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TMI Blog1991 (2) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ' banking company ' means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of that Act ; (b) 'deposit ' means any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company-- (i) from the Central Government or any State Government or any local authority, or from any other source where the repayment of the amount is guaranteed by the Central Government or a State Government ; (ii) from the Government of a foreign State, or from a citizen of, a foreign State, or from any institution, association or body (whether incorporated or not) established outside India ; (iii) as a loan from a banking company or from a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank) ; (iv) as a loan from any institution or body specified in the list in the Tenth Schedule or such other institution or body as the Central Government may, having regard to the nature and objects of the institution or body, by notification in the Official Gaze ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind this sub-section were set out in a memorandum accompanying the Finance Bill, 1975. It has been extracted in paragraph 8(b) of C.M.W.P. No. 175 of 1979. It reads thus : " 9. Deduction in respect of interest paid by non-banking non-financial companies on public deposits.--As a result of the general policy of credit restraint and enforcement of selective control measures by the Reserve Bank of India, non-banking non-financial companies have been increasingly resorting to acceptance of deposits from the public to meet their financial requirements. The levy of interest-tax under the Interesttax Act, 1974, on the gross amount of interest received by scheduled banks on loans and advances made in India has had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about one per cent. The levy of this tax has, therefore, made the acceptance of deposits by non-banking non-financial companies from the public all the more attractive. In order to ensure that the effectiveness of the monetary policy is not blurred by unrestricted growth of deposits in the non-banking sector, the Bill seeks to provide that 15 per cent. of the interest paid by non-banking non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation (b) to sub-section (8) impugned herein. Rule 3 places certain limits or ceilings, as they may be called, on the total amount of deposits, as also the period for which, a company may accept such deposit. Suffice it to say that these rules also represent a regulatory measure in the same direction. Sri S. P. Gupta, learned counsel for the petitioners, assailed the validity of sub-section (8) of section 40A on the following grounds : (1) Sub-section (8) of section 40A is beyond the legislative competence of Parliament. It is outside the purview of entry 82 of List I in the Seventh Schedule to the Constitution. The sub-section is in no way a legislative measure relating to income. It really imposes tax on a non-existent income. In effect, it treats the 15 per cent. of the expenditure incurred by a company by way of interest as its income, while it cannot be said to be income in any sense of the term. (2).(a) The sub-section is violative of article 14 of the Constitution. It singles out companies and subjects them to a certain disadvantage, while leaving out firms and individuals. There is no reasonable basis upon which companies could be distinguished from others left out, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the said judgment was dismissed on November 10, 1987 (vide S. L. P. No. 9039-41 of 1986). Mr. Gupta, learned counsel for the petitioners, however, contended that since the order of the Supreme Court dismissing the special leave petition does not contain any reasons and is a mere dismissal in limine, it does not constitute the decision of the Supreme Court. According to learned counsel, it does not even amount to affirming the judgment of the Karnataka High Court. He brought to our notice certain decisions of the Supreme Court in support of his contention. While it is not necessary to cite all the authorities relied upon by him, it would be enough if we refer to the decision in Indian Oil Corporation Ltd. v. State of Bihar [1987] 167 ITR 897 ; AIR 1986 SC 1780. In paragraph 8 (at page 1782) of the judgment, it is observed : " It is not the policy of this court to entertain special leave petitions and grant leave under article 136 of the Constitution save in those cases where some substantial question of law of general or public importance is involved or there is manifest injustice resulting from the impugned order or judgment. The dismissal of a special leave petition in limine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section. I. Parliament's competence to enact the sub-section :-- Entry 82 of List I in the Seventh Schedule to the Constitution empowers Parliament to enact laws relating to " taxes on income other than agricultural income ". Entries 43 and 45 may also be noticed. They read : "43. Incorporation, regulation and winding up of trading corporations, including banking, insurance and any financial corporations but not including co-operative societies." " 45. Banking " Entry 97 is a residuary entry. It reads: "Any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists." Entry 20 in List III reads : " Economic and social planning." The expression " income " is not defined in the Constitution, though the expression " agricultural income " is defined in clause (1) of article 366. The expression is also not defined in the General Clauses Act. It has, however, been defined in clause (24) of section 2 of the Income-tax Act, 1961. Clause (6c) of section 2 of the Indian Income-tax Act, 1922, also defined the said expression. These definitions are inclusive definitions and are not exhaustive of the meaning of the expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions in two legislative lists as was done in the C. P. Berar Act, AIR 1939 FC 1, or to enlarge their ordinary meaning as in the State of Bombay v. F. N. Balsara, AIR 1951 SC 318. The cardinal rule of interpretation, however, is that words should be read in their ordinary, natural and grammatical meaning subject to this rider that in construing words in a constitutional enactment conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude. What, then, is the ordinary, natural and grammatical meaning of the word " income " ? According to the dictionary it means " a thing that comes in " (See Oxford Dictionary, Vol. V. P. 162 ; Stroud, Vol. II, pp. 1416). In the United States of America and in Australia both of which also are English-speaking countries the word " income " is understood in a wide sense so as to include a capital gain. Reference may be made to--Eisner v. Macomber [1919] 252 US 189-Merchants Loan and Trust Co. v. Smietanka [1920] 255 US 509 and-United States of America v. Stewart [1940] 311 US 60 and Resch v. Federal Commissioner of Taxation [1943] 66 CLR 198. In each of these cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion " income " occurring in entry 82 of List I should be construed in the sense " Gross profits minus expenses is equal to income ". The Income-tax Act is full of provisions, which provide what income is ; it also prescribes what the permissible deductions are. In many cases, a deduction is granted more than the actual expenditure and, correspondingly, several items of actual expenditure are disallowed either wholly or partly. These rules may be called artificial, but so long as they have some rational relation to the income, they cannot be said to be outside the purview of entry 82. It is equally beyond doubt that Parliament can provide several incentives and disincentives either for encouraging a particular type of industrial/ commercial activity or to discourage it, as the case may be. This much is conceded by Mr. Gupta as well, but what he contends is that while it is open to Parliament to prescribe a ceiling on certain expenditure or to disallow certain expenditure, it is not open to it to provide the disallowance of the kind contained in the impugned sub-section (8). We are unable to see the logic behind this argument. The objects and reasons aforementioned make it evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the expression " banking " must be understood in its widest amplitude and not as confined to banking institutions alone. Any activity akin to banking would come under the expression. By this token, the acceptance of deposits by non-banking and non-financial companies would also fall within the said expression. Moneys so received are evidently used for the purposes of the company or for such other purposes as the company may decide. In any event, the sub-section is, without a doubt, relatable to entry 20 of List III read with entry 82 in List I, as a measure of " economic planning ". To reiterate, the sub-section is a measure of credit control, conceived in the interest of country's economy. In the present day world, Parliament has to, and must be presumed to, keep track of the evolving economic, financial and monetary scenario. It must have the power to regulate, control and channelise it in proper lines. More than one kind of regulation may be called for. There may be many ways an object can be achieved ; it is for Parliament to choose that which it thinks best. The court cannot sit in judgment over the choices made by Parliament, so long as it is within its competence and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of such a classification resulting in unequal burdens on different classes of properties. But if the same class of property similarly situated is subjected to an incidence of taxation, which results in inequality, the law may be stuck down as creating an inequality amongst holders of the same kind of property. It must, therefore, be held that a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in article 14 though the courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in a way that the court might think more just and equitable." Now, there is a well-marked and well-understood distinction between companies on the one hand and firms and individuals and other associations on the other. This is not a distinction created by the impugned sub-section. The incorporated companies constitute a class by themselves. By virtue of their size, clout and reputation, their creditworthiness is several times more than individuals or firms. The very fact that a year earlier--in 1975--the Central Government framed Rules, called Companies (Acceptance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --selective control. Parliament must be conceded a wide choice in this behalf. In any event, it is clear that the enumeration of sources specified in clause (b) of the Explanation is consistent with the above object. It cannot be said that there is no rationale behind the said enumeration. Mr. Gupta then contended that no distinction can be made with reference to the nature or character of the lending agency. He sought to rely upon certain observations of the Supreme Court in P. Vajravelu Mudaliar v. Special Deputy Collector for Land Acquisition, AIR 1965 SC 1017. In particular, paras 19 and 20 in the said judgment were relied upon. That was a case where the impugned Madras Amendment to the Land Acquisition Act provided that where the land is acquired for housing purposes, the compensation shall be paid on the basis of market value of the land as on the date of notification under section 4 or the average market value during the preceding five years, whichever is less. Solatium was also limited to five per cent. as against 15 per cent. under the Land Acquisition Act. The court found that land could be acquired for housing purposes even under the main enactment (Land Acquisition Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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