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Petitioner: KHANDIGE SHAM BHAT VS Respondent: AGRICULTURAL INCOME-TAX OFFICER KASARAGODHonorable Justice SUBBA RAOG. S. Pathak,H. N. Sanyal
1968 P T D 240
1968 P T D 240
[Supreme Court India]
Present : B. P. Sinha, C. J., K. Subba Rao, J. C. Shah, N. Rajagopala Ayyangar and J. R. Mudholkar, JJ
KHANDIGE SHAM BHAT AND ANOTHER
Versus
AGRICULTURAL INCOME‑TAX OFFICER KASARAGOD AND ANOTHER
Petitions Nos. 103 and 104 of 1961, decided on 29th August 1962.
Taxing statute‑No immunity from equality clause‑Arbit rariness or oppressiveness‑Several methods of assessing tax-- Selection of one‑Re‑organisation of States‑Transfer of area from one State to another‑Extension of local Agricultural Income‑tax Act to such area‑Court declaring extension ineffective even as regards part of year falling after transfer‑Amendment of Act to correct situation in regard to transferred area‑Whether discrimina tion‑Travancore‑Cochin Agricultural Income‑tax Act, 1950, S. 2‑A‑ Kerala Agricultural Income‑tax (Amendment) Ordinance, 1959-- Kerala Agricultural Income‑tax (Amendment) Act, 1959‑Constitu tion of India, Art. 14.
Agricultural income in the Part B State of Travancore Cochin was liable to tax under the Travancore‑Cochin Agricultural Income‑tax Act, 1950. As a result of the passing of the States Reorganisation Act, 1956, the Kerala State was formed compris ing the Part B State of Travancore‑Cochin, excluding certain territories, and certain territories transferred from the State of Madras. The legislature of the Kerala State extended the Act of 1950 to the areas transferred from the Madras State with the result that agricultural income derived from land situated throughout the State of Kerala became assessable to tax with effect from the assessment year 1957‑58. On a petition presented by some of the assessees the Kerala High Court held that the State of Kerala had no authority to levy tax on agricultural income which accrued before November 1, 1956, from lands situated in the transferred area. As a result of that decision it was not possible to tax assessees in the areas transferred from the Madras State under the scheme of the Act of 1950 even for that part of the year ending March 31, 1957, after it became part of the Kerala State. To remedy this situation the Kerala Agricultural Income‑tax (Amend ment) Ordinance, 1959, was promulgated and later the Kerala Agricultural Income‑tax (Amendment) Act, 1959, was passed to replace that Ordinance. By that amendment section 2‑A was inserted in the Act of 1950 providing that the previous year for the assessment year 1958‑59 in regard to agricultural income in areas transferred from the Madras State commenced from Novem ber 1, 1956, and ended on March 31, 1958, comprising a period of 17 months ; but an assessee could elect a lesser period as the previous year if his accounts were made up to a date within the financial year ending March 31, 1958. The section also prescribed that the rate of tax in regard to the income of that special previous year was the rate applicable to the "average annual income" and "average annual income" was defined as the amount proportion ate to 12 months of that special period.
The petitioner, who had lands in Kasaragod Taluk which formed part of the areas transferred from the Madras State, was assessed to tax for the assessment year 1958‑59 by the application of the provisions of section 2‑A. He presented a petition to the Supreme Court under Article 32 of the Constitution of India to have the assessment set aside on the ground that section 2‑A offended Article 14 of the Constitution as the classification of the Kerala State into two parts, viz., the areas transferred from the Madras State and the original areas, had no rational relation to the object of the Act, and, further, that there was discrimination between assessees of Kasaragod and those of the other parts of the areas transferred from the Madras State inasmuch as the arbitrary method of fixing the average annual income involved payment of higher taxes by the assessees in Kasaragod, as the major income of the assessees in that area came out of crops gathered between the months of November and March whereas it was not so as regards assessees of the other areas:
Held, (i) that the object of making the classification was not to discriminate against the agriculturists of the Madras area but to bring them into line with the agriculturists from the rest of the Kerala State. The classification was founded on an intelligible differentia between the assessees of the two parts of the State and the differentia had a rational relationship to the object of the amending Act. There was, therefore, no discrimination.
(ii) That the method selected for ascertaining the average annual income for purposes of the rate of tax was not unreason able and was neither arbitrary nor capricious.
(iii) That, therefore, section 2‑A did not offend Article 14 of the Constitution of India.
Taxation law cannot claim immunity from the equality clause of the Constitution. The taxation statute should not also be arbitrary and oppressive, but at the same time the Court cannot, for obvious reasons, meticulously scrutinize the impact of its burden on different persons or interests. Where there is more than one method of assessing tax and the Legislature selects one out of them, the Court will not be justified in striking down the law on the ground that the Legislature should have adopted another method which, in the opinion of the Court, is more reasonable, unless it is convinced that the method adopted is capricious, fanciful, arbitrary or clearly unjust. In view of the inherent complexity of fiscal adjustment of diverse elements, Courts would permit a larger discretion to the Legislature in the matter of classification.
Where the Legislature, in its sincere attempt to meet a difficult situation, makes a law adopting one of diverse methods open to it, if the overall picture indicates that that method works fairly well on all similarly situated, it cannot be struck down as arbitrary or capricious, merely because some hardship may be caused to some in the implementation of the law, which is inevitable in almost every taxation law.
It is true that no law, whether it is temporary or permanent, should infringe Article 14 of the Constitution ; but in considering the reasonableness of the legislation, the circumstance that it is a temporary provision intended to apply only for one year to tide over a difficult situation brought about by the reorganisation of States will have some bearing, particularly when the Legislature selects one of many methods open to it.
Krishan Singh v. State of Rajasthan (1955) 2 S C R 531 ref.
G. S. Pathak (R. Gopalakrishnan with him) for Petitioners.
H. N. Sanyal (Additional Solicitor‑General of India), (Sardar Bahadur with him) for Respondents.
JUDGMENT
SUBBA RAO, J.‑These two petitions filed under Article 32 of the Constitution by different parties are directed against the Agricultural Income‑tax Officer, Kasaragod, and the State of Kerala, for a deblaration that section 2‑A of the Kerala Agricultural Income‑tax Act, 1950, as amended by Kerala Act II of 1959 (hereinafter referred to as the Act) is constitutionally void and for quashing the orders of assessment made by the first respondent pursuant to the said provision.
As it is common case that the decision in the first petition would govern the second one, it would suffice if the facts in the first petition were given.
Kasaragod Taluk, wherein the agricultural lands of the peti tioner's family are situate, formed part of the district of South Kanara in the Madras State. Under the States Reorganization Act, 1956 (Central Act 37 of 1956), the Kerala State comprising the following territories was formed : (a) the territories of the existing State of Travancore‑Cochin, excluding the territories transferred to the State of Madras by section 4 ; and (b) the territories comprised in (i) Malabar District, excluding the islands of Laccadive and Minicoy, and (iii) Kasaragod Taluk of South Kanara District. Under the Act the territories comprised in Kasaragod Taluk of South Kanara District and the District of Malabar in the Madras State were constituted into a separate district known as the Malabar District in the State of Kerala. For convenience of reference we shall hereinafter describe the territories carved out of the Madras State as Madras area and the rest as T‑C area. After the formation of the State of Kerala on November 1, 1956, the laws in force in the State of Madras were continued in the Madras area and those in force in the Travancore Cochin State were continued in the T‑C area. In the T‑C area agricultural income was liable to tax under the Travancore‑Cochin Agricultural Income‑tax Act (XXII of 1950), which came into force on April 1, 1951. After the formation of the Kerala State, the Legislature of that State enacted the Travancore‑Cochin Agricultural Income‑tax (Amendment) Act, 1957, whereunder the earlier‑Act of 1950 was extended to the Madras area with appropriate amend ments. Under the said Act agricultural income derived from lands situated throughout the State of Kerala became assessable with effect from‑the assessment year 1957‑58. Pursuant to the provisions of that Act the income‑tax authorities started proceedings to assess the income derived from lands situated in the Madras area for the year 1957‑58. On a petition filed by some of the assessees, the Kerala High Court held that the State of Kerala had no authority to levy tax on agricultural income which accrued before November 1, 1956, from lands situated in the Madras area and that the assessments for 1957‑58 were not sustainable under the Act even in respect of income which arose after November 1, 1956, on the ground that the previous year, as defined under the Act, was a period of twelve months ending on March 31, preceding the year for which assessment was to be made. The result of the decision was that agricultural income derived from lands in the Madras area was not liable to tax for the assessment year 1957‑58, whereas similar income from agricultural lands situated in the T‑C area was liable to tax ; indeed, the income accrued between November 1, 1956, and March 31, 1957, i.e., the income accrued after the Madras area became part of the Kerala State, also could not be taxed. To remedy the situation brought about by historical reasons in the two geographical parts of the Kerala State, the Government of Kerala promulgated on January 12, 1959, the Agricultural Income‑tax (Amendment) Ordinance (II of 1959). Subsequently, the Kerala Legislature passed the Agricultural Income‑tax (Amendment) Act (II of 1959) replacing the earlier Ordinance, hereinafter called the Amending Act.
Before the Amending Act was passed, the petitioner, who has lands in different villages in Kasaragod Taluk, submitted a return of the income of his family for the assessment year 1957‑58 and on June 30, 1958, the concerned Income‑tax Officer determined the petitioner's net income for the accounting period April 1, 1956, to March 31, 1957, and the tax payable thereon. The petitioner preferred an appeal to the Assistant Commissioner of Agricultural Income‑tax, Kozhikode, against the order of the Income‑tax Officer questioning the said assessment on the ground, inter alia, that the assessment was made arbitrarily. When that appeal was pending, the judgment of the Kerala High Court was delivered and subsequently Ordinance II of 1959 v as promulgated. The Assistant Commissioner, therefore, set aside the order of the Income‑tax Officer on the basis of the decision of the Kerala High Court and remanded the matter to the Agricultural Income‑tax Officer for disposal in accordance with law. After remand, on March 23, 1959, the Income‑tax Officer issued a notice to the petitioner to submit his return of agricultural income for the assessment year 1957‑58 in accordance with the provisions of the Ordinance and the subsequent Amending Act replacing the said Ordinance. On November 10, 1960, the Income‑tax Officer determined the net income of the petitioner for the assessment year 1958‑59 at Rs. 87,745.36 and assessed the tax at Rs. 21,920.41 ; the tax was calculated on the average net annual income of the petitioner for 12 months under the proviso to section 2‑A of the Act. The petitioner seeks to set aside that assessment on the ground that the said section offends Article 14 of the Constitution and therefore the assessment was bad.
Mr. Pathak, learned counsel for the petitioner, argues that the classification of Kerala State into two parts, i.e., the Madras area and the T‑C area, has no rational relation to the object of the Act, namely, imposition of agricultural income‑tax, for, as the two parts belong to the same State, no post‑amalgamation law can treat assessees of the same State differently in the matter of taxation. He further contends that there is discrimination between assessees of Kasaragod Taluk and those of the other part of the Madras area inasmuch as under section 2‑A of the Act the average annual income‑would be the average annual income of 12 months out of 17 months, with the result that the assessees of Kasaragod Taluk whose entire income accrued after November 1, 1956, were unjustly discriminated from assessees of the other part of the Madras area whose income accrued only before November 1, 1956. He also contends that, in any view the basis adopted for ascertaining the rate was arbitrary and unreasonable as 24 months' income was taken as income for 17 months.
Learned Additional Solicitor‑General, on the other hand, seeks to sustain the assessment on the ground that the classifica tion was based on historical reasons, that on the face of the Act all the assessees falling within the class to which section 2‑A applies are treated alike, that the State is entitled to adopt one of the many modes available for ascertaining the rate, that whatever basis is adopted for ascertaining the rate there is bound to be some bard cases and that circumstance cannot conceivably affect the validity of the law.
At the outset n would be convenient to notice briefly the law on the doctrine of classification. The law on the subject is well settled and it does not require restatement in extenso. It would suffice if we notice the principles relevant to the enquiry. The law has been neatly and succinctly summarised in Ram Krishna Dalmia v. Shri Justice S. R. Tendolkar ((1959) S C R 219, 296‑29) thus:
"It is nova well established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelli gible differentia which distinguishes persons or things that are grouped together from others left out of the group and (ii) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classifica tion may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. It is also well established that Article 14 condemns discrimination not only by a substantive law but also by a law of procedure."
Though a law ex facie appears to treat all that fall within a class alike, if in effect it operates unevenly on persons or property similarly situated, it may be said that the law offends the equality clause. It will then be the duty of the Court to scrutinise the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely, a law may treat persons who appear to be similarly situate differently ; but on investigation they may be found not to be similarly situate. To state it differently, it is not the phraseology, of a statute that governs the situation but the effect of the law that is decisive. If there is equality and uniformity within each group the law will not be condemned as discriminative, though due to some fortuitous circumstance arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine: vide Purshottam Govindji Halai v: Shree B. M. Desai, Additional Collector of Bombay ((1955) 28 I T R 891) and Kunnathat Thathunni Moopil Nair v. State of Kerala ((1961) 3 S C R 77). But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of "wide range and flexibility" so that it can adjust its system of taxation in all proper and reason able ways.
Now let us look at the impugned section. Section 2‑A of the Act reads:
"Notwithstanding anything contained in clause (o) of section 2, `previous year' for the assessment for the financial year commencing from the 1st day of April, 1958, and so far as such assessment relates to the agricultural income derived from lands situated in the Malabar District referred to in subsection (2) of section 5 of the States Reorganization Act, 1956 (Central Act XXXVII of 1956), shall be the whole period commencing on the 1st day of November 1956, and ending on the 31st day of March 1958, or, if the accounts of the assessee have been made up to a date within the financial year ending on the 31st day of March 1958, then, at the option of the assessee, the period commencing on the 1st day of November 1956, and ending on the aforesaid date to which, the accounts have been so made up.
Provided that‑
(i) notwithstanding anything contained in sections 3 and 56, the agricultural income‑tax and super‑tax chargeable on the total agricultural income of the previous year as reckoned in this section shall be at the rates applicable to the `average annual income' according to the Schedule ; such `average annual income' shall be an amount bearing to the aforesaid total agricultural income the same proportion as the period of twelve months bears to the period of the previous year as defined in this section ; and
(ii) the limit of exemption from chargeability to tax shall be determined with reference to the `average annual income'."
The Malabar District in the State of Kerala is constituted by combining Kasaragod Taluk of the South Kanara District and the District of Malabar of the Madras State. For the purpose of assessment for the financial year 1958‑59 in respect of agricultural income derived from the said, district, section 2‑A of the Act gives a special definition of "previous year." Under that definition, "previous year" commences from November 1, 1956, and ends on March 31, 1958, ix., a period of 17 months ; but the assessee can elect a lesser period as "previous year" if his accounts are made up to a date within the financial year ending on March 31, 1958, that is to say, he can elect any date commencing from April 1, 1957, to March 31, 1958, if his, accounts are made up to that date in which case the "previous year" so far as he is concerned will commence from November 1, 1956, and end on the said date so chosen by him. The proviso to the section prescribes a mode of ascertaining the rate of tax in regard to the said income. It lays down that in respect of the said income the rates are those applicable to the "average annual income" accord ing to the Schedule. The "average annual income", as defined in the proviso, will be twelve‑seventeenths of the total income of the previous year as defined in the section. Under the section, there fore, the assessee in the Madras area will be liable to pay agricultural income‑tax on the income accrued to him during the 17 months commencing from November 1, 1956, and ending on March 31, 1958, but the rate of tax payable by him is that applica ble to the "average annual income" so defined. The question is whether this section infringes Article 14 of the Constitution or whether it can be justified on the basis of the doctrine of classifica tion. In the narration of facts we have stated why it became neces sary for the Legislature to insert section 2‑A in Act XXII of 1950. By reason of the States Reorganization' Act, the said Madras area became part of the Kerala. State on November 1, 1956. By reason of the decision of the Kerala High. Court, agricultural income‑tax could not be imposed in respect of income accrued to assessees in the Madras area between April 1, 1956, and March 31, 1957, and it was also not possible to tax them for their income even for that part of the year after it became part of the Kerala State ; with the result, the Legislature was confronted with two geographical divisions in respect of one of which the said law of agricultural income‑tax could not be enforced. While the assessees in the T‑C area were liable to agricultural income‑tax in regard to their income from their lands for the year commencing from April 1, 1956, and ending on March 31, 1957, the income of the agriculturists in the Madras area could not be reached by that law in respect of the whole or part of that year. These differences between the two parts of State which originated from historical reasons were the basis of classification for the purpose of taxation. The object of making the classification was not to discriminate against the agriculturists of the Madras area but to bring them into line with the agriculturists from the rest of the Kerala State in so far as the liability to pay agricultural income‑tax was concerned. The existing law had, therefore, to be appropriately adapted for securing this end. In these circumstances, can it be said that there was no reasonable nexus between the classification and the object of the legislation. The object of the legislation thus was to impose agricultural income‑tax on assessees in the Madras area and also in respect of the period between November 1, 1956, and March 31, 1957, which could not be done under the pre‑existing law. The differences between the two parts of that State have reason able nexus to the said object. Because of the said differences the Legislature thought that the definition of "previous year" should be so amended in respect of the Madras area that the assessees in that area may not escape payment of agricultural income‑tax in respect of the period after the said area formed part of the Kerala State. It is argued that this Court sustained the constitutional validity of a law on geographical and territorial bases only in a case where the said law was a pre‑existing law in an erstwhile State which continued to be law in the area of that State after it merged in the larger unit, and that it cannot be invoked where the law is for the first time enacted after the merger, for, it is said, in that event the law governs the new State as an indivisible unit. Reliance is placed upon the decision of this Court in Krishan Singh v. State of Rajasthan ((1955) 2 S C R 531) and Purshottam Govindji Halai v. B. M. Desai, Additional Collector of Bombay. But a perusal of the judgments does not bear out the contention. The validity of a classification does not wholly depend upon the source of law ; the law may be a pre‑existing law or one that was enacted after merger. What is important is to ascertain the existing circumstances in the two parts merged into one by historical events in order to determine whether the differences between the two have a reasonable nexus to the object of the said law. For the reasons already stated, we hold that the classification in the present case is founded on an intelligible differentia between the assessees of the two parts of the State, and that the said differences have rational relationship to the object of the Amending Act.
But it is said that the mode of ascertaining the average annual income for the purpose of finding the rate is arbitrary and unreasonable and that discrimination is inherent in such a law adopting such arbitrary process. This argument is elaborated thus : The major income of the petitioner's family is from arecanut, pepper and coconut ; the said crops are gathered between the months of November and March ; the season for harvesting arecanut in Kasaragod Taluk is from November to March ; the whole year's pepper and coconut are gathered between the months of January and March ; therefore, the income from arecanut, pepper and coconut accrued to the petitioner between November 1, 1956, and March 31, 1957, is the income for the entire year ; but under the proviso to section 2‑A of the Act, the said income is treated as the income for 5 months only, with the result that 24 months' income is treated as 17 months' income ; this is an…
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