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TMI Blog2003 (8) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel pointed out that the legislative competence for the impugned Act has to be necessarily referable to Article 366(29), Entry 82 of List-I of Schedule-VII of the Constitution i.e. Tax on Income ; since the impugned Act does not provide for deduction of basic expenditure or outgoing like interest payable by Bank to its depositors, and also deduction of administrative expenses incurred by the Bank for carrying out its activities and makes the levy of interest tax on total gross receipts, it ceases to be a tax on income and as such is unsustainable in law on the ground of lack of legislative competence. In other words, it is his submission that by seeking to include what cannot form part of he interest and levying the tax thereon, i.e., the discounts and commitment charges, the concept of interest is expanded to include what is not income . It is also his submission that the Interest Act, structurally, functionally and in the mode of ascertainment, forms part of income and therefore it cannot be traced to Entry 97 of List-I of Schedule-VII. In support of his submission, Sri Sarangan referred to us the observations made in Kanga Phalkiwala Volume-I, VIII Edition, page 455 foot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy of tax under the Act results in violation of the right guaranteed to the appellant under Article 14 of the Constitution of India. In support of this submission the learned Counsel referred to us the decisions of the Hon ble Supreme Court in the cases of ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82 and Murthy Match Works v. Asstt. Collector of Central Excise AIR 1974 SC 497. 5. Lastly, he submitted that the learned Single Judge, in the impugned Order, has not properly appreciated the purport of submission made on behalf of the Appellant under Article 270 of the Constitution of India. It is his submission that it is the case of the Appellant that in case the Interest Tax falls within Entry 82 of List-I of Schedule-VII, the fact that the Interest Tax is not being shared by the Union and the State in the manner laid down under Article 270 of the Constitution of India renders the Act void as a colourable piece of legislation intended to defeat Article 270 of the Constitution. According to him, Article 270 of the Constitution enjoins that the tax collected on income are liable to be distributed between the Union and the States; and non-distribution of interest tax between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court in the case of Jain Bros. v. Union of India [1969] 3 SCC 311, in the case of Kamta Prasad Aggarwal v. Executive Officer [1974] 4 SCC 440, in the case of N. Takin Roy Rymbai (supra), in the case of Murthy Match Works (supra), in the case of Hiralal Rattanlal v. State of UP [1973] 1 SCC 216, in the case of Avinder Singh v. State of Punjab [1979] 1 SCC 137, in the case of CST v. Radhakrishan [1979] 2 SCC 249 and in the case of Federation of Hotel Restaurant v. Union of India AIR 1990 SC 163. 7. In the light of rival submissions made by the learned Counsel appearing of the Parties, the only question that would arise for our consideration in this Appeal is as to whether the impugned Act is liable to be declared as unconstitutional on the grounds urged by the Counsel for the Appellant ? 8. Before we proceed to consider the contentions urged, it is useful to refer to the salient features of the impugned Act. The Act was enacted as Act No. 45 of 1974 by the Union of India and the Act originally envisaged the imposition of special tax on the amounts of interest received by the Scheduled Banks on loans and advances made. The Act introduced with effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to very certain agreements.-Notwithstanding anything contained in any agreement under which any term loan has been sanctioned by the credit institution before the 1st day of October, 1991, it shall be lawful for the credit institution to vary the agreement so as to increase the rate of interest stipulated therein to the extent to which such institution is liable to pay the interest-tax under this Act in relation to the amount of interest on the terms loan which is due to the credit institution. 9. Now, we proceed to examine each one of the contentions urged by the Counsel for the Parties. At the very outset we may point out that we are unable to accede to the first contention urged by Sri Sarangan that the Interest Tax is a tax on income and therefore it is referable only to Entry 82 of List-I of Schedule VII, i.e., Article 366(29) of the Constitution of India and therefore, the tax made leviable without providing for deductions towards the interest payable by the financial institutions to its depositors and also providing for deduction of expenditure incurred and making the tax leviable on gross income received, is beyond the legislative competence. Article 366 of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also the provision made under section 26C of the Act to pass on the interest-tax paid by the credit institution to its customers notwithstanding the agreement made fixing the rate of interest, supports the above conclusion of ours that the interest-tax levied under the Act is different from the income-tax levied under the Income-tax Act. The Hon ble Supreme Court in the case of Second GTO v. D.H. Hazareth AIR 1970 SC 999 has taken the view that the gift-tax enacted in traceable to Entry 97 of List-I of Schedule-VII. In the said case at paragraphs 4 and 5 it is observed as follows : 4. . . . Then there is the declaration in article 248 of the residuary powers of legislation. Parliament has exclusive power to make any law in respect to any matter not enumerated in the Concurrent List or State List and this power includes the power of making any law imposing a tax not mentioned in either of those lists. For this purpose, and to avoid any doubts, an entry has also been included in the Union List to the following effect : 97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists. 5. It will, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not fall either in entry 49, List-II or entry 86, List-I. It would be arbitrary to say that it does not fall within entry 97, List-I. We find it impossible to limit the width of article 248 and entry 97, List I by the words exclusive of agricultural land in Entry 86, List I. We do not read the words any other matter in entry 97 to mean that it has any reference to topics excluded in entries 1-96, List I. It is quite clear that the words any other matter have reference to matters on which the Parliament has been given powers to legislate by the enumerated entries 1-96, List I and not to matters on which it has not been given power to legislate. The matter in entry 86, List-I is the whole entry and not the entry without the words exclusive of agricultural land . The matter in entry 86, List-I again is not tax on capital value of assets but the whole entry.... 20. It seems to us that the function of article 246(1) read with entries 1-96, List-I, is to give positive power to Parliament to legislate in respect of these entries. Object is not to debar Parliament from legislating on a matter, even if other provisions of the Constitution enable it to do so. Accordingly we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y credit institutions, to pass on the interest tax payable by it to the borrower of the term loan notwithstanding anything contained in the agreement under which any term loan has been sanctioned by the Credit Institutions. Section 18 of the Act also empowers the credit institutions notwithstanding anything contained in the Income-tax Act in computing the income of such of credit institution chargeable to income-tax under the head of Profits and gains of business or profession or, under the head Income from other sources , the interest-tax payable by the credit institution for any assessment year, to deduct the interest-tax paid from the income under respective heads. The Division Bench of this Court, in the case of Devakala Consultancy Services v. Union of India AIR 1999 Kar. 319, has taken the view that the credit institutions are entitled to pass on the tax burden to the borrower. It is useful to refer to the observation made at paragraphs 5 and 6 of the said Judgment, which reads as hereunder : 5. The interest tax was enacted to impose a special tax on the total amount of interest received by the scheduled banks on loans and advances made in the country. Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fession is irrespective of the question of income. 13. It is also necessary to point out that even if it is held that the impugned Act amounts to levying tax on income and it is traceable to Entry 82 of List-I of Schedule-VII, still we are of the view that the said Act is not liable to be struck down as unconstitutional on the ground urged by the learned Counsel appearing for the Appellant. In fact, the learned Single Judge has taken the view that the income received by the credit institutions in respect of loans and advances is also an income. Therefore, the words tax on income as observed by the learned Single Judge, is wide enough to include several types of income including the tax on interest income of the financial institutions; and could have been special provision for levy of additional tax, surcharge on particular type of income in itself, or the Parliament could legislate by way of separate enactment as has been done in the instant case. The Hon ble Supreme Court in the case of Jain Bros. (supra) has taken the view that double taxation is not alien to fiscal statute. In this connection, it is useful to refer to the observation made by the Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The last one, for instance, deserves the least attention. There is nothing in article 265 of the Constitution from which one can spin out the constitutional vice called double taxation. (Bad economics may be good law and vice versa). Dealing with a somewhat similar argument, the Bombay High Court gave short shift to it in Western India Theatres. Some undeserving contentions die hard, rather survive after death. The only epitaph we may inscribe is : Rest in peace and don t be re-born! If on the same subject-matter the Legislature chooses to levy tax twice over there is no inherent invalidity in the fiscal adventure save where other prohibitions exist. (p. 144) 15. Further, in the case of Public Services Tribunal Bar Association v. State of Uttar Pradesh [2003] 4 SCC 104 the Hon ble Supreme Court while laying down the guidelines to nullify the legislation on the ground of constitutional infirmities, at paragraphs 27 and 28 has observed as follows : 27. ...In the present appeals legislative action of State is under challenge. Judicial system has an important role to play in our body politic and has a solemn obligation to fulfil. In such circumstances it is imperati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the three wings of the State and the concept of checks and balances inherent in such scheme. [Emphasis supplied] (p. 121) 16. Therefore, in the light of the discussion made above, it is not possible to take the view that the impugned Act is liable to be struck down either on the round it amounts to double taxation or on other grounds urged by Sri Sarangan. 17. The third contention advanced by Sri Sarangan that the impugned Act is liable to struck down on the ground it is violative of the right guaranteed to the appellant under Article 14 of the Constitution of India, in our view, is devoid of any substance. It is not possible to accept the submission of the learned Counsel that the appellant and other financial institutions which are similarly situated like the appellant are picked up for hostile discrimination while other persons who are similarly situated like the appellant and who are also in receipt of interest are not subjected to any interest tax. The contention of the learned Counsel that persons who are dissimilarly situated are grouped together, to our mind, in the facts and circumstances of the case, does not merit any consideration, as it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utes. ****** 19. In Khandige Sham Bhat v. Agricultural ITO AIR 1963 SC 591, this Court laid down the tests to find out whether there are discriminatory provisions in a taxing statute. Therein this Court observed that in order to judge whether a law was discriminatory what had primarily to be looked into was not its phraseology but its real effect. If there was equality and uniformity within each group, the law could not be discriminatory, though due to fortuitous circumstances in a peculiar situation some included in a class might get some advantage over others, so long as they were not sought out for special treatment. Although taxation laws could be no exception to this rule, the Courts would, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification so long as there was no transgression of the fundamental principles underlying the doctrine of classification. The power of the Legislature to classify must necessarily be wide and flexible so as to enable it to adjust its system of taxation in all proper and reasonable ways. 20. It must be noticed that generall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxation, the decisions of the Hon ble Supreme Court have permitted the Legislature to exercise an extremely wide discretion in classifying items for tax purposes so long as it refrains from clear and hostile discrimination against particular persons or classes. It is well settled that mere fact that a tax falls more heavily on some in the same category, it is not by itself a ground to declare the law invalid. In this connection, it is useful to refer to the observation made by the Hon ble Supreme Court in the case of N. Takin Roy Rymbai (supra). In the said decision at paragraph 27 the Hon ble Supreme Court has observed as follows: While it is true that a taxation law cannot claim immunity from the equality clause in article 14 of the Constitution, and has to pass, like any other law, the equality test of that article, it must be remembered that the State has, in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerable wide discretion in the matter of classification for taxation purposes. Given legislative competence, the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. Differential must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating differently in relation to different groups or class of persons to attain certain ends and must, therefore, possess the power to distinguish and classify persons or things. It is also recognised that no precise of set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be one of the palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience. [Emphasis supplied] (p. 1652) 21. From the law laid down by the Hon ble Supreme Court in the decisions referred to by us above, it is clear that the test could only be one of the palpable arbitrariness applied in the context of the felt needs of the times and societal exig ..... 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