THE INCOME TAX ACT AND THE CONSTITUTION OF INDIA

THE INCOME TAX ACT AND THE CONSTITUTION OF INDIA

By K P C Rao., LLB., FCS., FICWA

kpcrao.india@gmail.com

1.      Taxing Power

The power to tax is an incident of sovereignty, and since the Constitution of India is the supreme law of the land, all other laws, including the Income-tax Act, are subordinate to the Constitution and must be read and interpreted in the light of the constitutional provisions. In India Cement Ltd. vs. State of Tamil Nadu[1],  a seven-judge bench of the Supreme Court observed that the Constitution is ‘the mechanism under which the laws are to be made and not merely an Act which declares what the law is to be.’ One of the most important of the Constitution relating to taxation is Article 265, which provides: ‘No tax shall be levied or controlled except by authority of law. ‘Therefore, not only the levy but also the collection of a tax must be under the authority of some law. ‘Law’, in this article, means law enacted by a competent legislature and cannot include an executive order, or a rule without express statutory authority, or a custom. Thus, any act of the state that seeks to impose a tax without legislative authority will be void.

2.      Legislative Entries in the Constitution

The Constitution of India contemplates a threefold distribution of legislative powers between the Union and the States. The authority to legislate is conferred by Art. 246, which provides for three legislative lists that find place in the Seventh Schedule of the Constitution. These are :

(i)       List I or the Union List, which comprises of entries over which the Union has exclusive power of legislation;

(ii)    List II or the State List, which comprises of entries over which the State legislatures have exclusive power of legislation;

(iii)  List III or the Concurrent List, which gives concurrent powers of legislation to the Union and the States.

If a state law relating to an entry in List III is repugnant to a Union law relating to that entry, the Union law will prevail, and the state law shall, to the extent of such repugnancy, be void. (Article 254.) The various entries in the three Lists of the Seventh Schedule are not ‘powers’ of legislation but ‘fields’ of legislation or legislative heads designed to define and de-limit the respective areas of legislative competence of the state and the Union legislatures.

The subject matters of taxation available to Parliament are enumerated in entries 82 to 97 of List I, those available to the state legislature in entries 45 to 68 of List II, and those available to both in entry 44 of List III.. The parliament also has residuary powers of taxation under Article 248(2) and entry 97, List I. The Income-tax Act, 1961 has been passed under entry 82 of List I, which is : ‘Taxes on income other than agricultural income’.

3.      Constitutional Validity

In order that the law imposing the tax is regarded as constitutionally valid, it must firstly be examined whether the legislature that passed the law was competent to pass it or not; secondly, since a taxing statute is a law for the purpose of Article 13, its validity can also be challenged on the ground that it contravenes any of the fundamental rights guaranteed by Part III of the Constitution (Jagannath Baksh Singh vs. State of UP[2]). Yet, unless and until the Supreme Court or a High Court declares any provision to be ultra vires, it must be taken to be constitutionally valid and treated as such. Further, there is always a presumption in favour of the constitutionality of a statute and the burden is upon a person who attacks it to show that there has been a clear transgression of the constitutional principles.

(a)  Competence of the legislature to levy Tax

It is the duty of the courts to ascertain to what degree and to what extent the authority to levy tax exist in each legislature and to define the limits of the respective entry, incidental powers. Once a law in ‘pith and substance’ falls within a legislative entry, incidental encroachment on an entry in another list does not affect its validity. (Kanchenjunga Properties vs. State of Sikkim[3]) Further, there is no rule that an enactment must relate to only one entry in the Seventh Schedule; in the case of a Parliamentary enactment, it may relate to more than one entry in List I and to an entry or entries in List III. (Geep Flashlight vs. UOI[4]).

(b) Fundamental Rights

Article 14 provides that the state shall not deny to any person equality before the law or the equal protection of the laws within the territory of India. In Jagannath Baksh Singh vs. State of UP[5]  and Venugopal Varma vs. UOI[6],  the Supreme Court, while laying down the principles to be applied in determining whether a taxing statute violates the fundamental rights, ruled that a taxing statute can be held to contravene Article 14 if it purports to impose on the same class of persons or property similarly situated an incidence of taxation that leads to obvious inequality. The combined effect of these two decisions is to lay down, inter alia, the following basic propositions:

(i)       it is for the legislature to determine the objects on which tax shall be levied, and the rates thereof;

(ii)    the courts will not strike down an Act as denying the equal protection of laws merely, because other objects could have been, but are not, taxed by the legislature; for a state does not have to tax everything in order to tax something;

(iii)  the legislature is competent to classify persons or properties into different categories and tax them differently, and if the classification thus made is rational, the taxing statute cannot be challenged merely because different rates of taxation are prescribed for different categories of persons or objects; and (iv) if any taxing statute is found to contravene Article 14, it would be open to courts to strike it down as denying to the citizens the equality before the law guaranteed by that article.

Article 14 does not insist that all persons must be taxed equally or that the legislative classification must be scientifically perfect or logically complete. To pass the test of permissible classification, two conditions must still be fulfilled:

(i)       the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left over of the group and

(ii)    the differentia must have a rational relation to the object sought to be achieved by the statute.

Apart from Article 14, challenges to the constitutional validity of taxing statutes have been based on Article 19(1)(g), which provides that all citizens shall have the right to practice any professions, or to carry on any occupation, trade or business. This Article is, however , subject to Article 19(6), which permits the imposition of reasonable restrictions on the exercise of this right ‘in the interest of the general public’. Therefore, any such reasonable restriction in the interest of the general public would be saved by cl (6) of Article 19; but not a restriction that is unreasonable. In the case of Federation of Hotel and Restaurant Association of India[7], the Supreme Court observed :

A taxing statute is not, per se, a restriction of the freedom under Article 19(1)(g). The policy of a tax, in its effectuation, might, of course, bring in some hardship in some individual cases. But that is inevitable…. Every cause, it is said, has its martyrs. Then again, the mere excessiveness of a tax or even the circumstances that its imposition might tend towards the diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute violation of the rights under Article 19(1)(g).

Further, any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business.

Further, the Parliament has the power to levy tax retrospectively, provided it is reasonable and in public interest to do so. In Ramakrishna vs. State of Bihar (1963) 50 ITR 171 (SC) the Supreme Court dealt with the question of retrospective operation of a taxing statute violating the fundamental rights.

In Ujjambhai vs. State of UP[8]  a majority of the Supreme Court held that an order of assessment passed within jurisdiction and under a valid law cannot be regarded as violating the fundamental rights merely because it proceeds upon a misconstruction of the statute; therefore the validity of such an order cannot be challenged in a petition to the Supreme Court under Article 32 of the Constitution, though it may be challenged in a petition to the High Court under Article 226. Moreover, a fundamental right being in the nature of a prohibition to the state, an individual cannot waive it.

(c) Doctrine of Reading Down

The theory of ‘reading down’ is a rule of interpretation resorted to by the courts when a provision, read literally, seems to offend a fundamental right, or falls outside the competence of the particular legislature; reading down a provision is permissible as a part of the judicial process. This doctrine can be resorted to in giving the statute reasonable meaning and making it constitutionally valid. It has the principle effect that, where an Act is expressed in language of a generality which makes it capable, if read literally, of applying to matters beyond the legislative power, the court will construe it in more limited sense so as to keep it within its power.

4. Constitutional Remedies and Writs

(a) Articles 32 and 226

An aggrieved party has a right to approach the Supreme Court under Article 32, which itself is a fundamental right, or a High Court under Article 226, for an appropriate writ, direction or order. These are extraordinary and high prerogative remedies. Article 32 can be invoked only in the case of a contravention of a fundamental right, whereas Article 226 can be invoked in case of a violation of a fundamental right or any other legal right. The power of judicial review over legislative action vested in the Supreme Court under Article 32 and in the High Courts under article 226 is an integral and essential feature of the Constitution, constituting a part of its ‘basic structure’. (Chandra Kumar vs. UOI[9].)

The four writs relevant to this article (other than writ of Habeas Corpus) referred to in Articles 32 and 226 are discussed below:

(i) Writ of Mandamus

Mandamus is a judicial remedy which is in the form of an order from the Supreme Court or High Court to any government, court, public authority or public corporation to do or to forbear doing some specific act which that body is obliged under law to do or refrain from doing, and which is in the nature of a public duty and in certain cases a statutory duty.

(ii) Writ of Prohibition

A writ of prohibition is an order directed to an inferior court or authority forbidding it from continuing with a proceeding on the ground that the proceeding is without or in excess of jurisdiction or contrary to the laws of the land. (East India Comm vs. Coll[10])

(iii) Writ of Certiorari

A writ of certiorari is an order issued to an inferior court or authority exercising judicial or quasi-judicial functions to investigate and decide the legality and the validity of the orders passed by that court or authority. (Prabodh vs. State of UP[11]) The difference between the writ of prohibition and the writ of certiorari is that while a writ of prohibition is preventive and is used before a decision is made by the inferior court or authority, a writ of certiorari is corrective or remedial and is used after the decision has been made.

(iv) Writ of Quo Warranto

A writ of quo warranto (‘what is your authority) is a judicial remedy against an occupier or usurper of an independent substantive public office, franchise or liberty. It controls appointments to public offices and also protects a citizen from being deprived of a public office to which he may before the Court, in order to let the court know on what ground he has been confined and to set him free if there is no legal jurisdiction for the imprisonment. (State of Bihar vs. Kameshwar[12])

(b) Appeals to the Supreme Court

Article 132 to 135 of the Constitution deal with the regular appellate powers of the Supreme Court. Article 139A enables the Supreme Court to withdraw or transfer cases from one court to another court.

(c) Special Leave Petitions

Article 136 of the Constitution confers extraordinary powers on the Supreme Court to grant special leave to appeal from any judgment, decree, determination, sentence or order passed or made by any court or tribunal in India. The jurisdiction conferred by art 136 is divisible into two stages; the first stage is up to the disposal of the prayer for special leave to appeal; the second stage commences if and when the leave to appeal is granted and the petition for special leave to appeal is converted into an appeal. (Kunhayammed vs. State of Kerala[13]) While hearing a special leave petition the Supreme Court does not exercise its appellate jurisdiction; it merely exercises its discretionary jurisdiction to grant or not to grant leave to appeal. Although the power conferred upon the Supreme Court under this article is not subject to any limitation, the Supreme Court has itself imposed certain limitations upon its powers and it exercise its discretion to allow special leave to appeal sparingly and in exceptional cases only.

(d) Supervisory Jurisdiction of High Courts

Article 227 of the Constitution confers upon every High Court the power of superintendence over all the subordinate courts and inferior tribunals functioning in the state, with the object of securing that all such institutions exercise their powers and discharge their duties properly and in accordance with law. The nature of this power is judicial as well as administrative. The power conferred by this provision on every High Court is unlimited and unfettered, and has been held to be a part of the basic structure of the Constitution. However, in exercising this supervisory power, the High Court does not sit or act as an appellate authority. (Titanium Equipments vs. UOI[14]).

 [Published in Circuit, a Monthly magazine of ICAI, Hyderabad]

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[1] India Cement Ltd. vs. State of Tamil Nadu; (1991) 188 ITR 690, 699 (SC)

[2] Jagannath Baksh Singh vs. State of UP; (1962) 46 ITR 169 (SC)

[3] Kanchenjunga Properties vs. State of Sikkim; (1991) 191 ITR 575(Sik.)

[4] Geep Flashlight vs. UOI; (1996) 218 ITR 638(All)

[5] Jagannath Baksh Singh vs. State of UP; (1962) 46 ITR 169 (SC)

[6] Venugopal Varma vs. UOI; (1969) 74 ITR 49 (SC)

[7] Federation of Hotel and Restaurant Association of India; (1989) 178 ITR 97 (SC)

[8] Ujjambhai vs. State of UP; AIR 1962 SC 1621

[9] Chandra Kumar vs. UOI; (1997) 228 ITR 725(SC)

[10] East India Comm vs. Coll; AIR 1962 SC 1893, 1903

[11] Prabodh vs. State of UP; AIR 1985 SC167

[12] State of Bihar vs. Kameshwar; AIR 1965 SC 575

[13] Kunhayammed vs. State of Kerala; (2000) 245 ITR 360 (SC)

[14] Titanium Equipments vs. UOI; (1994) 207 ITR 566 (Mad.)