees paid to chartered accountants, tax consultants, and counsels for advice and return filing. There is also the cost of rent for office space occupied by the compliance team and operational costs such as electricity, telephone, internet, and conveyance for attending tax offices. These costs often range from 10% to 20% of the total TDS collected, creating a significant financial strain on TDS assessees who are forced to absorb these expenses without any compensation.
34. Article 14 guarantees the right to equality and prohibits arbitrary or discriminatory treatment. The imposition of financial and operational burdens on TD5 assessees, while absolving the Government of its responsibility to bear the cost of its sovereign function, violates the principle of equity.
35. In State of Gujarat v. Shantilal Mangaldas (1969 AIR 634), the Court held that private individuals cannot be arbitrarily burdened with responsibilities without due safeguards. Requiring TDS assessees to incur compliance costs, ranging from administrative expenses to professional fees, amounts to an arbitrary imposition that fails the test of equality.
36. Article 265 mandates that no tax shall be levied or collected except by the authority of law. While TDS provisions are statutorily authorized, the ancillary costs borne by assessees are neither legislatively mandated nor reimbursed. This results in an indirect levy, which is unauthorized and unconstitutional. The Honble Supreme Court in K.C. Gajapati Narayan Deo v. State of Orissa (1954 AIR 340) emphasized that financial liabilities must be clearly authorized by law and comply with procedural fairness. The imposition of compliance costs on TDS assessees fails this standard.
37. Government benefits substantially from the TDS mechanism, as it ensures advance tax collection, reduces evasion, and minimizes administrative costs. However, this benefit is derived at the expense of TDS assessees, who are compelled to bear the costs of compliance without compensation. This creates a scenario of unjust enrichment, which contravenes principles of justice and fairness in fiscal policy.
38. In taxation law, any imposition must provide a corresponding benefit or quid pro quo. The TDS assessees, despite acting as agents of the Government, receive no remuneration, tax credits, or recognition for their role. This arrangement fails the fundamental requirement of fairness and proportionality.
39. Internationally, governments recognize the burden placed on entities responsible for withholding taxes and often provide relief. United States: The Internal Revenue Service (IRS) offers credits and deductions to employers for payroll tax compliance. United Kingdom: Employers are allowed to deduct administrative costs associated with tax withholding. Australia: Australian Taxation Office simplifies compliance and provides advisory support at no cost to tax collectors.
40. TDS system, by contrast, unilaterally imposes compliance costs on assessees without providing any reimbursement or tax credit, making it an outlier among global tax regimes. This hardship is further amplified when the Government, with its expansive financial, technological, and administrative resources, is well-equipped to directly collect taxes from the actual earners of income. It is argued that the delegation of such sovereign functions to private individuals without corresponding safeguards or support violates principles of fairness and equity enshrined in the Constitution
41.Under the TDS framework, individuals and entities. making payments beyond certain thresholds are required to deduct tax at source, even if they themselves are not liable to pay income tax. For instance, a senior citizen selling a property may be required to deduct TDS under Section 194-IA while making payment to the buyer, regardless of whether the seller has taxable income. This creates an unreasonable burden on individuals who are not earning taxable income but are obligated to act as tax collectors for the Government.
42. The imposition of such a burden violates the principles of proportionality and fairness, as recognized in judicial precedents such as Maneka Gandhi v. Union of India (1978 AIR 597), where the Supreme Court held that any procedure that disproportionately affects the rights of individuals is violative of Article 21.
43. The Government is endowed with vast financial resources, technological infrastructure, and a network of tax officials, enabling itto effectively collect taxes directly from individuals who are actually earning income. The Government’s resources include: Technological Capabilities: Income Tax Department’s centralized database, PAN (Permanent Account Number) system, and data analytics enable efficient tracking of financial transactions and income sources. Annual Information Report (AIR): The AIR mechanism already mandates reporting of high-value financial transactions by banks, registrars, and financial institutions. This system can be expanded to capture details of taxable income received by individuals. Enforcement Mechanisms: The Income Tax Department possesses the authority to scrutinize returns, issue notices, and conduct surveys to identify tax evasion. Given these capabilities, the delegation of tax collection responsibilities to private individuals, especially those not earning income, appears to be an unnecessary abdication of the Government’s sovereign duty.
44. The primary objective of the TDS system is to prevent tax evasion by ensuring that taxes are deducted at the source of income. However, this objective can be achieved more efficiently and equitably through the following measures.
45.Enhanced Use of AIR: The Government can mandate the inclusion of details in the AIR of individuals or entities who receive taxable income exceeding a certain threshold during the financial year. The AIR system, currently limited to reporting high-value transactions such as property purchases and mutual fund investments, can be expanded to include payments made by businesses, employers, and other entities.
46.Direct Tax Collection from Income Earners: Based on the data collected through the AIR system, the Government can directly assess and recover taxes from individuals who have earned taxable income. This approach eliminates the need for intermediaries such as TDS assessees, reducing compliance costs and administrative burdens.
47. Integration with Income Tax Returns: The AIR system can be seamlessly integrated with annual income tax returns to cross-verify reported income and tax liabilities. This will ensure transparency and prevent evasion without burdening non-income earners with tax collection responsibilities.
48. Threshold-Based Exemption: Individuals with income below the taxable limit should be exempt from TDS compliance obligations, even if they are making payments covered under TDS provisions. This exemption would safeguard non-income earners from unnecessary procedural burdens.
49. 5impler procedure: A simpler procedure that requires no expertise and can be carried out by anyone.
50. TDS Assessees expect justice from this Hon’ble Court by directing the Central / State Governments to make its own arrangement to perform its Sovereign Function of collecting taxes through their own Tax Department directly from the Assessees who are liable to pay taxes. The Petitioner fails to understand why TDS Assessees should be compelled/ forced to perform the Sovereign Function of collecting taxes for and on behalf of the Government GRATUTIOUSLY & FREE of COST in a modern day and age where the digitisation of all’ aspects of government machinery can also include TDS collection. Instead of shifting the burden on private individual, the government should own up to their duty and perform its functions on its own.
51.The Government, through the Income Tax Department, has established robust mechanisms to ensure tax compliance, including: Independent Tax Departments: The Income Tax Department, equipped with trained officials and technological tools, is responsible for enforcing tax laws and collecting revenue. Specialized TDS Cells: Government has created dedicated TDS Cells that focus solely on monitoring and ensuring compliance with TDS provisions. These cells are staffed with professionals who have the • requisite expertise and access to advanced technological tools for detecting tax evasion. Given the availability of such specialized and well-resourced institutions, the rationale for imposing onerous obligations on private citizens, especially those lacking professional qualifications or experience, is neither justifiable nor necessary.
52. The TDS regime imposes disproportionate hardships on TD5 assessees, particularly because: Ignorance of Tax Laws: A significant proportion of TD5 assessees are either unaware of the complexities of tax laws or lack the expertise to understand their obligations under the Tax Act, 1961. Illiteracy and Lack of Resources: Many assessees, especially those from rural or semi-urban areas, are illiterate and find it difficult to navigate procedural and compliance requirements of TDS regime. Dependence on Tax Experts: The complexities of the TD5 framework compel assessees to rely on tax experts. However, these experts may misguide them through aggressive or dubious tax planning strategies, exposing assessees to significant legal risks, penalties, and interest liabilities under the Act. Imposition of such onerous obligations on individuals with limited knowledge/resources undermines the fundamental principles of fairness, proportionality, and equity in tax administration.
53. The Government’s objectives of timely and regular tax collection can be achieved more effectively and equitably by replacing the TD5 regime with a system of monthly advance tax payments. Under this alternative: Taxpayers earning taxable income beyond the exempt limit can be required to remit monthly installments of advance tax directly to the Government. This eliminates the need for intermediaries (i.e., TDS assessees) and reduces procedural complexities for individuals making payments subject to TDS. The Income Tax Department’s technological infrastructure, including the PAN and e-filing systems, is sufficiently advanced to track advance tax payments and ensure compliance.
54. The proposed system offers more advantages over the TDS regime: Reduces Hardships for TDS Assessees: By shifting the tax compliance burden to those earning taxable. income, the alternative system alleviates the hardships faced by TDS assessees, particularly those who are illiterate/lack expertise. Enhances Compliance by Taxpayers: Taxpayers with taxable income would be directly responsible for calculating and remitting taxes, ensuring greater accountability and transparency. Encourages Fairness in Tax Administration: The system respects the principles of equity and proportionality by holding actual income earners, rather than intermediaries, accountable for their tax liabilities.
55. Under common law, the relationship between a Principal and an Agent is one of fiduciary responsibility, where the Agent acts on behalf of the Principal to perform specific functions. Legally, the Principal is held accountable for the actions, omissions, and errors committed by the Agent during the course of their duties. This doctrine is well-established in Indian jurisprudence and is central to the functioning of public and private administrative systems. In the context of taxation, the Government (Principal) appoints Assessing Officers (A0s) and other tax officials (Agents) to enforce the collection of taxes, assess incomes, and ensure compliance with tax laws. These A0s, being employees and agents of the Government, act under its authority and are indemnified from personal liability for errors made during the course. of their official duties. Any consequences of their lapses, such as under-assessment of tax, allowance of inadmissible expenses, or failure to tax income appropriately, are borne by the Government itself.
56. A similar relationship is effectively established between the Government and Tax Deduction at Source (TDS) assessees, who are entrusted with the sovereign function of collecting taxes at source on behalf of the State. TDS assessees, like AOs, are required to perform critical tax-collection functions under the Income Tax Act, 1961. They deduct tax at source, remit the collected tax to the Government, issue TDS certificates, and file TDS returns. These responsibilities mirror the functions performed by AOs in their role as tax administrators. Despite being private entities, TDS assessees essentially act as collecting agents of the Government.
57. This relationship imposes certain obligations and liabilities on TDS assessees, akin to those borne by agents. However, the disparity in the treatment of errors or lapses between AOs and TDS assessees under the law raises critical legal and constitutional questions.
58. Errors by Assessing Officers: AOs, as agents of the Government, are indemnified from personal liability for any errors, lapses, or omissions committed during assessment functions. If income is under-assessed, inadmissible expenses are allowed, or taxable income escapes assessment, the consequences of these lapses—such as revenue loss—are borne entirely by the Government. The AO is not subject to penalties, interest payments, or prosecution.
59. Errors by TDS Assessees: In stark contrast, TDS assessees, despite acting as agents of the Government, are subjected to severe penalties, interest payments, and even prosecution under Sections 201 and 276B of the Act for errors or lapses in fulfilling their tax deduction and remittance obligations. These penalties and punishments are imposed even in situations where the ultimate taxpayer (the person whose income was subject to TDS) has fulfilled their tax liability through advance tax, self-assessment tax, or other means.
LEGAL AND CONSTITUTIONAL CONCERNS
60. Breach of Principal-Agent Doctrine: Under the common law doctrine, a Principal (Government) is primarily responsible for the actions of its Agent (TDS assessee) performed within the scope of agency. The imposition of penalties, interest, or prosecution on TDS assessees for lapses committed while performing a sovereign function on behalf of the Government contravenes this principle. The Supreme Court, in State of Rajasthan V. Basant Nahata (2005 AIR 3407), observed that statutory powers delegated to private entities must not result in inequitable treatment or disproportionate liabilities.
61. Proportionality of Punishment: Imposing. penalties and prosecution on TDS assessees even when the taxpayer has fulfilled their tax liability violates the doctrine of proportionality. The Supreme Court in Om Kumar v. Union of India (2001 2 SCC 386) held that penalties or restrictions imposed by law must not be disproportionate to the nature of the offense.
62. Economic Hardship and Right to Livelihood: The financial burden of penalties, interest, and compliance costs imposed on TDS assessees disproportionately affects small businesses and individual assessees, undermining right to livelihood under Article 21.
PRACTICAL CONCERNS AND ETHICAL IMPLICATIONS
63. Double Jeopardy for TDS Assessees: TDS assessees are penalized even in situations where the ultimate taxpayer has discharged their full tax liability through other means. This results in a form of double jeopardy, where the tax dues are collected by the Government but penalties are still imposed on the collecting agent.
64. Unjust Criminalization: Prosecution of TDS assessees under Section 276B for unintentional lapses creates an environment of fear and discourages voluntary compliance. Criminal liability should be reserved for deliberate and fraudulent actions, not for procedural or clerical errors.
65. Administrative Inefficiency: The imposition of penalties and prosecution on TDS assessees creates additional litigation and administrative burden for the tax department, diverting resources from more pressing enforcement priorities.
66. The Facts Constituting Cause of Action accrued on 01.03.2024 when petitioner came to know that TDS assessees are penalized even in situations where the ultimate taxpayer has discharged their full tax liability through other means. This results in a form of double jeopardy, where the tax dues are collected by the Government but penalties are still imposed on the collecting agent.
67.The injury to citizens is extremely large because Prosecution of TDS assessees under Section 276B for unintentional lapses creates an environment of fear and discourages voluntary compliance. Criminal liability should be reserved for deliberate and fraudulent actions, not for procedural or clerical errors.
68. Petitioner full name is Ashwini Kumar Upadhyay; Residence . at G-284, Govindpuram, Ghaziabad-201013; Phone No: 8800278866, Email: [email protected], PAN: AAVPU7330G, AADHAAR-659982174779. Income is around Rs. 25 LPA. Petitioner is Advocate, contributing his best to secure gender justice, gender equality, unity & integrity.
69. Petitioner has no personal interests in filing this PIL. It is totally bona-fide and to protect fundamental right. There is no personal gain, private motive, oblique reason in filing it.
70. There is no civil, criminal or revenue litigation, involving petitioner, which has or could have legal nexus with issue involved in this PIL.
71. Petitioner hasn’t filed any other same or similar writ petition in this Hon’ble Court or in any other Court.
72. Petitioner hasn’t submitted representation to respondents.
PRAYERS
Keeping in view the above stated facts, the Court may be pleased to issue appropriate writ, order or direction to:
a) direct and declare that the Tax Deducted at Source (TDS) system is manifestly arbitrary, irrational and against Articles 14, 19 & 21 of the Constitution, hence void and inoperative;
b) alternatively, direct the NITI Ayog to consider the grounds and contentions raised in this petition and suggest the necessary changes in Tax Deducted at Source (TDS) system;
c) alternatively, direct the Law Commission of India to examine the legality of the Tax Deducted at Source (TDS) system and prepare a report within three months;
d) pass such other order(s) as Court deems fit and proper.
Excellent. The PIL deserves to be allowed as it addresses undue complications, penalties and prosecution.