Notwithstanding the fact that this author is not in agreement with the judgement and considers this order identical to the Maulvi Tamizuddin Khan case insofar as tax matters are concerned. Nevertheless, it is the law of the country. Even if the tests designed by this judgement are applied, the levy of (7E) is void under Entries 47, 48 or 52 of the list. In paragraphs 31, 32 and 34 of the order of the Elahi Cotton the Supreme Court has deliberated the concept of income and deemed income as under:
“31. From the above case-law and the treatises, inter alia the following principles of law are deducible:—-
i) That in view of a wide variety of diverse economic criteria, which are to be considered for the formulation of a fiscal policy, Legislature enjoys a wide latitude in the matter of selection of persons, subject- matter, events, etc. for taxation. But with all this latitude certain irreducible desiderata of equality shall govern classification for differential treatment in taxation law as well.
Deemed income tax on ownership of vacant plot incorrect–I
(ii) That Courts while interpreting laws relating to economic activities view the same with greater latitude than the laws relating to civil rights such as freedom of speech, religion ,etc., keeping in view the complexity of economic problems which do not admit of solution through any doctrinaire or strait jacket formula as pointed out by Holmes, J. in one of his judgments.
(iii) That Frankfurter J., in Morey v. Doud (1957) U.S. 457 has remarked that in the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to the legislative judgement;
(iv) That the Legislature is competent to classify persons or properties into different categories subject to different rates of tax. But if the same class of property similarly situated is subject to an incidence of taxation, which results in inequality amongst holders of the same kind of property, it is liable to be struck down on account of infringement of the fundamental right relating to equality.
(v) That a State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably. (Willi’s Constitutional Law)
(vi) That the tests of the vice of discrimination in a taxing law are less rigorous. If there is equality and uniformity within each group founded on intelligible differentia having a rational nexus with the object sought to be achieved by the law, the Constitutional mandate that a law should not be discriminatory is fulfilled.
(vii) That the policy of a tax, in its operation, may result in hardships or advantages or disadvantages to individual assessees which are accidental and inevitable. Simpliciter this fact will not constitute violation of any of the fundamental rights.
(viii) That while interpreting Constitutional provisions, the Court should keep in mind, social setting of the country, growing requirements of the society/nation, burning problems of the day and the complex issues facing the people, which the Legislature in its wisdom through legislation seeks to solve. The judicial approach should be dynamic rather than static, pragmatic acid not pedantic and elastic rather than rigid.
(ix) That the law should be saved rather than be destroyed and the Court must lean in favour of upholding the constitutionality of a legislation keeping in view that the rule of Constitutional interpretation is that there is a presumption in favour of the constitutionality of the legislative enactments unless ex facie it is violative of a Constitutional provision.
(x) That as per dictionary the word ‘income’ means a thing that comes in. Its natural meaning embraces any profit or gain which is actually received. However, while construing the above word used in an entry in a legislative list, the above restricted meaning cannot be applied keeping in view that the allocation of the subjects to the lists is not by way of scientific or logical definition but by way of mere simple enumeration of broad categories.
(xi) That 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. For example, the use of a house by its owner.
(xii) That what is not income under the Income Tax Act can be made income by a Finance Act. An exemption granted by the Income Tax Act can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge, of course, subject to Constitutional limitations.
(xiii) That the question, whether a particular kind of receipt is income or not, would depend for its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source are not satisfactorily explained by an assessee, facts which are generally within his peculiar knowledge, the Income Tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source.
(xiv) That the expression clothes make the man would be more nearly right if it were Income makes the man. Knowledge about the income of a person will reveal most about him. It is a barometer to evaluate his habits and views.
(xv) In Haig‘s language income is the increase or accretion in one‘s power to satisfy his wants in a given period in so far as that power consists of (a) money itself or (b) anything susceptible of valuation in terms of money, whereas Simons equates personal income with algebraic sum of consumption and change is net worth:
(xvi) That the process of income determination is often expressed as one of the matching costs and revenues. It involves the process of working out costs used in connection with the earning of the revenue in a particular accounting period.
(xvii) That generally the effect of a deeming provision in a taxing statute is that it brings within the tax net an amount which ordinarily would not have been treated as an income. In other words, it brings within the net of chargeability income not actually accrued but which supposedly to have accrued notionally.
(xviii) That when a statute enacts that something shall be deemed to have been done which in fact and in truth was not done, the Court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to.
(xix) That where a person is deemed to be something the only meaning possible is that whereas he is not in reality that something, the Act required him to be treated as he were with all inevitable corollaries of that state of affairs.
(xx) That the legal fictions are limited for a definite purpose, they cannot be extended beyond the purpose for which they are created.
(xxi) That income-tax is a tax on a person in relation to his income. It is a tax imposed upon a person (natural or artificial) in relation to his income.
(xxii) That any legislation whereby either the prices of marketable commodities are fixed in such a way as to bring them below the cost of production and thereby make it impossible for a citizen to carry on his business or tax is imposed to such a way so as to result in acquiring property of those on whom the incidence of taxation fell, then such legislation would be violative of the fundamental rights to carry on business and to hold property as guaranteed in the Constitution.
(xxiii) That the taxing power is unlimited as long as it does not amount to confiscation and that the Legislature does not have the power to tax to the point of confiscation.
(xxiv) That the word ‘reasonable’ is a relative generic term difficult to adequately definition. It inter alia connotes agreeable to reason; conformable to reason; having the faculty of reason; rational; thinking, speaking, or acting rationally; or according to the dictates of reason; sensible; just; proper and equitable or to act within the Constitutional bounds.
(xxv) That a direct tax is one which is demanded from the very person, who it is intended or desired should pay it, whereas indirect taxes are those, which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, like custom duties, excise taxes and sales tax, which are borne by the consumers.
(xxvi) That levy of building tax on the basis of the covered area without taking into consideration, the class to which a particular building belongs, the nature of construction, the purpose for which it is used, its situation and its capacity for profitable use and other relevant circumstances bearing on the matters of taxation is not sustainable in law for want of reasonable classification.
(xxvii) That there is a clear distinction between the subject-matter of a tax and the standard by which the amount of tax is measured keeping in view the practical difficulties, which are encountered by the Revenue to locate the persons and to collect the tax due in certain trades, if the Legislature in its wisdom thought that it would facilitate the collection of tax due from specified traders on a presumptive basis, the same is not violative of the Fundamental Right relating to equality.
(xxviii) That denial of reliefs provided by sections 28 to 43-C of the Indian Income Tax Act to the particular business or trades covered by section 44-AC thereof without showing some basis fair and rational and without having nexus to the object sought to be achieved by the Legislature, held unfair, arbitrary, disproportionate to the prevalent evil and constitutes denial of equal treatment. Consequently, the Indian Supreme Court did not press into service the non obstante clause of section 44-AC by applying the theory of reading down as a rule of interpretation.
(xxix) That it is an accepted canon of taxation to levy tax on the basis of ability to pay. The section 115-J and 115-JA incorporated in Indian Income Tax Act, 1961, were intended and designed to bring within the tax net the companies, which though making huge profits and also declaring substantial dividends, but have been managing their affairs in such a way by availing of tax concessions etc., as to avoid payment of income-tax.
(xxx) That the theory of reading down is a rule of interpretation which is resorted to by the Courts when they find a provision read literally seems to offend a fundamental right or falls outside the competence of the particular Legislature.
(xxxi) That though the Legislature has the prerogative to decide the questions of quantum of tax, the conditions subject to which it is levied, the manner in which it is sought to be recovered, but if a taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of the tax or that is confiscatory, the Court may strike down the impugned statute as unconstitutional,
(xxxii) That the rule of interpretation that while interpreting an entry in a Legislative List it should be given the widest possible meaning does not mean that Parliament can choose to tax as income as an item which in no rational sense can be regarded as a citizen‘s income. The item taxed should rationally be capable of being considered as the income of a citizen.
(xxxiii) That before charging tax, an assessee must be shown to have received income or the same has arisen and accrued or deemed to be so under the statute. Any amount which cannot be treated as above is not an income and, therefore, cannot be subject to tax.
(xxxiv) That there is a marked distinction between a tax on gross revenue and a tax on income, which for taxation purposes, means gains and profits. There may be considerable gross revenues, but no income taxable by an income-tax in the accepted sense.
- We have summarised hereinabove in para. 31 the ratio decidendi of the above discussed cases and certain pertinent observations made therein. A perusal of above sub-paras. (i) to (xxx) of para. 31 indicates that the same do not advance the case of the appellants. On the contrary, they reinforce the principle of law that the Legislature, particularly in economic activities, enjoys a wide latitude in the matter of selection of persons, subject-matters, events etc., for taxation the presumption is in favour of the validity of the legislation. The burden to prove that the same is invalid is on the person who alleges it. However, one can urge that the general observations contained in sub-paras. (xxxi) to (xxxiv) of para. 31 lend support to some extent to the appellants’ case. However, should observations have been lifted the question, as to whether there can be presumptive tax or the minimum tax, in view of entries 47 and 52 of the Legislative List, was in issue. In this view of the matter, it would be inappropriate to apply the tests traditionally prescribed by the Income Tax Act and/or any other statute.
34 Keeping in view the above case-law and the treatises and the aforesaid legal inferences drawn therefrom, we may now revert to the question of vires of impugned sections. It may again be observed that the power to levy taxes is a sine qua non for a State. In fact it is an attribute of sovereignty of a State. It is a mandatory requirement of a State as it generates financial resources which are needed for running a State and for achieving the cherished goal, namely, to establish a welfare State. In this view of the matter, the Legislature enjoys -plenary power to impose taxes within the framework of the Constitution. It has prima facie power to tax whom it chooses, power to exempt whom it chooses, power to impose such conditions as to liability or as to exemption as it chooses, so long as they do not exceed the mandate of the Constitution. It is also apparent that the entries in the Legislative List of the Constitution are not powers of legislation but only fields of legislative heads. The allocation of the subjects to the lists is not by way of scientific or logical definition but by way of mere simple enumeration of a broad catalogue. A single tax may derive its sanction from one or more entries and many taxes may emanate from one single entry. It is needless to reiterate that it is a well-settled proposition of law that an entry in the Legislative List must be given a very wide and liberal interpretation. The word income is susceptible as to include not only arisen or accrued. It is also manifest that income-tax is not only levied in the conventional manner i.e., by working out the net income after adjusting admissible expenses and other items, but the same may also be levied on the basis of gross receipts, expenditure etc. There are new species of income-tax, namely, presumptive tax and minimum tax.
In our view, sections 80-C and 80-CC of the Ordinance fall within the category of presumptive tax as under the same the persons covered by them pay a predetermined amount of presumptive tax in full and final discharge of their liability in respect of the transactions on which the above tax is levied. Whereas section 80-D of the Ordinance is founded on the theory of minimum tax which has been elaborately dealt with in the treatises, the relevant portions of which have been quoted in extenso hereinabove. If we were to read Entry 47 in isolation without referring to Entry 52, one can urge that Entry 47 does not admit the imposition of presumptive tax as the expression taxes on income employed therein should be understood as to mean the working out of the same on the basis of computation as provided in the various provisions of the Ordinance. We are inclined to hold that presumptive tax is in fact akin to capacity tax i.e., capacity to earn. In this view of the matter, we will have to read Entry 47 in conjunction with Entry 52 which provides taxes and duties on production capacity of any plant, machinery, undertaking; establishment or installation in lieu of the taxes or duties specified in Entries 44, 47, 48 and 49 or in lieu of any one or more of them. Since under Entry 52, tax on capacity in lieu of taxes mentioned in Entry 47 can be imposed, the presumptive tax levied under sections 80-C and 80-CC of the Ordinance is in consonance with the above two entries if read in conjunction. However, we may point out that in Entry 52, the key words used are in lieu of taxes and duties specified in entries 44, 47, 48 and 49 or in lieu of any one or more of them. In order to understand, the real import of the above portion of Entry 52, we will have to refer to the meaning of the words in lieu of In this regard, reference may be made to Black‘s Law Dictionary, Sixth Edition, Ballentine‘s Law Dictionary, Third Edition; and the Legal Thesaurus by Steven C. De Costa, which read as follows:—-
In the aforesaid judgement in paragraphs 32 and 34 the matter has been summarised as under:
Paragraph 32
The word income is susceptible as to include not only arisen or accrued. It is also manifest that income-tax is not only levied in the conventional manner i.e., by working out the net income after adjusting admissible expenses and other items, but the same may also be levied on the basis of gross receipts, expenditure etc. There are new species of income-tax, namely, presumptive tax and minimum tax.
Paragraph 34
We are inclined to hold that presumptive tax is in fact akin to capacity tax i.e., capacity to earn. In this view of the matter, we will have to read Entry 47 in conjunction with Entry 52 which provides taxes and duties on production capacity of any plant, machinery, undertaking; establishment or installation in lieu of the taxes or duties specified in Entries 44, 47, 48 and 49 or in lieu of any one or more of them. Since under Entry 52, tax on capacity in lieu of taxes mentioned in Entry 47 can be imposed, the presumptive tax levied under sections 80-C and 80-CC of the Ordinance is in consonance with the above two entries if read in conjunction.
(To be continued)
Copyright Business Recorder, 2024
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