TMI Blog1985 (1) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of net wealth made by the WTO, the petitioner is not aggrieved. But, he is only aggrieved by the higher rate of tax levied on him which is also in conformity with the Act. Hence, the petitioner in this petition under art. 226 of the Constitution has challenged Item No. 2 of Part I of the First Schedule to the Act introduced by the Finance Act of 1974 (Central Act No. 20 of 1974), as amended by the Finance Act of 1976 (Central Act No. 66 of 1976) (Finance Acts), as violative of arts. 14 and 19(1)(f) of the Constitution. Article 19(1)(f) of the Constitution has been deleted by the Constitution 44th Amendment Act that came into force on June 20, 1979. With this, the challenge based on that article is no longer available. Even if art. 19(1)(f) of the Constitution should be deemed to be part of the Constitution for purposes of this case, then also that article did not guarantee immunity from taxation. Sri K. R. Prasad, learned counsel for the petitioner, in our opinion, very rightly did not pursue this challenge of the petitioner. We, therefore, reject this challenge of the petitioner. The petitioner has urged that an HUF with one member whose wealth exceeds Rs. 1,00,000 has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alth Rs. 15,000 plus 3 per cent. of the exceeds Rs. 10,00,000 but does not amount by which the net wealth exceed Rs. 15,00,000 exceeds Rs. 10,00,000; (d) where the net wealth Rs. 30,000 plus 8 percent. of the exceeds Rs. 15,00,000 amount by which the net wealth exceeds Rs. 15,00,000; Provided that for the purposes of this item, (i) no wealth-tax shall be payable, where the net wealth does not exceed the following limit, namely : (A) Rs. 1,00,000, in the case of an individual; (B) Rs. 2,00,000, in the case of a Hindu undivided family; (ii) the wealth-tax payable shall, in no case, exceed 10 per cent. of the amount by which the net wealth exceeds the limit specified in ,sub-clause (A) or, as the case may be, sub-clause (B) of clause (i) of this proviso. " But, s. 14 of the Finance Act of 1974, and s. 27 of the Finance Act of 1976, substituted the same as hereunder : " Part-I (1) In the case of every individual or Hindu undivided family, not being a Hindu undivided family to which item (2) of this paragraph applies,- Rate of tax (a) where the net wealth does 1/2 per cent. of the net wealth ; not exceed Rs, 5,00,000 (b) where the net wealth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the genesis of the above amendments and in particular those made by the Finance Act of 1974, that are substantive and material to the Act. On March 2, 1970, the Government of India appointed a Committee of experts under the Chairmanship of Sri justice K. N. Wanchoo, retired Chief justice of India, to examine and suggest legal and administrative measures for countering evasion and avoidance of direct taxes in the country (vide Chapter I-" Introduction") of Direct Taxes Enquiry Committee -Final Report (published by the Government of India in December, 1971). The Wanchoo Committee examined tax avoidance prevalent in the country in great detail in Chapter III-" Tax avoidance "and made various recommendations to Government for its consideration, examination and appropriate action thereto. On HUF, with which alone we are concerned in this case, the Committee at paras. 3.22 to 3.31 on pages 73 to 75 of the report stated thus "Hindu undivided family. 3.22. The present system of taxation gives certain advantages to the Hindu undivided family and its members. Subject to certain exceptions, the income and wealth of the Hindu undivided family are taxed separately from the income and wea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were certain anomalies in the tax treatment of the Hindu undivided family but came to the conclusion that it would be inexpedient to make any far reaching changes in this regard, particularly for the reason that the Hindu Code Bill was then pending before the Parliament. In his final report on Rationalisation and Simplification of the Tax Structure, S. Bhoothalingam has stated that there has always been some scope to use the institution of the Hindu undivided family as a means of lowering the tax liability of individuals and that 'in economic terms it would be justifiable to restrict or diminish the tax benefits which can thus be acquired in a perfectly legal way.' 3.25. The questionnaire issued by this Committee contained a question whether the Hindu undivided family was being used for tax avoidance and if so, what changes in law were required for plugging the loophole. number of persons who sent replies stated that the Hindu undivided family is being used as a medium for tax avoidance and that, therefore, change in the mode of its assessment is necessary. Others preferred the status quo being maintained. In their statements before us, however, some of these persons conceded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embers has independent income above the maximum not liable to tax. 3.29. Acceptance of the first suggestion would lead to double taxation inasmuch as proportionate shares of members in the income of the Hindu undivided family will have to be included in their individual assessments for rate purposes. Also, it would increase the administrative burden because the workload in the matter of assessments, reassessments, revisions, rectifications, etc., of the Hindu undivided family and its members would considerably go up without any corresponding reduction in the number of files to be handled. It is also likely to lead to delays in completion of assessments of members of the family. The second suggestion would act very harshly on families in the lower income brackets and has to be ruled out on that consideration alone. The third suggestion appeared to be quite attractive initially inasmuch as it casts a more equitable tax burden on the family and renders ineffective the various techniques of tax avoidance adopted by the Hindu undivided family and its members. It would also put an end to the widely prevalent practice of simultaneously claiming two status, viz., that of Hindu undivided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inistration would also not be faced with any additional burden as a result of our proposal. " Accepting these recommendations, s. 14 of the Finance Act of 1974 amended the Schedule to the Act. The Finance Act of 1976 again amended the rates only retaining the clause in principle effected in the Finance Act of 1974. Section 2 of the Finance Act, 1974, also made corresponding amendments in the I.T. Act of 1961 (the " I.T. Act "). The annual Finance Bill of 1973 (Bill No. 5 of 1973), which was later enacted as the Finance Act of 1974 introduced by the Hon'ble Finance Minister, contained the usual statement of objects and reasons to the effect that it was to give effect to the proposals of the Central Government for the financial year l973-74. Note son clause 20 of that Bill enacted as s. 14 of the Finance Act, 1974, which is material reads thus : "Clause 20 seeks to make certain amendments in Part 1 of the Schedule to the Wealth-tax Act relating to rates of wealth-tax. Under these amendments, the existing rate schedule, of ordinary wealth-tax will apply only in the case of individuals and Hindu undivided families not having one or more members with independent net wealth exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar, has been explained by the Supreme Court in a large number of cases and it is unnecessary to refer to all of them and set out the relevant extracts from all of them. We consider it useful to refer to Twyford Tea Co. Ltd. v. State of Kerala, AIR 1970 SC 1133, in which the Supreme Court upheld the Kerala Plantation (Additional Tax) (Amendment) Act of 1960, as amended in 1967. In this case, the majority, speaking through Hidayatullah C.J., reviewed all the earlier cases of the court including Kunnathat Thathunni Moopil Nair v. State of Kerala, AIR 1961 SC 552; [1961] 3 SCR 77 on which very strong reliance is placed by Sri Prasad before us, the American Supreme Court, several classic treatises on the subject and summarised the principles to be applied in examining a challenge to a taxation measure based on art. 14 of the Constitution, in these words (at p. 1137 of 1970 AIR): " We may now state the principles on which the present case must be decided. These principles have been stated earlier but are often ignored when the question of the application of article 14 arises. One principle on which our Courts (as indeed the Supreme Court in the United States) have always acted, is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imination. The burden is proving not possible 'inequality ' but hostile I unequal' treatment. This is more so when uniform taxes are levied. It is not proved to us how the different plantations can be said to be 'hostilely or unequally' treated. A uniform wheel tax on cars does not take into account the value of the car, the mileage it runs, or in the case of taxis, the profits it makes and the miles per gallon it delivers. An Ambassador taxi and a Fiat taxi give different out-turns in terms of money and mileage. Cinemas pay the same show fee. We do not take a doctrinnaire view of equality. The Legislature has obviously thought of equalising the tax through a method which is inherent in the tax scheme. Nothing has been said to show that there is inequality much less " hostile treatment All that is said is that the State must demonstrate equality. That is not the approach. At this rate, nothing can ever be proved to be equal to another. There is no basis even for counting one tree as equal to another. Even in a thirty years' settlement, the picture may change the very next year for some reason but the tax as laid continues. Siwai income is brought to land revenue on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnan v. State of Tamil Nadu, AIR 1975 SC 583 Lal v. STO [1973] 31 STC 178 (SC), the Supreme Court has ruled that administrative convenience was a valid ground for classification in a taxation measure. In Balaji v. ITO-[1961] 43 ITR 393 (SC) and Pooran Mal v. Director of Inspection [1974] 93 ITR 505 ; AIR 1974 SC 348 at para 17, the Supreme Court has ruled that differentiation made in a taxation measure to check evasion or avoidance of tax was a valid ground. Bearing these principles in mind, we will now proceed to examine the challenge of the petitioner to the Act. An HUF which is a creature of the Hindu religion and law with its own distinct, peculiar characteristics and legal incidents to which aspect, it is unnecessary to notice in any great detail, cannot be compared to other assessable entities or persons under the Act. If the Act or the amendments made thereto treats an HUF differently for purposes of assessment or levy of rate also, in the light of the principles enunciated in the cases noticed by us earlier, it is difficult to hold that the same violates art. 14 of the Constitution. What is true of an HUF is more true of an HUF consisting of a member with a separate wea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t situations that were found in those cases and the discrimination being too apparent as was found in those cases. We are, therefore, of the view that those cases do not bear on the point and assist Sri Prasad. Sri Prasad relying on the new doctrine evolved by the Supreme Court in E. P. Royappa v. State of Tamil Nadu, AIR 1974 SC 555, Maneka Gandhi v. Union of India, AIR 1978 SC 597, Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628 and Ajay Hasia v. Khalid Mujib Sehravardi 'AIR 1981 SC 487, that arbitrariness was the' very antithesis of the rule of law enshrined in art. 14 of the Constitution, with considerable vehemence has urged that the basis chosen or splitting of HUFs into two groups and really punishing a specified HUF, though the individual that possesses separate wealth does not augment or contribute to an HUF from his separate wealth, was opposed to the true concepts of the Hindu law, irrational, arbitrary and was violative of art. 14 of the Constitution. The Amending Act has not interfered with the rights and incidents of an HUF or its members. The Amending Act does not interfere with an HUF or its incidents. When that is so, there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompared with any other assessable entity and if, keeping in view such advantage in the matter of taxation which was being derived by the HUF, the Legislature subjected it to taxation at a higher rate, it cannot be said that it did anything which contravened art 14 of the Constitution. Learned counsel for the petitioner then urged that in any case there was no basis for making a distinction between an HUF, no member of which had an income of over Rs. 5,000 and an HUF, of which at least one member had income of over Rs. 5,000. The reason for such classification is obvious. In a case where no member of an HUF has taxable income of over Rs. 5,000, no member of the HUF is able to derive any special advantage in the rate of taxation because of the special treatment meted out by the I.T. Act to an HUF. In such a case, it would make little difference whether the proportionate income derived by a member from the HUF is added to his total income or not as the incidence of taxation would work out more or less in a way similar (though not mathematically) to that in the cases of firms and other associations of persons. But, in a case where there is a member of the HUF deriving income over Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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