TMI Blog2023 (12) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... in Union of India V/s. Exide Industries Limited and Anr. [ 2020 (4) TMI 792 - SUPREME COURT ] relied upon the approach of the Court in testing the constitutional validity of a provision is well settled and the fundamental concern of the Court is to inspect the existence of enacting power and once such power is found to be present, the next examination is to ascertain whether the enacted provision impinges upon any right enshrined in Part III of the Constitution. In the present case, the legislative power of the Parliament to enact sub-clause in the light of Article 245 of the Constitution is not doubted at all. Now to the next step of examination, i.e., whether the said clause contravenes any right enshrined in Part III of the Constitution, either in its form, substance or effect. It is no more res integra that the examination of the Court begins with a presumption in favour of constitutionality. This presumption is not just borne out of judicial discipline and prudence, but also out of the basic scheme of the Constitution wherein the power to legislate is the exclusive domain of the legislature/Parliament. This power is clothed with power to decide when to legislate, what to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f events is pivotal in assessing the merits of petitioner's arguments against the constitutional validity of Section 2(24) (xviii) of the Act. When petitioner applied for the subsidy, the amendment to the Act specifically the inclusion of sub-clause (xviii) to Section 2(24), had been in effect for more than two years. Therefore, petitioner, at the time of application, was having full knowledge or ought to have had full knowledge of the tax treatment of such subsidies post-amendment. Secondly, the act of applying for a subsidy after the amendment came into force indicates an acceptance of the prevailing tax regime. It is reasonable to infer that by choosing to partake in the subsidy scheme, petitioner implicitly acknowledged and consented to the accompanying tax obligations as legislated by the amendment. Thirdly and furthermore, it is a well-settled principle that ignorance of the law is no excuse. Petitioner cannot claim ignorance of the amendment or its implications. The legislative change was not done surreptitiously but was the result of a transparent legal process, providing ample opportunity for all stakeholders to acquaint themselves with the new provisions. A retr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K.R. SHRIRAM, J.) : 1. Considering the reliefs sought in the petition, it was decided to hear the petition finally at the admission stage itself. 2. Therefore, rule. Rule made returnable forthwith. 3. Petitioner is a biotechnology company manufacturing drugs and vaccines. Petitioner has a manufacturing plant at Hadapsar, Pune. Petitioner s units at Hadapsar area are eligible for deduction under Section 10AA of the Income Tax Act, 1961 (the Act). Petitioner also has commissioned another manufacturing facility in the Special Economic Zone (SEZ) located at Manjari, Pune, which commenced production during the Financial Year 2019-2020. 4. The Government of Maharashtra had, from time to time, issued several Industrial Policies and Schemes to promote industries in less developed areas of the State of Maharashtra. The present writ petition is concerned with one such scheme being, Package Scheme of Incentives, 2013 , which came into effect from 1st April 2013 for a period of five years (hereinafter referred to as the said Scheme). The said Scheme provides for various incentives to major industries depending on the type of project and amount of investments they make. The benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to total incentive/benefit of 75% of the eligible investment. 7. The Income Tax Act was amended in 2015 and sub-clause (xviii) to Section 2(24) of the Act was inserted by the Finance Act, 2015 with effect from 1st April 2016. The present petition is filed assailing the constitutional validity of sub-clause (xviii) to Section 2(24) of the Act (hereinafter referred to as impugned sub clause). Clause (24) to Section 2 defines the term income. The relevant portion of sub-clause (xviii) is reproduced herein below : 2(24) Income includes : (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than, - (a) the subsidy or grant or reimbursement which is take ninto account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43 or (b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing points are being contended by petitioner : (a) The sub-clause also has unintended retrospective application since at the time of introduction of the Scheme by the State Government, the impugned sub- clause was not there in the Act and example has been given of company ABC which has availed benefits from 2012 to 2022; (b) The impugned sub-clause seeks to tax a capital receipt as income which is constitutionally impermissible. It obliterates the clear, well established and fundamental distinction between income and capital receipts disregarding the constitutional scheme that tax can be imposed only on income . Capital or revenue receipt has to be determined on the basis of a purpose test . These subsidies are not taxable under the Act. The impugned sub-clause seeks to do away with the classification and the purpose test; (c) The amendment does not create any distinction between taxability of a capital subsidy or revenue subsidy. Earlier it was held that the subsidy received on capital account is not income under Sections 4 and 5 of the Act or under Section 28 of the Act. However, by insertion of the impugned sub-clause, the said distinction is sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. As held in Sahney Steel Press Works Ltd. (Supra) and Ponni Sugars and Chemicals Ltd. (Supra), the test laid down was the purpose test . The point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial. It is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. In the case at hand, the subsidy scheme was to enable petitioner to set up a new unit or expand the existing unit and, therefore, the receipt of the subsidy was on capital account; (b) The legislature has sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule VII. Although, a legislative entry should be given widest possible meaning, but one should not deviate from its natural and grammatical meaning; (c) The impugned sub-clause seeking to tax a capital receipt is in violation of Articles 246 and 265 read with Entry 82 to List 1 of Schedule VII. The Parliament cannot choose to tax as income , an item which in no rational sense can be regarded as a citizen's income or even receipt. The Supreme Court has repeatedly held time and again that a capital receipt is not a taxable receipt, and consequently not an income, to introduce the impugned sub-clause in the teeth of the Supreme Court's decision is ultra vires the Constitution of India. (d) The impugned sub-clause is arbitrary and ultra vires toArticle 14 of the Constitution. The impugned sub-clause without any basis and reasons overrules settled judicial precedents of the Supreme Court and various High Courts which have held that the capital subsidy is not income and cannot be subject matter of tax under the Act. To overrule these decisions by a Parliamentary exercise and without removing the basis of these decisions is arbitrary and in violation of Article 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and promote employment. There is nothing in the SOR, Memorandum of Finance Bill or even in the counter that has placed any material before this Court. In Saghir Ahmed V/s. State of Uttar Pradesh AIR 1954 SC 728,738, it was pointed out that the burden of proof is on the Union Government to justify law which prima facie involved Article 19(1)(g). The same principle applies to Article 14. (g) The impugned sub-clause does not make any distinction between a capital receipt and a revenue receipt. The Supreme Court has, in the Ponni Sugars and Chemicals Ltd. (Supra), Sahney Steel Press Works Ltd. (Supra), Chaphalkar Brothers (Supra) and CIT V/s. Shree Balaji Alloys 7 ITR-OL 50 (SC), held that the subsidies received from the Central or the State Government, whether capital or revenue receipt has to be determined on the basis of purpose test . Therefore, if the object of the assistance under the Subsidy Scheme is to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of the subsidy was on capital account. These subsidies are not taxable under the Act. However, the impugned sub-clause seeks to do away with the classification and the purpose t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income as there is no receipt in these cases. Such assistance is not an income under any of the five heads of income. Thus, such assistance is not an income, and merely by amending the definition or artificially expanding the definition of word income , any receipt will not take the characteristics. The impugned sub-clause is only intended for those subsidies which are revenue receipts, and the manner in which such receipts are to be computed for the purpose of taxation under the Act. However, since the impugned sub-clause does not make any distinction between a capital receipt and revenue receipt, the same is contrary to the very purpose for which it has been introduced, therefore, is liable to be struck down; (i) The importance of Sahney Steel Press Works Ltd. (Supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In such cases, one has to apply the purpose test. The point of time at which the subsidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interpretation of the law shall be otherwise than as declared by the Court. The definition of income under Section 2(24) has always been inclusive but was held to exclude subsidies which were capital receipts. The impugned amendment to include capital subsidies amounts to legislative overruling of several Supreme Court decisions which is impermissible as held in Madras Bar Association V/s. Union of India and Anr (2022) 12 SCC 455 . Recently in NHPC Ltd. V/s. State of Himachal Pradesh 2023 SCC Online SC 1137 a Division Bench of the Supreme Court summarised the entire case law and held that legislative overruling is not permissible. In Vodafone International Holdings BV V/s. Union of India 341 ITR 1 it was held that rights of management or controlling interest are not separate assets; they are incidental to the holding of shares. Similarly, controlling interest in a company is not an identifiable or distinct capital asset. The basis of this judgment was removed by inserting Explanation I to Section 2(14), which reads as under : [ Explanation-1 .]- For the removal of doubts, it is hereby clarified that property includes and shall be deemed to have always included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Standards (ICDS), the stakeholders suggested that in order to avoid any future controversy in this matter, there should be specific provision in the Act for treating these Government grants as income. The Accounting Standard Committee, which drafted the ICDS, suggested that the definition of income under clause (24) of Section 2 of the Act be amended so as to provide that the income shall include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of Section 43 of the Act. Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement would support further income generation and since income is to be understood in the widest sense, these items have also been included in the scope of income. It is settled law that income is a word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. The Court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract pro-positions and do not relate to abstract units and are not to be measured by abstract symmetry, that exact wisdom and nice adaption of remedy are not always possible and that judgment is largely a prophecy based on meagre and uninterpreted experience. As held in R. K. Garg V/s. Union of India and Ors. (1981) 4 SCC 675, there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. The Court also held that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The Court must while exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o approach them with deference. Unless a fiscal statute is manifestly arbitrary or discriminatory in its provisions or its operation, it is typically upheld. This allows for a broad range of discretion for the legislature in determining the classes of individuals or entities that are subject to or exempt from taxation, as long as there is a rational basis for such a classification. In the case of R. K. Garg (Supra) the views of Justice Frankfurter in the case of Morey V/s. Doud 354 US 457 (1957) was relied upon and the same is reproduced in paragraph 28 of State of Himachal Pradesh and Ors. V/s. Goel Bus Service Kullu 2023 SCC Online 46. The Revenue Department s approach towards taxation of concessions or subsidies is nuanced and specific. The tax is levied on the concession amount or the subsidy received, not the total transaction value. This ensures that the taxation is limited to the extra benefit accrued due to the state s incentive schemes, thereby upholding the principles of fairness and equity in taxation. This methodology aligns with the canons of taxation which advocate for fairness, equity, and simplicity, ensuring that the tax burden is proportionate and not und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of India. As held in Malva Bus Services V/s. State of Punjab and Ors. (1983) 3 SCC 237, the mere fact that a tax falls more heavily on certain goods or persons may not result in its invalidity. As held in Federation of Hotel and Restaurant (Supra), mere excessiveness of a tax or even the circumstance that its imposition might tend towards diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute violation of the rights under Part III Constitution of India. FINDINGS : 14. The petition challenges sub-clause (xviii) of Section 2(24) of the Act, which petitioner believes infringes various provisions of the Constitution of India and oversteps the legislative competence of the Parliament. It is petitioner s case that by amending Section 2(24)(xviii), the legislature has essentially overruled judicial precedents that distinguished capital receipts from revenue receipts, subsuming both under income and subjecting them to taxation, thereby overriding the established legal principles. Petitioner s argument regarding the violation of Article 14 stems from the assertion that the amendment to Section 2(24)(xviii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough which the subsidy is given is irrelevant; 17. In Ponni Sugars and Chemicals Ltd. (Supra) also the Apex Court held that it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. Keeping in mind the object behind the payment of the incentive subsidy, in that case the Court held that payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. In Ponni Sugars and Chemicals Ltd. (Supra), while answering whether the incentive subsidy received by the assessee was a capital receipt not includible in the total income, the Apex Court in paragraphs 13 to 17 held as under : 13. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel and Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 15. In the decision of House of Lords in the case of Seaham Harbour Dock Co. v. Crook (1931) 16 TC 333 the Harbour Dock Co. had applied for grants from the Unemployment Grants Committee from funds appropriated by Parliament. The said grants were paid as the work progressed the payments were made several times for some years. The Dock Co. had undertaken the work of extension of its docks. The extended dock was for relieving the unemployment. The main purpose was relief from unemployment. Therefore, the House of Lords held that the financial assistance given to the company for dock extension cannot be regarded as a trade receipt. It was found by the House of Lords ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s supplied) 18. In Sadichha Chitra (Supra), the subsidies were granted as and when the film was being completed which resulted in creation of a capital asset. The Apex Court in Sahney Steel Press Works Ltd. (Supra) confirmed the view taken in Sadichha Chitra (Supra) to be correct and in accordance with the principles laid down in Seaham Harbour Dock Co. case. In Seaham Harbour Dock Co. (Supra), the Dock Company had applied for and obtained grants from the Unemployment Grants Committee from funds appropriated by Parliament. The said grants were paid as the work progressed and were equivalent to half the interest on approved expenditure met out of loans. The payment were made several times a year for some years. The Dock company had undertaken an extension of its docks. The extended dock was also for relieving unemployment problem. Because the work undertaken was extension of the dock and the main purpose was relief of unemployment, the House of Lords held that the financial assistance given to the company for extension of the dock cannot be regarded as trade receipt. It was found that the assistance had nothing to do with trading of the company because the work undertaken was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the accrual of the liability to disburse or pay. In CIT vs. Shoorji Vallabhdas Co. (supra), it has been laid down : Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time all which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialise. 21. Before the amendment through the Finance Act, 2015, the Supreme Court applied the purpose test to determine whether a subsidy was a capital or revenue receipt. In the landmark cases of Sahney Steel and Press Works Ltd. (Supra) and Ponni Sugars and Chemicals Ltd. (Supra), the Court held that if the subsidy's purpose was to help the assessee run the business more profitably or meet daily business expenses, it was considered a revenue receipt (and thus taxable). Conversely, if the subsidy aimed at setting up a new unit or expanding an existi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation are based on adequate grounds. In adjudging constitutionality the Court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation. The Court must while examining the constitutional validity of a legislation in economic matters be resilient, not rigid, forward looking, not static, liberal, not verbal . It must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. It would be outside the province of the Court to consider if any particular immunity or exemption is necessary or not for the purpose of inducing disclosure of black money. The trial and error method is inherent in every legislative effort to deal with an obstinate social or economic issue and if it is found that any immunity or exemption granted under the Act is being utilised for tax evasion or avoidance not intended by the legislature, the Act can always be amended and the abuse terminated. Paragraphs 7, 8, 16 and 19 of R. K. Garg (Supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events-self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. The court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry that exact wisdom and nice adoption of remedy are not always possible and that judgment is largely a prophecy based on meagre and un-interpreted experience . Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court would be least fitted to pronounce. The court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not. There are so many imponderables that would enter into the determination that it would be wise for the court not to hazard an opinion where even economists may differ. The court must while examining the constitutional validity of a legislation of this kind, be resilient, not rigid, forward looking, not static, liberal, not verbal and the court must always bear in mind the constitutional proposition enunciated by the Supreme Court of the United States in Munn v. Illinois namely, that courts do not substitute their social and economic beliefs for the judgment of legislative bodies . The court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. The court should constantly remind itself of what the Supreme Court of the United States said i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atitude in the matter of selection of persons, subject matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. If there is equality and uniformity, within each group, the law would not be discriminatory. Decisions of the judiciary on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. 24. Therefore, though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy, legislature enjoys a wide latitude in the matter of taxation. Legislative assumption cannot be condemned as irrational. Judicial veto is to be exercised only in cases that leave no room for reasonable doubt. Constitutionality is presumed. Every statute, including fiscal statutes, comes with a presumption of constitutionality unless pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not, per se, and without more, constitute violation of the rights under Article 19(1)(g). 26. The Apex Court, in Federation of Hotel and Restaurant (Supra), in paragraphs 46 to 57, 62 and 77 held as under : 46. It is now well settled though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal-policy legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods, the sale or purchase of which should be brought to tax. Legislature was not incompetent to separate the processed or split pulses from the unsplit or unprocessed pulses and treat the two as separate and independent goods. ..... But the legislature has wide powers of classification in the case of taxing statutes. ..... The classification between the processed or split pulses and unprocessed or unsplit pulses is a reasonable classification. It is based on the use to which those goods can be put. Hence, in our opinion, the impugned classification is not violative of Article 14. 51. In State of Gujarat v. Sri Ambika Mills Ltd., Mathew J. said : Statutes are directed to less than universal situations. Law reflects distinction that exist in fact or at least appear to exist in the judgment of legislators - those who have the responsibility for making law fit fact. Legislation is essentially empiric. It ad- dresses itself to the more or less crude outside world and not to the neat, logical models of the mind. Classification is inherent in legislation. To recognize marked differences that exist in fact is living law; to disregard practical differences a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valid. It is only when within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a violation of Article 14. 54. In the present case, the bases of classification cannot be said to be arbitrary or unintelligible nor as being without a rational nexus with the object of the law. A hotel where a unit of residential accommodation is priced at over Rs.400 per day per individual is, in the legislative wisdom, considered a class apart by virtue of the economic superiority of those who might enjoy its custom, comforts and services. This legislative assumption cannot be condemned as irrational. It is equally well recognised that judicial veto is to be exercised only in cases that leave no room for reasonable doubt. Constitutionally is presumed. These words of James Bradley Thayer may be recalled : This rule recognizes that, having regard to the great, complex ever-unfolding exigencies of government, much which will seem unconstitutional to one man, or body of men, may reasonably not seem so to another; that the constitution often admits of different interpretations; that there is often a range ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... important constitutional directives contained in Part IV of the Constitution of India. If in this process a few individuals suffer severe hardship that cannot be helped, for individual interests must yield to the larger interests of the community or the country as indeed every noble cause claims its martyr. xxxxxxxxxxxxxx 77. There is also no established legislative practice which would enable one to limit the concept of an expenditure tax in the manner suggested. So far as expenditure tax is concerned, the only legislation earlier in force was the 1957 Act which was in force for a period of eight years. Such short lived legislation can hardly furnish the foundation of an argument to limit the scope of legislative power to the manner in which it was exercised under that enactment. If, after withdrawing this legislation, Parliament considered that it was not worthwhile or possible to impose a tax on all expenditure and that it would be sufficient, expedient or necessary to impose such a levy only on lavish spending in certain directions, that cannot certainly be precluded on any theory of established legislative practice, as was done in State of Madras v. Gannon Dunkerle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mity with the Constitution without delving into the policy merits. Furthermore, this presumption ensures stability and predictability in fiscal policies, which are essential for economic growth and development. Overturning fiscal statutes could lead to economic chaos and undermine the authority of the legislative body. Therefore, Courts must balance the necessity to uphold constitutional mandates with the practical implications of interfering with legislative judgments in fiscal matters. In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events - self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. The Apex Court, in State of Himachal Pradesh (Supra) in paragraphs 27 to 30, held as under : 27. It is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Act as amended by the Amendment Act 1997 on the ground that it was violative of Article 14 and Article 19(1)(g) of the Constitution. This Court dismissed the challenge to the said provision in paragraph 26 of the report. It observed that matters of economic policy should be best left to the wisdom of the legislature. Further, it went on to state that in the context of a changed economic scenario the expertise of the people dealing with the subject should not be lightly interfered with. It was also observed that while dealing with economic legislation, this court would interfere only in those few cases where the view reflected in the legislation is not possible to be taken at all. 30. In the case of Indian Oil Corporation Limited vs. State of Bihar and another, (2018) 1 SCC 242 , provisions of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein Act 1993, was under challenge. Justice Nariman speaking for the Bench observed in paragraph 25 that when it comes to taxing statute, the law laid down by this Court is clear that it can be said to be breach only when there is perversity or gross disparity resulting in clear and hostile discriminat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision. Nor, is it to examine the culpable conduct of the legislature as an appellate authority. The only examination of the Court is restricted to the finding of a constitutional infirmity in the provision, as is placed before the Court. In the absence of any finding of any constitutional infirmity in a provision, the Court is not empowered to invalidate a provision. The raison d' tre behind this self-imposed restriction is because of the fundamental reason that different organs of the State do not scrutinise each other's wisdom in the exercise of their duties. The time-tested principle of checks and balances does not empower the Court to question the motives or wisdom of the legislature, except in circumstances when the same is demonstrated from the enacted law. The approach of constitutional Courts ought to be different while dealing with fiscal statutes. It is trite that the legislature is the best forum to weigh different problems in the fiscal domain and form policies to address the same including to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to new regulatory measures. In the very nature of taxing statutes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitutional validity of a taxation law enacted by Parliament or State Legislature, the court must have regard to the following principles : (i) there is always presumption in favour of constitutionality of a law made by Parliament or a State Legislature, (ii) no enactment can be struck down by just saying that it is arbitrary or unreasonable or irrational but some constitutional infirmity has to be found, (iii) the court is not concerned with the wisdom or unwisdom, the justice or injustice of the law as Parliament and State Legislatures are supposed to be alive to the needs of the people whom they represent and they are the best judge of the community by whose suffrage they come into existence, (iv) hardship is not relevant in pronouncing on the constitutional validity of a fiscal statute or economic law, and (v) in the field of taxation, the legislature enjoys greater latitude for classification .. 17. In the present case, the legislative power of the Parliament to enact clause (f) in the light of Article 245 is not doubted at all. That brings us to the next step of examination i.e. whether the said clause contravenes any right enshrined in Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutes. It is trite that the legislature is the best forum to weigh different problems in the fiscal domain and form policies to address the same including to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to new regulatory measures. In the very nature of taxing statutes, legislature holds the power to frame laws to plug in specific leakages. Such laws are always pinpointed in nature and are only meant to target a specific avenue of taxability depending upon the experiences of tax evasion and tax avoidance at the ground level. The general principles of exclusion and inclusion do not apply to taxing statutes with the same vigour unless the law reeks of constitutional infirmities. No doubt, fiscal statutes must comply with the tenets of Article 14. However, a larger discretion is given to the legislature in taxing statutes than in other spheres. In Anant Mills Co. Ltd. vs. State of Gujarat Ors. 16, this Court noted thus : 25. ...But, in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, especially when such benefits have fulfilled their economic purpose. The imposition of tax on these subsidies under the amended provision does not constitute taking away of a benefit but rather represents a recalibration of fiscal advantages in line with broader economic and policy considerations. Profits, by their nature, are subject to fluctuations resulting from various factors, taxation being but one. It is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources. Section 2(24)(xviii) of the Act is an example of this balancing act, and its imposition is a reflection of a subsidy's life cycle coming to its fiscal fruition. Petitioner's argument, is ostensibly rooted in concerns over profitability. This does not, in substance, however, provide a tenable basis to impugn the constitutional validity of the amended provision. Hence, petitioner s argument of eroded profitability due to taxation lacks constitutional merit. An extension of this logic could open floodgates of untenable demands from loss-incurring entities seeking tax exemptions to improv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were addressed before the High Court on this point nothing new has been brought to our notice which would justify the view that the tax which has been imposed exceeds the limits of permissible reasonableness. As regards public interest we are unable to find nor has any attempt been made to satisfy us that the provisions of the impugned Validating Act with regard to imposition of tax are not in public interest. 8. This is sufficient to dispose of the challenge under Article 19(1)(g), as well. We may in this connection refer briefly to the conclusion of the High Court which was reached on a consideration of the affidavits filed before it. It has been found that there is no material which would warrant the conclusion that the increase in the surcharge of the fares and freight contemplated by the impugned Validating Act would constitute an impediment to the trade. The utmost that could be said was that it would result in the diminution of profits. Even on the assumption that the profits would be diminished or greatly reduced it cannot be held that there is any infringement of Article 19(1)(g). (emphasis supplied) 32. Taxation is an economic reality that every busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the amendment or its implications. The legislative change was not done surreptitiously but was the result of a transparent legal process, providing ample opportunity for all stakeholders to acquaint themselves with the new provisions. 34. As regards Mr. Datar s submissions that the parliament to remove the basis of the Hon ble Supreme Court rulings on subsidies should have done it by a suitable explanation and not by the impugned sub clause, it is settled law as held in Hindustan Gum and Chemicals Ltd. vs. State of Haryana and Ors. (1985) 4 SCC 124 that it is permissible for a competent Legislature to overcome the effect of a decision of a Court setting aside imposition of tax by passing a suitable legislation, by amending the relevant provisions of the statute concerned with retrospective effect, thus taking away the basis on which the decision of the Court had been rendered and by enacting an appropriate provision validating the levy and collection of tax made before the decision in question was rendered. 35. As stated earlier, it should be left to the wisdom of the Legislature to decide whether there should be an amendment or explanation. 36. We are unable to fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disrupt the revenue stream but also place an undue burden on the exchequer. Hence we are not inclined to strike down Section 2(24)(xviii). 40. In Bhagwan Dass Jain V/s. Union of India and Ors. (1981) 2 SCC 135, relied upon by ASG, the short question that arose for consideration was whether it was open to the Revenue to include in the income of the assessee any amount calculated in accordance with Section 23(2) of the Act in respect of a house in the occupation of the assessee for the purposes of his own residence. The assessee contended that inclusion of any amount under Section 23(2) of the Act in his income was unconstitutional as there could be no income at all in such a case accruing to him in the true sense of that term. The liability that was sought to be imposed under the Act in respect of his residential house was, therefore, in its pith and substance a tax on building falling under Entry 49 of List II of the Seventh Schedule to the Constitution and hence, Parliament could not impose the said liability under a law made in exercise of its legislative power under Entry 82 of List I of the Seventh Schedule to the Constitution which authorised it only to levy taxes on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that computation of income for purposes of levy of income tax in accordance with section 23(2) of the Act is justifiable under Entry 82 of List I of the Seventh Schedule to the Constitution. It is to be borne in mind that the Government of India Act, 1935 was enacted when the Indian Income-tax Act, 1922 was in force. Section 9 of the Indian Income-tax Act, 1922 provided for levy of income tax on the basis of the bona fide annual value of the property even when it was in the occupation of the assessee for the purposes of his own residence. While enacting entry 54 of list I of the Seventh Schedule to the Government of India Act, 1935, the British Parliament must have had in its view the Indian Income-tax Act, 1922 which was probably the only law relating to tax on incomes in force in British India then. Similarly the Constituent Assembly while enacting Entry 82 of List I of the Seventh Schedule to the Constitution must have understood that the word 'income' used in that Entry would in any event include within its scope all items which came within the definition of income and were subjected to charge in the Indian Income-tax Act, 1922 which was in force at the time t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the legislature is the best forum to weigh different problems in the fiscal domain and form policies to address the same including to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to new regulatory measures. In the very nature of taxing statutes, legislature holds the power to frame laws to plug in specific leakages. The mere fact that the institution of tax by virtue of the impugned sub clause falls more heavily on petitioner cannot result in its invalidity. 43. In light of the above, in our view, the amendment to Section 2(24) by the insertion of sub-cause (xviii) of the Finance Act, 2015, is a perfect example of a legislative endeavour to align the definition of income with the evolving economic landscapes and judicial precedent of it being an inclusive and elastic term. The submissions of petitioner though appear to be of fiscal concern were, in our view, more an argument of diminished profits and a narrow interpretation of income which the Apex Court has time and again expanded. The submissions of petitioner fall short of appreciating the overarching legislative intent to foster a comprehensive and equitable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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