Fee for default in filing IT Returns challenged, Madras HC issues notice

CHENNAI, JUL 21: The Madras High Court on Friday issued notice in a petition challenging the constitutionality of Section 234F of the Income Tax (IT) Act, 1961, which prescribes a fee for delay in filing IT Returns.
The Bench of Chief Justice Indira Banerjee and PT Asha issued notice after hearing preliminary submissions made by Advocate T Mohan on behalf of the petitioner, Nirai Mathi Azhagan, a chartered accountant based in Vellore
Effective April 1, 2018, Section 234F – inserted through the Finance Act, 2017 – deals with “Fee for default in furnishing return of income.”
As per this provision, income tax assessees failing to file their IT Returns within the prescribed time would have to pay a fee for default. The amount of the late fee to be paid is as follows,
1. Upto R 1,000 for persons with a total income between R 1 lakh and R 5 lakh
2. R 5,000 for persons with an annual income higher than R 5 lakh if the ITR is filed before December 31 of the assessment year
3. R 10, 000 in any other case
Prior to the insertion of Section 234F, the erstwhile Section 271F came into play on default in filing of IT Returns
As per Section 271F, if there is a default in paying IT Returns, the Assessing Officer was conferred the discretion to impose a penalty of R 5000 on the assessee. Importantly, before such a penalty is imposed, the Assessing Officer was required to give the assessee an opportunity to be heard.
Section 271F was deleted after Section 234F came into force. Section 234F, in turn, has now been challenged as harsh, oppressive, unreasonable and arbitrary by the petitioner on the following grounds.
Penalty disguised as “Fee”
It has been pointed out that Section 234F uses the word “Fee” in prescribing what is effectively a penalty. Whereas “Fees” connote that there is an element of quid pro quo, with a person paying for the provision of a service, Section 234F does not entail the provision of any such reciprocal arrangement. It has been contended,
“I submit that since section 234F is a fee sans any service rendered, it is illogical, irrational and liable to be held unconstitutional….
In the absence of any work or service given by the Department to the taxpayer, No fees ought to be collected from the taxpayer.”
Violation of Natural Justice
The imposition of the penalty via Section 234F is in turn being carried out without giving the income tax assessee an opportunity to be heard, thereby violating the principle of audi alteram partem.
“…there is an imposition of penalty for the failure to furnish tax returns without even giving an opportunity to the defaulting assessee to explain his case and therefore is irrational on the fact of it and palpably arbitrary and violation of principles of natural justice.”
Adding to the problem, the petitioner points out that the late fee is deducted automatically.
“The provision is such that it not only does not dwell into the reasons for delay but also deducts the fee automatically before affording any opportunity in any manner to the assessee to furnish these explanations.”
Hence, it is argued that Section 234F entails a clear violation of the principles of natural justice.
Section 234F attracted even if tax liabilities are discharged
As noted in the petitioner’s affidavit,
“…it is pertinent to note that Section 234F of the Income Tax Act, 1961 is attracted even if the taxpayer has discharged his entire tax liability to the Government by way of Advance Tax, TDS, Self Assessment etc. Therefore, an assessee is punished by the virtue of Section 234F even if he has fulfilled his tax responsibilities. In view of the same, Section 234F is illogical and harsh.”
Classification of taxpayers under Section 234F is arbitrary
As noted above, the provision only makes a single differentiation when it comes to determining the amount of late fee to be paid i.e. those earning less than R 5 lakh and those whose income exceeds R 5 lakh. The petitioner has argued that such classification violates the right to equality under Article 14 of the Constitution thus,
“…a person earning R 5.01 lakhs is treated on the same pedestal with a person earning in Crores. While that being so, the statute infringes the cornerstone of equality enshrined under article 14 of the Indian Constitution which postulates not only that equals should not be treated unequally but also that unequals must not be treated equally.”
No exemption for Senior Citizens, Differently-Abled etc
The petitioner has also objected to the provision being unmindful of the difficulties faced by senior citizens and the differently-abled. Further, it does not provide any leeway for the delay in filing IT Rerturns due to genuinely acceptable reasons such as sickness, chronic ailments, maternity, marriage, death in the family etc.
It is further noted that the provision disregards giving exemption to charitable trusts. Therefore, after the amendment, a charitable trust will also lose its exemption under Section 11 of the IT Act.
Added difficulty on account of online transactions
The petitioner points out that the taxpayer is further inconvenienced due to the fact that the IT Returns can only be paid online. In this context of the challenge to Section 234F, the petitioner has argued that the provision is silent on what has to be done when technical delays in transactions are attributed to the government and not the assessee.
“…there is an inordinate delay in activating the ITRs in the e-portal from the side of the Government. Section 234F is however silent on what has to be done when the delay is attributed to the department and not due to the assessee. I submit that a citizen must not be made to suffer due to the default of the government.”
Representations made by the petitioner last May to the government authorities, requesting that Section 234F be dropped in view of these concerns did not yield any response.
Hence, the High Court was approached with a prayer that the Court declare Section 234F of the Income Tax Act, 1961, as inserted by the Finance Act 2017 as unconstitutional.