1971 (7) TMI 49 - HC - Income Tax

In these two writ petitions, the constitutional validity of section 40A(3) and (4) of the Income-tax Act, 1961 has been questioned on two grounds (1) that it is ultra vires the powers of Parliament under entry 82, List I of the Seventh Schedule to the Constitution ; and (2) that it violates the fundamental right guaranteed under article 19(1)(g) of the Constitution. Rule 6DD is also challenged on the ground that it is beyond the competence of the rule-making authority and repugnant to article 14 of the Constitution - we are unable to find any merit in both the writ petitions and they are accordingly dismissed

Issues Involved:
1. Constitutional validity of section 40A(3) and (4) of the Income-tax Act, 1961.
2. Violation of fundamental rights under Article 19(1)(g) of the Constitution.
3. Competence and repugnance of Rule 6DD to Article 14 of the Constitution.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 40A(3) and (4) of the Income-tax Act, 1961:
The petitioners contended that section 40A(3) and (4) of the Income-tax Act, 1961, is ultra vires the powers of Parliament under entry 82, List I of the Seventh Schedule to the Constitution. They argued that these provisions result in taxing the gross receipts in respect of income in the guise of disallowing the expenditure. The court, however, held that the provisions are designed to safeguard the revenues of the State and prevent tax evasion. The measures taken to check evasion are within the powers of the legislature. The court cited precedents such as Sardar Baldev Singh v. Commissioner of Income-tax and Balaji v. Income-tax Officer, which upheld the legislative competence to enact provisions preventing tax evasion under the relevant entries in the legislative lists.

2. Violation of Fundamental Rights under Article 19(1)(g) of the Constitution:
The petitioners argued that the mandatory requirement for payment by a crossed cheque or a crossed bank draft under section 40A(3) acts as a clog affecting their fundamental right to transact their business by making payments in cash. They claimed that this requirement imposes an unreasonable restriction on their right to carry on trade or business. The court, however, found that the restriction is reasonable and in the public interest to prevent the use of unaccounted money for clandestine transactions. The court emphasized that the Constitution does not guarantee an unrestricted privilege to conduct business as one pleases and that certain regulations are necessary to prevent tax evasion and protect public revenue.

3. Competence and Repugnance of Rule 6DD to Article 14 of the Constitution:
The petitioners challenged Rule 6DD on the grounds that it is beyond the competence of the rule-making authority and repugnant to Article 14 of the Constitution. They argued that the rule discriminates by specifying certain bodies or institutions to whom payments exceeding Rs. 2,500 could be made otherwise than by a crossed cheque or a crossed bank draft. The court held that the cases specified in Rule 6DD form a different class altogether, and it is impossible to have clandestine or fictitious dealings with the institutions or bodies specified in the rule. The court stated that there must be a reasonable nexus between the cases or classes exempted and the object of the provisions under consideration. The special treatment of the cases specified in the rule is founded upon a reasonable and rational basis, and the legislature is free to recognize degrees of harm and confine its restrictions to those cases where the need is deemed to be the clearest.

Conclusion:
The court found no merit in the writ petitions and dismissed them, holding that the impugned provisions of the Income-tax Act and Rule 6DD are valid, reasonable, and within the legislative competence. The restrictions imposed by these provisions are in the public interest to prevent tax evasion and do not violate the fundamental rights of the petitioners under Article 19(1)(g) or Article 14 of the Constitution. The court emphasized the necessity of these provisions to safeguard public revenue and maintain the integrity of the tax system. The petitions were dismissed with costs.

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