Constitutionality of Section 94A(1) of the Income Tax Act, 1961, upheld

Madras High Court: In the present case where questions were raised on the constitutionality of Section 94A(1) of the Income Tax Act, 1961 on the ground that the impugned provision contravenes Articles 14, 19, 51, 253 and 265 read with Entry 82 of List 1 of VII Schedule of the Constitution and is beyond the legislative competence of Parliament under Articles 246 and 248 read with Entry 10, 14, 82 and 97 of List 1 of VII Schedule of the Constitution, the Division Bench of V. Ramasubramanian and T. Mathivanan, JJ., upheld the constitutionality of Section 94A (1) of the Income Tax Act stating that in the present times when scams like Panama Leaks are being revealed, the provisions related to tax avoidance are the need of the hour.

India had entered into an ‘Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital’, with the Republic of Cyprus in 1994. The challenge against Section 94A (1) came up before the Court as the petitioners via their counsel Arvind P. Datar argued that the provision has conferred sweeping powers upon the Central Government to specify any country as a notified jurisdictional area in relation to transactions entered into by any assessee, irrespective of whether such country is one, with whom a bilateral Treaty has already been entered into or not. It was further contended that since the State has an obligation under Article 51(c) of the Constitution to foster respect for Treaty obligations. So to specify by notification, any country as a notified jurisdictional area, without reference to the existence of a Treaty with that country, violates Articles 14, 19(1)(g), 51, 245, 253 and 269 of the Constitution and suffers from the vice of excessive delegation.

Observing the constitutional scheme and the contentions of the petitioner, the Court at length discussed the Constitutional provisions enshrined in Articles 245-255 and Article 51(c) along with the 7th Schedule of the Constitution. It was observed by the Court that it is clear from the language of Section 94A (1) that the Parliament did not show any disrespect to the bilateral tax avoidance Treaty as the provision was enacted in consonance with the resolution passed by the G-20 Nations to take action against non-cooperative jurisdictions including tax havens. The Court further stated that ‘haven’ practically means ‘a place of safety’, and in the recent past where revelations of stashed money in foreign countries for the purposes of tax avoidance are getting exposed, the term ‘tax haven’ has assumed different connotations. [T. Rajkumar v. Union of India, 2016 SCC OnLine Mad 2001, decided on 12.04.2016]

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