1991 (6) TMI 47 - HC - Indian Laws

Karnataka Tax Law Upheld: Flat Rate of Tax on Companies Deemed Constitutional

Sri Banashankari Leasing Co. Limited And Another Versus State Of Karnataka And Another

Sri Banashankari Leasing Co. Limited And Another Versus State Of Karnataka And Another - [1992] 194 ITR 650, 65 TAXMANN 224 Issues Involved:1. Constitutional validity of entry 19 of the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976.2. Flat rate of taxation irrespective of the nature of the profession, trade, or calling.Detailed Analysis:1. Constitutional Validity of Entry 19:The appellants challenged the constitutional validity of entry 19 of the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976, which levies a flat rate of tax of Rs. 2,500 per annum on every company. They argued that this flat rate disregards the paying capacity of the company and fails to distinguish between the nature of the profession, trade, or calling carried on by the company. The appellants relied on the principle that classification must have a nexus to the object to be achieved, as laid down in P. Rajendran v. State of Madras, AIR 1968 SC 1012.The court, however, rejected this contention, emphasizing that the Legislature has the widest latitude and flexibility in matters of taxation. The court noted that the law of taxation allows for a clear distinction between individuals and companies, and such a distinction is well-defined. The court cited the principle that equality means treating equals as equals and not unequals as equals. Since companies have a distinct legal personality, they cannot be compared with individuals for the purpose of taxation. The court concluded that the classification made by the Legislature was sound and did not violate Article 14 of the Constitution.2. Flat Rate of Taxation:The appellants argued that the flat rate of Rs. 2,500 per annum, irrespective of the paying capacity and the nature of the profession, trade, or calling, was impermissible in law. They cited several Supreme Court decisions, including State of Kerala v. Haji K. Haji K. Kutty Naha, AIR 1969 SC 378, and Kodar (S.) v. State of Kerala, AIR 1974 SC 2272, where similar flat rate taxes were struck down for lack of rational classification.In response, the court highlighted that the Legislature has the discretion to classify persons and objects for the purpose of legislation. The court referred to Murthy Match Works v. Asst. Collector of Central Excise, AIR 1974 SC 497, which stated that classification is primarily for legislative judgment and does not always become a judicial question. The court also cited State of Karnataka v. Ganesha Krishna Bhat [1990] ILR 2 (Kar) 1045, where a flat rate of entertainment tax on video parlours was upheld. The court concluded that the flat rate of taxation under entry 19 was not unconstitutional, as the Legislature had adopted a reasonable and practical approach in levying the tax.Conclusion:The court dismissed the writ appeals, agreeing with the learned single judge's decision. The court upheld the constitutional validity of entry 19 of the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976, and the flat rate of taxation of Rs. 2,500 per annum on companies. The court emphasized the Legislature's wide discretion in matters of taxation and the reasonableness of the classification and flat rate adopted. There was no order as to costs.