SUPREME OOURT REPORTS v. S. K. Das J

and hill wife, by name Godawaribai, constituted a Joint Hindu family. The family was a trading family and it had, besides business in money lending, considerable agricultural lands. On November 23, 19·16, two of his sons became divided In the year 1951, through the from the family. intervention of mediators the other members of the family were also divided and another major member started a separate business on his own. Thereafter, the petitioner and his wife formed themselves into a partnership to carry on their business and admitted their three minor sons to the benefits thereof. On September 22, 1952, a partnership deed was executed giving an equal share to each of the partnera. On the basis of the partnership deed, in respect of the assessment year 1952-53 the petitioner filed two applications before the In<'ome-tax Officer, Wardha, one under s. 25-A of the Act recognizing the partition, and the other under s. 26-A for registration of the firm. Both the applications were finally ordered by the Income-tax Appellate .Tribu, nal, Bombay, by its order <lated September 3, 1958, that is, the parti. tion was recognized and the firm was granted regi~tration. For the assessment years 1953-.54 Income-tax Department and 1954-55 i.lso, registered the firm under s. 26-A 0f the Act. The assessment proceedings in respect of the saicj. three years are pending before the concerned Income-tax authorities. For the assessment year 1955-56 also, the Income-tax Officer allowed the registration of the firm, 'but determined the total income of the petitioner at Rs. 2,44,625 as against the total income returned by him at Rs. 58,232. The disparity arose because, while the assessee excluded from his total income the income of the partner ship falling to the shares of his wife and three minor sons, the Income-tax Officer included the share income of his wife and three minor sons in the said business in the total income of the peti the present petition1 tionev

1.'he petitioner, by ,. • 2 S.C.R. SUPREME COURT REPORTS 987 challenges the constitutional validity of s.16( 3 )(a) (i) and (ii) of the Act, and prays fo'.r a declaration that the said provisions are ultra vires the Constitu tion and for the issue of a writ of certiorari quash ing the assessment order dated .Marc~ 15, 1960, and for the issue of a writ of pr'.ohibit10n restraining the respondents from including the share income of his wife and minor children from the part11e1 - ship firm in his total income and taxing the same in his hands. raised The first question is whether the appropriate Legislature had t.he competence to enacts. l6(3)(a)'(i) and (ii) of the Act. It would be convenient at the outset to read the re~evant part of the said section. 1961 Balaji . v. Income•tax Officer, Special I nvMtigalion Circle Subba RaoJ, Section 16. income of any individual for the purpose of asses sment, there shall be included- (3) In computing • ( a) so much of the income of a wife or a minor child of such individual as arises directly or indirectly- ( i) from the membership of the wife in a firm, of which her husband is a partner; (ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner. Section 16 provides for the computation of total income of a person and describes what sums are to be inoluded and what sums are to be excluded therefrom. Under sub-els. (i) aud {ii) of cl. (a) of irub-s. (3) of the said section, the shares iu the profits of the firm received by the wife and the minor childreu shall be included iu the total iucome of the iudividual. Under the said sub-clauses an individual is made liable to pay tax in respect 6f tl:.e income of his wifr and minor children, ., 1961 Balaji v. 1 nconie .. tax l.ij/icei-, Special Inve,,tigation Circle Suhba Rao J. StrPRE.ME COURT REPORTS [1962] though the said liability is confined to the cn·cum stances mentioned therein. Learned counsel for the petitioner contended that Entry 54 in the Federal Legislative List of the Guvernment of India Act, 1935, did not confer on the Legislature any power to tax A on the ineom l of B and, therefore, the sub-section was nltm vires the Legislature. Entry 54 of Federal Legislative List ran : "Taxes on income other than agricultural income". The said Entry i~ identical with item 82 of List I of the Seventh f.lchedule to the Constitution. The argument is that income-tax is a tax imposed upon a person in relation to his income and, therefore, A can onlv . be taxed on his income and not on the income df B. Learned counsel for the respondents, on the other hand, would contend that the express terms of the Entry did not restrict the lagislative power to tax only the income of the person assessed, what could be taxed under that Entry was "in come" and, L<'gislitture from imposiug the incidence of the tax on a person other than the 1ierson whose income was to be assessed. Alternatively, he would make a distinction .between the taxability of the income and the machinery for its collection, and contlmd that, though the income of the wife and the minor sons was only taxable, there was nothing illegal in imposing the immediate incidence on the father, as there was sufficient intimate nexus between the individual, his wife a:nd minor sons, doing business the ultimate liability inter se to be settled between themselves. This question was directly raised in B. J-I. Amina Umma v. Income-tax Officer, Kozhikode (') aud was answered in favour of the Income-tax Department. The same question was posed before, this Court in Sardar Bcildev Singh v. Commissioner of Income Tax, Delhi and Ajmtr (') and was left therefore, nothing prevented in partnership, leaving (I) (1954)261.T.R.137. (2) (1961) I S.C.R.482,493. • • • • ._ 1961 Balaji v. Incame-tax Officer, Special I tW€8tigation Oirc/,e Subba Rao J, 2 S.C.R. SUPREME COURT REPORTS 989 open. A final decision lJy this Court on such an important question at the earliest point of time is highly desirable, but, with some relnct.ance, we are leaving open this qneslion once again, as the petition can be satisfactorily disposed of on a narrower Lasis. It is well settled that the Entri('s in the Lists are not powers but ;ire only fields uf legislation, and that wicle~t import and significance must be given to the language used by Parliament in the various Entries. Sarkar, J., speaking Court, observed in Sardar Baldev Si:ngh's Case (1 thus: ) " So entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. If it wen' not tu be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances." This decision holds that the said Entry can sustain a law made to prevent the evasion of tax. The short question, therefore, is whether s.1'3 (3)(a)(i) and. (ii) is a provision made by the Legisla ture to prevent evasion uf tax. Under the relevant provision of the Income-tax Act, if a firm is register- eel, the share of each partner in the profit of the firm would be added to his other income and charged as part of his total income. After 1966, the posi tion is the same except in one regard with which we are not now concerned. This provision was intend ed for the benefit of partners of a business, for it made th(em liable only to pay tax on their own in come. But it gave au effective handle to evade taxation in another direction. A husband or a father could nominally take his wife or his minor sons in partnership with him so that tax burden -. (1) (1961) 1 S.C.R. 482, 493. 19()1 Balaji v. Income-tax Officer, Special ln~estigation Oircle Subba Rao J. • • 990 SUPREME COURT REPORTS (1962] might be lightened, for, if the income was divided between a number of people, the income derived by an individual therefrom might fall under the limits of taxable income or under a less onerous slab This device enables an assessee to secure the entire income of the businAss but at the same time to evade income-tax which he would have otherwise liable to pay. The Income-tax El).quiry Co=ission of 1936 made certain recommendation to prevent evasion of tax in such cases. The Legislature accepted those recommendations and the loopholes were sought to be plugged by enacting the said sub-section. (ii) was therefore enacted for preventing evasion of tax and was well within the competence of the Federal Legislature. Sub-section (3)(a)(i) and • The constitutional validity of the said provision was next questioned on the ground that i't violated the doctrine of equality before the law enshrined in .Art.14 of the Constitution. Under Art. 14, ''The State shall not deny to any person equality before the law or the equal protection of the laws within the terri tory of India." But decisions of this Court permitted classification if there was reasonable basjs for the differentiation. It was held that what Art. 14 pro hibited was .class legislation and not reasonable classification for the purpose of legislation. Two conditions were laid down for passing the test of permissible classification, namely, fi) the classification must be founded on an intelligible differentia which things that are grouped distinguishes persons or together from others left out of the group, and (ii) that the differentia must have rational relation to the object sought to be achieved by the statute in question. Under the impugned sub-section, an individual is taxed on the income of his wife or his minor children, if he carries on business in partner ship with his wife or if he admits his minor sons to the benefits individual, if he carries on busine88 in partnership ~ - of the partnership, whereas an , ,_ 1961 Balaji ". Income-tax Officer, Sp•cial Investigation Circle Subia Rao J. S.C.R. SUPREME COURT REPORTS 991 with a third party, whether a man or a woman, or even with his major children, or if he and his wife or children carry on business separately, will be liable only to pay tax on his share o{ the partner ship income, that is, for the purpose of this sub section, the former is put in a category different from the latter. It cannot be Raid that there is no differentia between the two groups; but what is contended is that the said differentia has no rational relation to the object sought to be achieved by the statute in question. It was asked how, from the standpoint of the difference imposition of tax, between an individual and his wife doing business in partnership, and between an individual and his wife doing business separately and an individnal . doing business in partnership with his wife and an individual doing business in partn~rship with a third party, male or female, and between an indivi dual who has admitted his minor children to the partnership business and an individual who is doing business in partnership with his major children or outsiders, would have any reasonable basis. This argument ignores the object of the legislation. We have held that the object of the legislation was to prevent evasion of tax. A similar device would not ordinarily be resorted to by individuals hy entering into .partnership with persons other than those mentioned in the sub-section, as it would involve a risk of the third-party turning round and asser ting his own rights. The Legislature, therefore, selected for the purpose of classification only that group of persons who in fact are used as a cloak to perpetrate fraud on taxation. It was then said that there might be genuine partuerships between an individual and hiS wife is no reasonable relation and, therefore, :Jetween the classification and the object sought to the extent of those be achieved, at any rate to . genuine oases. But .jg no c1assillcativn then. -. between genuine and non-genuine c11iseii: the classi- 1961 Ba.!nji v. I 11come-tax Offerer, 1Spc,.£al I nve._<1U gati'.on G'ircl?. Subba Raa J. 992 SUPREME COURT REPORTS [1962] fication is between cases of partncrsl1ip between husband, wife and/or minor chil<lren, whether genuine or not, and partnerships between others. In demarcating a group, the net was cast a littfo wider, but it was necessary, a~ any further sub classification as genuine and non-genuine partner ships might defeat ·the purpose of the Act. Strong reliance is placed upon the decision of the Supreme Court of America in Albert A. Hoeper v. Tax Cornrnissi'.oner of Wi8consin (1) and it is, therefore, necessary to consider it in some detail. There,. the appellant niarried a widow. Both the parties had separate incomes and made separak returns. Under the relevant tax Act, the incomes of the wife were added to the income of the husband for the purpose of taxation. The result was to increase the rate of the appellant's income-tax and to charge him with a tax otherwise payable by his wife. It wa~ contended that the said law deprived the tax-payer of the due prbcess and equal protec tion of the law. Roberts, J., who expressed the majority view, accepted the contention and struck learned Judge observed thus:· law. The "We have no doubt that, because of the fundamental conceptions which underlie our system, any attempt ,by a state to measure the tax on one person's- property or income by reference to the prope'rty or income of another is contrary to due process of law as guaran teed by the 14th Am.iinclment. That which is not in fact the taxpayer's income cannot be made such by calling it income." sustaining The Court of Appeal in that case assigned two reasons the provisions : one was that necessary to prevent frauds and evasions of tax by married persons, ;ind the other was that it was (l} (1931) 76 L. Ed. 24S, 251. the provi!lions under attack wer ~ 1961 Balofii v. I ncome·l/Jx Officer, Sptcitil Investigation Circle Subba Rao J. 2 s.c.R. SUPREME OOURT REPORTS 993 a regulation of marriage. The first reason was not accepted by the Supreme Court on the ground that the claimed necessity could not justify the other wise unconstitutional exaction ; and the second reason was rejected for the reason that it could hardly be claimed that a mere difference in social relations so altered the taxable status of one receiv ing income as to justify a different measure for the tax. Holmes, J., in his dissenting judgment, justified his view on the ground that the statute was the outcome of thousand years of history indicating that husband and wife were one and also for the reason that it had a tendency to tax evasion. Prima facie the majority prevent view supports the content.ion of learned counsel for the petitioner, but a deeper scrutiny reveals fundamental differences between that decision and the present case. There, there wM 110 question of any pertnership between husband and wife, and the income of the wife was adclP<l to that of the husband to pay not also a portion of the tax otherwise payble by wife ; in the present case, the impugnerl provisions do not impose any such general liability but confine it onlv to a case where the husband takes bis wife in pa'ftnership. There is a greater scope for fraudulent fictitious pm'tnership along with one's wifo allfl minor ehildrcn than in a ease of separate income of the spouses derived from diffon:nt sources. That apart, the pr('sent social and economic poAit~on of womPn in India as compared with their eompecrs in is so low that America, even as it existed in H131, it would be inapprnprinte to apply the decision 1.iade in Americ1i to s, similar case arising in Int.1.ia. A wife in India, partieuhrly if she be illit.m nfr-- a large majority of them are illiterate-would onli narily he iu economic matters a tool in the hamlfl in h0r of her husband. Many things a.re done the result that he had increased evasion by constitnting income 1961 Balaji v. Income-tax Offiosr, Special I nvestigatioo Circle Subba Rao J. 994 SUPREME COURT REPORTS [1962] name without her knowledge of the same. When the Legislature of this country, which is assumed to know the conditions of the people and their require ments, with the awareness of this particular wide spread fraudulent device in the matter of evasion of taxes, made a law to prevent the said fraud, it is difficult for this Court in the absence of any counter balancing circumstanceg to hold, on the analogy drawn from American decisions, that the need for such a law is not in existence. On the contrary there is a direct decision of the Madras High Court in B .. M. Amina Umma v. Income Tax Officer, Kozhi ) sustaining the said provision on the ground kode (1 J., of reasonable speaking for the division bench, after considering the relevant decisions on the subject, observed thus: classification. Rajagopalan, "The reasonableness or otherwise of a classification has to be decided with reference to all the circumstances of the case including the social and economic structure prevalent in the area where the taxing statute is in operation .......... An attempt to prevent by legislation an evasion of just tax liability and the necessary classification to give effect to that object cannot, in our view, be termed unreasonable." With respect we give our ful~ lJ.SSe~t to the ~id observations. We, therefore, reiect this content10n. The next attack on the validity of the pro visions is based upon Art. 19 (1) (f) and (g) of the Constitution. The said constitutional provisions read: Art. 19 ( 1) : All citizens shall have the right (f) to acquire, hold and dispose of property; (I) (1954) 26 I.T.R. 137, 150. 1961 Balaji v. I ncome-taa: Officer, Special Invutigation Circle Subba llao J. ' 2 S.C.R. SUPREME COURT REPORTS (g) to practise any profession, or to carry on any occupation, trade or business. It was argued that as the husband is statutorily made to pay certain amount as tax on the income of his wife, to that extent, he is deprive6 of his pro perty by the State action and, therefore, his funda mental right under s. 19 (1) (f) is infringed. The impugned statutory provision, the argument pro ceeds, is an unreasonable restriction on the said right, as the husband is compelled to pay tax on the income of his wife and children who are in law distinct legal persons. The learned Additional Solicitor-General broadly contended that a tax imposed by authority of law cannot be questioned on the ground that the law infringes the provisions of Art. 19 of the consti tution. We cannot see any justification for contention in any of the constitutional provisions. The relevant provisions of the Constitution read : Art. 265 : No tax shall be levied or Art. 13 (1) : All collected except by authority of law. ' in force in the territory of India immediately before the commencement of this Constitution, in so far as they are inconsistent with the provisions of this Part shall, to the extent of such inconsis tency, be void. (3) In this Article, unless the context otherwise requires,- ( a) 'law' includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law ; (b) 'law in force' includes laws passed or made by a Legislature or other competent the territory of India before the authority in 1961 Balaji v. Income-tax Officer, Special Investigation Circle Subba Bao, J, 996 SUPREME COURT REPORTS (1962] commencement of this Constitution and not previously repealed, notwithstanding that any such law or any part thereof may not be then in operation either at all or in particular areas." A combined and plain reading of the said provisions makes it abundantly clear that a law which is in consistent with any of the provisions of Part III is void. It cannot be denied that a law providing for levy and collection of taxes is a law within the meaning of Part III of the Constitution, and there fore it must stand the test laid down by Art. 13 of in Art. 265 of the 'law' the Constitution. The Constitution must be a valid law. A law to be valid must not only be one passed by the Legis lature in exercise of a power. conferred on it, but must also be one that does not infringe the funda· mental rights declared by the Constitution. When a licence fee was imposed by a munieipality under a bye-law framed in excess of the power conferred on it by the provisions of the U. P. Municipalities Act, this Court in Mohammad Yas'in v. The Town ) held that the enforce Area Committee, Jalalabad (1 ment of the said bye-law against a citi_zen consti tuted an infringement of his right under Art. 19 (l)(g) of the Constitution. Where a Sta, to sought to impose s!Lles-tax in exercise of a power conferred under a provision which was nltra vires the State Legislature, this Court held in Himmatlal Harilal Mehta v. The State of Madhya Pradesh(') that a threat by the said State to realise tax from the asscsse~ without the authority of law by using the coercive machinery of the impugned Act was a sufficient infrigement of bis fundamental right under Art. l!J(l)(g) of the Constitution. The same princi ple must necessarily apply even in a case where the law imposing a tax is void as offending the fundamental rights under tlw Constitution. This I (1) (1952) S.C.R. 572. (2) (1954) S.C.R. 1122. ~ · 2 S.C.R. SUPREME COURT REPORTS 997 Court in Kamllipprl'l'n Kottamthil Kochuni ~ 1lfoopi'.l Nair v. State of Jlfodr1is ('),after considering the earlier decisions obserwd thus : "It is, thcreforo, maHifost that the law must rnt, isfy two tests before it can be '' valid la\r, namely, (1) that the apprnpriate legis lature has compet<'ncy to make the law ; (2) that it does not take away or abridge any of the fundamental rights enumerated in Part III of the Constitution." 1961 Balaji Income-tax Officer, Special Investigation Circle Subba Rao J f ). There, the petitioners im11ugned Section 16 (3)(a) of the Act must, therefore, pass both the tests rmd tf it violates any of the provisions of Art. 19, to the extent it is· inconsistent with the said prnvisions, it will be void. This view is in consonance witli that expressed by this Court in Kunnathat Thatlmnni Moopil Nair v. The /itate of K erala (2 constitutionality of the Travancore-Cochin Land Tax Act, XV of 1955, as amended by Travancore-Oochin (Amendment) Act, X of 1957, and Sinha, C. J., speaking for the Court held the Act was void as infringing not only Art. 14 of the Constitution ·but also Art. 19 (1) (f) thereof. The learned Chief ~ustice, airer considering the relevant proviRions of the Act and having regard to the unreasonable nature oL the restrictions, came to the conclusion that the provisions of the Act were unconstitutional, viewed from tlie, angle of the provisions of Art. 19 ( 1 )(f) of the Constitution. Land Tax '" We'eannot, th.frefore, accept broad contention of the learned, Additional Solicitor-General that a tax law. cannot be questioned on the ground that it infringes Art. 19 of the'Constitutirm. \ Even. 'so learned· 1.~dditfonaj f:lolit:itur General co1itended (1960) 3 S.C.R. 887, 911. (I) (~) (1961) 3 S.C.R. 77. prov~io11s of . 1961 Balaji v. Income-tax Officer, Special I nvNJtigation Circle Subba Rao J. \ t 9198 SUPREME COURT'R,EPORTS (1962) s. 16 (3) (a) (i) and (ii) of the Act constituted only reasonable restrictions on the exercise of the rights conferred under Art. 19(l)(f) and (g) of the Consti tution, in the interest of the general public. to pay a Learned counsel for the petitioner argued that the restrictions are not reasonable for the following reasons: (i) the husband is made to pay tax on the income which his wife derived from the business, that is, a tax is levied on one person on the income of another; (2) such an imposition not only prevents a husband from taking his wife as a in his business but also prevents a partnPr wife, who has got a business of her own, from taking her husband as a partner in the business ; tax at a rate (3) the husband has higher than that he would have to pay if the income of to his income ; ( 4) the same situation is created inter Be between a parent and his minor children vis-a vis their joint business. Learned, counsel, therefore, contended that the provisions prevented the honest pooling of resources of the members of a family so intimately ('onnected with each other to the detri ment of the family prosperity, and that it amount ed to an unreasonable restriction on the said funda mental rights. There is some plausibility in this argument, but if an overall picture of the situation is taken, the reasonab!Cness of the restrictions will be apparent. In the State of 1Wadra8 v. V. G. Row (1 ) Patanjali Sastri, C. J., lays down the following test of reasonableness: the wife was not added "The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevail in~ conditions at the time, should all enter into the judicial verdict." So judged, can it be said that the restrictions imposed (I) (1952) S.C.R. 597. 1961 Balaji v. Income-tax Officer, Special Investigation Circle Subba RaoJ. 2 S.C.R. SUPREME COURT REPORTS 999 under the impugned provisions are not reason able? The object sought to be achieved was to pre vent the prevalent abuse, namely, evasion of tax: by an individual doing business under a partner ship nominally entered with his wife or minor chil dren. The scope of the provisions is limited only to a few of the intimate members of a family who ordinarily are under the protection of the assessee and are dependants of him. The persons selected by the provisions, namely, wife and minor ehildren, cannot also be ordinarily expected to carry on their business independently with their own funds when the husband or the father is alive and when they are under his protection. Doubtless some of the b-aid partnerships may be genuine and the wife or minor children may have contributed capital to the business ; but the provisions do not in any way affect their rights and even the liability inter se between the husband and the wife or the minor children, as the case may be, in respect of the tax paid. It is true that in computing the total income of an individual for the purpose of assessment, their income in their capacity as partners shall be included in the income of the individual; but the section does not prevent the husband or the father, as the case may be, from debiting against them in the partner ship accounts that part of the tax referable to the share or shares of their income. It may be that a father or a husband may have to pay tax than ordinarily he would at a higher have to pay if the addition of the wife's or children's income to his own brings his total income to a higher slab. But it may not neces sarily be so in a case where the income of the for mer is not appreciable ; even if it is appreciable, he can debit a part of the excess payment to his wife ~.nd children. In short, the firm, though registered, would he treated as a distinct unit of assessmPnt, with the difference that, unlike in the case of a regis tered firm, the entire income of the unit is added to the personal income of the father or the husband 1961 Balaji v. lncome•tax Officer, Special Investigation Circle Subba Rao J. 1000 SUPREME COURT REPORTS [1962) as the case may be. This mode of taxation may be a little hard on a husband or a father in the case of genuine partnership with wife or minor children, but that is offset, to a large extent, by the beneficient results that flow therefrom to the public, namely, the prevention of evasion of income-tax, and also by the fact that, by and large, the additional payment of tax made on the income of the wife or the minor children will ultimately be borne by them in the final accounting between them. In these circum stances, we cannot say that the provisions of s. 16(3) of the Act impose an unreasonable restriction on the fundamental rights of the petitioner under Art. 19 (0 (f) and (g) of the Constitution. In the result, the petition fails and is dismissed with costs. Petition dismissed. ! I