Law:

Section:

Section 40(a)(ia), read with section 194C, of the Income-tax Act, 1961 - Business disallowance - Interest, etc., payable to a resident - Whether section 40(a)(ia) is constitutionally valid and there is no arbitrariness, unreason-ableness or discrimination in said provision - Held, yes FACTS In all the writ petitions, common challenge was to section 40(a)( ia) to declare it as ultra vires of the Constitution. Contentions of the petitioners were three fold; first, implication of section 40(a)( ia) is arbitrary, unreasonable and in violation of article 14 of the Constitution; second, it imposes unreasonable restrictions in violation of article 19(1)(g) of the Constitution; and third, it lacks legislative competence and is in violation of articles 265 and 300A of the Constitution. Main contention of the petitioners was that under section 40(a)( ia) either due to the failure to deduct as stipulated under section 194C or after deduction if not paid as provided under the relevant rules, the draconic effect of disallowance to the whole of the expenditure is so harsh that it is liable to be held to be highly arbitrary and unreasonable and in violation of article 14. Elaborate contentions made by the petitioners were as follows : 1. That as per specific provision contained in section 194C, where it stipulates that the deduction is to be made at the point of either credit or payment, in the event of any default in compliance with the said provision, section 40(a)( ia) would immediately come into play. 2. That when under Chapter XVII-B stringent provisions have been made for imposing penalty, interest, etc., for committing any default in making the TDS, creating a disallowance of the entirety of the expenses should be held to be arbitrary or unreasonable and violative of articles 14 and 19(1)(g) of the Constitution. 3.That by sheer accounting adjustment or mechanism of non-deduction of expenses, a disguised taxation or levy is camouflaged in terms of section 40(a)( ia) which is in violation of article 265 of the Constitution. 4.That the provision seeks to tax the income of the payee in the hands of the payer and, therefore, it imposes an arbitrary and unreasonable…

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