D. Kumara Siddanna vs First Income Tax Officer and Another

Mahendra, J.—The petitioner, a coffee planter in Coorg District, is an assessee under the Income Tax Act - hereinafter referred to as "the Act" - with his accounting year ending on 31st of March every year. He filed his return of income for the assessment year 1977-78. In the course of assessment proceedings, the First Income Tax Officer, Mercara Circle, Mercara, being of opinion that the petitioner was liable to pay compulsory deposit under the Compulsory Deposit Scheme (income tax Payers) Act, 1974 - hereinafter referred to as "the CDS Act" - after completing the assessment, issued a notice of demand exhibit A, u/s 14(1) of the CDS Act, for compulsory deposit of Rs. 50,000. The petitioner gave a representation, exhibit C, that his income excluding the capital gains does not exceed the minimum prescribed and he is not liable to deposit any amount. The Income Tax Officer did not agree with the assessee and issued a notice, exhibit B, u/s 10 of the CDS Act to the petitioner calling upon him to show cause as to why penalty should not be levied on him for non-payment of the compulsory deposit in the relevant accounting year, i.e., on or before March 31, 1977. The petitioner again gave a representation, exhibit D, stating that his income does not exceed the minimum prescribed and he is not liable to pay the compulsory deposit. He has in this writ petition challenged the CDS Act as unconstitutional, as offending articles 14 and 19 of the Constitution and prayed for quashing of exhibits "A" and "B" and for other reliefs.

The President of India promulgated on July 17, 1974, the Compulsory Deposit Scheme (income tax Payers) Ordinance, 1974. This Ordinance was promulgated to provide in the interest of national economic development for compulsory deposit by certain classes of Income Tax payers and for the framing of a scheme in relation thereto and for matters connected therewith or incidental thereto. This Ordinance came into effect on July 17, 1974. This Ordinance was followed by the Compulsory Deposit Scheme (income tax Payers) Act, 1974. This Act repealed the Ordinance and came into force retrospectively from 17th day of July, 1974, the day the CDS Ordinance came into force.

In order to appreciate the contentions of the parties, we may refer to some provisions and the scheme of the CDS Act. Section 3 of the CDS Act provides that the persons specified therein are liable to make compulsory deposits for the assessment years commencing from April 1, 1975, and April 1, 1976. Section 4 lays down that in relation to the two assessment years referred to in section 3, if the current income of a person referred to therein exceeds Rs. 15,000, such person or if any other person is assessable under the Income Tax Act in respect of the total income of such person, the person so assessable shall make a compulsory deposit for that assessment year at the rates specified in the Schedule to the Act and current income is also defined in sub-section (3) of section 3. u/s 5, a depositor, i.e., a person who is liable to make compulsory deposit, is required to make the compulsory deposit within the time specified in section 5. In certain cases, section 6 provides for an order being made by the Income Tax Officer directing persons failing to make compulsory deposit for that assessment year to make compulsory deposit with reference to his current income. Section 6 provides for payment of simple interest at a rate equal to the bank deposit rate on every compulsory deposit made. Section 8 provides for the repayment of the compulsory deposit made in five equal instalments commencing from the expiry of two years from the end of that financial year together with interest on the whole or, as the case may be, part of the amount of the compulsory deposit which has remained unpaid. Section 9 requires every depositor to furnish to the Income Tax Officer along with the return of income for the assessment year for which he is required to make the deposit, proof of his having made the deposit. Section 10 provides penalty for failure of any person to make compulsory deposit. Section 11 specifies the authorities functioning under the Act. Section 12 provides for appeals and revisions. Section 14 provides for the collection and recovery of compulsory deposit and penalty. Section 19 provides for the Compulsory Deposit (income tax Payers) Scheme or Schemes being framed by the Central Government in relation to compulsory deposit. Section 21 is the repealing and saving clause. The Schedule specifies the rates of compulsory deposit.

The preamble to the CDS Act which "affords useful light as to what the statute intends to reach" or, in other words, "affords a clue to the scope of the statute", makes it clear that this Act is intended to provide for the compulsory deposit by certain classes of Income Tax payers and for the framing of a scheme in relation thereto and for matters connected therewith or incidental thereto and is enacted in the interest of national economic development. The Act requires a specified class of Income Tax payers in a comparatively higher income group to make compulsory deposit within the time specified at the rate specified in the Schedule. On the failure of the deposit by the person liable to make the deposit, he will be exposing himself to penalty under the penal provisions. The amount deposited is liable to be returned after a specified period and carried simple interest at the rate equal to bank deposit rate.

It was argued on behalf of the petitioner that this Act provides for public borrowing by the Central Government from a selected class of assessees the provisions are expropriatory and beyond the competence of Parliament and also violate article 14 of the Constitution. It was argued on behalf of the Revenue that the provisions are not expropriatory, are enacted as an anti-inflationary measure and are within the competence of Parliament and there has not been any violation of article 14. It was also argued that similar contentions have been rejected by the Supreme Court in Hari Krishna Bhargav Vs. union of india (UOI) and Another,

It May be useful to consider and analyse Hari Krishna Bhargav Vs. union of india (UOI) and Another, before considering the contentions of the parties. Harikrishna Bhargav, a trader in Meerut, was ordered by the Income Tax Officer to pay Rs. 1,800 as annuity deposit under Chapter XXII-A of the Income Tax Act. He challenged this chapter as unconstitutional and otherwise violative of the fundamental right guaranteed under article 14 of the Constitution. Under this chapter, certain classes of taxpayers in the comparatively higher income groups are required to make out of their total income, deposits at the specified rates on the adjusted total income with the Central Government. The amount so deposited is made returnable with interest in ten annual instalments. In computing the total income of the year in which it is made, the deposit is an admissible deduction. But the instalment due in any year is liable to be adjusted in the total income of the year in which it is due. The taxpayer, however, has the option not to pay the deposit and pay tax on his total income and fifty per cent. of the amount saved by not making the deposit.

It was argued in that case that (1) Parliament had no competence to incorporate in the Indian Income Tax Act, a provision which was substantially one relating to borrowings by the Central Government from a class of taxpayers, (2) the provisions contained in this Chapter are enacted in colourable exercise of legislative power and that in any event they are so harsh and unconscionable that they may be regarded as expropriatory and on that account not within the legislative competence of Parliament, and (3) the provisions of section 280X and Schedule II are discriminatory and infringe the fundamental freedom under article 14.

The Supreme Court, assuming that the Chapter, viz., Chapter XXII-A, is for borrowing money by the Central Government from the taxpayers in the higher income group at the rates prescribed, which is repayable in instalments, held (i) that the power to legislate in this behalf is still within the competence of Parliament by virtue of entry 97, List 1 of the Seventh Schedule and if Parliament has the power to legislate for collecting annuity deposits from taxpayers, there is nothing in the Constitution which disentitles Parliament as a matter of legislative arrangement to incorporate the provisions relating to borrowing from taxpayers in the Income Tax Act or any other statute, (ii) the doctrine of colourable legislation can have no application where Parliament is invested with the authority to legislate in respect of annuity deposit and it exercises its power, and a taxing statute is not open to challenge merely on the ground that the tax is harsh or excessive and (iii) the provisions of section 280X(1) do not offend the right guaranteed under article 14.

Let us now examine the attack on the provisions of the CDS Act in the light of the principles enunciated in Hari Krishna Bhargav Vs. union of india (UOI) and Another,

We will assume that the CDS Act is enacted for borrowing money by the Centra1 Government from a class of taxpayers in the higher income group. Even then, as held by the Supreme Court in Hari Krishna Bhargav Vs. union of india (UOI) and Another, the power of Parliament to legislate in that behalf is traceable to entry 97 in List I of the Seventh Schedule. That being so, the CDS Act, even if it is enacted for borrowing money as contended on behalf of the petitioner, was within the competence of Parliament. It was, however, argued that in the scheme in Chapter XXII-A, the taxpayer had an option not to pay the deposit but under the CDS Act, a taxpayer has no option and he has to make the deposit and, therefore, Hari Krishna Bhargav Vs. union of india (UOI) and Another, is distinguishable. It is true that under the scheme under Chapter XXII-A, a taxpayer had the option not to pay the deposit. But if he exercised the option and decided not to pay the deposit, he had to pay the tax on his total income and 50% of the amount saved by not making the deposit. The option given was only illusory because a taxpayer instead of deciding not to pay the deposit and pay 50% of the amount saved by not making the deposit would prefer to pay the deposit and get a return of the same with interest as provided in the scheme. Therefore, in our opinion, the giving of an option in the scheme under Chapter XXII-A and not giving any option under the CDS Act to a taxpayer does not make any difference. Even granting there is a difference, this, as rightly argued by Sri Srinivasan, does not in any way affect the applicability of the law laid down in Hari Krishna Bhargav Vs. union of india (UOI) and Another, to the question that arises before us.

According to Sri Sarangan, as the provisions of the CDS Act are applicable to a class of income taxpayers subjecting them to hostile discrimination, the classification is arbitrary and is, therefore, violative of article 14 of the Constitution.

While considering the constitutional validity of a statute when it is challenged as violative of article 14, as laid down by the Supreme Court in R.K. Garg and Others Vs. Union of India (UOI) and Others, , it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in the discharge of its constitutional functions of judicial review. The first is that there is always a presumption of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching on civil rights such as freedom of speech, religion, etc.,

We may now proceed to examine the correctness of the challenge made on behalf of the petitioner. If a classification is based on some real and substantial distinction, bearing a just and reasonable relation to the object sought to be achieved, the classification is valid. Parliament has always the power to make a reasonable classification of persons, objects or transactions for attaining certain objectives. As the preamble states, the Act is enacted to provide in the interest of national economic development for compulsory deposit by certain classes of income tax payers. The basic object, therefore, is to take deposits from a class of taxpayers whose current income exceeds Rs. 15,000. The object is, therefore, to take the deposits from taxpayers who are in a higher group of income and are, therefore, able to save more. This compulsory saving is used for national development. The Act is enacted to achieve the twin objectives of mobilisation of private savings for public purposes and imposing curbs on the inflationary trends in the economy of the country. The classification of taxpayers with current income above Rs. 15,000 who are in an economically superior position and making the CDS Scheme applicable only to them is based on a reasonable classification and cannot be said to be unreasonable and has a rational nexus to the object sought to be achieved by Parliament by enacting the CDS Act. The classification made is rational and intelligible and operation of the provisions of this Act is rightly confined to persons who are economically in a superior position. We are, therefore, of the view that none of the provisions of the CDS Act is violative of article 14 of the Constitution.

The other decision referred to us by Union of India (UOI) Vs. Shri Harbhajan Singh Dhillon, It is not necessary to consider this decision, as the case before us is fully covered by the decision in Hari Krishna Bhargav Vs. union of india (UOI) and Another,

On the above discussion, we hold that the CDS Act, does not suffer from legislative incompetence and does not violate the right guaranteed under article 14 of the Constitution.

In the result, we dismiss the writ petition and discharge the rule. But, in the circumstances of the case, we direct the parties to bear their own costs.