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TMI Blog2023 (12) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... e Apex Court in Union of India V/s. Exide Industries Limited and Anr. [ 2020 (4) TMI 792 - SUPREME COURT ] relied upon the approach of the Court in testing the constitutional validity of a provision is well settled and the fundamental concern of the Court is to inspect the existence of enacting power and once such power is found to be present, the next examination is to ascertain whether the enacted provision impinges upon any right enshrined in Part III of the Constitution. In the present case, the legislative power of the Parliament to enact sub-clause in the light of Article 245 of the Constitution is not doubted at all. Now to the next step of examination, i.e., whether the said clause contravenes any right enshrined in Part III of the Constitution, either in its form, substance or effect. It is no more res integra that the examination of the Court begins with a presumption in favour of constitutionality. This presumption is not just borne out of judicial discipline and prudence, but also out of the basic scheme of the Constitution wherein the power to legislate is the exclusive domain of the legislature/Parliament. This power is clothed with power to decide when to legislate, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in assessing the merits of petitioner's arguments against the constitutional validity of Section 2(24) (xviii) of the Act. When petitioner applied for the subsidy, the amendment to the Act specifically the inclusion of sub-clause (xviii) to Section 2(24), had been in effect for more than two years. Therefore, petitioner, at the time of application, was having full knowledge or ought to have had full knowledge of the tax treatment of such subsidies post-amendment. Secondly, the act of applying for a subsidy after the amendment came into force indicates an acceptance of the prevailing tax regime. It is reasonable to infer that by choosing to partake in the subsidy scheme, petitioner implicitly acknowledged and consented to the accompanying tax obligations as legislated by the amendment. Thirdly and furthermore, it is a well-settled principle that ignorance of the law is no excuse. Petitioner cannot claim ignorance of the amendment or its implications. The legislative change was not done surreptitiously but was the result of a transparent legal process, providing ample opportunity for all stakeholders to acquaint themselves with the new provisions. A retrospective annulment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etition, it was decided to hear the petition finally at the admission stage itself. 2. Therefore, rule. Rule made returnable forthwith. 3. Petitioner is a biotechnology company manufacturing drugs and vaccines. Petitioner has a manufacturing plant at Hadapsar, Pune. Petitioner s units at Hadapsar area are eligible for deduction under Section 10AA of the Income Tax Act, 1961 (the Act). Petitioner also has commissioned another manufacturing facility in the Special Economic Zone (SEZ) located at Manjari, Pune, which commenced production during the Financial Year 2019-2020. 4. The Government of Maharashtra had, from time to time, issued several Industrial Policies and Schemes to promote industries in less developed areas of the State of Maharashtra. The present writ petition is concerned with one such scheme being, Package Scheme of Incentives, 2013 , which came into effect from 1st April 2013 for a period of five years (hereinafter referred to as the said Scheme). The said Scheme provides for various incentives to major industries depending on the type of project and amount of investments they make. The benefits include stamp duty concessions, exemption from electricity duty and VAT/C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter referred to as impugned sub clause). Clause (24) to Section 2 defines the term income. The relevant portion of sub-clause (xviii) is reproduced herein below : 2(24) Income includes : (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than, - (a) the subsidy or grant or reimbursement which is take ninto account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43 or (b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be. 8. The effect of the impugned sub-clause is that subsidies, grants, cash incentives, duty drawback, waivers, concessions or reimbursements provided by the Central or State Governments either in cash or kind, will be included within the meaning of term income and consequently, will be taxable under the Act. The impugned sub-clause, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t obliterates the clear, well established and fundamental distinction between income and capital receipts disregarding the constitutional scheme that tax can be imposed only on income . Capital or revenue receipt has to be determined on the basis of a purpose test . These subsidies are not taxable under the Act. The impugned sub-clause seeks to do away with the classification and the purpose test; (c) The amendment does not create any distinction between taxability of a capital subsidy or revenue subsidy. Earlier it was held that the subsidy received on capital account is not income under Sections 4 and 5 of the Act or under Section 28 of the Act. However, by insertion of the impugned sub-clause, the said distinction is sought to be done away with. The amendment which removes the said distinction is contrary to the principles of real income theory which is one of the foundations for levy of income tax, and hence liable to be struck down as being unconstitutional and violative of fundamental rights; (d) The State Government provides incentives, in order to promote industries and employment from its own coffers and the disbursal of the incentives and benefits is through funds of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy/assistance is given which determines the nature of the incentive subsidy. As held in Sahney Steel Press Works Ltd. (Supra) and Ponni Sugars and Chemicals Ltd. (Supra), the test laid down was the purpose test . The point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial. It is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. In the case at hand, the subsidy scheme was to enable petitioner to set up a new unit or expand the existing unit and, therefore, the receipt of the subsidy was on capital account; (b) The legislature has sought to artificially do away with the distinction between a revenue receipt and a capital receipt, without providing any legal or rationale for the same. If the object of the scheme is only one, i.e., to promote industrial development and generation of employment, which is the case under the said Scheme, the same can be only on capital account. Any benefit provided by the Governments to augment capital investment cannot by any means be treated as income. The impugned sub-clause seeks to obliterate the clear, well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able receipt, and consequently not an income, to introduce the impugned sub-clause in the teeth of the Supreme Court's decision is ultra vires the Constitution of India. (d) The impugned sub-clause is arbitrary and ultra vires toArticle 14 of the Constitution. The impugned sub-clause without any basis and reasons overrules settled judicial precedents of the Supreme Court and various High Courts which have held that the capital subsidy is not income and cannot be subject matter of tax under the Act. To overrule these decisions by a Parliamentary exercise and without removing the basis of these decisions is arbitrary and in violation of Article 14 of the Constitution. The impugned sub-clause is manifestly arbitrary as it seeks to tax all subsidy without making any distinction between a revenue receipt or capital receipt. Imposing tax on subsidies, irrespective of whether such subsidy is received on revenue account or capital account results in violation of Article 14 of the Constitution. The impugned sub-clause makes no distinction between capital subsidy and revenue subsidy. The failure to make a proper classification is also violative of Article 14. The impugned sub-clause does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (Supra), Sahney Steel Press Works Ltd. (Supra), Chaphalkar Brothers (Supra) and CIT V/s. Shree Balaji Alloys 7 ITR-OL 50 (SC), held that the subsidies received from the Central or the State Government, whether capital or revenue receipt has to be determined on the basis of purpose test . Therefore, if the object of the assistance under the Subsidy Scheme is to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of the subsidy was on capital account. These subsidies are not taxable under the Act. However, the impugned sub-clause seeks to do away with the classification and the purpose test, and consequently, all subsidies are treated as income to be taxable under the Act. In absence of any specific head, the income is to fall under the residuary head income from other sources . This classification, however, may not be correct as these subsidies, if assumed to be subsidies, will be treated as business income. Therefore, in absence of any corresponding amendment to Section 28 of the Act, subsidies received on capital account remains outside the scope of Section 28 and thereby not taxable under the Act. In the event if the Court is not inclin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd revenue receipt, the same is contrary to the very purpose for which it has been introduced, therefore, is liable to be struck down; (i) The importance of Sahney Steel Press Works Ltd. (Supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or expand the existing unit then the receipt of the subsidy was on capital account. (j) The House of Lords in the case of Seaham Harbour Dock Co. V/s. Crook (1931) 16 TC 333 (HL) held that the financial assistance given to the company for dock exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verruling is not permissible. In Vodafone International Holdings BV V/s. Union of India 341 ITR 1 it was held that rights of management or controlling interest are not separate assets; they are incidental to the holding of shares. Similarly, controlling interest in a company is not an identifiable or distinct capital asset. The basis of this judgment was removed by inserting Explanation I to Section 2(14), which reads as under : [ Explanation-1 .]- For the removal of doubts, it is hereby clarified that property includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. Similarly, in the same Vodafone case, it was held that a share of a company incorporated outside India cannot be treated as an asset located in India even if the company's value is derived from underlying assets located in India. By another amendment, the basis of this decision was removed under Section 9(1)(i). Explanation 5 was added whereby such shares were deemed to be situated in India, i.e., foreign shares were deemed to be an asset in India. Explanation reads as under : Explanation 5.-For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of Section 43 of the Act. Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement would support further income generation and since income is to be understood in the widest sense, these items have also been included in the scope of income. It is settled law that income is a word of elastic import; (b) With regards to the challenge of constitutional validity of the impugned sub-clause, it is settled that the following parameters have to be followed by Writ Courts for examining the constitutional validity of any provision namely : (i) Whether the law under challenge lacks legislative competence? (ii) Whether it violates any Article of Part III of the Constitution, particularly, Article 147? (iii) Whether the prescribed criteria and classification resulting there from is discriminatory, arbitrary and has no nexus with the object of the Act? (iv) Whether it is legislative exercise of power which is not inconsonance with constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. The Court also held that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The Court must while examining the constitutional validity of a legislation of this kind be resilient, not rigid, forward looking, not static, liberal and not verbal. The Court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. It would be outside the province of the Court to consider if any particular immunity or exemption is necessary. The trial and error method is inherent in every legislative effort to deal with an obstinate social or economic issue; (e) In Federation of Hotel and Restaurant V/s. Union of India (1989) 3 SCC 634 the Court held that the subject of a tax is different fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idies is nuanced and specific. The tax is levied on the concession amount or the subsidy received, not the total transaction value. This ensures that the taxation is limited to the extra benefit accrued due to the state s incentive schemes, thereby upholding the principles of fairness and equity in taxation. This methodology aligns with the canons of taxation which advocate for fairness, equity, and simplicity, ensuring that the tax burden is proportionate and not unduly onerous. Petitioner's claim of an indirect rollback of incentives is unfounded as the incentives remain intact. The only aspect subjected to taxation is the monetary benefit derived from the subsidy or concession, which is a fair and justifiable tax base; (g) The Constitution safeguards the right to trade under Article 19(1)(g) but does not extend this protection to the right to profit. Petitioner s assertion that taxation of subsidies and concessions under the impugned sub-clause effectively nullifies the distinction between capital and revenue subsidies leading to the erosion of what they perceive as a benefit or savings cannot be entertained. They are not, however, intended to serve as permanent fixtures bey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Parliament. It is petitioner s case that by amending Section 2(24)(xviii), the legislature has essentially overruled judicial precedents that distinguished capital receipts from revenue receipts, subsuming both under income and subjecting them to taxation, thereby overriding the established legal principles. Petitioner s argument regarding the violation of Article 14 stems from the assertion that the amendment to Section 2(24)(xviii) of the Act, which brings various subsidies under the ambit of taxable income, is discriminatory and arbitrary. Petitioner s argument is based on the premise that such savings are not a gain or profit that accrues to the business but rather a reduction in expenditure. Petitioner s argument is that such amendment indiscriminately broadens the definition of income to include subsidies, without distinguishing between various types of subsidies and the purposes for which they are granted. 15. The facts, therefore, are very short. It is petitioner s case that it expanded its business unit in Hadapsar, Pune, in view of the said Scheme introduced by the Government of Maharashtra. The benefit that petitioner was to get by setting up this ultra mega project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel and Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payments were made several times for some years. The Dock Co. had undertaken the work of extension of its docks. The extended dock was for relieving the unemployment. The main purpose was relief from unemployment. Therefore, the House of Lords held that the financial assistance given to the company for dock extension cannot be regarded as a trade receipt. It was found by the House of Lords that the assistance had nothing to do with the trading of the company because the work undertaken was dock extension. According to the House of Lords, the assistance in the form of a grant was made by the Government with the object that by its use men might be kept in employment and, therefore, its receipt was capital in nature. The importance of the judgment lies in the fact that the company had applied for financial assistance to the Unemployment Grants Committee. The Committee gave financial assistance from time to time as the work progressed and the payments were equivalent to half the interest for two years on approved expenditure met out of loans. Even though the payment was equivalent to half the interest amount payable on the loan (interest subsidy) still the House of Lords held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employment problem. Because the work undertaken was extension of the dock and the main purpose was relief of unemployment, the House of Lords held that the financial assistance given to the company for extension of the dock cannot be regarded as trade receipt. It was found that the assistance had nothing to do with trading of the company because the work undertaken was dock extension. Lord Buckmaster, in his judgment, wrote as under : Now I do not myself think that the matter can be put more succinctly than it was put by Mr. Hills when he said : Was this a trade receipt? , and my answer is most unhesitatingly : No. It appears to me that it was nothing whatever of the kind. It was a grant which was made by a government department with the idea that by its use men might be kept in employment, and it was paid to and received by the Dock Company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed. I find myself quite unable to see that it was a trade receipt, or that it bore any resemblance to a trade r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supra) and Ponni Sugars and Chemicals Ltd. (Supra), the Court held that if the subsidy's purpose was to help the assessee run the business more profitably or meet daily business expenses, it was considered a revenue receipt (and thus taxable). Conversely, if the subsidy aimed at setting up a new unit or expanding an existing unit, it was deemed a capital receipt (and not taxable). The Finance Act, 2015, significantly altered the landscape by introducing sub-clause (xviii) to Section 2(24) of the Act. This amendment defined any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement provided by the Central or State Government as income, hence taxable, unless used to determine the actual cost of an asset. This amendment sought to end disputes by making all subsidies taxable unless they fell under an exclusion category; 22. There is very limited scope in challenge to constitutional validity. The fulcrum of the constitutional challenge is the question of legislative competence. Every legislation is an experiment in achieving certain desired ends and trial and error method is inherent in every such experiment. The law is very cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive effort to deal with an obstinate social or economic issue and if it is found that any immunity or exemption granted under the Act is being utilised for tax evasion or avoidance not intended by the legislature, the Act can always be amended and the abuse terminated. Paragraphs 7, 8, 16 and 19 of R. K. Garg (Supra) read as under : 7. Now while considering the constitutional validity of a statute said to be violative of Article 14, it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in discharge of its constitutional function of judicial review. The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Company 94 Lawyers Edition 381 be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. The court should constantly remind itself of what the Supreme Court of the United States said in Metropolis Theater Co. v. City of Chicago : The problems of government are practical ones and may justify, if they do not require, rough accommodations, illogical it may be, and unscientific. But even such criticism should not be hastily expressed. What is best is not always discernible, the wisdom of any choice may be disputed or condemned. Mere errors of government are not subject to our judicial review. It is true that one or the other of the immunities or exemptions granted under the provisions of the Act may be taken advantage of by resourceful persons by adopting ingenious methods and devices with a view to avoiding or saving tax. But that cannot be helped because human ingenuity is so great when it comes to tax avoidance that it would be almost impossible to frame tax legislation which cannot be abused. Moreover, as already pointed out above, the trial and error method is inherent in every legislative effort to deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as irrational. Judicial veto is to be exercised only in cases that leave no room for reasonable doubt. Constitutionality is presumed. Every statute, including fiscal statutes, comes with a presumption of constitutionality unless proven otherwise. The onus falls on petitioner to demonstrate a clear transgression of constitutional principles. In the realm of fiscal laws, the presumption of constitutionality is particularly significant due to the complex nature of economic regulation. Since these laws are instrumental in the financial governance of the state and are often the outcome of detailed economic planning and consideration, courts are inclined to approach them with deference. Unless a fiscal statute is manifestly arbitrary or discriminatory in its provisions or its operation, it is typically upheld. This allows for a broad range of discretion for the legislature in determining the classes of individuals or entities that are subject to or exempt from taxation, as long as there is a rational basis for such a classification. 25. No precise or set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of this Court on the matter have permitted the legislatures 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. 47. But, with all this latitude certain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws 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. Differentia 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 or set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be one of palpable arbitrariness applied in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mind. Classification is inherent in legislation. To recognize marked differences that exist in fact is living law; to disregard practical differences and concentrate on some abstract identities is lifeless logic. and concluded In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The Courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events - self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. 52. In G.K. Krishnan v. Tamil Nadu, Mathew J. referred to the following observations of the Supreme Court of U.S.A. in San Antonio School District v. Rodrigues : Thus we stand on familiar ground when we continue to acknowledge that the Justices of this Court lack both the expertise and the familiarity with local problems so necessary to the making of wise decisions with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other; that the constitution often admits of different interpretations; that there is often a range of choice and judgment; that in such cases the constitution does not impose upon the legislature any one specific opinion, but leaves open this range of choice; and that whatever choice is rational is constitutional. 55. Thayer also referred to the words of a Chief Justice of Pennsylvania way back in 1811 which are also worth recalling : For weighty reasons, it has been assumed as a principle in constitutional construction by the Supreme Court of the United States, by this court, and every other court of reputation in the United States, that an Act of the legislature is not be declared void unless the violation of the constitutional is so manifest as to leave no room for reasonable doubt. 56. In Secretary of Agriculture v. Central Roig Refining Co., the Supreme Court of USA said : ..... This court is not a tribunal for relief for crudities and inequities of complicated experimental economic legislation. 57. In Hoechst Pharmaceuticals Ltd. v. State of Bihar it was observed : ..... On questions of economic regulations and related matters, the court must defer to the legislative-judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of Madras v. Gannon Dunkerley Co., in respect of sales tax. In that case the legislative trend prevalent over decades was relied upon in interpreting the expression sale of goods used in the Constitution. But there the Court was concerned with a legal term, sale , which had acquired a definite connotation in law and in legislative instruments and that analogy cannot be availed of to interpret the scope of Entry 97. On the other hand, even a fairly long-established legislative practice under which income tax levy by the Centre was restricted to items of income stricto sensu (as contrasted with capital gains) was not considered sufficient to place that type of restriction on the interpretation of the expression taxes on income used in the Central Legislative List: vide, Navinchanda Mafat Lal v. CIT. Not only that, the validity of later definitions of income under the Income-tax Act which have a much wider ambit has been upheld as covered by the above legislative entry. See, in this context, the decisions in Naynit Lal v. AAC, Bhargava v. Union, and Bhagwandas v. Union. There is not even that much of legislative practice, so far as expenditure tax is concerned, which would justify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell settled that any tax legislation may not be easily interfered with. The Courts must show judicial restraint to interfere with tax legislation unless it is shown and proved that such taxing statute is manifestly unjust or glaringly unconstitutional. Taxing statutes cannot be placed or tested or viewed on the same principles as laws affecting civil rights such as freedom of speech, religion, etc. The test of taxing statutes would be viewed on more stringent tests and the law makers should be given greater latitude. It would be useful to refer to a couple of judgments on the above proposition. 28. In the case of R.K. Garg etc. vs. Union of India and others, (1981) 4 SCC 675, the Constitution Bench was judging the constitutionality of economic legislation wherein challenge was to the validity of the provisions of Special Bearer Bonds (Immunities and Exemption Act, 1981) on the grounds of discrimination and violation of Article 14. P.N. Bhagwati J., speaking for himself, Chief Justice Chandrachud, A.C. Gupta, S. Murtaza Fazal Ali and A.N. Sen, J.J., observed in paragraph 7 regarding the presumption in favour of constitutionality of the statute and that the burden is on the person wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation for the same. (emphasis supplied) 28. It was submitted on behalf of petitioner that the test of manifest arbitrariness was a ground to invalidate even the primary legislation and Mr. Datar relied upon Shayara Bano V/s. Union of India 1981 (4) SCC 675 and In Re Natural Resources Allocation 1989 (3) SCC 634. According to petitioner, the impugned Section is liable to be struck down as manifestly arbitrary. There is nothing to indicate that there was anything arbitrary in introduction of the impugned sub-clause. We do not find that the sub-clause suffered from the vice of discrimination. All have been treated with equality and uniformity. There is no discrimination against any particular persons or classes. 29. As held by the Apex Court in Union of India V/s. Exide Industries Limited and Anr. 2020 (5) SCC 274 relied upon by the ASG, the approach of the Court in testing the constitutional validity of a provision is well settled and the fundamental concern of the Court is to inspect the existence of enacting power and once such power is found to be present, the next examination is to ascertain whether the enacted provision impinges upon any right enshrined in Part III of the Consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n specific leakages. Such laws are always pin-pointed in nature and are only meant to target a specific avenue of taxability depending upon the experiences of tax evasion and tax avoidance at the ground level . The general principles of exclusion and inclusion does not apply to taxing statutes with the same vigour unless the law reeks of constitutional infirmities. No doubt, fiscal statutes must comply with the tenets of the Constitution. However, a larger discretion is given to the legislature in statutes than in other spheres. Paragraphs 15 to 17, 36, 37 and 44 of Exide Industries Limited and Anr. (Supra) read as under : 15. The approach of the Court in testing the constitutional validity of a provision is well settled and the fundamental concern of the Court is to inspect the existence of enacting power and once such power is found to be present, the next examination is to ascertain whether the enacted provision impinges upon any right enshrined in Part III of the Constitution . Broadly speaking, the process of examining validity of a duly enacted provision, as envisaged under Article 13 of the Constitution, is premised on these two steps. No doubt, the second test of infringeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of constitutionality. This presumption is not just borne out of judicial discipline and prudence, but also out of the basic scheme of the Constitution wherein the power to legislate is the exclusive domain of the Legislature/ Parliament. This power is clothed with power to decide when to legislate, what to legislate and how much to legislate. Thus, to decide the timing, content and extent of legislation is a function primarily entrusted to the legislature and in exercise of judicial review, the Court starts with a basic presumption in favour of the proper exercise of such power. xxxxxxxxxx 36. The process of testing validity is not to sneak into the prudence or proprieties of the legislature in enacting the impugned provision. Nor, is it to examine the culpable conduct of the legislature as an appellate authority over the legislature. The only examination of the Court is restricted to the finding of a constitutional infirmity in the provision, as is placed before the Court. Thus, the nondisclosure of objects and reasons per se would not impinge upon the constitutionality of a provision unless the provision is ambiguous and the possible interpretation violate Part III of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djust its system of taxation in all proper and reasonable ways... Viewed thus, the reason weighed with the Division Bench of the High Court in the impugned judgment is untenable. (emphasis supplied) 30. In Malwa Bus Service (Private) Limited and Ors. V/s. State of Punjab and Ors. (1983) 3 SCC 237, the Court held in paragraph 21 as under : 21. xxxxxxxxxxxxxx even a fiscal legislation is subject to Article 14 of the Constitution. But it is well settled that a legislature in order to tax some need not tax all. It can adopt a reasonable classification of persons and things in imposing tax liabilities. A law of taxation cannot be termed as being discriminatory because different rates of taxation are prescribed in respect of different items provided it is impossible to hold that the said items belong to distinct and separate groups and that there is a reasonable nexus between the classification and the object to be achieved by the imposition of different rates of taxation. The mere fact that a tax falls more heavily on certain goods or persons may not result in its invalidity. xxxxxxxxxxxx (emphasis supplied) 31. The Constitution safeguards the right to trade under Article 19(1)(g) but d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nished or greatly reduced, it cannot be held that there is any infringement of Article 19(1)(g) under Part III of the Constitution of India. Paragraphs 7 and 8 of the said judgment read as under : 7. It has not been contended on behalf of the State that the impugned Validating Act imposes a tax which is by way of a regulatory or compensatory measure. It has, therefore, to be seen whether the restrictions imposed are reasonable and in public interest within the meaning of Article 304(b). Before the High Court an attempt was made on behalf of the appellants to show that by raising the rate of tax the burden had been increased to such an extent that the business of the appellants had been virtually annihilated. According to some of the affidavits filed on behalf of the writ petitioners, profits derived in recent years did not exceed an average of Rs. 2,000/- per stage carriage even without the additional burden which had been imposed and the transporters would suffer heavy losses if the tax as increased by the impugned legislation were to be realized. The High Court referred to the computation of the income by the Income tax department of some of the transporters in whose assessments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its invalidity. The policy of a tax, in its effectuation, might, of course, bring in some hardship in some individual cases. But that is inevitable, so long as law represents a process of abstraction from the generality of cases and reflects the highest common factor. Every cause, it is said, has its martyrs. Then again, the mere excessiveness of a tax or even the circumstance that its imposition might tend towards diminution of the earnings or profits of the persons of incidence, like in the case at hand savings get reduced resulting in lower profitability, does not, per se, and without more, constitute violation of the rights under Part III of Constitution of India. 33. The chronology of events is pivotal in assessing the merits of petitioner's arguments against the constitutional validity of Section 2(24) (xviii) of the Act. When petitioner applied for the subsidy, the amendment to the Act specifically the inclusion of sub-clause (xviii) to Section 2(24), had been in effect for more than two years. This timeline is not merely incidental but is of substantive significance for several reasons. Firstly, petitioner, being engaged in business activities, is presumed to have co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of constitutional principles. The nature of economic regulation is complex. The fiscal laws are instrumental in the financial governance of the state and are outcome of detailed economic planning and consideration. 37. Undoubtedly, the power to tax exists and the extent of burden is a matter for the discretion for the law makers. It is not the function of the court to consider the propriety or justness of the tax or enter upon the reality of legislative policy. If the evident intent and general operations of the tax legislation is to adjust the burden with a fair reasonable degree of equality, the constitutional requirement is satisfied. 38. The policy of tax in its effectuation, might, of course, bring in some hardship in some individual cases. That is, inevitable. Every cause, it is said, has its martyrs. Mere excessiveness of a tax or even the circumstances that its imposition might tend towards the diminution of the earnings or profits of petitioner, per se and cannot constitute violation of constitutional rights. If in the process a few individuals suffer severe hardship that cannot be helped, for individual interests must yield to the larger interests of the community or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y means realisation of monetary benefit and that in the absence of any such realisation by the assessee, the inclusion of any amount by way of notional income under Section 23(2) of the Act in the chargeable income was impermissible as it was outside the scope of Entry 82 of List I of the Seventh Schedule to the Constitution. The court held, words in the Constitution conferring legislative power should receive a liberal construction and should be interpreted in their widest amplitude. The word income in Entry 82 is capable of a wider meaning than what was given to it in the Indian Income Tax Act, 1922 or the English Act of 1918 and includes all items which were taxable under the contemporaneous law relating to tax on incomes which was in force at the time when the Constitution was enacted. The Court held that even in its ordinary economic sense, the expression income include not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income. Paragraphs 5, 6, 13 and 14 of the said judgment read as under : 5. Entry 82 of List I of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich defines 'agricultural income' as agricultural income as defined for the purposes of the enactments relating to Indian Income-tax and Article 366(29) which defines 'tax on income' as including a tax in the nature of an excess profits tax. In the circumstances it would not be wrong to construe the word 'income' in Entry 82 as including all items which were taxable under the contemporaneous law relating to tax on incomes which was in force at the time when the Constitution was enacted when as observed by this Court in the case of Navinchandra Mafatlal (supra) the word 'income' in Entry 82 is capable of a wider meaning than what was given to it in the Indian Income-tax Act, 1922 or the English Act of 1918. 14. Even in its ordinary economic sense, the expression 'income' includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income. The tax levied under the Act is on the income (though computed in an artificial way) from house property in the above sense and not on house property. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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