2000 (10) TMI 22 - HC - Income Tax

Court upholds constitutionality of Income-tax Act provision excluding salaried persons, with retrospective effect.

The court upheld the constitutionality of Section 5A of the Income-tax Act, 1961, which excludes salaried persons from its benefits. It also affirmed the ... Legislative Powers, Discrimination Issues Involved:1. Constitutional validity of Section 5A of the Income-tax Act, 1961.2. Retrospective application of Section 5A.3. Discrimination against salaried persons under Section 5A.Issue-wise Detailed Analysis:1. Constitutional Validity of Section 5A of the Income-tax Act, 1961:The petitioners, an association of salaried taxpayers, challenged the constitutional validity of Section 5A of the Income-tax Act, 1961, introduced by the Finance Act, 1994, and made retrospective from April 1, 1963. Section 5A pertains to the apportionment of income between spouses governed by the Portuguese Civil Code. The petitioners argued that the exclusion of salaried persons from the benefits of this section was discriminatory and violated Article 14 of the Constitution of India.The court noted that prior to Section 5A, the Income-tax Act did not recognize the community of property principle for Goan citizens. Judicial decisions, such as CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932 and Addl. CIT v. Mr. and Mrs. Valentino F. Pinto [1984] 150 ITR 408, had recognized the community of property for income from house property and business, respectively. However, in CIT v. Modu Timblo (Individual) [1994] 206 ITR 647, the court held that salary income should be taxed solely in the hands of the individual earning it, not shared between spouses.The court observed that Section 5A was introduced to mitigate the harshness of the Modu Timblo judgment and to recognize the community of property principle for certain types of income, excluding salary. The Finance Minister's speech during the presentation of the Finance Budget for 1994-95 highlighted the need to address the anxiety among Goan couples due to judicial decisions affecting the division of business income.2. Retrospective Application of Section 5A:The petitioners also contested the retrospective application of Section 5A from April 1, 1963. However, the court did not find substantial grounds to invalidate the retrospective application. The court emphasized that the legislative intent was to provide relief to Goan citizens by recognizing the community of property principle for income other than salary, thereby addressing the administrative and legal difficulties faced by taxpayers.3. Discrimination Against Salaried Persons Under Section 5A:The petitioners argued that excluding salaried persons from the benefits of Section 5A was discriminatory and violated Article 14 of the Constitution. They contended that all heads of income under Section 14 of the Income-tax Act should be treated equally, and the exclusion of salary was unjust and unequitable. They demonstrated the adverse impact on salaried individuals through an illustration, showing higher tax liability for a salaried person with additional professional income compared to a non-salaried spouse.The court, however, upheld the classification made by Section 5A, stating that the Legislature has the discretion to determine the categories of income to be treated under the community of property principle. The court cited various judgments, including Ram Krishna Dalmia v. Justice S. R. Tendolkar, AIR 1958 SC 538, and S. K. Dutta, ITO v. Lawrence Singh Ingty [1968] 68 ITR 272, to support the view that reasonable classification for legislative purposes is permissible and does not violate Article 14.The court further emphasized that the exclusion of salaried persons was based on practical and administrative considerations. It noted that treating salaried income differently was justified due to the distinct nature of salary income and the complexities involved in its assessment. The court also referred to the Supreme Court's observations in cases like Kerala Hotel and Restaurant Association v. State of Kerala [1990] 77 STC 253, highlighting that legislative classifications need not be logically perfect and can be based on pragmatic considerations.Conclusion:The court concluded that Section 5A of the Income-tax Act, 1961, is constitutionally valid. The classification excluding salaried persons from the benefits of Section 5A was justified based on practical and administrative considerations. The retrospective application of Section 5A was also upheld. Consequently, the writ petition challenging the validity of Section 5A was dismissed, with no order as to costs.