1965 (10) TMI 17 - SC - Income Tax

Whether the scheme of annuity deposit incorporated in Chapter XXII-A is invalid? Held that - The argument that the scheme of annuity deposit makes an unlawful discrimination between taxpayers is also devoid of force. Article 14 of the Constitution guarantees equality before the law, and equal protection of the laws. But thereby the power of the legislature to make a reasonable classification of persons, objects or transactions for attaining certain objectives is not excluded. The legislature is apparently of the view, having regard to the life span in our country, capacity to engage in gainful employment and other relevant circumstances, that the latter should be exempted from payment of additional tax. Every taxpayer who is otherwise required to make a deposit is permitted to declare his option under section 280X(1) and once he does so, he is not liable to make the annuity deposit. Such a taxpayer will be obliged to pay income-tax on his total income. Only a section out of this class of taxpayers are exempted from liability to pay additional income-tax.. It is difficult to regard the provision exempting this class of persons from liability to pay additional tax as depriving other taxpayers below the age of seventy who have exercised the option under section 280X(1) of the guarantee of equal protection of the laws. The classification is prima facie reasonable, and the petitioner has placed no materials before us to prove that it is not genuine or has no rational nexus to the object sought to be achieved by the Parliament. Appeal dismissed.

Issues Involved:

1. Constitutionality of Chapter XXII-A of the Income-tax Act, 1961.
2. Legislative competence of Parliament to enact Chapter XXII-A.
3. Allegation of colorable exercise of legislative power.
4. Allegation of harshness and expropriatory nature of the annuity deposit scheme.
5. Allegation of discrimination and violation of Article 14 of the Constitution.

Detailed Analysis:

1. Constitutionality of Chapter XXII-A of the Income-tax Act, 1961:

The petitioner, a trader, challenged the validity of the demand for annuity deposit under Chapter XXII-A of the Income-tax Act, 1961, on the grounds that it is unconstitutional and violates the fundamental right guaranteed by Article 14 of the Constitution. The Supreme Court held that the Parliament has the power to legislate for collecting annuity deposits from taxpayers, and there is nothing in the Constitution that prevents the Parliament from incorporating the provisions relating to borrowing from taxpayers in the Income-tax Act or any other statute. The court found no substance in the contention that Chapter XXII-A is unconstitutional.

2. Legislative Competence of Parliament to Enact Chapter XXII-A:

The petitioner argued that the Parliament had no competence to incorporate provisions related to borrowings by the Central Government from a class of taxpayers within the Indian Income-tax Act. The Supreme Court held that the Parliament has the power to levy taxes on income other than agricultural income under Article 246 read with Entry 82 in List I of the Seventh Schedule. Even if the scheme of Chapter XXII-A is for borrowing money, the power to legislate in that behalf is within the competence of the Parliament by virtue of Entry 97 of List I of the Seventh Schedule. The court concluded that there is no prohibition against the Parliament enacting in a single statute matters which call for the exercise of power under two or more entries in List I of the Seventh Schedule.

3. Allegation of Colorable Exercise of Legislative Power:

The petitioner contended that the provisions contained in Chapter XXII-A are enacted in a colorable exercise of legislative power. The Supreme Court rejected this argument, stating that the doctrine of colorable legislation does not involve any question of bona fides or mala fides on the part of the legislature. The court emphasized that the Parliament has the power to enact legislation for levying, assessing, and collecting annuity deposits and for repayment in annual installments. The court found no evidence of pretence, disguise, or subterfuge in the exercise of this power by the Parliament.

4. Allegation of Harshness and Expropriatory Nature of the Annuity Deposit Scheme:

The petitioner argued that the scheme is harsh and the demands made by the State are excessive. The Supreme Court acknowledged that a taxing statute is subject to the conditions laid down in Article 13 of the Constitution and may be open to challenge on the ground that it is expropriatory or that the statute prescribes no procedure or machinery for assessing tax. However, the court held that the annuity deposit scheme is not open to challenge merely on the ground that the tax is harsh or excessive. The court found that the scheme is closely related to the levy of income-tax and provides a reasonable classification of taxpayers.

5. Allegation of Discrimination and Violation of Article 14 of the Constitution:

The petitioner claimed that the provisions of Section 280X and Schedule II are discriminatory and infringe the fundamental freedom under Article 14 of equality before the law. The Supreme Court held that Article 14 guarantees equality before the law and equal protection of the laws, but it does not exclude the power of the legislature to make a reasonable classification of persons, objects, or transactions for attaining certain objectives. The court found that the classification based on income levels and age is reasonable and has a rational nexus to the objectives sought to be achieved by the Parliament, such as mobilization of private savings for public purposes and imposing curbs on inflationary trends in the economy. The court concluded that the scheme does not violate Article 14.

Separate Judgment by Hidayatullah J.:

Hidayatullah J. agreed with the dismissal of the petition but did not rest his decision on Entry No. 97 of List I of the Seventh Schedule. He emphasized that the annuity deposit scheme is an alternative to paying the full tax due on income and that it is not obligatory. He concluded that the provisions relating to annuity deposits rightly belong to the topic of taxes on income and are appropriately included in the Income-tax Act. He also rejected the argument that the scheme is a case of "borrowing" under Article 292, stating that the annuity deposit is an alternative to paying income-tax and is a means of reduction in the amount of income-tax. He found no basis for invoking the aid of Entry No. 97 and concluded that the provisions are neither colorable nor discriminatory.

Conclusion:

The petition was dismissed with costs, and the Supreme Court upheld the validity of Chapter XXII-A of the Income-tax Act, 1961, finding no merit in the contentions raised by the petitioner.

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