Constitutional validity of Section 94A of the Act (Madras HC) - T. Rajkumar, K. Dhanakumar & T. K. Dhanashekar

Madras High Court Ruling – Whether Section 94A(1) of the Act is ultra vires Articles 14, 19, 51, 253 and 265 of The Constitution of India (the Constitution) – Whether Notification No. 86 dated 1.11.2013 issued by the CBDT is ultra vires Section 94A of the Act r.w. Articles 14, 19 and 265 of  the Constitution – Whether Press Release issued by Ministry of Finance titled “Concerning The Double Tax Treaty between Cyprus and India” dated 1.11.2013 is ultra vires Section 4, 5, 94A(5) and 195 of the Act r.w. Articles 14 & 265 of the Constitution


T.Rajkumar, K.Dhanakumar and T. K. Dhanashekar (the petitioners)

 [Writ Petition No. 17241 to 17243 and 17407 to 17412 of 2015]


Facts of the case

  • The petitioners, entered into tripartite Agreement (Securities Purchase Agreement) dated 16.10.2014 with the Indian Company (New Kovai Real Estate Private Limited) and a company incorporated in Cyprus (Skyngelor Limited) for the purchase of 15,200 equity shares of the face value of INR 10 each and 21,39,200 compulsorily convertible debentures of the face value of INR 100 each in Kovai Real Estate Private Limited from Skyngelor Limited.
  • Identical show cause notices dated 29.1.2015 were issued to all the petitioners inviting attention to Section 94A(1) of the Act and the Notification No. 86/2013 dated 1.11.2013 and calling upon them to show cause as to why each one of them should not be treated as assessee in default, warranting the initiation of proceedings under Section 201(1)/ 201(1A) of the Income-tax Act, 1961 (the Act).
  • Income-tax Officer rejected the main contention of the petitioners that they are not liable to deduct tax at source under Section 195, in spite of the fact that they had purchased the above securities at a rate below their face value and that the Cyprus company had suffered a loss.
  • The petitioners filed statutory appeals under Section 246A of the Act before Commissioner of Income-tax (Appeals). Simultaneously, the petitioners had filed writ petitions challenging the validity of Section 94A(1) of the Act, Notification dated 1.11.2013 and the Press Release dated 1.11.2013 as referred above, in view of the fact that so long as these provisions are in force, petitioners claim on the merits may prove to be very weak.
  • The petitioners challenged Section 94A(1) of the Act, on the ground that it had conferred sweeping powers upon the Central Government (CG), to specify any country as a notified jurisdictional area, irrespective of the fact that whether there was any bilateral treaty that had already been entered into with such country or not, and it was violative of Articles 14, 19(1)(g), 51, 245, 253 and 269 of the Constitution.
  • The petitioners relied on the decision of Hon’ble Supreme Court in Union of India Vs. Azadi Bachao Andolan [2004 (10) SCC 1] contending that Section 90(1) of the Act empowers the CG to issue notification for implementation of the terms of a Double Taxation Avoidance Agreement (DTAA) and the provisions of the such DTAA would operate, even if inconsistent with the provisions of the Act and the power conferred by Section 94A(1) is clearly unconstitutional and also suffers from the vice of excessive delegation.


Relevant Provisions and Terminology

  • Section 90(1) empowers the CG to enter into an Agreement with the Government of a foreign country whereas Section 94A(1) empowers the CG to specify any country as a notified jurisdictional area, having regards to lack of effective exchange of information with such country.
  • The CG had specified ‘Cyprus’ as ‘notified jurisdictional area’ under section 94A(1) of the Act vide Notification No. 86 dated 1.11.2013 and the Press Release was issued in this regards.
  • The main contention of the petitioners revolves around Articles 51(c), 245(1) and 253 of the Constitution. Article 51(c) obliges the state to endeavor to foster respect for International Law and Treaty obligations. Article 245(1) empowers the Parliament to make laws for the whole or any part of the territory of India, subject to the provisions of the Constitution. Article 253 is an enabling provision that empowers the Parliament to make any law for the whole or any part of the territory of the country for implementing any Treaty, Agreement or Convention with any other country.
  • The principles of international law contain two theories namely (i) monism and (ii) dualism.
    1. In the monism school of thought what is propagated, is the superiority of international law over the national law in cases of conflicts.
    2. In contrast, under the dualistic theory the rule of international law would apply within a State only as a result of their adoption by the local law of the State.
  • The Vienna Convention on the Law of Treaties contains the doctrine of 'Pacta Sunt Servanda' (i.e. assumption of good faith). It obliges the Member States to treat every Treaty in force as binding upon the parties to it and to be performed in good faith. However, it should be noted that India has not ratified the Vienna Convention, though a reference to the same, has been made in a few decisions of the Courts.


Key observations and decision of the Hon’ble Madras High Court (HC)

The Hon’ble Madras HC, took into account various decisions as stated below:

  • In Jolly George Varghese Vs. The Bank of Cochin [AIR 1980 SC 470], the Hon’ble Supreme Court held that the executive power of the Government of India to enter into international treaties does not mean that international law, ipso facto, is enforceable upon ratification.

Since, the Hon’ble Supreme Court has held that Indian Constitution follows dualistic doctrine with respect to international law, it must be taken that an international treaty, can be enforced only so long as it is not in conflict with the municipal laws of the State

  • The Hon’ble Supreme Court in the case of Vellore Citizens Welfare Forum Vs. Union of India [AIR 1996 SC 2715] held that “the rules of Customary International Law, which are not contrary to the municipal law shall be deemed to have been incorporated in the domestic law and shall be followed by the courts of law.”
  • The observation made by the Hon’ble Supreme Court in Azadi Bachao (supra) that “the provisions of such an Agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act”, cannot be viewed in isolation. If viewed in isolation, it would result in mutually inconsistent results.
  • The Hon’ble Supreme Court in State of West Bengal Vs. Kesoram Industries Ltd. [2004 (10) SCC 201] pointed out that “a Treaty entered into by India cannot become law of the land and it cannot be implemented unless Parliament passes a law as required under Article 253.”
  • In Ram Jethmalani Vs. Union of India [2011 (8) SCC 1], the Hon’ble Supreme Court took note of the Vienna Convention as well as the decision in Azadi Bachao (supra) and came to a conclusion that "The Government cannot bind India in a manner that derogates from the Constitutional provisions, values and imperatives."
  • The HC observed that ‘in spite of the existence of DTAA, no information sought for was forthcoming from Cyprus, which prompted the impugned Notification....’. When one of the parties commits a default by failing to provide information, it is not open to the beneficiary of such a default to contend that the other contracting party should honour their obligations.
  • The HC also observed that, once it is stated that India has followed the dualistic model and once it is found that the Courts have drawn inspiration from Treaties, whenever the Municipal Law was silent, it is impossible to think that the supremacy of the Parliament could be compromised by the Executive entering into a Treaty. The collective will and the collective conscience of the people, which the Parliament is supposed to reflect, cannot be subordinated to the power of the Executive.
  • The HC was of view that if the purpose of the CG entering into an agreement under Section 90(1) is defeated by the lack of effective exchange of information, then Section 90(1) is actually diluted by one of the contracting parties and not by Section 94A(1) of the Act.
  • Therefore, the HC held that the challenges to Section 94A(1), the Notification dated 1.11.2013 and the Press Release dated 1.11.2013 are not sustainable in law. Further, it was also held that since, Panama appears to have followed Cyprus, Section 94A was the need of the hour and the same should not suffer from unconstitutionality. Hence, all the writ petitions were dismissed.


Our Comments

The decision of the Hon’ble Madras HC again reiterates the basic principle that there can be no encumbrance to the power of the Parliament as regards its competence to make laws, which are within the framework of The Constitution of India.

The HC states that “The Constitution imposes only two limitations upon the power of the Parliament to make a law. They are (i) that such a law cannot infringe any of the Fundamental Rights or erode the basic structure of the Constitution and (ii) that it must be within its legislative competence. To say that there is one more limitation on the power of the Parliament, in the form of a Treaty entered into by the Executive, is to recognise a limitation not imposed by the Constitution”. 

15 Apr 2016