TMI Blog1973 (9) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... oner-company before January 1, 1954. It is an admitted position that the petitioner-company had obtained depreciation on the said assets. Before the Income-tax Officer, Circle I, Ward-E, Ahmedabad, in the course of the assessment proceedings, a question arose with regard to the levy of tax on capital gains. The petitioner-company claimed before the said Income-tax Officer that it should be permitted to substitute the market valuation of the machinery as on January 1, 1954, as the cost of acquisition for purposes of computation of capital gains. The said Income-tax Officer rejected the claim of the petitioner-company as he was of the opinion that the case of the petitioner-company was governed by section 50(1) of the Income-tax Act, 1961. At this stage it should be noted that the petitioner-company had purchased the machinery for a sum of Rs. 1,51,121 and the building for a sum of Rs. 1,48,455. The price realised by the petitioner-company on the sale of the said assets were Rs. 1,75,276 and Rs. 1,51,590, respectively. The Income-tax Officer, therefore, levied capital gains tax on the difference between the sale price and the written down value as adjusted under section 50(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to substitute the price as on January 1, 1954, only if he has become the owner of the depreciable assets in the circumstances mentioned in section 49 and not otherwise. This so-called classification of the depreciable assets is absolutely irrational, capricious, arbitrary and has no rational nexus with the objective of the aforesaid provisions and, therefore, violative of the equality clause contained in article 14 of the Constitution and, therefore, null and void. On the other hand, the case of the revenue is that the legislature has in its wisdom classified the assets into depreciable assets acquired in the mode specified under section 49 of the said Act and depreciable assets acquired otherwise than in the manner specified under section 49. The legislature has conferred some benefits upon the assets falling under the former class and refrained from conferring the same in respect of the assets in the latter class. The legislature has also specified the conditions under which the former class would be entitled to the benefits. As this classification is based on intelligible differentia which has a reasonable nexus with the object of the legislation, there is no questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company to its subsidiary company ; or by a subsidiary company to its holding company ; or any transfer taking place as a result of the scheme of amalgamation. Section 48 prescribes the mode of computation and deductions. Section 49 provides for the basis of computation for such capital gains in the cases of depreciable assets acquired by what is broadly known as " succession to the assets ". Section 50 is in the nature of special provision for computing the cost of acquisition in the case of depreciable assets acquired in a manner other than those specified in section 49 and section 52 provides for consideration for the transfer in cases of under-statement. Section 53 provides for capital gains which are exempt from tax. Section 54 provides for profits on the sale of property used for residence. Section 54A provides for relief of tax on capital gains in the cases mentioned therein. Section 55 is a sort of a definition clause which gives the meaning of the terms "adjusted", "cost of improvement" and "cost of acquisition" as used in sections 48, 49 and 50. The relevant sections for the purposes of this decision are sections 48, 49, 50 and 5 5. They are as under : " 48. Mode of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any Act repealed by that Act, or under executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications :-- (1) The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset. (2) Where under any provision of section 49, read with sub-section (2) of section 55, the fair market value of the asset on the 1st day of January, 1954, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset, on the said date, as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted." " 55. Meaning of 'adjusted', 'cost of improvement ' and 'cost of acquisition.--(1) For the purposes of sections 48, 49 and 50,-- (a) 'adjusted' in relation to written down value or fair market value, means diminished by any loss deducted or increased by any profits assessed, under the provisions of clause (iii) of sub-section (1) of section 32, or sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... air market value of the asset on the date of distribution ; (iv) (Omitted by F.A., 1966) (v) where the capital asset, being a share or a stock of a company, became the property of the assessee on-- (a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares, (b) the conversion of any shares of the company into stock, (c) the re-conversion of any stock of the company into shares, (d) the sub-division, of any of the shares of the company into shares of smaller amount, or (e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived. (3) where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner." The question, which has been raised in this Special Civil Application is whether the division of depreciable assets into two classes, namel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure has, thereafter, provided for the computation of the cost of acquisition in the case of the depreciable assets. This is a special provision made in section 50 of the Act and what the legislature has tried to achieve by this special provision is that in relation to a capital asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year under the 1961 Act or prior Acts, the provisions contained in sections 48 and 49 should be modified and the cost of acquisition in the case of assessee's acquiring depreciable assets otherwise than in one of the modes mentioned in section 49, would be the adjusted written down value as defined under clause (6) of section 43, while in the case of depreciable assets acquired by the assessee in any of the modes mentioned in section 49 the fair market value of the assets on the first day of January, 1954, or its original cost is to be taken into account at the option of the assessee as reduced by the amount of depreciation that might have been allowed to the assessee on the said date as the cost of acquisition for purposes of computation of capital gains tax. The first ground urged by Mr. Shah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he consequent contention which has been urged by Mr. Shah as to whether this classification made with reference to earning and enjoyment of the benefit is the object of the legislature in making this classification or not. In support of his contention that there is no classification at all, much less reasonable classification, Mr. Shah relied on a number of decisions of the Supreme Court. Mr. Shah relied on the decision of the Supreme Court in Kunnathat Thathunni Moopil Nair v. State of Kerala , where the court was concerned with the vires of the provisions contained in Travancore Cochin Land Tax Act (15 of 19 5 5 as amended by Act 10 of 1957) by which a uniform basic tax was sought to be levied on the lands situated in the State. The vires of the provisions of the Amending Act were challenged on the ground of they being violative of the equality clause contained in article 14 of the Constitution. The court found that inequality was writ large on the face of the Act and was inherent in the very provisions of the taxing section. As there was no attempt at classification in the provisions of the Act, the court did not think it necessary to consider as to what should have been the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racteristics being that they are persons who have not truly disclosed their income and have evaded payment of taxation on income. The court, therefore, observed in this context as under: " The State can by classification determine who should be regarded as a class for purposes of legislation and in relation to a law enacted on a particular subject, but the classification permissible must be based on some real and substantial distinction bearing a just and reasonable relation to the objects sought to be attained and cannot be made arbitrarily and without any substantial basis. Classification means segregation in classes which have a systematic relation, usually found in common properties and characteristics." The court, therefore, held section 5(4) of the Taxation on Income (Investigation Commission) Act, 1947, as offending the equality clause because the procedure prescribed by the said section in regard to the persons similarly situated should have the advantage substantially of the procedure prescribed by the Indian Income-tax Act, 1922, and they should not be deprived of it. Mr. Shah thereafter drew our attention to another decision of the Supreme Court in S. C. Prashar v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c of legislation and then try to discover if there is a connection between the two and a reasonable basis for making a difference between different classes of persons affected by the law, in keeping with the topic of legislation and the object of the enactment. A difference which is aimless, arbitrary or unreasonable and which is unconnected with the object in view must remain a discrimination and incapable of being upheld. In all cases in which laws were struck down under article 14 this was the approach. It is hardly necessary to refer to the previous cases because each provision to be tested must be tested in its own setting, and no two cases can be alike." We do not understand how these rulings take the case of the petitioner-company any further. It is no doubt a settled position of law that the validity of a taxing statute is open to attack on the ground that it infringes the fundamental rights (see State of Kerala v. Haji K. Kutty Naha). It is true that a State cannot make any law which takes away or abridges the equality clause contained in article 14 which enjoins upon a State not to deny to any person equality before law or equal protection of law (see Khandige Sham Bha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the determination of the rate or rates applicable. If production must always be taken into account there will have to be a settlement for every year and the tax would become a kind of income-tax. The next principle is that the burden of proving discrimination is always heavy and heavier still when a taxing statute is under attack. This was also observed in the same case of this court approving the dictum of the Supreme Court of the United States in Madden v. Kentucky : ' In taxation even more than in other' fields, legislatures possess the greatest freedom in classification. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it.' As Rottschaefer said in his Constitutional Law at page 668 : ' A statute providing for the assessment of one type of intangible at its actual value while other intangibles are assessed at their face value does not deny equal Protection even when both aye subject to the same rate of tax. The decisions of the Supreme Court on this field have permitted a State legislature to exercise an extremely wide discretion in classifying property for tax purposes so long as it refrained from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t some advantage over others, provided of course they are not sought out for special treatment :--[Khandige Sham Bhat v. Agricultural Income-tax Officer]. Likewise, the mere fact that a tax falls more heavily on some in the same group or category is by itself not a ground for its invalidity, for then hardly any tax, for instance, sales tax and exise tax, can escape such a charge (Twyford Tea Co. Ltd. v. State of Kerala ). " In the light of the aforesaid principles, we have, therefore, to consider whether the first ground of attack has any substance in it. As stated by us above, what the legislature has tried to achieve by sections 49 and 50 is that it has classified the assessees owning depreciable assets into two groups, namely, (i) assessees purchasing or acquiring the assets themselves from their own funds, and (ii) assessees acquiring depreciable assets as successors to the original owners free of cost. The classification is, in our view, intelligible enough and it has got a rational basis, namely, that the assessees owning depreciable assets in their own right as being the purchasers of the assets themselves and the assessees acquiring depreciable assets as successors free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with the objective of the provisions contained in section 48 onwards relating to capital gains. In support of his contention Mr. Shah relied on the decision of the Supreme Court in Nagpur Improvement Trust v. Vittal Rao, where the court was concerned with the vires of the provisions contained in clause (3)(a) to section 23 and a proviso to section 23(2) of the Land Acquisition Act on the ground of breach of the equality clause contained in article 14. What the legislature sought to achieve by addition of these new provisions was that the owner whose land was acquired under the Improvement Act was paid compensation not according to the market value of the land but the market value according to the use to which the land was put at the date with reference to which the market value was to be determined in that clause. In other words, if the land was being used for agricultural purposes, even though it might have a potential value as a building site, the potential value was to be ignored according to the new provisions, and it also deprived the owner of the solatium at the statutory rate which he would have got if the land had been acquired under the Land Acquisition Act. Having regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee being the successor and acquiring the property free of cost either by inheritance, gift or otherwise ; the classification, in the submission of Mr. Shah, cannot have any bearing with the object of the legislation, namely, the capital gains. We are not inclined to accept this submission of Mr. Shah for the simple reason that in the matter of classification in a fiscal statute, as held by the Supreme Court in Twyford Tea Co. Ltd. v. State of Kerala the legislature has wider latitude and in such classification, if the tax is sought to be levied on the property on the basis of its real value or the depreciated value, the matter is solely within the discretion of the legislature and its legislative wisdom. The classification, as stated by us, is based on a rational basis, namely, whether the assessee who is owning, and has acquired depreciable assets from his own fund and has earned and enjoyed the depreciation allowance on the said assets ; while in the case of successor, in any of the modes mentioned in section 49, the assessees have not enjoyed the depreciation on such assets, as that depreciation allowance might have been enjoyed by the previous owner. Mr. Shah, therefore, pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... January 1, 1954, or the original cost of acquisition to the previous owner as adjusted by the depreciation, if any, earned by the assessees. In that view of the matter, therefore, we thing that the second ground of Mr. Shah should also be rejected. The result is that this petition deserves to be dismissed. The rule should be discharged. There should be no order as to costs in this application. This takes us to the consideration of the Income-tax Reference No. 26 of 1971. The facts have been set out above while setting out the facts of the specil civil application. The question which has been referred to us is as under : " Whether, on the facts and the circumstances of the case, the applicant was entitled to substitute the value as on January 1, 1954, as the cost of acquisition of the buildings and machinery? " We have set out the relevant sections 48, 49 and 50. On the plain reading of section 50, we think that it is only those assessees who acquired depreciable assets in any one of the modes prescribed under section 49 that have the benefit of option to select either the fair market value of the assets on January 1, 1954, or the cost of acquisition by the previous own ..... X X X X Extracts X X X X X X X X Extracts X X X X
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