(a) Income‑tax‑‑‑--

‑‑‑‑Loans or deposits‑‑‑Provision requiring receipt by account payee cheque or bank draft‑‑‑Valid‑‑‑Within legislative competence of Parliament‑‑‑‑Not discriminatory‑‑‑Provisions for punishment for failure to do so‑‑‑Not expropriatory‑‑‑Indian Income Tax Act, 1961, Ss.269SS, 271D, 273B & 276DD.

(b) Income‑tax‑‑‑

‑‑‑‑Parliament‑‑‑Legislative powers‑‑‑Legislative entry‑‑‑"Taxes on income other than agricultural income"‑‑‑Scope of‑‑‑Of wide amplitude‑ Extends to all ancillary and subsidiary matters‑‑‑Constitution of India, Art. 246 & Sched. VII, List I, Entry 82.

(c) Income‑tax‑‑‑

‑‑‑‑Colourable legislation‑‑‑Not unless Legislature has no power but camouflages in away as to appear within its competence ‑‑‑[Kumari A.B. Shanthi v. Assistant Director of Inspection (1992) 197 ITR 330 reversed].

Section 269SS of the Income Tax Act, 1961, prescribing the mode of taking or accepting certain loans or deposits, is not discriminatory and is not violative of Article 14 of the Constitution of India; nor was it enacted by Parliament without legislative competence. It cannot be said that section 269SS deals with a subject outside the scope of the Income‑tax Act or that it relates to a topic not within the competence of Parliament. Nor are the provisions of section 269SS or section 271D or section 276DD unconstitutional on the ground that the provisions are draconion or expropriatory.

The object of introducing section 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he makes some false entries, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money is unearthed and the taxpayer would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so‑called lender also to manipulate his records to suit the plea of the taxpayer. The main object of section 269SS was to curb this menace of making false entries in the account books and later giving an explanation for the same.

The undue hardship of the provisions of section 271D, which replaced section 276DD providing for a penalty, is substantially mitigated by the inclusion of section 273B providing that if there was a genuine and bona fide transaction and the taxpayer could not get a loan or deposit by account‑payee cheque or demand draft for some bona fide reason, the authority vested with the power to impose penalty has a discretionary power not to levy the penalty.

It is settled law that the heads of legislation given in the Lists in the Seventh Schedule to the Constitution should not be construed in a narrow or pedantic way. If any Legislature makes an ancillary or subsidiary provision which incidentally transgresses its jurisdiction for achieving the object of such legislation, it would be a valid piece of legislation. The entries in a legislative list should be given their fullest meaning and widest amplitude and be held to extend to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in them. It is only when a Legislature which has no power to legislate, or the legislation is camouflaged in such a as to appear to be within its competence when it knows that it is not, that it can be said that the legislation so enacted is a colourable legislation and that there is no legislative competence. If any legislation which is intended to achieve the collection of Income‑tax and to make it easier and systematic is enacted, such legislation would certainly be within the competence of Parliament.

When a provision in a statute is challenged on the ground of colourable legislation, what has to be proved to the satisfaction of the Court is that though the statute ostensibly is within the legislative competence of the Legislature in question, in substance and in reality, it covers a field which is outside its legislative competence.

S.K. Dutta, ITO v. Lawrence Singh Ingty (1968) 68 ITR 272 (SC) applied.

Sukhdev Rathi v. Union of India (1995) 211 ITR 157 (Guj.) approved.

Union of India v. A. Sanyasi Rao (1996) 219 ITR 330 (SC,); Jaora Sugar Mills (P.) Ltd. v. State of M.P. (1966) AIR 1966 SC 416 and P. N. Krishna Lal v. Government of Kerala (1995) Suppl. 2 SCC 187. rel.

K.R.M.V. Ponnuswamy Nadar Sons (Firm) v. Union of India (1992) 196 ITR 431 (Mad) impliedly approved.

Chamundi Granites (P.) Ltd. v. Deputy CIT (2000) 245 ITR 661 affirmed.

Kumari A.B. Shanthi v. Assistant Director of Inspection (1992) 197 ITR 330 reversed

Chamundi Granites (P.) Ltd. v. Deputy CIT (1999) 239 ITR 694 (Karn); East India Tobacco Co. v. State of Andhra Pradesh (1962) AIR 1 1962 SC 1733; (1963) SCR 404; Kunnathat Thanthunni Moopil Nair v. State of Kerala (1961 AIR 1961 SC 552 and (1961) 3 SCR 77 ref.

Attorney‑General of India; Soli J. Sorabjee.

Senior Advocates: S. Ganesh and T.L.V. Iyer.

Other Advocates; Rajiv Nanda, B.V.B. Das, Manish Singhvi, P. Parameshwaran, Dhruv Mehta, Ms. Shobha, Ms. Anu Mehta, K.L. Mehta and R.A. Preumal.

JUDGMENT

K. G. BALAKRISHNAN, J.‑‑‑In both these appeals, the Constitutional validity of sections 269SS and 271D of the Income Tax Act, 1961 (for short, "the Act"), is challenged. In Criminal Appeal No.601 of 1992, the learned Single Judge of the Madras High Court (see (1992) 197 ITR 330), quashed the prosecution initiated against the respondent by holding that section 269SS is violative of Article 14 of the Constitution and, therefore, the prosecution initiated against the respondent was not legal. The learned Single Judge granted certificate under Article 134A of the Constitution and the present appeal has been filed by the Department

In Civil Appeal No.4478 of 2000, the appellant had challenged the Constitutional validity of sections 269SS and 271D of the Act before the High Court. The learned Single Judge (see (1999) 239 ITR 694 (Karn)) dismissed the writ petition. Thereupon, the appellant filed an appeal before the Division Bench. The Division Bench in Writ Appeal No.5447 of 1999 (see (2000) 245 ITR 661) affirmed the order of the learned Single Judge. The judgment of the Division Bench is now challenged before us in this appeal.

Section 269SS was inserted in the Income‑tax Act by the Finance 5 Act, 1984, with effect from April 1, 1984, but the same was made operative from July 1, 1984. The Income‑tax Department, in the course of searches carried out by them from time to time recovered large amounts of unaccounted cash from certain taxpayers and often the taxpayers gave explanation for their unaccounted cash to the effect that they had borrowed loans or received deposits made by other persons. Sometimes, it was noticed, that the unaccounted income was also brought into the books of account in the form of loans and deposits and later they would obtain confirmatory letters from other persons in support of their explanation. The Department was not able to unearth the source of such unaccounted cash. Therefore, in order to plug the loopholes and to put an end to the practice of giving false and spurious explanation by the taxpayers, a new provision was inserted in the Income‑tax Act debarring persons from taking or accepting from any other person any loan or deposit otherwise than by account‑payee cheque or account‑payee bank draft, if the amount of such loan or deposit or the aggregate amount of such loan or deposit is Rs.10,000 or more. The amount of Rs.10,000 was later revised as Rs.20,000 with effect from April 1, 1989.

Section 269SS of the Act, 1961 reads a‑ follows:

"269SS. Mode of taking or accepting certain loans and deposits.‑‑‑No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account‑payee cheque or 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; or

(c)the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is twenty 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 cooperative 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:

Provided further that the provisions of this section shall not. apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both Having agricultural income and neither of them has any income chargeable to tax under this Act.

Explanation.‑‑‑For the purposes of this section,‑‑‑

(i)`banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

(ii)`cooperative bank' shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);

(iii)`loan or deposit' means loan or deposit of money."

Section 276DD was inserted in the Act by the Finance Act, 1984, which came into effect from April 1, 1994. and which reads as under:

"276DD. Failure to comply with the provisions of sec tion 269SS.‑‑‑If a person 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. "

Subsequently, section 271D, which is the penal clause in the Act which provides for imposition of penalty for failure to comply with the, provisions of section 259SS was introduced with effect from April 1, 1989, omitting section 276DD with effect from the same date. In the original section 276DD, in case of imposition of punishment, the term of imprisonment was also prescribed which could extend to two years. But; subsequently, by the introduction of section 271D, the punishment of imprisonment was taken away and the failure to comply with the provisions of section 269SS could only by visited with a penalty of fine equal to the amount of loan or deposit to be taken or accepted. Section 271D as incorporated with effect from April 1, 1989, reads as follows:

"271D. Penal for failure to comply with the provisions of section 269SS.‑‑‑(1) If a person takes or accepts any loan or deposit in contrav6ntion of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit to taken or accepted.

(2)Any penalty imposable under subsection (1) shall be imposed by the Deputy Commissioner."

The main attack against section 269SS of the Act is made on the basis that it violates Article 14 of the Constitution. The contention of the appellant's counsel in the civil appeal is that taking a loan or receiving a deposit is a single transaction wherein a lender and borrower are involved and by the impugned section the borrower alone is sought to be penalized and the lender is allowed to go scot free. It is contended that if the intention of the Legislature is to unearth black money, it is really the black money of the lender that is involved in the transaction and, therefore, the policy behind the enactment to find fault with the borrower is illegal and violative of Article 14 of the Constitution vis‑a‑vis the lender. It is also contended that the classification made by Parliament is an artificial one and has no nexus with the objects sought to be achieved by the enactment.

The contention of the appellant's counsel has no force. The object of introducing section 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he has given some false entries in his accounts, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money is unearthed and the taxpayer would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so‑called lender also to manipulate his records later to suit the plea of the taxpayer. The main object of section 269SS was to curb this menace. As regards the tax legislations, it is a policy matter, and it is for Parliament to decide in which manner the legislation should be made, Of course, it should stand the test of Constitutional validity.

A Constitution. Bench of this Court in S.K. Dutta, ITO v. Lawrence Singh Ingty (1968) 68 ITR 272 held (page 275):

"It is not in dispute that taxation laws must also pass the test of Article 14. That has been laid down by this Court in Moopil Nair v. State of Kerala (1961) 3 SCR 77. But as observed by this Court in East India Tobacco Co. v. State of Andhra Pradesh (1963) 1 SCR 404, 409 in deciding whether the taxation law is discriminatory or not it is necessary to bear in mind that the State has a wide discretion in selecting persons or objects it will tax, and that a statute is not open to attack on the ground that it taxes some persons or objects and not others; it is only when within the range of its selection, the view operates unequally, and ‑that cannot be justified on the basis of any valid classification, that it would be violative of Article 14. It is well settled that a State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably."

The above dictum applies in full force as regards the present case. The object sought to be achieved was to eradicate the evil practice of making of false entries in the account books and later giving explanation for the same. To a great extent, the problem could be solved by the impugned provision.

The very same provision was earlier challenged in another writ petition before the High Court of Madras and the Division Bench of the Madras High Court had upheld the Constitutional validity of section 269SS in K.R.M.V. Ponnuswamy Nadar Sons (Firm) v. Union of India (1992) 196 ITR 431 (Mad.) decided on September 11, 1989. Despite this decision of the Division Bench, the learned single Judge (see (1992) 197 ITR 330 (Mad)) quashed the proceedings initiated against the respondent under section 269SS of the Income‑tax Act.

A Division Bench of the Gujarat High Court in Sukhdev Rathi v. Union of India (1995) 211 ITR 157, also upheld the Constitutional validity of section 269SS. Speaking for the Bench, acting Chief Justice G.T. Nanavati (as he then was) held (page 162):

"A borrower by adopting the device of giving a false explanation or making false entries or by obtaining confirmatory letters is found evading payment of tax. Thus, the borrower as a class is found to be including in such practices. By making such false entries or by giving false explanations or by creating false evidence, it is the borrower who was found to be evading payment of tax. In the case of a lender, we fail to appreciate how while lending money by not making payment by a cheque or a draft, he would evade payment of Income‑tax. Therefore, though the transaction bf loan can be regarded as a single transaction, and the borrower and the lender can be said to be equal integral parts, when we view them from the angle of tax evasion, we find that they cannot be regarded as equals or similarly situated. Compared to the class consisting of lenders, the class consisting of borrowers can be said to be in a position to evade tax by adopting the devices, for curbing which provisions have been made in Chapter XX‑B by inserting section 269SS and other sections."

In view of the aforesaid circumstances, we do not think that section 269SS is, in any way, violative of Article 14 of the Constitution and consequently quashing of the proceedings by the learned single Judge of the Madras High Court (see (1992) 197 ITR 330) for this reason is not legally sustainable.

Another contention urged by the appellant's counsel in Civil Appeal No.4478 of 2000 is that Parliament had no legislative competence to enact section 269SS. The source of power for enactment of section 269SS is traceable to entry 82 in List of the Seventh Schedule and this according to the appellant's counsel can relate only to tax on income other than agricultural income and the expression "income" in that entry has to be interpreted according to its natural and grammatical meaning and if that be so the Union has no legislative power to enact section 269SS.

Entry 82 in List 1 of the Seventh Schedule reads as follows:

"Taxes on income other than agricultural income."

The contention of the appellant's counsel is that the amount which is received as loan or deposit need not necessarily be the "income" of the taxpayer and, therefore, any legislation made by treating the loan or deposit as "income" is not a valid Constitutional legislation. It is settled law that the heads of legislation given in the list should not be constructed in a narrow or pedantic way. If any Legislature makes any ancillary or subsidiary provision which incidentally transgresses over its jurisdiction for achieving the object of such legislation, it would be a valid piece of legislation. The entries in a legislative list should be given their fullest meaning and the widest amplitude and be held to extend to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in them. It is only when a Legislature which has no power to legislate, or the legislation is camouflaged in such a way as to appear to be within its competence when it knows it is not, then alone it can be said that the legislation so enacted is a colourable legislation and that there is no legislative. The law relating to taxation can very well be enacted under entry 82 in List I of the Seventh Schedule. If any legislation which intended to achieve the collection of Income‑tax and to make its easier and systematic is enacted, such legislation would certainly be within the competence of the Legislature.

In Union of India v. A. Sanyasi Rao (1996) 219 ITR 330 (SC), sections 44AC and 206C of the Income‑tax Act were challenged. It was held by this Court (headnote):

"The heads of legislation in the lists should not be construed in a narrow and pedantic sense, but should be given a large and liberal interpretation. The word `income' occurring in entry 82 in List I of the Seventh Schedule to the Constitution should be construed liberally and in a very wide manner and the power to legislate will take in all incidental and ancillary matters including the authorization to make provision to prevent evasion of tax, in any suitable manner."

When the principle in a statute is challenged on the ground of colourable legislation, what has to be proved to the satisfaction of the Court is that though the Act ostensibly is within the legislative competence of the Legislature in question, in substance and in reality, it covers a field which is outside its legislative competence (see Jaora Sugar Mills (P.) Ltd. v. State of M.P. AIR 1966 SC 416).

Applying the above principle, it cannot be said that section 269SS was enacted in respect of a subject which is outside the scope of the Income‑tax Act or that this section relates to a topic not within the competence of the Legislature. This Court in P.N. Krishna Lal v. Government of Kerala (1995) Suppl. 2 SCC 187 held (headnote):

"An entry in the Seventh Schedule to the Constitution is not a power given to the Legislature but is a field of its legislation. The Legislature derives its power under Article 246 and other related Articles in the Constitution. The language of an entry should be given the widest meaning fairly capable to meet the need of the Government envisaged by the Constitution. Each general word should extend to all ancillary or subsidiary matters which can fairly and reasonably be comprehended within it. When the vires of an enactment is impugned, there is an initial presumption of its constitutionality. If there exists any difficulty in ascertaining the limits of the Legislative power, it must be resolved, as far as possible, in favour of the Legislature, putting the most liberal construction on the legislative entry so that it is intra vires. Narrow interpretation should be avoided and the construction to be adopted must be beneficial and cover the amplitude of the power. The broad liberal spirit should inspire those whose duty. it is to interpret the Constitution to find out whether the impugned Act is relatable to one or the other entire in the relevant list. The allocation of the subjects of the entries in the respective lists is not done by way of scientific or logical definitions but it is a mere enumeration of broad and comprehensive categories."

Therefore, we do not think that section 269SS is either violative of Article.14 of the Constitution, or it was enacted without legislative competence.

The next contention urged by counsel for the appellant is that original section 276DD is draconian in nature as penalty imposed for violation of section 269SS is imprisonment which may extend to two years and shall also be liable to fine equal to the amount of loan or deposit. This section was subsequently omitted and a new section 271D was enacted. The penalty of imprisonment was deleted in the new section. The new section 271D provides only for fine equal to the amount of loan or deposit taken or accepted.

It is important to note that another provision, namely section 273B was also incorporated which provides that notwithstanding anything contained in the provisions of section 271 D, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provision if he proves that there was reasonable cause for such failure and if the assessee proves that there was reasonable cause for failure to take a loan otherwise than by account‑payee cheque or account‑payee demand draft, then the penalty may not be levied. Therefore, undue hardship is very much mitigated by the inclusion of section 273B in the Act. If there was a genuine and bona fide transaction and if for any reason the taxpayer could not get a loan or deposit by account‑payee cheque or demand draft for some bona fide reasons, the authority vested with the power to impose penalty has got discretionary power.

In that view of the matter, we do not think that section 269SS or 271 D or the earlier section 276DD is unconstitutional on the ground that it was draconian or expropriatory in nature.

M view of the foregoing, Criminal Appeal No.601 of 1992 is allowed and the impugned judgment is set aside. Civil Appeal No.4478 of 2000 is without any merit and dismissed, however, without costs.

M.B.A./1108/FCOrder accordingly.