TMI Blog1973 (11) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... s delivered by DIVAN C.J.-In each of these five special civil applications the petitioner concerned has challenged the constitutional validity of section 271(1)(c) and section 274(2) of the Income-tax Act, 1961, on the ground that these provisions of the Income-tax Act contravene the provisions of articles 14, 19(1)(f), 19(1)(g), 31(1), 245 and 265 of the Constitution of India. Since the challenges are common and since Mr. Pathak has only urged the constitutional validity in the course of the hearing before us and since he has made it clear that though he does not give up the question regarding the merits of each particular case he was not pressing the merits before us since in the event of his losing the challenge to the constitutional validity he would be arguing those questions on merits before the income-tax authorities concerned, we will dispose of these five special civil applications by this common judgment. In order to appreciate the manner in which the challenge to the constitutional validity arises, we need only set out the facts in Special Civil Application No. 235 of 1971. The petitioner is carrying on business in Ahmedabad. On April 21, 1962, the petitioner had pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een various types of tax evasions. In support of this challenge, various submissions were made which we will set out herein in the course of this judgment. The alternative ground of challenge to the constitutional validity is that the impugned provisions are a colourable exercise of legislative power inasmuch as in the guise of levying penalty the legislature had enacted for expropriation of the whole of the property of the citizen. It was also contended that the impugned provisions are arbitrary and excessive and no care and deliberation appear in such a scheme of penalty and as a result no proper balance is struck between social control which is permissible in law and the freedom guaranteed by the Constitution. In order to appreciate the contentions urged on behalf of both the sides it is necessary to set out in brief the history regarding the penalty provisions under the Income-tax Act. The Indian Income-tax Act, 1922, continued to remain in force till March 31, 1962. Under the Act of 1922, under section 28, no minimum penalty was laid down but the maximum penalty that could be imposed was 150 per cent. of the tax evaded by the assessee. With effect from April 1, 1962, the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed income taken as a single block, at the rates prescribed for personal income or corporate income by the Finance Act, 1965, and not at an ad hoc concessional rate. Further, facilities were allowed for payment of the tax in appropriate instalments extending over a period not exceeding four years, subject to a down payment of not less than 10 per cent. of the tax due and furnishing of security in respect of the balance. Income which had already been detected on materials available prior to the date of the disclosure were, however, to be assessed under the regular provisions of the Income-tax Act and not under this scheme. Any admissions made by a person in the declaration filed by him under the scheme in respect of such income were not to be used against him in assessing that income under the Income-tax Act. Under the second scheme also the disclosed income was not to be subject to any further proceedings of assessment and the identity of the declarant was not to be revealed and he was to be immune from penalty and prosecution for the past concealment of such disclosed income. Thereafter, with effect from April 1, 1968, in order to counter tax evasions, the impugned sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 271(1)(a)(i) failure to furnish a return results in a less severe penalty than concealment of income because, under section 271(1)(a)(i), the penalty would be in addition to the amount of the tax, if any, payable by the assessee, a sum equivalent to two per cent. of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent. of the tax. Thus the penalty for failure to furnish the return in time results in the maximum penalty of fifty per cent. of the tax that he is liable to pay. In this connection it was further urged by Mr. Pathak that this particular provision works very hard and since income is the basis for penalty, extent of guilt and extent of penalty are not correlated. They work hardship in an unreasonable manner. It was contended that though the object of enacting the penalty provision is to see that tax on income is not evaded, in fact the penalty is correlated to the income concealed instead of to the tax evaded and he urged that in the context in which the provisions have been enacted, checking evasion of taxes must be considered to be the object of the impugned legislation. The provisions of article 14 have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... den v. Kentucky legislatures possess the greatest freedom in classification. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it. How wide the powers of the legislature are in classifying objects for purposes of taxation was pointed out by the following passage from Rottschaefer in his Constitutional Law: " The Federal Supreme Court has seldom held invalid any classification made in connection with the levying of property taxes. It has sustained the levy of a heavier burden of taxation upon motor vehicles using the public highways than that levied upon other forms of property, and the imposition of a heavier tax upon oil than upon other property. The equal protection clause does not prohibit the levy of a tax on ores which is not imposed upon similar interests in quarries, forests and other forms of wasting asset, nor even the imposition of a tax upon anthracite that is not levied upon bituminous coal. A statute providing for the assessment of one type of intangible at its actual value while other intangibles are assessed at their face value does not deny equal protection even when both are subject to the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Calcutta. The Central Board of Revenue, without giving any previous notice, passed an order of transfer from the Income-tax Officer, District III(I), Calcutta, to the Income-tax Officer, Special Circle, Ranchi. The Income-tax Officer at Ranchi called upon the petitioner to submit its return for the assessment year 1955-56 and the petitioner applied to the Supreme Court under article 32 of the Constitution for relief alleging that the order of transfer infringed its fundamental rights under articles 14, 19(1)(g) and 31. The majority of the learned judges held that the income-tax department had by an illegal order denied to the petitioner, as compared with other bidi merchants who were similarly situate, equality before the law or the equal protection of the laws and the petitioner could legitimately complain of an infraction of his fundamental right under article 14 of the Constitution and, therefore, the order was liable to be set aside. In Khandige Sham Bhat v. Agricultural Income-tax Officer it was held that the impugned provision pertaining to agricultural income-tax in the State of Kerala was not violative of article 14 of the Constitution of India. It was held that the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue where the classification was based on avacuts was unreasonable and was violative of article 14 of the Constitution. It was pointed out that there was no reasonable relationship between the extent of the avacut and the assessment payable in respect of an acre of land forming part of that avacut. It was, therefore, held that the Andhra Pradesh Land Revenue (Additional Assessment) and Cess Revision Act as amended by the subsequent enactments of the Andhra Pradesh Legislature was violative of article 14 of the Constitution. In this case the Supreme Court followed the earlier decision in K. T. Moopil Nair's case and it was held that the Supreme Court while conceding a larger discretion to the legislature in the matter of fiscal adjustment would insist that a fiscal statute just like any other statute cannot infringe article 14 of the Constitution by introducing unreasonable discrimination between persons or property either by classification or lack of classification. In our opinion, the challenge of Mr. Pathak on the ground of article 14 must fail because in this piece of taxing statute he has not been able to point out any hostile discrimination against a particular type of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on independently and also that the set up of the department itself is not quite conducive to effective enforcement of laws. There are others who feel that taxation laws and administrative policies themselves have certain loopholes which water down their efficacy. It is contended that frequent resort to voluntary disclosure schemes to net in untaxed income, absence of an effective intelligence machinery in the income-tax department and lack of a vigorous prosecution policy for tax offences provide encouragement to tax evaders to carry on with their nefarious activities with impunity in the belief that the department will not detect them. We agree with this view substantially and do feel that there is need and scope for more vigorous enforcement of tax laws." Mr. Pathak contended that this passage from the Direct Taxes Enquiry Committee Report clearly brings out that the stringent measures of penalty had become necessary because as enacted in the impugned provisions of section 271(1)(c)(iii), the taxation laws were not being properly enforced. In our opinion, the challenge on the basis of constitutional validity under article 14 cannot succeed on this argument. Ultimately, if at al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislature to enforce the tax laws embrace both civil and criminal sanctions. The former consist of additions to the tax upon determinations of fact made by an administrative agency and with no burden on the Government to prove its case beyond a reasonable doubt. The latter consist of penal offences enforced by the criminal process in the familiar manner. Invocation of one does not exclude resort to the other. Thus, it is clear that merely because a penalty is provided for concealing income and that penalty is correlated to the income concealed rather than to the tax evaded, it cannot be said that the provision is a piece of hostile legislation or hostile discrimination. The apparent harshness of the provision in the case of evaders of small income arises merely because at the lower levels of taxation the tax imposed is on a much lesser basis than on the higher slabs of income. Therefore, the higher the slab and the greater the extent of the income concealed, the lesser will be the ratio of the penalty, maximum and minimum, to the tax actually evaded as a result of concealment of such income. But this result has been brought about by the higher rates of taxation in the upper brac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d their property is an essential attribute of the Government and Government may legitimately exercise the said power by reference to the objects to which it is applicable to the utmost extent to which Government thinks it expedient to do so. The objects to be taxed so, long as they happen to be within the legislative competence of the legislature can be taxed by the legislature according to the exigencies of its needs, because there can be no doubt that the State is entitled to raise revenue by taxation. The quantum of tax levied by the taxing statute, the conditions subject to which it is levied, the manner in which it is sought to be recovered, are all matters within the competence of the legislature, and in dealing with the contention raised by a citizen that the taxing statute contravenes article 19, courts would naturally be circumspect and cautious. Where for instance it appears that the taxing statute is plainly discriminatory, or provides no procedural machinery for assessment and levy of the tax, or that it is confiscatory, courts would be justified in striking down the impugned statute as unconstitutional. In such cases, the character of the material provisions of the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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