1972 (3) TMI 19 - HC - Income Tax

The challenge in these petitions filed under article 226 of the Constitution by a public limited company the Lord Krishna Bank Ltd. and two of its directors is to the validity of four assessment orders passed under the Income-tax Act 1961 (43 of 1961)

Issues Involved:
1. Validity of assessment orders under the Income-tax Act, 1961.
2. Classification of companies into widely held and closely held for tax purposes.
3. Constitutionality of the provisions of the Income-tax Act and Finance Acts under Articles 14 and 19(1)(c) and (f) of the Constitution.

Issue-wise Detailed Analysis:

1. Validity of Assessment Orders:
The petitions challenge four assessment orders passed under the Income-tax Act, 1961, relating to the years 1964-65, 1966-67, 1968-69, and 1969-70. The orders for the years 1964-65 and 1966-67 relate to reassessment, while those for the remaining years pertain to original assessments. The challenge is based on the argument that certain sections of the Income-tax Act and Finance Acts authorizing higher tax rates are void as they violate Articles 14 and 19(1)(c) and (f) of the Constitution.

2. Classification of Companies:
The Act distinguishes between companies "in which the public are substantially interested" (widely held companies) and those "in which the public are not substantially interested" (closely held companies). Widely held companies are excluded from liability for additional income-tax on undistributed income, whereas closely held companies are subject to higher tax rates. The Finance Acts of 1964, 1966, 1968, and 1969 set different tax rates for these categories, with closely held companies facing higher rates.

3. Constitutionality under Articles 14 and 19(1)(c) and (f):
The petitioners argue that the classification of companies into widely held and closely held is artificial, irrational, and lacks economic or financial justification. They contend that the definition of "relative" in the Act is arbitrary and that the objective of preventing profit accumulation and tax avoidance could be achieved through other legislative means.

The court references several Supreme Court decisions to establish that for a classification to pass the test under Article 14, it must be founded on an intelligible differentia and have a rational relation to the object sought to be achieved by the statute. The court finds that the classification of companies into widely held and closely held is reasonable and has a rational relation to the object of preventing tax evasion and accumulation of profits.

The court also notes that while the Companies Act does not distinguish between widely held and closely held companies, the Income-tax Act does so for valid reasons related to public finance and economic policy. The classification is not unique to India and is also present in the English Finance Act of 1965.

The court holds that the definition of "relative" in the Act is natural and justified, as close relatives are likely to act in unison, which is relevant for anti-evasion measures. The court emphasizes that taxing statutes have a broader discretion in classification and that the legislature can choose objects, persons, and rates for taxation as long as it does so reasonably.

The court concludes that the classification does not lead to "obvious inequality" and is therefore not violative of Article 14. Additionally, the Act does not restrict any citizen's right to form associations or acquire, hold, or dispose of property, thus not infringing Articles 19(1)(c) and (f).

Separate Judgment:
In O.P. No. 3453 of 1969, the petitioner challenges the assessment order for the year 1968-69, claiming errors in the depreciation allowance and other apparent mistakes. The court directs that the application for rectification should be disposed of on its merits and clarifies that this judgment does not affect that process.

Conclusion:
The original petitions are dismissed, and the court upholds the validity of the assessment orders and the classification of companies under the Income-tax Act and Finance Acts. The court finds no violation of Articles 14 and 19(1)(c) and (f) of the Constitution.

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