TaxTMI 
TaxTMI 
1973 (12) TMI 5
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....minating between similarly situated persons who evade tax liability and conceal income contrary to article 14 of the Constitution? The following is the background of law and facts out of which these twin questions have arisen for decision. The Direct Taxes Enquiry Committee chaired by Shri Justice K. N. Wanchoo, retired Chief Justice of India, was appointed by the Government in March, 1970, inter alia: "(a) to recommend concrete and effective measures; (i) to unearth black money and prevent its proliferation through further evasion; (ii) to check avoidance of tax through various legal devices, including the formation of trusts; and (iii) to reduce tax arrears." As observed in the final report of the Committee (paragraphs 2.25, 2.26 and 2.197) despite the steps taken by the Government from 1936 onwards the twin problems of "black money and tax evasion" have continued unabated. In December, 1970, the Committee made an interim report to deal with them and the Taxation Laws (Amendment) Act, 1972, was enacted to implement their recommendations. The salient features of the Act of 1972 are as follows: (1) An Assistant Commissioner of Income-tax scrutinises registered ....
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....nsfer deed plus 15 per cent. The amount by which the compensation so paid falls short of the amount which would have been payable had the property been acquired under the Land Acquisition Act shall be deemed to have been realised by the Central Government as a penalty from the transferee for being a party to a transfer with the object of evading tax liability and/or concealing income. This being done, no other penalty would be leviable on the purchaser on this account. (5) The seller of the property who is also a party to the understatement of the consideration and undervaluation of the property in the sale deed and who is also supposed to have received more consideration than is stated in the instrument of transfer would be dealt with separately, for instance, under section 52 of the Income-tax Act, 1961. The relevant part of the Act of 1972 is inserted in the Income-tax Act, 1961, as Chapter XXA. The Act came into force on 15th November, 1972. The Taxation Laws (Amendment) Bill, 1971, was introduced in Parliament on 12th August, 1971. The instrument of transfer was executed in favour of the petitioner by the seller of the property on 31st May, 1972, for a stated considerati....
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....The Assistant Commissioner of Income-tax could not be said to have "reason to believe" that the fair market value of the immovable property purchased by the petitioner on 31st May, 1972, exceeded the consideration stated in the transfer deed by more than 15 per cent. of such stated consideration. He had thus no jurisdiction to initiate the proceedings. And (3) The Act of 1972 was not retrospective in its operation. It could not, therefore, apply to the transfer of the property to the petitioner inasmuch as the title of the petitioner to the property dated back to 31st May, 1972, even though the transfer deed was actually registered after 15th November, 1972, when the Act came into force. The writ petition was opposed by the Union of India and the Assistant Commissioner of Income-tax who has initiated the proceedings under Chapter XXA of the Income-tax Act against the petitioner. They point out that the relevant part of the Act of 1972, namely, Chapter XXA of the Income-tax Act, 1961, was enacted to meet the widespread evil of tax evasion and black money. In so far as Chapter XXA of the Income-tax Act imposes a penalty on the petitioner for evasion of tax liability and/or conc....
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....ted July 2, 1973, was received by the Assistant Commissioner. It appeared from the said report that the fair market value of the said property would be Rs. 1,97,209. The Assistant Commissioner thereafter recorded his reasons and initiated proceedings against the petitioner inasmuch as he certainly had reason to believe that the consideration in the transfer deed was understated with the object of evading tax liability and concealing income. Lastly, the question of retrospective operation of the Act did not arise. The Act applies to a transaction of transfer of immovable property of the fair market value of more than Rs. 25,000 only if the transfer is made by an instrument registered under the Indian Registration Act. The event which attracts the application of the Act is thus the registration of the transfer deed. This event took place after 15th November, 1972, when the Act came into force. The Act was, therefore, applicable to this transfer even though the title of the transferee to the property dated back to the date of the execution of the transfer deed, namely, 31st May, 1972. Logically, the first question to be decided should be whether Chapter XXA of the Income-tax Act, 1....
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....s of the individual such as property. The difference reflects also the change in political thought from individualism to socialism. The modern concept of constitutional liberty is based on the concept of social, economic and political justice. In his contribution on "Constitutional Liberty and the Concept of Justice" in "NOMOS VI-JUSTICE" (1963), John Rawls thus lays down justice as the basis of liberty in the following words: " One may distinguish the various kinds of constitutional liberty as liberty of the person, liberty of conscience and freedom of thought, political liberty, freedom of movement, and equality of opportunity. It is characteristic of these liberties in a constitutional democracy that they are equal liberties; in respect to these liberties, no person is favoured over another. Since the Constitution is the foundation of the social and political structure, the highest-order system of positive rules regulative in relation to other institutions, the constitutional liberties define and establish an initial position of equal liberty for all citizens within the basic social system in which everyone must begin to have a place.....the concept of justice is, therefore, ....
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....A harmonious construction of the Constitution would reconcile the two. The law giving effect to a directive principle of State policy could always be regarded as a reasonable restriction on the corresponding fundamental right. As both the fundamental rights and the directive principles of State policy are parts of the same Constitution, the intention of the framers of the Constitution must be that the laws effectuating the directive principles of State policy would of necessity harmonise with the fundamental rights. It would be rare, therefore, for such laws to come into conflict with the fundamental rights. However, in the process of actual interpretation, conflicts between such laws and the right to property arose which led to the First, Fourth, Seventeenth and finally the Twenty-fifth Amendment of the Constitution. The possibility of conflict between laws implementing the directive principles and the right to property was largely diminished by the enactment of articles 31A, 31B and 31C. These provisions introduced by successive amendments to the Constitution to restrict the scope of judicial review were not based on any new principle. The Constitution as originally enacted also ....
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....etween such a law and clauses (b) and (c) of article 39 would be sufficient to enable such a law to withstand challenges based on articles 14, 19 and 31. In view of the majority decision holding the first part of article 31C to be valid, the observations by the minority have resulted in giving support to the validity of laws enacted to implement the principles embodied in clauses (b) and (c) of article 39 rather than in opposing their validity. It is in the background of this authoritative interpretation of the scope of article 31C that we have to consider the validity of the Act of 1972, as inserted in Chapter XXA of the Income-tax Act, 1961. Article 39(b): The science of economics recognises land to be a scarce goods. It is a factor of production. It is strictly limited in quantity. It is, therefore, a part, perhaps the most important one, of the "material resources of the community" within the meaning of article 39(b). The same remarks apply to constructions made on land. The thrust of the Act of 1972 is to penalise certain kinds of transfer of immovable property, namely, a part of the material resources of the community. The effect of action under the Act is to deprive the o....
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....ood. It is sometimes argued that acquisition of property by State would mean concentration of property in the hands of the State. This would not be distribution contemplated by article 39(b). While this argument may have plausibility regarding such property as would be permanently owned and controlled by the State, it is entirely out of place in regard to the immovable properties, the transfers of which are hit by the Act of 1972. These immovable properties are not like factories or large farms which could be owned and controlled by the State itself. On the other hand, these immovable properties are spread out all over the country in the hands of numerous individuals. They cannot be fused together. They will always remain separate from each other. Each of them is too small to be owned and controlled by the State. It is obvious, therefore, that these, properties could not be owned and controlled by the State permanently inasmuch as they cannot be used and operated by the State as each of them is too small and scattered for State ownership and control. The State may, therefore, be compelled at some stage or other to distribute these properties; various distribution techniques may the....
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....triment". It cannot be doubted that accumulation of money by evading tax liability and concealment of income results in concentration of wealth and also that such black money is used to the common detriment. Levy of taxes and penalties always results in reducing concentration of wealth. We are of the view, therefore, that there is a reasonable nexus between the implementation of the objective embodied in article 39(c) and the impugned Act. Liberal construction of beneficial provisions contained in article 39(b) and (c) of the Constitution and in the impugned Act : The object of article 39(b) and (c) is to bring about an egalitarian society in India. The impugned Act has also a laudable social and economic objective. It would be the duty of the courts, therefore, to liberally construe both these provisions so that their praise-worthy objects are not defeated. The nexus between article 39(b) and (c) and the impugned Act should not, therefore, be examined in a pettifogging manner but broadly with a view to allow the objective to be fulfilled. It also seems to us that as long as the property which is the medium of these transactions in "black" is not taken away, the objective may be....
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....ng with the imposition of penalty are, therefore, squarely covered by article 31(5)(b)(i) of the Constitution. It is, however, rightly argued by Shri G. C. Sharma, learned counsel for the petitioner, that the acquisition of property of the buyer cannot be said to be the imposition of either a tax or a penalty. That part of the impugned Act is not, therefore, covered by article 31(5)(b)(i). Shri Sharma argues that the provisions relating to acquisition of property are not either an integral part of or incidental to the provisions relating to imposition of penalty. They are not, therefore, covered by article 31(5)(b)(i). These provisions are, therefore, not immune from the application of article 31(2). Learned counsel then contends that the acquisition of property is not for any public purpose. He distinguishes between the duty of the State to penalise a tax evader and a public purpose for acquisition of property. According to him, even if it is assumed that the acquisition of property is made to punish the tax evader, such punishment cannot amount to a public purpose. As we see it, the impugned Act is divisible into two parts, namely, one relating to the imposition of penalty and....
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....jects to which the expression (public use) would apply. One theory of 'public use' limits the application to 'employment'-'occupation'. The more liberal and more flexible meaning makes it synonymous with 'public advantage', 'public benefit. . .. . . . As might be expected the more limited application of the principle appears in the earlier cases and the more liberal application has been rendered necessary by complex conditions due to recent developments of civilisation." (3) Corpus Juris, volume 20, article 30, at pages 552-553, concludes the discussion as follows: " No general definition of what degree of public good will meet the constitutional requirements for a 'public use' can be framed, as it is in every case a question of public policy." Public policy is essentially for the State to propound. For, the State acting through the democratic Government represents the public. The Legislature by making laws expresses the public policy. Such policy changes to meet "the felt necessities of the times". To ensure more flexibility, therefore, our Constitution in article 31(2) used the expression "public purpose" in preference to the expression "public use" occurring in the U.S.....
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....nsidering the question whether the acquisition was for a public purpose and observed at page 941 : " The legislature is the best judge of what is good for the community, by whose suffrage it comes into existence and it is not possible. for this court to say that there was no public purpose behind the acquisition contemplated by the impugned statute." Whatever, therefore, is considered by the legislature acting to give effect to the policy of article 39(b) and (c) to be in the public interest and for the public good must be regarded as being for a public purpose. The word "purpose" merely denotes the objective sought to be achieved by the State. It is not to be narrowly construed as any particular use of any particular property. The question, therefore, whether the acquisition of property under the impugned Act is for a public purpose is closely related to the question whether the impugned Act implements the objectives embodied in clauses (b) and (c) of article 39. As it does so, the acquisition must be regarded for a public purpose. No reasonable person can suggest that the unearthing of black money and penalising tax evasion is not in the public interest or for a public good....
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....ter disclosing in the sale deeds only a small part of the consideration threatens to undermine the very basis of an egalitarian society. The legislature, therefore, thought it fit to use a more drastic remedy to curb this evil by acquiring the properties themselves. The object of the legislation is public good and, therefore, the acquisition was for a public purpose. In State of Bihar v. Maharajadhiraja Sir Kameshwar Singh also the public purpose appeared only in the object of the legislation, namely, reduction of economic inequality and concentration of wealth in the hands of a few persons. But the Bihar Land Reforms Act, 1950, was silent as to how the zamindari lands acquired by the State were to be used. It was said that a land commission was constituted by the Government to recommend as to how these lands were to be used. But quite irrespective of that consideration, the acquisition was held to be for a public purpose. The reason was that the object of the acquisition was the good of the public. This made it for a public purpose. The use of the lands as may be recommended by the land commission was irrelevant in determining the public purpose of the acquisition. In the prese....
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....ver the seller and in which case the seller and the buyer have colluded by understating the actual consideration which passed for the transfer. It must also be recognised that human nature being what it is, a seller would always try to sell his property for a price which is on a par or if possible above the market value of the property and would not agree to sell it too much below the market value. The legislature has to proceed on the basis of human nature and commonsense. As it was impossible to exclude cases of genuine purchases of a high value property for a low price, the legislature has no option but to establish a uniform rule. In other words, absence of uniformity itself might help to defeat the measure. This is why presumptions were raised by clauses (a) and (b) of sub-section (2) of section 269C of the Act, namely. " (a) That if the fair market value exceeds the apparent consideration by more than 25 per cent. this shall be conclusive proof that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer ; and (b) where the apparent consideration is less than the market value of the property, it shall ....
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....ersons would not amount to treating unequals as equals contrary to article 14 of the Constitution. In Balaji v. Income-tax Oficer section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922, required that in computing the total income of an individual there shall be included so much of the income of a wife or a minor child of such individual as arises from the membership of the wife in a firm of which the husband is the partner and from the admission of the minor to the benefits of a partnership of which such an individual is a partner. This provision was challenged as being contrary to articles 14 and 19(1)(f) of, the Constitution. At page 991, it was argued that there might be genuine partnerships between an individual and his wife and, therefore, there is no reasonable relation between the classification and the object sought to be achieved at any rate to the extent of those genuine cases. This contention was rejected by the Supreme Court in the following words: " But there is no classification between genuine and non-genuine cases: the classification is between cases of partnership between husband, wife and/or minor children, whether genuine or not, and partnerships betw....
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....------------------------------------------------------------------------------------------------------------------------ Compensation Actual black Deemed penalty Actual loss Actual gain unad Land Acq. money under impugned to buyer to seller Act passing provisions -------------------------------------------------------------------------------------------------------------------------------------------------- 6 7 8 9 10 -------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. Rs. Rs. A. 2,01,250 30,000 63,250 12,000 50,000 B. 2,30,000 30,000 57,500 7,500 80,000 C. 2,76,000 30,000 80,500 4,500 1,00,000 -------------------------------------------------------------------------------------------------------------------------------------------------- But the extent of penalties imposed on them differ widely. Similarly, the actual loss suffered by the buyer and the actual gain made by the seller also differ widely. Again, it was said that the Act treated equals as unequals and was, therefore, discriminatory. This chart, in our view, is unrealistic. It wo....
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....es of land. The decision was distinguished later by the majority of the Supreme Court in Twyford Tea Company Ltd. v. State of Kerala. Hidayatullah C.J., speaking for the majority, observed at page 389-90 as follows : " It may also be conceded that the uniform tax falls more heavily on some plantations than on others because the profits are widely discrepant. But does that involve a discrimination ? If the answer be in the affirmative hardly any tax direct or indirect would escape the censure for taxes touch purses of different lengths and the very uniformity of the tax and its equal treatment would become its undoing. The rich and the poor pay the same taxes irrespective of their incomes in many instances such as the sales tax and the profession tax, etc." Reference was also made to Karimbil Kunhikoman v. State of Kerala, in which the progressive cuts made from compensation payable to larger landlords were held to be discriminatory. But under the impugned Act, the larger the amount of concealment of consideration the larger will be the deemed penalty. The larger the deception, the larger the penalty. There is thus no discrimination. Similarly, the larger the disclosed conside....
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....on and the buyer would find it difficult to show that his own admission was false. (c) The legislature also wanted to deter the occurrence of such malpractices in the future. The deterrent effect is heightened by the provisions for acquisition of properties used for such malpractices. Imposition of monetary penalties for concealment of income were provided for in the past before the Act of 1972 was enacted. These provisions did not deter some persons from taking recourse to buying immovable properties for understated consideration. The legislature was, therefore, justified in using a more drastic method in the hope that this would at least deter the people from indulging in such foul play. (d) The transactions hit by the Act consist of two distinct parts. On the one hand, a disclosed consideration has been paid, the value of which would be equal to the value of part of a property. On the other hand, undisclosed consideration is presumed to have been paid for the rest of the property. The first part of the transaction is legitimate. To that extent, that part of the property cannot be forfeited by way of a penalty by a law which could be justified as being one under article 31(....
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....s no need to enact it at all. The Act must, therefore, stand or fall with this feature of it. The different treatment of buyers and sellers does not thus constitute any discrimination. The transactions hit by the impugned Act are sui generis. That is why this novel method of dealing with this novel problem had to be invented by the legislature. The impugned Act has been enacted to penalise the tax evaders and to deter them from indulging in such malpractices. If, therefore, the provisions of the impugned Act operate harshly towards the tax evaders, it is they alone who are to be blamed. The action taken by the British Parliament against tax evaders was justified in Lord Howard De Walden v. Inland Revenue Commissioners by Lord Greene M.R., in the following quotable words: " The section is a penal one, and its consequences, whatever they may be, are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. For years a battle of manoeuvre has been waged between the legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In t....
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....e and the petitioner and the only question for decision is as to which is the transfer on which the impugned Act can fasten. There can be no doubt that the transfer is the one which is effected by an instrument registered under the Registration Act. This transfer came into being only when the instrument was registered and when it was registered the Act had already come into force. As observed in Ram Saran Lall v. Mst. Domini Kuer: "The object of this section (section 47 of the Registration Act) is to decide which of two or more registered instruments in respect of the same property is to have effect ....It has nothing to do with the completion of the registration and, therefore, nothing to do with the completion of a sale" Their Lordships also observed at page 478 that: " Section 47 of the Registration Act does not, however, say when a sale would be deemed to be complete." Their Lordships referred to section 54 of the Transfer of Property Act at page 477 and observed that the sale of an immovable property of the value of more than rupees hundred could be made only by a registered instrument and held that there would be no sale unless and until the instrument is register....
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....ould continue. Even thereafter the approval of the Commissioner would be necessary for the final acquisition of the property. Then there are all the usual remedies of appeal to the Income-tax Appellate Tribunal and reference to the High Court open to the petitioner. It is not possible, therefore, to decide the question of valuation in this writ petition as the versions of the parties as to valuation are divergent and a disputed question of fact which cannot be decided without oral evidence arises as to the valuation. The forum provided by the Act and not this court acting under article 226 of the Constitution is best fitted to deal with this disputed question of fact. No other contentions were advanced. The writ petition is, therefore, dismissed with costs. DESHPANDE J.-This order supplements the main order passed by us to-day dismissing the writ petition filed by the petitioner against the respondents. The writ petition challenged the validity of Chapter XXA of the Income-tax Act, 1961, as inserted therein by the Taxation Laws (Amendment) Act, 1972, for the first time and raised the following important questions of first impression, namely: " (1) Whether Chapter XXA of th....
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....es 14, 19 and 31. The provisions of clauses (b) and (c) of article 39 are, therefore, bound to be considered on numerous occasions in future in view of the enactment of article 31C. The Taxation Laws (Amendment) Act, 1972, inserting Chapter XXA in the Income-tax Act, 1961, is also a unique enactment. For the first time, it introduces a legislative measure which combines imposition of penalty with acquisition of property of a tax evader. The method of concealing income and evading taxes by buying immovable properties by understating the consideration for the purchase has been used on a large scale in our country and has become a major threat to its economy. The Report of the Direct Taxes Enquiry Committee, 1971 (Wanchoo Committee), has pointed out that, though the problem of evasion of tax liability and concealment of income has been tackled by the legislature for a long time from 1936 onwards, the drastic method of acquiring the property of the tax evader has been resorted to for the first time in this legislation which implements the Interim Report of the Wanchoo Committee submitted in December, 1970. Thousands of such transactions all over the country would be covered by the n....