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TMI Blog1973 (12) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the meaning of article 31(5)(b)(i) and/or is it a "law giving effect to the policy of the State towards securing the principles specified in clause (b) or clause (c) of article 39" within the meaning of the first part of article 31C of the Constitution? If not, is it wholly or partly unconstitutional as being an unreasonable restriction on the fundamental right to hold property under article 19(1)(f) or as authorising the State to acquire property otherwise than for a public purpose thus contravening article 31(2) of the Constitution or as discriminating between similarly situated persons who evade tax liability and conceal income contrary to article 14 of the Constitution? The following is the background of law and facts out of which these twin questions have arisen for decision. The Direct Taxes Enquiry Committee chaired by Shri Justice K. N. Wanchoo, retired Chief Justice of India, was appointed by the Government in March, 1970, inter alia: "(a) to recommend concrete and effective measures; (i) to unearth black money and prevent its proliferation through further evasion; (ii) to check avoidance of tax through various legal devices, including the formation of trusts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase of the property is viewed as consisting of two parts namely : (a) the purchase of a part of the property the fair market value of which is equal to the consideration stated in the instrument of transfer, and (b) the purchase of the rest of the property for consideration which has not been stated in the transfer deed. The whole of the property is acquired by the Government and vests in the Government, on such acquisition. The amount of compensation payable to the purchaser of the property would be the consideration stated in the transfer deed plus 15 per cent. The amount by which the compensation so paid falls short of the amount which would have been payable had the property been acquired under the Land Acquisition Act shall be deemed to have been realised by the Central Government as a penalty from the transferee for being a party to a transfer with the object of evading tax liability and/or concealing income. This being done, no other penalty would be leviable on the purchaser on this account. (5) The seller of the property who is also a party to the understatement of the consideration and undervaluation of the property in the sale deed and who is also supposed to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act. The latter are punished more severely inasmuch as their property which is the subject-matter of the transfer is itself acquired in addition to the deemed imposition of penalty while the former are only asked to pay a monetary penalty for concealment of income. Again, the seller of such a property is as much a party to this transaction as the buyer. But he is dealt with less severely, for instance, under section 52 of the Income-tax Act, while the buyer is dealt with more severely inasmuch as he loses his property altogether. (2) The Assistant Commissioner of Income-tax could not be said to have "reason to believe" that the fair market value of the immovable property purchased by the petitioner on 31st May, 1972, exceeded the consideration stated in the transfer deed by more than 15 per cent. of such stated consideration. He had thus no jurisdiction to initiate the proceedings. And (3) The Act of 1972 was not retrospective in its operation. It could not, therefore, apply to the transfer of the property to the petitioner inasmuch as the title of the petitioner to the property dated back to 31st May, 1972, even though the transfer deed was actually registered after 15th Nov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ordinary tax evaders but only with those who not only evade tax liability but also conceal their income by entering into such transactions. They thus constitute different classes of persons. Of course, the seller and the buyer. could not be treated exactly similarly inasmuch as the property can be acquired only from the buyer but not from the seller. As for the jurisdiction of the Assistant Commissioner of Income-tax to initiate proceedings against the petitioner in respect of the transfer dated 31st May, 1972, a valuer's report dated July 2, 1973, was received by the Assistant Commissioner. It appeared from the said report that the fair market value of the said property would be Rs. 1,97,209. The Assistant Commissioner thereafter recorded his reasons and initiated proceedings against the petitioner inasmuch as he certainly had reason to believe that the consideration in the transfer deed was understated with the object of evading tax liability and concealing income. Lastly, the question of retrospective operation of the Act did not arise. The Act applies to a transaction of transfer of immovable property of the fair market value of more than Rs. 25,000 only if the transfer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd affluence puts the rights of the individual above the institution of the Government. But the latter in 1950 in the land of scarcity facing problems of poverty and inequality places justice, social, economic and political, equality of status and opportunity along with fraternity assuring the dignity of the individual and the unity of the Nation at the forefront and refers only to the one cherished liberty, namely, liberty of mind, that is, of thought, expression, belief, faith and worship. It does not refer to the other rights of the individual such as property. The difference reflects also the change in political thought from individualism to socialism. The modern concept of constitutional liberty is based on the concept of social, economic and political justice. In his contribution on "Constitutional Liberty and the Concept of Justice" in "NOMOS VI-JUSTICE" (1963), John Rawls thus lays down justice as the basis of liberty in the following words: " One may distinguish the various kinds of constitutional liberty as liberty of the person, liberty of conscience and freedom of thought, political liberty, freedom of movement, and equality of opportunity. It is characteristic of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution. Further, the property right of the individual was to be balanced by the interests of the society embodied in the Directive Principles of State Policy enumerated in Part IV of the Constitution. As article 37 expressly directs the State to apply the principles of State policy in making laws, a law enacted to implement one or more directive principles of State policy is as much an effort to promote social interest as would be the corresponding fundamental right to protect the interests of the individual. A harmonious construction of the Constitution would reconcile the two. The law giving effect to a directive principle of State policy could always be regarded as a reasonable restriction on the corresponding fundamental right. As both the fundamental rights and the directive principles of State policy are parts of the same Constitution, the intention of the framers of the Constitution must be that the laws effectuating the directive principles of State policy would of necessity harmonise with the fundamental rights. It would be rare, therefore, for such laws to come into conflict with the fundamental rights. However, in the process of actual interpretation, confl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It, therefore, impinges on a particular kind of economic system only." (Keshavananda Bharati v. State of Kerala, para. 598). According to the decision of the majority on this point led by Ray J., a law which has a reasonable nexus to the implementation of the principles embodied in clauses (b) and (c) of article 39 would be protected by article 31C against challenges based on articles 14, 19 and 31. This decision of the majority is helped by the argument which has appealed to the minority that even a tenuous connection between such a law and clauses (b) and (c) of article 39 would be sufficient to enable such a law to withstand challenges based on articles 14, 19 and 31. In view of the majority decision holding the first part of article 31C to be valid, the observations by the minority have resulted in giving support to the validity of laws enacted to implement the principles embodied in clauses (b) and (c) of article 39 rather than in opposing their validity. It is in the background of this authoritative interpretation of the scope of article 31C that we have to consider the validity of the Act of 1972, as inserted in Chapter XXA of the Income-tax Act, 1961. Article 39(b): The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommittee (1971) transfers of immovable property have been widely used as a means of tax evasion and concealment of income (paragraph 2.6). This means that the ownership and control of the material resources of the community are being used against the interests of the society. If persons who indulge in such malpractices are deprived of the ownership and control of immovable property so misused by them, it is arguable that these material resources of the community would be better distributed as best to subserve the common good. It is sometimes argued that acquisition of property by State would mean concentration of property in the hands of the State. This would not be distribution contemplated by article 39(b). While this argument may have plausibility regarding such property as would be permanently owned and controlled by the State, it is entirely out of place in regard to the immovable properties, the transfers of which are hit by the Act of 1972. These immovable properties are not like factories or large farms which could be owned and controlled by the State itself. On the other hand, these immovable properties are spread out all over the country in the hands of numerous individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains both by the buyer and the seller. Making of such gains by them leads to concentration of wealth in their hands. This wealth being hidden from the State and the tax authorities can be used as black money in a parallel economy which, according to the Wanchoo Committee Report and according to common knowledge, is operating in the country. Such concentration of illegal gains in the hands of such buyers and sellers thus leads to "concentration of wealth" within the meaning of article 39(c) which works "to the common detriment". It cannot be doubted that accumulation of money by evading tax liability and concealment of income results in concentration of wealth and also that such black money is used to the common detriment. Levy of taxes and penalties always results in reducing concentration of wealth. We are of the view, therefore, that there is a reasonable nexus between the implementation of the objective embodied in article 39(c) and the impugned Act. Liberal construction of beneficial provisions contained in article 39(b) and (c) of the Constitution and in the impugned Act : The object of article 39(b) and (c) is to bring about an egalitarian society in India. The impugned A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act is not protected by the first part of article 31C, the next question is whether the impugned Act is a law enacted "for the purpose of imposing or levying any tax, or penalty" within the meaning of article 31(5)(b)(i) and, therefore, immune from the application of article 31(2). It is common ground between the parties that the main object of the Act is to impose a penalty on the purchaser of immovable property by a transfer in which true consideration for the transfer is not stated. The provisions of the Act dealing with the imposition of penalty are, therefore, squarely covered by article 31(5)(b)(i) of the Constitution. It is, however, rightly argued by Shri G. C. Sharma, learned counsel for the petitioner, that the acquisition of property of the buyer cannot be said to be the imposition of either a tax or a penalty. That part of the impugned Act is not, therefore, covered by article 31(5)(b)(i). Shri Sharma argues that the provisions relating to acquisition of property are not either an integral part of or incidental to the provisions relating to imposition of penalty. They are not, therefore, covered by article 31(5)(b)(i). These provisions are, therefore, not immune from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to have a public use, there must be a use by the public . . . . . According to the newer view-point, there is a public use if the thing taken is useful to the public. This makes public use for Eminent Domain practically synonymous with public purpose for taxation and somewhat like social interest for Police power." (2) Cooley (Constitutional Limitations, volume II, pages 1139-40) expressed the same view as follows: " Two different theories are presented by the judicial attempts to describe the subjects to which the expression (public use) would apply. One theory of 'public use' limits the application to 'employment'-'occupation'. The more liberal and more flexible meaning makes it synonymous with 'public advantage', 'public benefit. . .. . . . As might be expected the more limited application of the principle appears in the earlier cases and the more liberal application has been rendered necessary by complex conditions due to recent developments of civilisation." (3) Corpus Juris, volume 20, article 30, at pages 552-553, concludes the discussion as follows: " No general definition of what degree of public good will meet the constitutional requirements for a 'public u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep pace with the realities of the social and political evolution of the country as reflected in the Constitution. If, therefore, the State is to give effect to these avowed purposes of our Constitution (referred to in articles 38 and 39) we must regard as a public purpose all that will be calculated to promote the welfare of the people as envisaged in these directive principles of State policy whatever else that expression may mean." Mahajan J. also referred to article 39 of the Constitution in considering the question whether the acquisition was for a public purpose and observed at page 941 : " The legislature is the best judge of what is good for the community, by whose suffrage it comes into existence and it is not possible. for this court to say that there was no public purpose behind the acquisition contemplated by the impugned statute." Whatever, therefore, is considered by the legislature acting to give effect to the policy of article 39(b) and (c) to be in the public interest and for the public good must be regarded as being for a public purpose. The word "purpose" merely denotes the objective sought to be achieved by the State. It is not to be narrowly construed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the evil proved ineffective. It was necessary, therefore, for Government to take more drastic steps and in doing so they acted for the public weal. There was consequently a clear public purpose and an undoubted public benefit." The evils of black money and tax evasion have also been tackled by various general provisions such as the Income-tax Act for the last many years. The particular field of investing black money and evading disclosure of income and taxes by buying large properties after disclosing in the sale deeds only a small part of the consideration threatens to undermine the very basis of an egalitarian society. The legislature, therefore, thought it fit to use a more drastic remedy to curb this evil by acquiring the properties themselves. The object of the legislation is public good and, therefore, the acquisition was for a public purpose. In State of Bihar v. Maharajadhiraja Sir Kameshwar Singh also the public purpose appeared only in the object of the legislation, namely, reduction of economic inequality and concentration of wealth in the hands of a few persons. But the Bihar Land Reforms Act, 1950, was silent as to how the zamindari lands acquired by the State w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lever and a buyer may genuinely acquire a property for the stated consideration though the market value of the property is more than 15 per cent. of such stated consideration. In such a case, it could not be said that the object of the transaction was either to conceal income or evade taxes. For, the whole of the actual consideration has been stated in the sale deed. It is equally true, however, that it is impossible to know in which case a buyer has genuinely secured such an advantage over the seller and in which case the seller and the buyer have colluded by understating the actual consideration which passed for the transfer. It must also be recognised that human nature being what it is, a seller would always try to sell his property for a price which is on a par or if possible above the market value of the property and would not agree to sell it too much below the market value. The legislature has to proceed on the basis of human nature and commonsense. As it was impossible to exclude cases of genuine purchases of a high value property for a low price, the legislature has no option but to establish a uniform rule. In other words, absence of uniformity itself might help to defeat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct before its amendment in 1964 were held to be constitutional and valid by the Supreme Court. If some innocent persons are treated in the same way as persons who have deliberately understated the consideration in the sale deed with a view to conceal income and evade taxes, then this was inevitable to achieve the main purpose of catching the guilty persons. Such inevitable treatment of a small number of innocent persons in the same way as the overwhelmingly large number of guilty persons would not amount to treating unequals as equals contrary to article 14 of the Constitution. In Balaji v. Income-tax Oficer section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922, required that in computing the total income of an individual there shall be included so much of the income of a wife or a minor child of such individual as arises from the membership of the wife in a firm of which the husband is the partner and from the admission of the minor to the benefits of a partnership of which such an individual is a partner. This provision was challenged as being contrary to articles 14 and 19(1)(f) of, the Constitution. At page 991, it was argued that there might be genuine partnerships ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. Rs. Rs. A. 1,00,000 1,50,000 1,75,000 1,20,000 1,38,000 B. 1,00,000 1,80,000 2,00,000 1,50,000 1,72,500 C. 1,00,000 2,00,000 2,40,000 1,70,000 1,95,500 -------------------------------------------------------------------------------------------------------------------------------------------------- CHART -------------------------------------------------------------------------------------------------------------------------------------------------- Compensation Actual black Deemed penalty Actual loss Actual gain unad Land Acq. money under impugned to buyer to seller Act passing provisions -------------------------------------------------------------------------------------------------------------------------------------------------- 6 7 8 9 10 -------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. Rs. Rs. A. 2,01,250 30,000 63,250 12,000 50,000 B. 2,30,000 30,000 57,500 7,500 80,000 C. 2,76,000 30,000 80,500 4,500 1,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. State of Kerala, for the proposition that lack of classification among transactions in which the amount of black money involved was the same created inequality of treatment among the purchasers. The said decision has no application to the present case. It rested on the reason that the difference in quality and productive capacity of the land which could be known were not taken into account in imposing a uniform rate of basic tax on such widely different pieces of land. The decision was distinguished later by the majority of the Supreme Court in Twyford Tea Company Ltd. v. State of Kerala. Hidayatullah C.J., speaking for the majority, observed at page 389-90 as follows : " It may also be conceded that the uniform tax falls more heavily on some plantations than on others because the profits are widely discrepant. But does that involve a discrimination ? If the answer be in the affirmative hardly any tax direct or indirect would escape the censure for taxes touch purses of different lengths and the very uniformity of the tax and its equal treatment would become its undoing. The rich and the poor pay the same taxes irrespective of their incomes in many instances such as the sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. (b) By taking the buyer at his own word, the legislature has achieved a master-stroke of policy. It has shown its perfect bona fides in enabling the income-tax authorities to acquire the buyer's property precisely for the consideration which he says he has paid for the transfer plus 15 per cent. which he would have got if the property had been acquired under the Land Acquisition Act. The legislature is, therefore, acting on the buyer's own admission and the buyer would find it difficult to show that his own admission was false. (c) The legislature also wanted to deter the occurrence of such malpractices in the future. The deterrent effect is heightened by the provisions for acquisition of properties used for such malpractices. Imposition of monetary penalties for concealment of income were provided for in the past before the Act of 1972 was enacted. These provisions did not deter some persons from taking recourse to buying immovable properties for understated consideration. The legislature was, therefore, justified in using a more drastic method in the hope that this would at least deter the people from indulging in such foul play. (d) The transactions hit by the Act c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f taxes. People do not mind paying black money consideration though it is not stated in the sale deed because they get the full value for the consideration paid by them in the shape of the immovable property. The intention of the Act is to take away this facility for being used for concealment of income and evasion of taxes. Indeed, this is the most distinctive feature of the Act. If the Act were not to provide for the acquisition of property, there was no need to enact it at all. The Act must, therefore, stand or fall with this feature of it. The different treatment of buyers and sellers does not thus constitute any discrimination. The transactions hit by the impugned Act are sui generis. That is why this novel method of dealing with this novel problem had to be invented by the legislature. The impugned Act has been enacted to penalise the tax evaders and to deter them from indulging in such malpractices. If, therefore, the provisions of the impugned Act operate harshly towards the tax evaders, it is they alone who are to be blamed. The action taken by the British Parliament against tax evaders was justified in Lord Howard De Walden v. Inland Revenue Commissioners by Lord Greene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be relevant. But, in the present case, all that is necessary is to know when the property was transferred. For that purpose, section 54 is alone relevant. Thereunder, transfer of immovable property is not effected till it is registered. It is only When there is a conflict between two buyers and the priority between the two is to be decided that section 47 of the Registration Act may be invoked. In the present case, the conflict is between the State and the petitioner and the only question for decision is as to which is the transfer on which the impugned Act can fasten. There can be no doubt that the transfer is the one which is effected by an instrument registered under the Registration Act. This transfer came into being only when the instrument was registered and when it was registered the Act had already come into force. As observed in Ram Saran Lall v. Mst. Domini Kuer: "The object of this section (section 47 of the Registration Act) is to decide which of two or more registered instruments in respect of the same property is to have effect ....It has nothing to do with the completion of the registration and, therefore, nothing to do with the completion of a sale" Their Lords ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property is substantial. The competent authority will be better fitted to decide the valuation of the property as a question of fact. If it finds that the fair market value of the property does not exceed the consideration stated in the sale deed by more than 15 per cent. it will drop the proceedings. It is only if it finds that the fair market value exceeds the consideration stated in the deed by more than 15 per cent. that the proceedings would continue. Even thereafter the approval of the Commissioner would be necessary for the final acquisition of the property. Then there are all the usual remedies of appeal to the Income-tax Appellate Tribunal and reference to the High Court open to the petitioner. It is not possible, therefore, to decide the question of valuation in this writ petition as the versions of the parties as to valuation are divergent and a disputed question of fact which cannot be decided without oral evidence arises as to the valuation. The forum provided by the Act and not this court acting under article 226 of the Constitution is best fitted to deal with this disputed question of fact. No other contentions were advanced. The writ petition is, therefore, dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of clauses (b) and (c) of article 39. Since the enactment of article 31C, the first part of which has been held to be constitutional by the Supreme Court, it has become very important to know the scope and meaning of clauses (b) and (c) of article 39 inasmuch as any statute which can be shown to have been enacted to fulfil the objectives contained in clauses (b) and (c) of article 39 would be immune from challenge based on articles 14, 19 and 31. The provisions of clauses (b) and (c) of article 39 are, therefore, bound to be considered on numerous occasions in future in view of the enactment of article 31C. The Taxation Laws (Amendment) Act, 1972, inserting Chapter XXA in the Income-tax Act, 1961, is also a unique enactment. For the first time, it introduces a legislative measure which combines imposition of penalty with acquisition of property of a tax evader. The method of concealing income and evading taxes by buying immovable properties by understating the consideration for the purchase has been used on a large scale in our country and has become a major threat to its economy. The Report of the Direct Taxes Enquiry Committee, 1971 (Wanchoo Committee), has pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X
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