1999 (7) TMI 2 - SC - Income Tax

Constitutional validity of section 171(9) - violative of article 14 of the Constitution of India - Addition of section 171(9) is not beyond the legislative competence. The cut-off date of December 31, 1978, cannot be said to be arbitrary - section 171(9) is valid in law

Issues Involved:
1. Legislative competence of Section 171(9) of the Income-tax Act, 1961.
2. Violation of Article 14 of the Constitution by Section 171(9).
3. Impact of Section 171(9) on the charging provisions of Sections 4 and 5 of the Income-tax Act.
4. Penal liability imposed by Section 171(9) on Hindu undivided families (HUFs).
5. Arbitrary nature of the cut-off date, December 31, 1978, in Section 171(9).
6. Restriction of Section 171(9) to partial partitions after December 31, 1978.
7. Recognition of partial partitions prior to the assessment year 1980-81.

Issue-wise Detailed Analysis:

1. Legislative Competence of Section 171(9) of the Income-tax Act, 1961:
The Supreme Court held that it is within the legislative competence of Parliament to amend or delete any provision of the Income-tax Act. The authority to levy taxes on income is derived from Item 82 of List I of the Seventh Schedule to the Constitution. The amendment to Section 171(9) was introduced to prevent tax evasion through multiple partial partitions of HUFs. The court noted that the concept of partial partition was not recognized under the Indian Income-tax Act, 1922, and was only introduced in the 1961 Act. Thus, the amendment merely restored the status quo ante and was within the legislative competence.

2. Violation of Article 14 of the Constitution by Section 171(9):
The court rejected the claim that Section 171(9) violated Article 14. It held that differentiation is not always discriminatory if there is a rational nexus with the object sought to be achieved. The classification of HUFs based on the cut-off date of December 31, 1978, was deemed to have a rational nexus with the objective of preventing tax evasion. The court emphasized that it is within the Legislature's domain to decide the basis of differentiation and the choice of the cut-off date was not arbitrary or whimsical.

3. Impact of Section 171(9) on the Charging Provisions of Sections 4 and 5 of the Income-tax Act:
The court found no substance in the argument that Section 171(9) entrenches upon the charging provisions of Sections 4 and 5. The charging sections must be read with the definition of "person" in Section 2(31), which includes HUFs. The court noted that even before the amendment, not all partial partitions were recognized under the Act. The amendment did not enlarge the scope of Sections 4 and 5 but merely clarified that partial partitions after the cut-off date would not be recognized for tax purposes.

4. Penal Liability Imposed by Section 171(9) on HUFs:
The court dismissed the contention that Section 171(9) imposed an unjust penal liability on HUFs. It held that it is for the Legislature to decide whether to recognize partial partitions for tax purposes. The court reiterated that considerations of hardship are irrelevant in determining legislative competence. The tax is to be calculated as if the assets remain with the HUF, and it is up to the members of the HUF to opt for a complete partition if they find the provision burdensome.

5. Arbitrary Nature of the Cut-off Date, December 31, 1978, in Section 171(9):
The court upheld the cut-off date as not arbitrary, noting that the Amending Bill was introduced in June 1980 and applied from the assessment year 1980-81. The choice of a date for classification is within the Legislature's discretion unless shown to be capricious or whimsical. The court found no basis to consider the cut-off date as such, and thus, the differentiation based on the date was justified.

6. Restriction of Section 171(9) to Partial Partitions After December 31, 1978:
The court clarified that the amendment specifically targeted partial partitions after December 31, 1978, to curb tax evasion. Partial partitions before this date retained their recognition, and the amendment aimed to prevent the creation of multiple HUFs solely for tax benefits. The court found this restriction reasonable and within the legislative intent to prevent tax avoidance.

7. Recognition of Partial Partitions Prior to the Assessment Year 1980-81:
The court noted that partial partitions recognized in the assessment year 1979-80 were not affected by the amendment. The provision applied prospectively from the assessment year 1980-81, ensuring that previously recognized partitions remained valid. This approach was deemed consistent with the legislative objective and did not violate any constitutional principles.

Conclusion:
The Supreme Court allowed the appeals, setting aside the judgments that declared Section 171(9) of the Income-tax Act and Section 20A of the Wealth-tax Act as unconstitutional. The court upheld the legislative competence and rational basis of the provisions, dismissing the writ petitions challenging their validity. The orders of the Gujarat High Court were also set aside, directing the Income-tax Appellate Tribunal to refer the relevant questions to the High Court for determination. No order as to costs was made.

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