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Constitutional validity of income-tax laws

T N Pandey

Tax laws are often challenged, more so when a new provision is introduced, inter alia, on the ground that these violate the provisions of the Constitution relating to fundamental rights. Over the years, the legal position in this regard is fairly settled by the decisions of the Supreme Court in the past where categorical views have been expressed on this subject, as could be seen from the subsequent discussion.

In RK Garg vs Union of India (1982) 133 ITR 239 SC in which case the government's order regarding the issue of Special Bearer Bonds was challenged as being unconstitutional, the court opined that there is always a presumption in favour 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 constitutional principles.

This observation is of a general nature, not specifically relatable to tax laws and applies to all situations where the constitutional validity of any act is challenged. It has been held by the Supreme Courtin Kalwa Bus Service Pvt Ltd vs State of Punjab AIR 1983 SC 634, that the Legislature in order to tax some, need not tax all. It can adopt a reasonable classification of persons and things in imposing tax liabilities.

The mere fact that a tax falls more heavily on certain goods or persons may not result in its invalidity. The courts lean more readily in favour of upholding the constitutionality of a taxing law in view of the complexities involved in the social and economic life of the community. Unless the fiscal law in question is manifestly discriminatory, the court should refrain from striking it down on the ground of discrimination.

In fiscal legislation, the rate of tax varies from year to year. Nothing is static in taxing laws. When new exemptions and concessions are granted by the Finance Act. This is a peculiar feature under the Income-tax Act and this is dependent on the economic wisdom which is within the exclusive province of the Legislature.

Taxation law cannot claim immunity from theequality clause of the Constitution. Where there is more than one method of assessing tax and the legislature selects one 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 the matter of retrospective operation of laws, the Supreme Court's view has rather been hard. The view taken has been that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.

However, the courts have been upholding the validity of tax laws imposing taxretrospectively.

On the issue of validity of taxing statues in general, very important observations have been made in the case of Raja Jagannath Baksh Singh vs State of Uttar Pradesh (1962) 46 ITR 169 (SC). On this subject, the court has said that:

  • The validity of legislation imposing a tax can be challenged not only on the ground of lack of absence of legislative competence but also on the ground that the impugned legislation violates the fundamental rights guaranteed by Part III of the Constitution.

  • A taxing statute can be held to contravene Article 14 if it purports to impose on the same class of property similarly situated an incidence of taxation which leads to obvious inequality. It is for the legislature to decide on what objects to levy tax and at what rates and it is not for the courts to consider whether some other objects should have been taxed or whether a different rate should have been prescribed for the tax.

  • The legislature is also competent to classify persons orproperties 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. But if, in its operation, 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 Article 14.

  • If a taxing statute makes no specific provision about machinery to recover tax and procedure to assess the tax and leaves it entirely to the executive to devise such machinery as it thinks fit and to prescribe such procedure as appears to it to be fair, an occasion may arise for the courts to consider whether the failure to provide for a machinery and to prescribe a procedure does not tend to make the imposition of tax an unreasonable restriction within the meaning of Article 19(5).

  • The position, however, is different when the challenge ismade on the ground that the act is inconsistent with Article 31. So far as Article 31(1) is concerned, all that it requires is that no person can be deprived of his property save by authority of law, and the authority of law postulated by Article 31(1) is obviously the authority of a valid law.

    If the law is not valid because it offends against Article 14 or Article 19 or some other fundamental right guaranteed by Part III, then the imposition of tax levied by it cannot be said to meet the requirements of Article 31(1). But if the act in question is otherwise valid, then Article 31(1) is complied with.

  • Article 31(2) would be inapplicable to a taxing statute because the taxing statute does not purport to acquire or requisition any property. The imposition of the tax levied by the statute may be excessive and may ultimately lead to the loss of the assessee's property, but even then, it cannot be said that by virtue of the act, the property has been acquired or requisitioned.

  • Though the validityof a taxing statute cannot be challenged merely on the ground that it imposes an unreasonably high burden, it does not follow that a taxing statute cannot be challenged on the ground that it is a colourable piece of legislation and as such, is a fraud on the legislative power conferred on the legislature in question. But such a challenge cannot succeed by merely showing that the tax levied is unreasonably high or excessive; other relevant circumstances which justify the conclusion that the statute is colourable, and as such, amounts to a fraud, must also be proved.

    It is however a pity that in spite of such clear guidelines, there still persists a tendency to proliferate litigation on constitution issues.

    The author is former director of Central Board of Direct Taxes

    Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.

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