1991 (2) TMI 3 - HC - Income Tax

Issues Involved:
1. Legislative competence of Parliament to enact sub-section (8) of section 40A of the Income-tax Act, 1961.
2. Violation of Article 14 of the Constitution.
3. Violation of Article 19(1)(g) of the Constitution.
4. Violation of Article 19(1)(c) of the Constitution.

I. Legislative Competence of Parliament to Enact the Sub-section:

The primary issue was whether sub-section (8) of section 40A of the Income-tax Act, 1961, was within the legislative competence of Parliament. The court examined Entry 82 of List I in the Seventh Schedule to the Constitution, which empowers Parliament to enact laws relating to "taxes on income other than agricultural income." The court noted that the expression "income" is not defined in the Constitution or the General Clauses Act but is broadly defined in the Income-tax Act, 1961. The court referred to the Supreme Court's decision in Navinchandra Mafatlal v. CIT, which emphasized that the expression "income" should be given the widest possible construction. The court concluded that the impugned sub-section (8) was enacted as a measure of credit restraint upon non-banking and non-financial companies and had a rational relation to income. Therefore, it was within the legislative competence of Parliament under Entry 82 of List I. Additionally, the court noted that the sub-section could also be justified with reference to Entry 45 of List I (Banking) and Entry 20 of List III (Economic and Social Planning).

II. Violation of Article 14 of the Constitution:

The petitioners argued that sub-section (8) of section 40A violated Article 14 of the Constitution by singling out companies and subjecting them to a disadvantage while leaving out firms and individuals. The court referred to the principles enunciated by the Supreme Court in Kunnathat Thathunni Moopil Nair v. State of Kerala, which stated that a taxing statute must impose a similar burden on everyone with reference to the same kind of property. The court noted that incorporated companies constitute a distinct class due to their size, clout, and creditworthiness. The impugned sub-section was a measure of credit control and economic planning intended to check the flight of deposits to non-banking and non-financial companies. The court found that the classification was reasonable and had a nexus to the object of the enactment. The court also rejected the argument that the sub-section was arbitrary, noting that Parliament must be presumed to know the needs of the citizens and the economy of the nation.

III. Violation of Article 19(1)(g) of the Constitution:

The petitioners argued that sub-section (8) of section 40A violated Article 19(1)(g) of the Constitution, which guarantees the right to practice any profession or carry on any occupation, trade, or business. The court noted that the restriction contained in the impugned sub-section was in the interest of the general public and was saved by clause (6) of Article 19. The court emphasized that the restriction was not disproportionate or excessive and was a measure of credit control and economic planning.

IV. Violation of Article 19(1)(c) of the Constitution:

The petitioners initially argued that sub-section (8) of section 40A violated Article 19(1)(c) of the Constitution, which guarantees the right to form associations or unions. However, this argument was not pressed during the hearing, and the court did not provide a detailed analysis on this issue.

Conclusion:

The court dismissed the writ petitions, upholding the constitutional validity of sub-section (8) of section 40A of the Income-tax Act, 1961. The court concluded that the sub-section was within the legislative competence of Parliament, did not violate Article 14 or Article 19(1)(g) of the Constitution, and the argument based on Article 19(1)(c) was not pressed. The court also noted that the sub-section was a measure of credit control and economic planning, designed to regulate the availability of credit in the market.

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