Wealth-tax on closely-held companies upheld under article 14 as a rational and non-arbitrary classification.

Section 40 of the Finance Act, 1983, imposing wealth-tax on closely-held companies, was upheld as a valid classification under article 14. The Court found that private and public companies form distinct classes under company law, that closely-held companies enjoy special privileges not available to public companies, and that the levy applied uniformly within the defined class. It further held that a taxation measure offends article 14 only when there is no reasonable basis for classification or when similarly situated property is taxed unequally. The exclusion of certain business assets and the two per cent levy were considered to rest on a rational and non-arbitrary basis.

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Issues: Whether section 40 of the Finance Act, 1983, levying wealth-tax on closely-held companies, was unconstitutional as violating article 14 of the Constitution of India for want of rational classification.

Analysis: The challenge was examined on the basis that closely-held companies were allegedly treated alike despite differences between companies that held transferred assets to avoid wealth-tax and companies carrying on genuine business. The classification was upheld because private companies and public companies constitute distinct classes under company law, closely-held companies enjoy special privileges not available to public companies, and the levy operated uniformly on all companies within the specified class. The Court held that a taxation measure is invalid under article 14 only if there is no reasonable basis for the classification or if similarly situated property is subjected to unequal taxation. The legislative choice to levy wealth-tax on closely-held companies at two per cent, with exclusions for certain business assets, was found to rest on a reasonable basis and not on arbitrariness.

Conclusion: Section 40 of the Finance Act, 1983, was held to be constitutionally valid and not violative of article 14.

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