Calcutta High Court passes landmark interim order in petition challenging constitutional validity of section 194N of the Income Tax Act, 1961 which mandates the deduction of tax at source at the rate of 2% on cash withdrawals from banking company .

Petitioner submitted that Section 194N of the said Act is beyond the legislative competence of the Parliament and Entry 82 of List I of Schedule VII to the Constitution allows the Parliament to enact laws for and levy of tax on “income” and the Parliament cannot legislate a provision stipulating the deduction of tax at source from an amount which is admittedly not income and such legislation would be beyond the legislative competence of the Parliament under Entry 82 of List I of Schedule VII of the Constitution imposition, collection .

Petitioner has also relied on several unreported decisions of the Hon’ble Kerala High Court involving the same issue and one of which is order dated 13th August, 2020 passed in Kanan Devan Hills Plantations Company Pvt. Ltd Versus Union of India in WP (C ) No. 1658 of 2020 where Hon’ble Court has admitted the writ petition on this issue and has granted interim stay of deduction of tax on source under Section 194N of the Income Tax Act, 1961 .

The court ordered as under :

“Considering these facts, I am inclined to grant an interim order restraining the respondents authorities concerned from deducting tax on source on the basis of the aforesaid provisions of Section 194N till 30th September, 2021”.

Given the basic principle of TDS, the collection of TDS U/s 194N may not be I’m accordance with the power embedded in Constitution of India. All transactions of cash withdrawals may not relate to business and may be related to other payment as well.

 Let us hold on & see how the court opines on this issue.