SC trashes plea to declare TDS system void and unconstitutional

New Delhi, Jan 24 The Supreme Court on Friday declined to entertain a public interest litigation (PIL) seeking scrapping of the TDS (Tax Deducted at Source) system, envisaged under the Income Tax Act.

"We will not entertain this (petition). Dismissed," a bench of CJI Sanjiv Khanna and Justice Sanjay Kumar told the PIL litigant.

Without expressing its opinion on the merits of the matter, the CJI Khanna-led bench suggested that the petitioner may move to the appropriate high court for relief.

Terming the Tax Deducted at Source (TDS) system as manifestly "arbitrary, irrational and against Articles 14, 19, 21 of the Constitution", the petition said that the regulatory and procedural framework surrounding TDS is excessively technical, often requiring specialised legal and financial expertise, which most assessees lack, imposing substantial administrative and financial obligations on the assessee.

The plea said that the government does not lack the resources to directly collect taxes through its tax department, still it transfers the responsibility to TDS assessees without remuneration.

"The result is an unjust shifting of sovereign responsibilities from the government to private citizens without adequate compensation, resources, or legal safeguards. Minor errors in the form of the correct name, account details, PAN number and sometimes even spacing result in TDS being deposited at the end of the assessor but not reflected in the account of the assessee, thereby the legally receivable amount to the assessee is kept in loop and withheld from him, till the errors are discovered and rectified," said the petition filed by advocate Ashwini Kumar Upadhyay.

It added that the TDS system disproportionately burdens assessees with significant administrative expenses such as salaries for employees managing TDS compliance and professional fees for chartered accountants or tax consultants, and non-compliance, even if unintentional, invites heavy penalties, interest, and prosecution under Sections 201 and 276B of the Income Tax Act.

"Illiterate or economically weaker assessees, who lack the capacity to navigate technical framework, suffer undue hardship and harassment, undermining the constitutional guarantee of equality before the law under Article 14. The imposition of tax collection duties on TDS assessees constitutes forced labour under Article 23(1) of the Constitution, which prohibits any form of coerced labour," further said the petition.

As per the petition, the TDS system, governed by 39 Sections, 28 Rules and 41 Forms under the Income Tax Act, mandates assessees (the deductors) to collect tax at the time of making payments to payees, including the payments of salaries, contractual fees, rents, commissions, and other taxable sums.