TMI Blog1991 (2) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ship Act and engaged in any profession, trade, calling or employment is levied with an annual tax of Rs. 500. This provision is challenged as violative of article 14 of the Constitution as well as articles 276(2) and 304(b) of the Constitution of India. The attack tinder article 14 arises primarily because the tax is imposed only on a partner of a firm registered under the Partnership Act. But no such tax is imposed on similar partners of unregistered firms. According to the petitioners there is no qualitative difference between the partner of a registered firm and the partner of an unregistered firm ; both are engaged in carrying on trade or business as partners of the firm and, therefore, picking out only one set of partners for the levy is patently arbitrary. Under article 276(2), the total amount payable as tax on profession, trade, calling or employment by any one person cannot exceed Rs. 250 per annum. Here each partner is levied with an annual tax of Rs. 500. The number of partners of the firm of which the petitioners are partners exceed 5, in some cases there are nearly 20 partners ; in such a case the total tax paid in respect of the business of the firm will exceed Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otification No. I specifies item 15(a). Therefore, the firm is liable to pay the profession tax under item No. 15(a). By virtue of Notification No. 11, the partners of the firm are exempted from paying the tax under item No. 15(a). Explanation I to the Schedule has to be noted here. It reads as follows: "Explanation I. -Notwithstanding anything in this Schedule, where a person is covered by more than one entry in the Schedule the highest rate of tax specified under any of those entries shall be applicable in his case. " There is no dispute that the partnership firms of the petitioners are registered under the provisions of the Indian Partnership Act. They are engaged in the business of finance and money-lending. According to the petitioners, the amount lent by each of the said firms does not exceed Rs. 10 lakhs per annum. Therefore, item No. 15(a) is not applicable. If so, they fall under item No. 15(b). In the case of item No. 15(b), the firms are exempted by virtue of Notification No. I. The petitioners are burdened with tax at the rate of Rs. 500 per annum because each of them is partner of a registered firm. According to the petitioners, this again brings out the discrimina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on his profession as a partner of a firm and that is to be taxed, there is no separate provision attracting tax under the. Act, as it stood then. Whatever may be the definition of the term 'person', which includes artificial persons such as firms, etc., it does not create any charge in respect of a firm as well as a partner of that firm and the charging section covers only persons enumerated in the Second Schedule which specifically provides for levy of tax on firms carrying on a profession. Therefore, it is clear that under the scheme of the Act when firm is taxed, a partner of that firm cannot be taxed separately. " Under the earlier entry No. 20, a firm which was engaged in any profession, trade or calling or employment was liable to tax at a particular rate. The question was whether the partners could be individually taxed as well as the firm in respect of the same trade, calling or profession. This court negatived the claim of the Revenue. It was pointed out that the scheme of the Act was that, when a profession is carried on by an individual person in his individual capacity, a different entry was attracted ( entry 2 in the said case because it was the case of a " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eafter, on principle, unless there is a statutory provision permitting the assessment of a dissolved firm, there is no longer any scope for assessing the firm which ceased to have a legal existence." The object of the Act here is to levy tax on professions, trades, etc. the subject of the levy, therefore, is the " occupation " ; the person who exercises the profession or is engaged in the trade is liable to pay the tax. The liability to pay the tax is fastened on the person who indulges in a particular occupation. Therefore, it has to be seen whether there is an intelligible differentiation between partners of an unregistered firm and partners of a registered firm in the matter of carrying on a trade by them, and whether there exists a qualitative difference between them in the matter of carrying on the trade or occupation. Registration of a partnership under the provisions of the Partnership Act is purely optional. It has no relevancy to the validity of the constitution of the firm or regarding the inter se rights of the partners. Registration is required only for certain limited purposes and non-registration affects the procedural rights of the partners, as per section 69 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le has to be examined. In Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp Cas 325, 356 ; AIR 1970 SC 564 at page 593, the Supreme Court observed: "Under the Constitution, protection against impairment of the guarantee of fundamental rights is determined by the nature of the right, the interest of the aggrieved party and the degree of harm resulting from the State action. Impairment of the right of the individual and not the object of the State in taking the impugned action, is the measure of protection. To concentrate merely on power of the State and the object of the State action in exercising that power is therefore to ignore the true intent of the Constitution. In this court, there is, however, a body of authority that the nature and extent of the protection of the fundamental rights is measured not by the operation of the State action upon the rights of the individual, but by its object. Thereby the constitutional scheme which makes the guaranteed rights subject to the permissible restrictions within their allotted fields fundamental got blurred and gave impetus to a theory that certain articles of the Constitution enact a code dealing exclusively with matters dealt w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd have failed to pay it and with regard to whom finding or direction is given, and persons who are liable to pay tax and have failed to pay it and with regard to whom no finding or direction is given. I am in agreement with the view expressed by the learned Chief justice that no rational basis has been made out for the distinction between the two classes of people referred to above, who really fall in the same category and with regard to whom there was no difficulty in having uniform provision of law. I am further in agreement with the view of the learned Chief justice that the principle laid down by this court in Suraj Mall Mohta and Co. v. A. V. Viswanatha Sastri [1954] 26 ITR 1 ; [1955] 1 SCR 448 ; AIR 1954 SC 545, applies. In that case sub-section (4) of section 5 of the Taxation on Income (Investigation Commission ) Act was challenged and this court pointed out that there was nothing uncommon either in properties or in characteristics between persons who were discovered as evaders of income-tax during an investigation conducted under section 5(1) and those who were discovered by the Income-tax Officer to have evaded payment of income-tax. Both these kinds of persons really be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erences where there are none and by making no difference where there is one. Decided cases laid down two tests to ascertain whether a classification is permissible or not, viz., (i) the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group ; and (ii) that the differentia must have a rational relation to the object sought to be achieved by the statute in question. The said principles have been applied by this court to taxing statutes. The requirement of a qualitative difference between the persons classified differently under a legislation is again brought out by the Supreme Court in Rattan Arya v. State of Tamil Nadu, AIR 1986 SC 1444. The question was whether there was an intelligible difference between residential tenants who pay a monthly rent exceeding Rs. 400 and the non-residential tenants, the law protected the non-residential tenants, but not such residential tenants. After referring to the objects of the law in question, it was observed at page 1446: "For the advancement of these objects, tenants are invested with certain rights and landlords are subjected to certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and (2) that that differentia must have a rational relation to the object sought to be achieved by the Act. 8. The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short, while article 14 forbids class discrimination by conferring privileges or imposing liabilities upon persons arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense abovementioned." By the application of these pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doing no more than avoid any disputations in regard to the taxability of an entity not having a juristic existence. The aim of the entry was the collective made up of partners. The change did no more than effect a difference in the mode and quantum payable by the partners where they paid a lesser amount as one unit in the name adopted for their joint venture, the amendment made them (i) pay tax at a higher rate, and (ii) as separate units. Significantly, the Revenue never tried to reach the registered firm of unamended entry No. 19, under entry 8, on the plea that there was a difference between registrations under the Partnership and ST Acts, the registered entities being different persons, and therefore, both being liable. In principle, there is no reason why the same restraint should not be shown between the entities of entry 8 and amended entry 19. This would be in conformity with article 276(2), section 3 and most important item II of the Schedule. The Tribunal did not therefore err in repelling the Revenue's contention. " By the same reasoning, it should have been held that registration of a firm under the Partnership Act has no relevance to the status of the partners and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mposes a fetter on the State's power to levy tax under entry No. 60 of List II of Schedule VII to the Constitution and, therefore, the scope of the fetter on legislative competence should not be stretched by any process of statutory interpretation. Under entry No. 60 of List II of Schedule VII, the Constitution created the field of legislation to levy " taxes on professions, trades, callings and employments." This being a legislative head, it has to be given the widest scope. It is a well known principle that legislative powers are given the widest amplitude, unless specific limitations are found in the context of the power. Similarly, any fetter imposed on the power to legislate is strictly construed without unduly expanding the rigour of the limitation. Here, the court is concerned with the power to levy tax ; article 276(2) restricts this power. It is all the more necessary to restrict this limitation, as the legislative power to impose tax is hedged in by the ceiling imposed under article 276(2). A "firm" as such is not a legal entity ; a firm is given the status of an entity for limited purposes by a few statutes, like the Incometax Act and the Sales Tax Act. But for these s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir individual capacity. As noticed already, clause (b) makes it clear in no uncertain terms that this is a tax on 'persons'. Its incidence falls on individuals, who belong to a class practising any profession or art or carrying on trade or calling in the municipality. To hold that persons who are collectively carrying on a trade in the municipality cannot be taxed individually, would be to read into the statute words which are not there. " An extension of the above principle, if applied to article 276(2), would prima facie lead to the conclusion that the " person " referred to therein has to be a " legal person ", as normally understood and not a firm. In view of our conclusion on the first question it is not necessary to examine the contention based on article 304(b) of the Constitution. For the reasons stated above, the amendment brought about by substituting entry No. 20 by the Karnataka Act 15 of 1989, is declared as unconstitutional, being violative of article 14 of the Constitution of India. Consequently, we make the following order : (1) It is declared that entry No. 20 in Schedule to the Karnataka Act 35 of 1976, as introduced by the Karnataka Act 15 of 1989, violat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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