Kumari A.B Shanthi (Alias) Vennira Adai Nirmala v. Assistant Director Of Inspection, Investigation.

The Judgment of the Court was delivered by

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 under section 482, Criminal Procedure Code, 1973, praying to call for the records in the aforesaid case and quash the same.

2. The respondent has filed the complaint against the petitioner, arraying her as accused under section 276DD of the 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 as 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 under section 276DD and hence the complaint.

3. 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 fall within the ambit of section 269SS of the 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(iv) The punishment provided in section 276DD of the Income-tax Act, 1961, is draconian in nature and hence it has been repealed subsequently.

4. 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 submissions made by rival counsel.

5. 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 it contained wrong particulars. Establishment of these facts will arise only at the time of the trial. Thatstage hah 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 under section 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 placed 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 of section 269SS of the Income-tax Act, 1961, was to curb black money and there is a 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 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 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.”

6. 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.”

7. By a reading of the above, it is clear that failure to follow the procedure as stipulated in section 269SS would entail punishment under section 276DD. It is further clear that only the borrower is put under an obligation to take a loan by an account payee cheque or account payee bank draft, if it is for Rs. 10,000 or more under section 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 Courts touching on this point.

8. Before going into the merits Of the rival contentions, at the outset I shall refer to the ruling relied upon by Mr. N.C Raghavachari to show that, in a proceeding under section 182, Criminal Procedure Code, this aspect of the case can be considered. In Rayala Corpn. (P.) Ltd. v. Director of Enforcement, (1969) 2 SCC 412 : AIR 1970 SC 494, in a proceeding under section 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 vires 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 under section 561A of the (old Code) Criminal Procedure Code and considered. Mr. K. Ramasamy, learned counsel appearing for the respondent, did not dispute the proposition that, in a proceeding under section 482, Criminal Procedure Code, this aspect can be considered.

9. In ITO v. N. Takin Roy Rymbai, [1976] 103 ITR 82, 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 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 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, incomes 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 not 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. 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.”

10. In T.S Nataraj v. Union of India, [1985] 155 ITR 81, 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 or 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 was held that income-tax practitioners who belong to a separate class cannot compare themselves with the class of chartered accountants who have special qualifications and expertise to do the job of 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):

“1. 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 to 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.

2. 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.”

11. In K.S Muthukali Chettiar v. IAC of I.T, [1986] 159 ITR 477, the Karnataka High Court had considered the concept of article 14 of the Constitution. The learned judge has stated as follows (at page 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 of 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 treated alike’. This principle proceeds on the premises that men are unequal in many respects, but those who are similarly, situated 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 Charanjit Lal v. Union of India, AIR 1951 SC 41, to the ‘Special Bearer Bonds’ case Garg v. Union of Indira, [1982] 133 ITR 239 (SC).”

12. In Anandji Haridas and Co. P. Ltd. v. S.P Kushare, STO, [1967] 66 ITR (Sh. N.) 13 (SC), AIR 1968 SC 565, [1968] 21 STC 326, 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 objects 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 a 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 substantialbasis.

13. In State of Andhra Pradesh v. Nalla Raja Reddy, AIR 1967 SC 1458, 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 there are none and by making no difference 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 the statute in question. The said principles have been applied by this court to taxing statutes.”

14. In Shashikant Laxman Kale v. Union of India, [1990] 185 ITR 104, 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. 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. 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.

15. 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 a 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 of permissible classification under article 14 is that the classification must not be “arbitrary, artificial or 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 legislatibn so determined.

16. 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 obligatory 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 the borrower. These two ingredients are to be necessarily present in a transaction of loan. In the absence of one ingredient, there cannot be any transaction of loan. While so, only the taker of a loan, viz., the borrower, is put under obligation by hot 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 principles 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 section 276DD of the Income-tax Act, 1961, 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.

17. 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.

18. In W.P No. 3919 of 1985 (K.R.M.V Ponnuswamy Nadar Sons (Firm) v. Union of India, [1992] 196 ITR 431) 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 under section 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 under section 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 under section 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 a 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 a 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.

19. 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.

20. Mr. K. Ramasamy relied upon [1990] 184 ITR (St.) 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 that 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.

21. 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 special leave petition against the judgment of the Karnataka High Court which was reported in [1985] 155 ITR 81, 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 which is referred to at [1991] 190 ITR (St.) 322. The apex court had dismissed several appeals by various assessees against judgments 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 a 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.

22. 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 [1992] 196 ITR 431 (Mad), which I have referred to supra, where this question was raised and negatived.

23. 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.

24. 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.