1994 (3) TMI 4 - HC - Income Tax

Summary

Issues:
Constitutional validity of section 40 of the Finance Act, 1983 - Violation of article 14 of the Constitution of India.

Analysis:
The petitioners challenged the constitutional validity of section 40 of the Finance Act, 1983, which imposed wealth tax on closely-held companies. They argued that the provision lacked rational classification and violated article 14 of the Constitution of India. The petitioners contended that the provision was arbitrary as it encompassed all closely-held companies without distinguishing between those transferring assets to avoid taxation and those legitimately conducting business. They claimed that the classification of "closely-held companies" under section 40 was not based on a rational basis.

The court examined the definition of "company in which the public are substantially interested" under section 2(18) of the Income-tax Act, 1961, to determine the scope of wealth tax imposition on closely-held companies. It noted that private companies, as defined in the Companies Act, 1956, were not considered companies in which the public are substantially interested, making them liable for wealth tax under section 40 of the Finance Act, 1983.

The court analyzed the equal protection clause under the constitution, emphasizing that the wealth tax imposed on closely-held companies was uniform and applied equally to all companies within the defined class. It concluded that the imposition of wealth tax did not constitute discrimination as it treated all companies in the described class uniformly.

The court considered the speech of the Finance Minister introducing the levy of wealth tax on closely-held companies. It noted that the tax was aimed at preventing tax evasion through asset transfers to such companies. The court found that the classification of closely-held companies for wealth tax purposes was reasonable and within the legislative competence, rejecting the petitioners' claims of discrimination and arbitrariness.

In conclusion, the court dismissed the petitions challenging the constitutional validity of section 40 of the Finance Act, 1983, and ordered costs against the petitioners.