2001 (2) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Legislative Competence
2. Violation of Article 14
3. Violation of Article 19(1)(g)

Detailed Analysis:

Legislative Competence:
The petitioners, associations of tax practitioners, chartered accountants, and architects, challenged the constitutional validity of section 116 of the Finance (No. 2) Act of 1998, which levies a service tax at 5% on services provided by these professionals. They argued that this tax falls under "tax on professions" in Entry 60 of List II, which is within the State's legislative competence, and not under the Union's residuary powers in Entry 97 of List I.

The court held that the service tax is distinct from a professional tax. The former is levied on the actual service provided for remuneration, while the latter is a tax for the privilege of belonging to a profession, irrespective of whether the professional earns income. The court cited precedents such as Western India Theatres Ltd. v. Cantonment Board and Kamta Prasad Aggarwal v. Executive Officer, Ballabgarh, to support this distinction. Thus, the service tax falls within the Union's legislative competence under Entry 97 of List I.

Violation of Article 14:
The petitioners argued that the Act discriminates against chartered accountants and architects by taxing services provided by them while exempting similar services provided by non-qualified persons. They claimed this classification lacks intelligible differentia and rational nexus with the objective of the Act.

The court rejected this contention, stating that the Legislature has wide latitude in selecting persons, subject-matter, and events for taxation. It is permissible to classify qualified professionals for taxation purposes due to the difficulty in tracing non-qualified persons rendering similar services. The classification was deemed reasonable and not violative of Article 14.

Violation of Article 19(1)(g):
The petitioners contended that the Act imposes unreasonable restrictions on their right to practice their profession, as they would be liable to pay service tax even if their clients default on payments.

The court dismissed this argument, clarifying that under section 68 of the Act and rule 6 of the Service Tax Rules, 1994, professionals can amend their bills to reflect non-payment by clients. The Act aims to cover the service sector, which constitutes 40% of the GDP, and any hardship faced by individuals cannot justify declaring the Act unconstitutional.

Conclusion:
The petitions were dismissed, upholding the constitutional validity of the service tax under the Finance (No. 2) Act of 1998. The court granted an extension for compliance, allowing the petitioners to pay arrears of service tax with interest by April 22, 2001, without facing penal action.