BALAJI versus INCOME-TAX OFFICER, SPECIAL INVESTIGATION CIRCLE

This question was directly raised in B. J-I. Amina Umma v. Income-tax Officer, Kozhikode (') aud was answered in favour of the Income-tax Department. The same question was posed before, this Court in Sardar Bcildev Singh v. Commissioner of Income Tax, Delhi and Ajmtr (') and was left (I) (1954)261.T.R.137. (2) (1961) I S.C.R.482,493. open. A final decision lJy this Court on such an important question at the earliest point of time is highly desirable, but, with some relnct.ance, we are leaving open this qneslion once again, as the petition can be satisfactorily disposed of on a narrower Lasis.

pp. 988–989

It is well settled that the Entri('s in the Lists are not powers but ;ire only fields uf legislation, and that wicle~t import and significance must be given to the language used by Parliament in the various Entries. Sarkar, J., speaking for this Court, observed in Sardar Baldev Si:ngh's Case ( thus:

p. 989

" So entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. If it wen' not tu be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious

p. 989

contrivances." This decision holds that the said Entry can sustain a law made to prevent the evasion of tax.

p. 989

The short question, therefore, is whether s.1'3 (3)(a)(i) and. (ii) is a provision made by the Legislature to prevent evasion uf tax. Under the relevant provision of the Income-tax Act, if a firm is registereel, the share of each partner in the profit of the firm would be added to his other income and charged as part of his total income. After 1966, the position is the same except in one regard with which we are not now concerned. This provision was intended for the benefit of partners of a business, for it made th(em liable only to pay tax on their own income. But it gave au effective handle to evade taxation in another direction. A husband or a father could nominally take his wife or his minor sons in partnership with him so that tax burden (1) (1961) 1 S.C.R. 482, 493.

p. 989

might be lightened, for, if the income was divided between a number of people, the income derived by an individual therefrom might fall under the limits of taxable income or under a less onerous slab This device enables an assessee to secure the entire income of the businAss but at the same time to evade income-tax which he would have otherwise been liable to pay. The Income-tax El).quiry Co=ission of 1936 made certain recommendation to prevent evasion of tax in such cases. The Legislature accepted those recommendations and the loopholes were sought to be plugged by enacting the said sub-section. Sub-section (3)(a)(i) and (ii) was therefore enacted for preventing evasion of tax and was well within the competence of the Federal Legislature.

p. 990

The constitutional validity of the said provision was next questioned on the ground that i't violated the doctrine of equality before the law enshrined in .Art.14 of the Constitution. Under Art. 14, ''The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India." But decisions of this Court permitted classification if there was reasonable basjs for the differentiation. It was held that what Art. 14 prohibited was .class legislation and not reasonable classification for the purpose of legislation. Two conditions were laid down for passing the test of permissible classification, namely,fi) 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 rational relation to the object sought to be achieved by the statute in question. Under the impugned sub-section, an individual is taxed on the income of his wife or his minor children, if he carries on business in partnership with his wife or if he admits his minor sons to the benefits of the partnership, whereas an , individual, if he carries on busine88 in partnership with a third party, whether a man or a woman, or even with his major children, or if he and his wife or children carry on business separately, will be liable only to pay tax on his share o{ the partnership income, that is, for the purpose of this subsection, the former is put in a category different from the latter. It cannot be Raid that there is no differentia between the two groups; but what is contended is that the said differentia has no rational relation to the object sought to be achieved by the statute in question. It was asked how, from the standpoint of imposition of tax, the difference between an individual and his wife doing business in partnership, and between an individual and his wife doing business separately and an individnal . doing business in partnership with his wife and an individual doing business in partn~rship with a third party, male or female, and between an individual who has admitted his minor children to the partnership business and an individual who is doing business in partnership with his major children or outsiders, would have any reasonable basis. This argument ignores the object of the legislation. We have held that the object of the legislation was to prevent evasion of tax. A similar device would not ordinarily be resorted to by individuals hy entering into .partnership with persons other than those mentioned in the sub-section, as it would involve a risk of the third-party turning round and asserting his own rights. The Legislature, therefore, selected for the purpose of classification only that group of persons who in fact are used as a cloak to perpetrate fraud on taxation.

pp. 990–991

It was then said that there might be genuine partuerships between an individual and hiS wife and, therefore, there is no reasonable relation :Jetween the classification and the object sought to

p. 991

be achieved, at any rate to the extent of those . genuine oases. But then. no c1assillcativn between genuine and non-genuine c11iseii: the classification is between cases of partncrsl1ip between husband, wife and/or minor chil<lren, whether genuine or not, and partnerships between others. In demarcating a group, the net was cast a littfo wider, but it was necessary, a~ any further subclassification as genuine and non-genuine partnerships might defeat ·the purpose of the Act.

pp. 991–992

Strong reliance is placed upon the decision of the Supreme Court of America in Albert A. Hoeper v. Tax Cornrnissi'.oner of Wi8consin ( and it is, therefore, necessary to consider it in some detail. There,. the appellant niarried a widow. Both the parties had separate incomes and made separak returns. Under the relevant tax Act, the incomes of the wife were added to the income of the husband for the purpose of taxation. The result was to increase the rate of the appellant's income-tax and to charge him with a tax otherwise payable by his wife. It wa~ contended that the said law deprived the tax-payer of the due prbcess and equal protection of the law. Roberts, J., who expressed the majority view, accepted the contention and struck out the law. The learned Judge observed thus:·

p. 992

"We have no doubt that, because of the fundamental conceptions which underlie our system, any attempt ,by a state to measure the tax on one person's- property or income by reference to the prope'rty or income of another is contrary to due process of law as guaranteed by the 14th Am.iinclment. That which is not in fact the taxpayer's income cannot be

p. 992

made such by calling it income." The Court of Appeal in that case assigned two reasons for sustaining the provisions : one was that the provi!lions under attack wer necessary to prevent frauds and evasions of tax by married persons, ;ind the other was that it was (l} (1931) 76 L. Ed. 24S, 251. a regulation of marriage. The first reason was not accepted by the Supreme Court on the ground that the claimed necessity could not justify the otherwise unconstitutional exaction ; and the second reason was rejected for the reason that it could hardly be claimed that a mere difference in social relations so altered the taxable status of one receiving income as to justify a different measure for the tax. Holmes, J., in his dissenting judgment, justified his view on the ground that the statute was the outcome of thousand years of history indicating that husband and wife were one and also for the reason that it had a tendency to prevent tax evasion. Prima facie the majority view supports the content.ion of learned counsel for the petitioner, but a deeper scrutiny reveals fundamental differences between that decision and the present case. There, there wM question of any pertnership between husband and wife, and the income of the wife was adclP<l to that of the husband with the result that he had to pay not only increased rate on his income hut also a portion of the tax otherwise payble by wife ; in the present case, the impugnerl provisions do not impose any such general liability but confine it onlv to a case where the husband takes bis wife in pa'ftnership. There is a greater scope for fraudulent evasion by constitnting fictitious pm'tnership along with one's wifo allfl minor ehildrcn than in a ease of separate income of the spouses derived from diffon:nt sources. That apart, the pr('sent social and economic poAit~on of womPn in India as compared with their eompecrs in America, even as it existed in H131, is so low that it would be inapprnprinte to apply the decision 1.iade in Americ1i to s, similar case arising in Int.1.ia. A wife in India, partieuhrly if she be illit.m nfr--a large majority of them are illiterate-would onlinarily he iu economic matters a tool in the hamlfl of her husband. Many things a.re done in h0r name without her knowledge of the same. When the Legislature of this country, which is assumed to know the conditions of the people and their requirements, with the awareness of this particular widespread fraudulent device in the matter of evasion of taxes, made a law to prevent the said fraud, it is difficult for this Court in the absence of any counterbalancing circumstanceg to hold, on the analogy drawn from American decisions, that the need for such a law is not in existence. On the contrary there is a direct decision of the Madras High Court in B .. M. Amina Umma v. Income Tax Officer, Kozhikode ( sustaining the said provision on the ground of reasonable classification. Rajagopalan, J., speaking for the division bench, after considering the relevant decisions on the subject, observed thus:

pp. 992–994

"The reasonableness or otherwise of a classification has to be decided with reference to all the circumstances of the case including the social and economic structure prevalent in the area where the taxing statute is in operation .......... An attempt to prevent by legislation an evasion of just tax liability and the necessary classification to give effect to that object cannot, in our view, be termed

p. 994

unreasonable." With respect we give our ful~ lJ.SSe~t to the ~id observations. We, therefore, reiect this content10n.

p. 994

The next attack on the validity of the provisions is based upon Art. 19 (1) (f) and (g) of the Constitution. The said constitutional provisions read:

p. 994

Art. 19 ( 1) : All citizens shall have the right- (f) to acquire, hold and dispose of property;

p. 994

and (I) (1954) 26 I.T.R. 137, 150.

p. 994

(g) to practise any profession, or to carry on any occupation, trade or business. It was argued that as the husband is statutorily made to pay certain amount as tax on the income of his wife, to that extent, he is deprive6 of his property by the State action and, therefore, his fundamental right under s. 19 (1) (f) is infringed. The impugned statutory provision, the argument proceeds, is an unreasonable restriction on the said right, as the husband is compelled to pay tax on the income of his wife and children who are in law distinct legal persons.

p. 995

The learned Additional Solicitor-General broadly contended that a tax imposed by authority of law cannot be questioned on the ground that the law infringes the provisions of Art. 19 of the constitution. We cannot see any justification for this contention in any of the constitutional provisions. The relevant provisions of the Constitution read :

p. 995

Art. 265 : No tax shall be levied or collected except by authority of law. '

p. 995

Art. 13 (1) : All laws in force in the territory of India immediately before the commencement of this Constitution, in so far as they are inconsistent with the provisions of this Part shall, to the extent of such inconsistency, be void.

p. 995

(3) In this Article, unless the context otherwise requires,-

p. 995

( a) 'law' includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law ;

p. 995

(b) 'law in force' includes laws passed or made by a Legislature or other competent authority in the territory of India before the commencement of this Constitution and not previously repealed, notwithstanding that any such law or any part thereof may not be then in operation either at all or in particular

pp. 995–996

areas." A combined and plain reading of the said provisions makes it abundantly clear that a law which is inconsistent with any of the provisions of Part III is void. It cannot be denied that a law providing for levy and collection of taxes is a law within the meaning of Part III of the Constitution, and therefore it must stand the test laid down by Art. 13 of the Constitution. The 'law' in Art. 265 of the Constitution must be a valid law. A law to be valid must not only be one passed by the Legislature in exercise of a power. conferred on it, but must also be one that does not infringe the funda· mental rights declared by the Constitution. When a licence fee was imposed by a munieipality under a bye-law framed in excess of the power conferred on it by the provisions of the U. P. Municipalities Act, this Court in Mohammad Yas'in v. The Town Area Committee, Jalalabad ( held that the enforcement of the said bye-law against a citi_zen constituted an infringement of his right under Art. 19 (l)(g) of the Constitution. Where a Sta,to sought to impose s!Lles-tax in exercise of a power conferred under a provision which was nltra vires the State Legislature, this Court held in Himmatlal Harilal Mehta v. The State of Madhya Pradesh(') that a threat by the said State to realise tax from the asscsse~ without the authority of law by using the coercive machinery of the impugned Act was a sufficient infrigement of bis fundamental right under Art. l!J(l)(g) of the Constitution. The same principle must necessarily apply even in a case where the law imposing a tax is void as offending the fundamental rights under tlw Constitution. This (1) (1952) S.C.R. 572. (2) (1954) S.C.R. 1122. Court in Kamllipprl'l'n Kottamthil Kochuni ~ 1lfoopi'.l Nair v. State of Jlfodr1is ('),after considering the earlier decisions obserwd thus :

pp. 996–997

"It is, thcreforo, maHifost that the law must rnt,isfy two tests before it can be '' valid la\r, namely, (1) that the apprnpriate legislature has compet<'ncy to make the law ; (2) that it does not take away or abridge any of the fundamental rights enumerated in Part III

p. 997

of the Constitution." Section 16 (3)(a) of the Act must, therefore, pass both the tests rmd tf it violates any of the provisions of Art. 19, to the extent it is· inconsistent with the said prnvisions, it will be void. This view is in consonance witli that expressed by this Court in Kunnathat Thatlmnni Moopil Nair v. The /itate of K erala ( There, the petitioners im11ugned the constitutionality of the Travancore-Cochin Land Tax Act, XV of 1955, as amended by the Travancore-Oochin Land Tax (Amendment) Act, X of 1957, and Sinha, C. J., speaking for the Court held that the Act was void as infringing not only Art. 14 of the Constitution ·but also Art. 19 (1) (f) thereof. The learned Chief ~ustice, airer considering the relevant proviRions of the Act and having regard to the unreasonable nature oL the restrictions, came to the conclusion that the provisions of the Act were unconstitutional, viewed from tlie, angle of the provisions of Art. 19 ( 1 )(f) of the Constitution.

p. 997

'" We'eannot, th.frefore, accept broad contention of the learned, Additional Solicitor-General that a tax law. cannot be questioned on the ground that it infringes Art. 19 of the'Constitutirm.

p. 997

Even. 'so the learned· 1.~dditfonaj f:lolit:itur- General co1itended that the prov~io11s of (I) (1960) 3 S.C.R. 887, 911. (~) (1961) 3 S.C.R. 77. s. 16 (3) (a) (i) and (ii) of the Act constituted only reasonable restrictions on the exercise of the rights conferred under Art. 19(l)(f) and (g) of the Constitution, in the interest of the general public.

pp. 997–998

Learned counsel for the petitioner argued that the restrictions are not reasonable for the following reasons: (i) the husband is made to pay tax on the income which his wife derived from the business, that is, a tax is levied on one person on the income of another; (2) such an imposition not only prevents a husband from taking his wife as a partnPr in his business but also prevents a wife, who has got a business of her own, from taking her husband as a partner in the business ; (3) the husband has to pay a tax at a rate higher than that he would have to pay if the income of the wife was not added to his income ; ( 4) the same situation is created inter Be between a parent and his minor children vis-avis their joint business. Learned, counsel, therefore, contended that the provisions prevented the honest pooling of resources of the members of a family so intimately ('onnected with each other to the detriment of the family prosperity, and that it amounted to an unreasonable restriction on the said fundamental rights. There is some plausibility in this argument, but if an overall picture of the situation is taken, the reasonab!Cness of the restrictions will be apparent. In the State of 1Wadra8 v. V. G. Row ( Patanjali Sastri, C. J., lays down the following test of reasonableness:

p. 998

"The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailin~ conditions at the time, should all enter

p. 998

into the judicial verdict." So judged, can it be said that the restrictions imposed (I) (1952) S.C.R. 597. under the impugned provisions are not reasonable? The object sought to be achieved was to prevent the prevalent abuse, namely, evasion of tax: by an individual doing business under a partnership nominally entered with his wife or minor children. The scope of the provisions is limited only to a few of the intimate members of a family who ordinarily are under the protection of the assessee and are dependants of him. The persons selected by the provisions, namely, wife and minor ehildren, cannot also be ordinarily expected to carry on their business independently with their own funds when the husband or the father is alive and when they are under his protection. Doubtless some of the b-aid partnerships may be genuine and the wife or minor children may have contributed capital to the business ; but the provisions do not in any way affect their rights and even the liability inter se between the husband and the wife or the minor children, as the case may be, in respect of the tax paid. It is true that in computing the total income of an individual for the purpose of assessment, their income in their capacity as partners shall be included in the income of the individual; but the section does not prevent the husband or the father, as the case may be, from debiting against them in the partnership accounts that part of the tax referable to the share or shares of their income. It may be that a father or a husband may have to pay tax at a higher rate than ordinarily he would have to pay if the addition of the wife's or children's income to his own brings his total income to a higher slab. But it may not necessarily be so in a case where the income of the former is not appreciable ; even if it is appreciable, he can debit a part of the excess payment to his wife ~.nd children. In short, the firm, though registered, would he treated as a distinct unit of assessmPnt, with the difference that, unlike in the case of a registered firm, the entire income of the unit is added to the personal income of the father or the husband as the case may be. This mode of taxation may be a little hard on a husband or a father in the case of genuine partnership with wife or minor children, but that is offset, to a large extent, by the beneficient results that flow therefrom to the public, namely, the prevention of evasion of income-tax, and also by the fact that, by and large, the additional payment of tax made on the income of the wife or the minor children will ultimately be borne by them in the ! final accounting between them. In these circumstances, we cannot say that the provisions of s. 16(3) of the Act impose an unreasonable restriction on the fundamental rights of the petitioner under Art. 19 (0 (f) and (g) of the Constitution.

pp. 998–1000

In the result, the petition fails and is dismissed with costs.

p. 1000

Petition dismissed.

p. 1000