2018 (4) TMI 207 - HC - Wealth-tax

Constitutional validity of Section 40(3) of Wealth Tax Act - as submitted that Section 40(3) is unconstitutional as it brings to tax all lands and buildings (to the extent not used for the purposes of the business) owned by a company in which public are not substantially interested, as it has no relation to the object of the Act - Held that - Section 40(3) of the Act bringing to tax land and building which is not used for business purposes by companies in which public are not substantially interested to tax under the Wealth Tax Act and leaving out those land and buildings which are used for business purposes by companies in which public are not substantially interested from the charge of wealth tax under the Act is a reasonable classification. Therefore, the legislation bringing to tax land and buildings owned by the companies in which public are not substantially interested without any reference to the manner in which such companies came into ownership of the land and buildings is a decision taken by the legislature and cannot be faulted on the touchstone of Article 14 of the Constitution of India Parliament made a reasonable classification between the companies in which public are substantially interested from the companies in which public are not substantially interested. This classification cannot be found fault with because the petitioners want further classification to have been done by the Parliament. The legislature has in its wisdom decided that the executive should not be burdened with finding out the manner in which the land and buildings has been acquired by the company, to bring it to tax. The mere fact that there is land and building owned by the company and it is not used for the purposes of business is sufficient to hold that these assets to be taken into account under Section 40(3) of the Act for the purposes of wealth tax under the Wealth Tax Act. - Challenge to Section 40(3) of the Act is not sustainable. Therefore, the petition is dismissed.

Issues Involved:
1. Constitutional validity of Section 40(3) of the Finance Act, 1983.
2. Applicability of Section 40(3) to the immovable properties owned by the petitioner.
3. Challenge to the notices issued under the Wealth Tax Act, 1957.

Detailed Analysis:

1. Constitutional Validity of Section 40(3) of the Finance Act, 1983:
The petitioner initially challenged the legislative competence of Parliament to enact Section 40(3) of the Act, arguing it encroached upon the State List under the 7th Schedule to the Constitution. However, this challenge was not pressed during the hearing, and the petitioner restricted its challenge to the ground that Section 40(3) is arbitrary and violates Article 14 of the Constitution of India.

The petitioner's argument was that Section 40(3) is arbitrary because it includes land and buildings owned by closely held companies without distinguishing whether these assets were transferred by shareholders or acquired organically by the company from its profits. The petitioner contended that this broad classification lacked a rational nexus with the object of the Act, which was to prevent tax avoidance by transferring personal wealth to closely held companies.

The court examined the petition and found that the challenge was specifically directed at Section 40(3) and not the entire Section 40 of the Act. The court emphasized that a constitutional challenge must be specific, clear, and unambiguous, and the petition did not meet this requirement for challenging the entire Section 40. The court concluded that the petitioner's challenge was limited to Section 40(3) and could not be expanded to include other subsections.

2. Applicability of Section 40(3) to the Immovable Properties Owned by the Petitioner:
The petitioner argued that the properties in question, including the Express Tower in Mumbai, land and building in Hyderabad, and vacant land in Talegaon, were acquired out of the company's profits and not transferred by shareholders. Therefore, these properties should not attract the provisions of Section 40(3) of the Act.

The court, however, noted that the Finance Minister's speech introducing the bill indicated the intention to bring to tax all lands and buildings owned by closely held companies, not used for business purposes, regardless of how they were acquired. The court found that the classification made by the legislature was reasonable and aimed at preventing tax avoidance. The court held that Section 40(3) was a valid exercise of legislative power and did not violate Article 14 of the Constitution.

3. Challenge to the Notices Issued Under the Wealth Tax Act, 1957:
The petitioner sought to quash the notices issued for assessment, penalty, and prosecution under the Wealth Tax Act, 1957. These notices were issued based on the provisions of Section 40(3) of the Finance Act, 1983.

Given the court's conclusion that Section 40(3) was constitutionally valid, the challenge to these notices was also dismissed. The court found no basis to quash the notices as they were issued in accordance with the valid provisions of the law.

Conclusion:
The court dismissed the petition, upholding the constitutional validity of Section 40(3) of the Finance Act, 1983. The interim relief granted earlier was vacated, allowing the respondents to proceed with the assessment, penalty, and prosecution as per the notices issued under the Wealth Tax Act, 1957. The court emphasized that the legislature's classification was reasonable and aimed at addressing tax avoidance, thus not violating Article 14 of the Constitution.

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