TMI Blog1986 (3) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... are partnership firms engaged in carrying on one or the other businesses detailed in their respective petitions. All the petitioners are assessees under the Act on the file of the concerned Income-tax Officer of the area. The petitioners have challenged the validity of sections 37(3A), 40A(8), (9), (10) and 43B of the Act either separately or cumulatively on three substantial grounds and they are-(i) the provisions do not relate to entry No. 82 of List I of the Seventh Schedule to the Constitution and were beyond the legislative competence of the Union Parliament; (ii) that the provisions suffer from the vice of impermissible classification or were irrational, unconscionable, arbitrary and were violative of article 14 of the Constitution; and (iii) that the provisions unreasonably interfere with their freedom of trade and business guaranteed to them under article 19(1)(g) of the Constitution and were not saved by sub-article (6) of article 19 of the Constitution. The respondents have resisted these writ petition. Sri G. Sarangan, the learned advocate, has appeared for the petitioners in all these cases. Sri K. Srinivasan, learned senior standing counsel for the Income-tax Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 59 ITR 243 (SC), we should not resort to the residuary entry without first ascertaining whether the provisions fall within a specific entry or not. The distribution of legislative powers enumerated in the Seventh Schedule to the Constitution closely follows the pattern of distribution of legislative powers enumerated in the Seventh Schedule to the Government of India Act, 1935 (GI Act). Entry No. 54 of List I of the Government of India Act has been bodily lifted and enacted as entry No. 82 of List I of the Seventh Schedule to the Constitution and the same reads thus: " Taxes on income other than agricultural income." In construing the scope and ambit of the corresponding entry of the Government of India Act, the Supreme Court in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 at pp. 763 and 764, expressed thus: "It should be remembered that the question before us relates to the correct interpretation of a word appearing in a Constitution Act which, as has been said, must not be construed in any narrow and pedantic sense. Gwyer C.J. in In re The Central Provinces and Berar Act, XIV of 1938 [1939] FCR 18, observed at pages 36-37, that the rules which apply to the interpretat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d judges deciding those cases which have been quoted in the judgment of Tendokar J., quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word 'income'. Its natural meaning embraces any profit or gain which is actually received. This is in consonance with the observations of Lord Wright to which reference has already been made. Mr. Kolah concedes that the word 'income' is understood in the United States and Australia in the wide sense contended for by the learned Attorney-General but he maintains that the law in England is different and, therefore, entry No. 54 which occurs in a parliamentary statute should be construed according to the law of England. We are again brought back to the same argument as to the word having acquired restricted meaning by reason of what has been called the legislative practice in England an argument which we have already discarded. The argument founded on an assumed legislative practice being thus out of the way, there can be no difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages 1257-1258) of the same treatise by the same author, IInd Edition, does not support the extreme contention urged by Sri Sarangan and positively reject the same. Assuming that it does so then, we regret our inability to subscribe to the views of the learned author of the treatise. Assuming that Sri Sarangan is right in his submission, then also as ruled by the Supreme Court in Harbhajan Singh Dhillon's case [1972] 83 ITR 582 and reiterated in Khandelwal Metal and Engineering Works v. Union of India, AIR 1985 SC 1211 at 1223, para 40, the impugned provisions would, in any event, fall within the purview of entry No. 97 of List 1, Union List, and are within the legislative competence of Parliament. On the foregoing discussion, we hold that the impugned provisions were within the legislative competence of Parliament. Sri Sarangan has urged that every one of the impugned provisions, viz., sections 37(3A), 40A(8), (9), (10) and 43B of the Act suffer from the vice of impermissible classification and were unconscionable, irrational, arbitrary and are violative of article 14 of the Constitution. Sri Srinivasan in refuting the contention of Sri Sarangan had urged that every one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head " Profits and gains of business or profession ". The disallowance over the limit of one lakh is uniform. Section 40A(8) of the Act enacted by the Finance Act of 1975 which also stands omitted by the Finance Act of 1985 from April 1, 1986, reads thus : " 40A(8). Where the assessee, being a company (other than a banking company or a financial company), incurs any expenditure by way of interest in respect of any deposit received by it, fifteen per cent. of such expenditure shall not be allowed as a deduction. Explanation.-In this sub-section, (a) `banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of that Act ; (b) `deposit' means any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company- (i) from the Central Government or any State Government or any local authority, or from any other source where the repayment of the amount is guaranteed by the Central Government or a State Government; (ii) from the Government of a foreign State, or from a citizen of a foreign State, or fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other marketable securities of a like nature; or (iii) a housing finance company, that is to say, a company which carries on, as its principal business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith; (iv) a loan company, that is to say, a company not being a company referred to in sub-clauses (i) to (iii) which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise; (v) a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be Nidhi or Mutual Benefit Society; (vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses. " The object with which the provision was made is set out in the Budget speech of the Finance Minister and Notes on Clauses of the Finance Bill of that y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall, in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee. " The object of their enactment is explained by the Finance Minister in his Budget Speech and the Notes on Clauses of the Finance Bill in these words : " Another undesirable practice noticed is the tendency of some corporate bodies to make large contributions to the so called welfare funds. further understand that utilisation of these funds is discretionary and subject to no discipline. I am, therefore, providing that deductions will be available only in respect of contributions to such funds as are established under statute or an approved provident fund, sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt.-Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. Explanation.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount only. The true scope and ambit of article 14 of the Constitution and in its application to taxation measures has been explained by the Supreme Court in a large number of cases and are now well settled. We will examine the challenge of the petitioners based on article 14 of the Constitution bearing these principles summarised in Ram Krishna Dalmia v. S. R. Tendolkar, AIR 1958 SC 538, In re The Special Courts Bill, 1978, AIR 1979 SC 478, majority opinion in Twyford Tea Company Limited v. State of Kerala, AIR 1970 SC 1133 and R. K. Garg v. Union of India [1982] 133 ITR 239. Section 37(3A) uniformly provides for disallowing 20% of the expenditure over and above a sum of Rs. 1,00,000 incurred on advertisements, publicity and sales promotion, or running and maintenance of aircraft and motor cars, or payments made to hotels. The Legislature in its wisdom after allowing a sum of Rs. 1,00,000 as expenditure on the aforesaid items, uniformly disallows 20% over and above the same. Such a provision can hardly be condemned as violative of article 14 of the Constitution. Even assuming that the same had not attempted to classify persons, then also it is difficult to hold that the same co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of accounting normally adopted by business organisations can hardly be doubted. But, that practice can hardly be treated as a constitutional or legal right to hold that Parliament was bound to accept the claims made in the accounts but not actually paid as deductions under the Act. When the section recognises the payments actually made, we fail to see as to how the same contravenes article 14 of the Constitution. When Government and Parliament found that the system had led to large scale abuse by many taxpayers, we cannot say that Parliament was not competent or unjustified in intervening and recognising only the actual payments. If the Parliament decides that an evil should be curbed without in any way affecting the rights of the parties, then the court cannot condemn the same as violative of article 14 of the Constitution. Even otherwise, Parliament had treated all alike and has not made any invidious distinction or discrimination and has not picked up anybody for a hostile and discriminatory treatment. When that is so, it is difficult to hold that section 43B of the Act contravenes article 14 of the Constitution. We have carefully examined the, impugned provisions fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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