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Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. (In Liquidation) Vs. Commissioner of Income-tax, Gujarat I - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Referene No. 26 of 1971 and Special Civil Application No. 103 of 1972
Judge
Reported in[1975]99ITR264(Guj)
ActsConstitution of India - Article 14; Income Tax Act, 1961 - Sections 5(1), 6, 7, 8, 32(1), 41(2), 43(6), 45, 46, 47, 47(V), 48, 49, 49(1), 50, 50(1), 50(2), 51, 52, 53, 54, 54A, 55 and 55(2)
AppellantRajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. (In Liquidation)
RespondentCommissioner of Income-tax, Gujarat I
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredTwyford Tea Co. Ltd. v. State of Kerala
Excerpt:
(i) direct taxation - cost of acquisition - article 14 of constitution of india and sections 43 (6), 49, 50 and 50 (1) of income tax act, 1961 - whether applicant entitled to substitute value as on 01.01.1954 as cost of acquisition of building and machinery - assesses who acquired depreciable assets in any one of modes prescribed under section 49 have benefit of option to select either fair market value of assets on 01.01.1954 or cost of acquisition by previous owner as per section 50 - assessee's case admittedly falls under section 50 (1) and not under section 49 - in case of applicant for purposes of computation of capital gains tax adjusted written down value as per section 43 (6) would be cost of acquisition of assets - question answered in negative. (ii) classification -.....b.k. mehta, j. 1. as these two matters involve inter-dependent questions, it would be convenient to dispose them of by a single judgment and, therefore, we intend to deliver a common judgment in these two matters. 2. in special civil application no. 103 of 72, the petitioner-company is a private limited company having its registered office in manekchowk, ahmedabad. at present it is under liquidation and one bharatkumar chandulal shah has been appointed its liquidator. in the assessment year 1968-69, the relevant accounting year of which was ending on august 31, 1967, the company was resolved to be taken into voluntary liquidation. it appears that some of its assets were sold on june 15, 1967. the assets so disposed of were building and machinery, which were purchased by the.....
Judgment:

B.K. Mehta, J.

1. As these two matters involve inter-dependent questions, it would be convenient to dispose them of by a single judgment and, therefore, we intend to deliver a common judgment in these two matters.

2. In Special Civil Application No. 103 of 72, the petitioner-company is a private limited company having its registered office in Manekchowk, Ahmedabad. At present it is under liquidation and one Bharatkumar Chandulal Shah has been appointed its liquidator. In the assessment year 1968-69, the relevant accounting year of which was ending on August 31, 1967, the company was resolved to be taken into voluntary liquidation. It appears that some of its assets were sold on June 15, 1967. The assets so disposed of were building and machinery, which were purchased by the petitioner-company before January 1, 1954. It is an admitted position that the petitioner-company had obtained depreciation on the said assets. Before the Income-tax Officer, Circle I, Ward E, Ahmedabad, in the course of the assessment proceedings, a question arose with regard to the levy of tax on capital gains. The petitioner-company claimed before the said Income-tax Officer that it should be permitted to substitute the market valuation of the machinery as on January 1, 1954, as the cost of acquisition for purposes of computation of capital gains. The said Income-tax Officer rejected the claim of the petitioner-company as he was of the opinion that the case of the petitioner-company was governed by section 50(1) of the Income-tax Act, 1961. At this stage it should be noted that the petitioner-company had purchased the machinery for a sum of Rs. 1,51,121 and the building for a sum of Rs. 1,48,455. The price realised by the petitioner-company on the sale of the said assets were Rs. 1,75,276 and Rs. 1,51,590, respectively. The Income-tax Officer, therefore, levied capital gains tax on the difference between the sale price and the written down value as adjusted under section 50(1) of the aforesaid Act. The claim of the petitioner-company was that, as the market price as on January 1, 1954, was Rs. 2,50,000 and Rs. 2,25,000 for machinery and building, respectively, the Income-tax Officer should take that as the cost of acquisition for purposes of ascertaining capital gains. The assessment order was passed by the said Income-tax Officer on March 10, 1969. Being aggrieved with this assessment order, the petitioner-company be his order of September 18, 1970. The petitioner-company, therefore, went in further appeal before the Income-tax Appellate Tribunal, Ahmedabad. The Tribunal also did not accept this contention of the petitioner-company on the plain reading of section 50 of the 1961 Act. It, therefore, by its order of January 16, 1971, dismissed the appeal. The petitioner-company had, therefore, sought a reference to this court and the Tribunal has referred the following question to us for our opinion :

'Whether, on the facts and circumstances of the case, the applicant was entitled to substitute the value as on January 1, 1954, as the cost of acquisition of the building and machinery ?'

3. By way of a greater caution, the petitioner-company has also filed the present Special Civil Application No. 103 of 1972 challenging the vires of the provisions contained in sections 45 and 55 and prayed for appropriate writ, orders and directions declaring the said provisions as unconstitutional, illegal and void as being violative of article 14 of the Constitution and also quashing and setting aside the orders of assessment as confirmed in the appeals.

4. The aforesaid three orders of the Income-tax Officer, Appellate Assistant Commissioner and the Tribunal, are annexed to the petition as annexures 'A', 'B' and 'C', respectively.

5. The case of the petitioner-company shortly is as under :

Section 50 of the Income-tax Act, 1961, classified depreciable assets into those acquired in the circumstances mentioned under section 49 and those assets acquired otherwise. In non-depreciable assets, whether acquired in the circumstances, mentioned under section 49 or otherwise, the assessee is entitled to substitute the market price as on January 1, 1954, as the cost of acquisition, whereas in depreciable assets, the assessee is entitled to substitute the price as on January 1, 1954, only if he has become the owner of the depreciable assets in the circumstances mentioned in section 49 and not otherwise. This so-called classification of the depreciable assets is absolutely irrational, capricious, arbitrary and has no rational nexus with the objective of the aforesaid provisions and, therefore, violative of the equality clause contained in article 14 of the Constitution and, therefore, null and void. On the other hand, the case of the revenue is that the legislature has in its wisdom classified the assets into depreciable assets acquired in the mode specified under section 49 of the said Act and depreciable assets acquired otherwise than in the manner specified under section 49. The legislature has conferred some benefits upon the assets falling under the former class and refrained from conferring the same in respect of the assets in the letter class. The legislature has also specified the conditions under which the former class would be entitled to the benefits. As this classification is based on intelligible differentia which has a reasonable nexus with the object of the legislation, there is no question of offending article 14 of the Constitution on the ground of discrimination.

6. It is in the context of these contentions and the rival cases of the parties that we have to determine whether the petitioner-company has been able to justify its challenge that the provisions contained in sections 45 to 55 are violative of the equality clause contained in article 14 of the Constitution. It should be noted that, though the relief claimed by the petitioner-company in this application is for a declaration of the entire complex of sections 45 to 55, the petitioner-company has in the grounds stated in the petition restricted its challenge only to the provisions contained in sections 48 to 52. At the time of hearing of this application also, the learned advocate of the petitioner-company has also restricted his address to the vires of the provisions contained in sections 48 to 52. For all intents and purposes, the challenge is really to section 50 of the 1961 Act.

7. Before we deal with the rival contentions of the parties, we would reproduce some of the relevant sections which have a bearing on the challenge which has been made by the petitioner-company to the provisions contained in sections 48 to 52 of the 1961 Act. Chapter IV of the aforesaid Act deals with the computation of total income. Section E of Chapter IV deals with capital gains. Section 45 provides :

'Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place.'

8. Sections 46 and 47 provide as to which transactions are not transfer within the mischief of section 45. Section 46 says that where the assets of a company are distributed to its shareholders on its liquidation, such distribution would not be regarded as a transfer by the company within the meaning of section 45. Section 47 provides that the various transfers mentioned therein would not be within the purview of section 45. They are broadly what is known as distribution of capital assets on the partition of a Hindu undivided family or dissolution of a firm, body of individuals or other association of persons, or bequest under a gift, will or an irrevocable trust; or transfer of a capital asset by a company to its subsidiary company; or by a subsidiary company to its holding company; or any transfer taking place as a result of the scheme of amalgamation. Section 48 prescribes the mode of computation and deductions. Section 49 provides for the basis of computation for such capital gains in the cases of depreciable assets acquired by what is broadly known as 'succession to the assets'. Section 50 is in the nature of special provision for computing the cost of acquisition in the case of depreciable assets acquired in a manner other than those specified in section 49 and section 52 provides for consideration for the transfer in cases of under-statement. Section 53 provides for capital gains which are exempt from tax. Section 54 provides for profits on the sale of property used for residence. Section 54A provides for relief of tax on capital gains in the cases mentioned therein. Section 55 is a sort of a definition clause which gives the meaning of the terms 'adjusted', 'cost of improvement' and 'cost of acquisition' as used in sections 48, 49 and 49, 50. and 55. They are as under :

'48. Mode of computation and deductions. - The income chargeable under the head 'capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto'.

'49. Cost with reference to certain modes of acquisition. - (1) Where the capital assets became the property of the assessee -

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;

(ii) under a gift or will;

(iii) (a) by succession, inheritance or devolution, or

(b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or

(c) on any distribution of assets on the liquidation of a company, or

(d) under a transfer to a revocable or an irrevocable trust, or

(e) under any such transfer as is referred to in clause (iv) or clause

(v) or clause (vi) of section 47,

The cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Explanation. - In this sub-section the expression 'previous owner of the property' in relation to any capital asset owned by an assessee mean the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) of this sub-section.

(2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share of shares in the amalgamating company.'

'50. Special provision for computing cost of acquisition in the case depreciable assets. - Where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications :-

(1) The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.

(2) Where under any provision of section 49, read with sub-section (2) of section 55, the fair market value of the asset on the 1st day of January, 1954, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset, on the said date, as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted.'

'55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'. - (1) For the purposes of sections 48, 49 and 50, -

(a) 'adjusted' in relation to written down value or fair market value, means diminished by any loss deducted or increased by any profits assessed, under the provisions of clause (iii) of sub-section (1) of section 32, or subsection (2) of section 41, as the case may be, the computation for this purpose being made with reference to the period commencing from the 1st day of January, 1954, in cases to which clause (2) of section 50 applies;

(b) 'cost of any improvement' in relation to a capital asset, -

(i) where the capital asset became the property of the previous owner or the assessee before the 1st day of January, 1954, and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and

(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner,

but does not include any expenditure which is deductible in computing the income chargeable under the head 'Interest on securities', Income from house property', 'Profits and gains of business or profession', or 'Income from other sources' and the expression 'improvement' shall be construed accordingly.

(2) For the purposes of sections 48 and 49, 'cost of acquisition', in relation to a capital asset, -

(i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee;

(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49 and the capital asset became the property of the previous owner before the 1st day of January, 1954, means the cost of the capital asset on the 1st day of January, 1954, at the option of the assessee.

(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head 'Capital gains' in respect of that asset under section 46, means the fair market value of the asset on the date of distribution;

(iv) (Omitted by F. A., 1966)

(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on -

(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,

(b) the conversion of any shares of the company into stock,

(c) the re-conversion of any stock of the company into shares,

(d) the sub-division of any of the shares of the company into shares of smaller amount, or

(e) the conversion of one kind of shares of the company into another kind,

means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.

(3) where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.'

9. The question, which has been raised in this Special Civil Application is whether the division of depreciable assets into two classes, namely, (i) depreciable assets acquired by the assesses themselves, and (ii) depreciable assets acquired by the assessees as successors under any of the cases mentioned in section 49, results in discrimination, inasmuch as those assessees who have acquired depreciable assets from their own funds are subjected to capital gains tax on the basis of their adjusted written down value as defined in clause (6) of section 43 while successors in any of the modes mentioned in section 49 would have the option for the purposes of capital gains to take as cost of acquisition the fair market value as on 1st day of January, 1954, or the cost of the assets to the original owner who might have acquired before the said date, as reduced by the depreciations allowed to such successor-assessee.

10. Mr. J. P. Shah, the learned advocate, appearing on behalf of the petitioner-company urged the following grounds :

(a) This so-called classification of depreciable assets with reference to the mode of acquisition is not only not based on any rational ground but is arbitrary and, therefore, offends the equality clause contained in article 14 of the Constitution.

(b) Assuming that there is a valid and reasonable classification relating to the depreciable assets for purposes of computation of capital gains into assessees acquiring depreciable assets in any of the modes mentioned in section 49 and the assessees acquiring assets otherwise, it has no reasonable nexus with the object of the legislation, namely, the capital gains.

11. On reading sections 48, 49 and 50, we are of the opinion that what the legislature has done for purposes of computation of the income chargeable under the head of capital gains is to deduct from the consideration received or accrued as a result of transfer of capital assets the cost of acquisition of the capital assets and any improvement thereto together with the expenditure incurred wholly or exclusively in connection with such transfer. In respect of the assessees who are successors to the capital assets in any of the manners provided in section 49, the legislature has provided that the cost of acquisition of such assets would be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner of the assessee concerned, as the case may be. The legislature has, thereafter, provided for the computation of the cost of acquisition in the case of the appreciable assets. This is a special provision made in section 50 of the Act and what the legislature has tried to achieve by this special provision is that in relation to a capital asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year under the 1961 Act or prior Acts, the provisions contained in sections 48 and 49 should be modified and the cost of acquisition in the case of assessees acquiring depreciable assets otherwise than in one of the modes mentioned in section 49, would be the adjusted written down value as defined under clause (6) of section 43, while in the case of depreciable assets acquired by the assessee in any of the modes mentioned in section 49 the fair market value of the assets on the first day of January, 1954, or its original cost is to be taken into account at the option of the assessee as reduced by the amount of depreciation that might have been allowed to the assessee on the said date as the cost of acquisition for purposes of computation of capital gains tax. The first ground urged by Mr. Shah on behalf of the petitioner-company is that there is no justifiable and rational classification, and if that is so, this arbitrary division by the legislature itself offends against the equality clause contained in article 14 of the Constitution of India. We have not been able to appreciate how Mr. Shah contends that there is no rational classification or any reasonable basis underlying such classification. What the legislature has done, for purposes of finding out what should be the basis for computation of the capital gains tax, is to make a special provision in respect of the depreciable assets and not in relation to all other counts of assets. In relation to depreciable assets the legislature has classified the assets into two groups, viz., (i) those assessees who have acquired the depreciable assets themselves; in other words, those assessees who have acquired the depreciable assets themselves; in other words, those assessees who have acquired the depreciable assets themselves from their own funds and consequently, therefore, earned and enjoyed the depreciable assets of such assets themselves, and (ii) those assessees who ar broadly known as successors acquiring assets in any of the modes mentioned in section 49. In other words, they are the assessees who have not themselves acquired the assets but they have acquired the assets as a result of the distribution of the assets but they on the happening of any of the contingencies mentioned in section 49, such as partition of a Hindu undivided family, dissolution of a firm, body of individuals or association of persons or as a result of a bequest under gift, will or under transfer to a revocable or an irrevocable trust or as a result of transfer by a subsidiary company to its holding company or by a parent company to its subsidiary company or as a result of the amalgamation of companies. They are, therefore, owners of the properties which have been transferred to them but are not within the mischief of section 45. They are the assessees who have succeeded to the assets and, therefore, they are not the persons who have earned and enjoyed the depreciation on these assets. Now, to attack this classification as an irrational or arbitrary classification is, to say the least, misconceived. What is the result of the classification so far as the tax liability is concerned is a question beside the point as far as this attack as to the reasonableness of classification is concerned. We will shortly consider the consequent contention which has been urged by Mr. Shah as to whether this classification made with reference to earning and enjoyment of the benefit is the object of the legislature in making this classification or not.

12. In support of his contention that there is no classification at all, much less reasonable classification, Mr. Shah relied on a number of decisions of the Supreme Court. Mr. Shah relied on the decision of the Supreme Court in Kunnatha Thathunni Moopil Nair v. State of Kerala, where the court was concerned with the vires of the provisions contained in Travancore Cochin Land Tax Act (15 of 1955 as amended by Act 10 of 1957) by which a uniform basic tax was sought to be levied on the lands situated in the State. The vires of the provisions of the Amending Act were challenged on the ground of they being violative of the equality clause contained in article 14 of the Constitution. The court found that inequality was writ large on the face of the Act and was inherent in the very provisions of the taxing section. As there was no attempt at classification in the provisions of the Act, the court did not think it necessary to consider as to what should have been the basis of such an alleged classification. The court was, therefore, of the opinion that this was one of the cases where the lack of classification created inequality and, therefore, was clearly hit by the prohibition to deny equality before the law contained in article 14 of the Constitution. It is in this context that the court observed as under :

'A taxing status is not wholly immune from attack on the ground that it infringes the equality clause in article 14, though the courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in a way that the court might think more just and equitable. If the legislature has classified persons or properties into different categories which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal. Similarly, different kinds of property may be subjected to different rates of taxation, but so long as there is a rational basis for the classification, article 14 will not be in the way of such classification resulting in unequal burdens on different classes of properties. But, if the same class of property similarly situated is subjected to an incidence of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property.'

13. The next case relied on by Mr. Shah in this connection was in Suraj Mall Mohta and Co. v. A. V. Visvanatha Sastri, where the court was concerned with the vires of sections 5(1), 5(4), 6, 7 and 8 or any portion thereof of the Taxation on Income (Investigation Commission) Act, 1947. Mahajan C.J. (as he then was), speaking for the court found that the classification made in the aforesaid provisions of the said Act was bad and had no rational basis as both the kinds of persons sought to be classified have common properties and have common characteristics and, therefore, require equal treatment. The court there was of the opinion that both section 34 of the Indian Income-tax Act, 1922, and sub-section (4) of section 5 of the Taxation on Income (Investigation Commission) Act, 1947, dealt with all persons who have similar characteristic and similar properties, the common characteristics being that they are persons who have not truly disclosed their income and have evaded payment of taxation on income. The court, therefore, observed in this context as under :

'The State can by classification determine who should be regarded as a class for purposes of legislation and in relation to a law enacted on a particular subject, but the classification permissible must be based on some real and substantial distinction bearing a just and reasonable relation to the objects sought to be attained and cannot be made arbitrarily and without any substantial basis. Classification means segregation in classes which have a systematic relation, usually found in common properties and characteristics.'

14. The court, therefore, held section 5(4) of the Taxation on Income (Investigation Commission) Act, 1947, as offending the equality clause because the procedure prescribed by the said section in regard to the persons similarly situated should have the advantage substantially of the procedure prescribed by the Indian Income-tax Act, 1922, and they should not be deprived of it. Mr. Shah thereafter drew our attention to another decision of the Supreme Court in S. C. Prashar v. Vasantsen Dwarkadas, where the court was concerned with the vires of the second proviso to section 34(3) of the Indian Income-tax Act, 1922, as being bad on the ground that it violated article 14 of the Constitution. The Division Bench of the Bombay High Court from the decision of which the appeal was preferred to the Supreme Court had struck down the said proviso. The majority of the judges of the Supreme Court in that case agreed with the decision of the High Court as, in their opinion, the persons with regard to whom no finding or direction was given really belonged to the same category, namely, category of the persons who are liable to pay tax and had failed to pay it for one reason or the other, as the persons who were liable to pay tax and had not paid it could not be proceeded against after the period of limitation, unless a finding or direction with regard to them was given by some Tribunal under various sections mentioned in the proviso, and, therefore, out of the large category of people who were liable to pay tax but failed to pay it, a certain number was selected for action by the proviso and with regard to that small number the right of limitation given to them was taken away. In the opinion of the majority judges, therefore, there was no rational basis for distinguishing between persons who were liable to pay tax and had failed to pay it and with regard to whom a finding or direction was given, and persons who were liable to pay tax and had failed to pay it and with regard to whom no finding or direction was given. As there was no rational basis made out for the distinction between the two classes of people referred to above who really belonged to the same category entitled to have uniform provision of law, the majority judges following the decision in Suraj Mall Mohta & Co. v. A. V. Visvanatha Sastri, held that the second proviso to section 34(3) was unconstitutional and, therefore, bad in law. Mr. Shah had drawn our attention to the judgment of Mr. Justice Hidayatullah (as he then was), which was given in dissent in S. C. Prashar v. Vasantsen Dwarkadas, where he pointed out the manner in which a problem of discrimination should be approached. According to Mr. Justice Hidayatullah :

'One must first find out the object of the impugned provision and compare it with the topic of legislation and then try to discover if there is a connection between the two and a reasonable basis for making a difference between different classes of persons affected by the law, in keeping with the topic of legislation and the object of the enactment. A difference which is aimless, arbitrary or unreasonable and which is unconnected with the object in view must remain a discrimination and incapable of being upheld. In all cases in which laws were struck down under article 14 this was the approach. It is hardly necessary to refer to the previous cases because each provision to be tested must be tested in its own setting, and no two cases can be alike.'

15. We do not understand how these rulings take the case of the petitioner-company any further. It is no doubt a settled position of law that the validity of a taxing statute is open to attack on the ground that it infringes the fundamental rights (see State of Kerala v. Haji K. Kutty Naha). It is true that a State cannot make any law which takes away or abridges the equality clause contained in article 14 which enjoins upon a State not to deny to any person equality before law or equal protection of law (see Khandige Sham Bhat v. Agricultural Income-tax Officer). The principles which the courts should bear in mind while considering such challenge to the denials of equality before law or equal protection of law are also sell-settled. As has been often said what article 14 prevents is class legislation and not classification and such classification, in order to be put beyond the prohibition of article 14, must be founded on intelligible differentia which distinguishes the persons grouped together with those who are left out and that differentia must have rational nexus with the object sought to be achieved by the Act. In matters of challenge to fiscal measures on the ground of article 14, courts have laid down more rigorous considerations which must be borne in mind while considering a challenge under article 14. In Twyford Tea Co. Ltd. v. State of Kerala, where the court was considering a challenge under article 14 to the provisions of the Kerala Plantation (Additional Tax) Act (17 of 1960) as amended by the Kerala Plantation (Additional tax) amendment Act (19 of 1967), Mr. Justice Hidayatullah (as he then was), speaking for the court, observed in paragraphs 15 and 16 as under :

'We may now state the principles on which the present case must be decided. These principles have been stated earlier but are often ignored when the question of the application of article 14 arises. 'One principle on which our courts (as indeed the Supreme Court in the United States) have always acted, is nowhere better stated than by Willis in his Constitutional Law at page 587. This is how he put it :

'A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably.... The Supreme Court has been practical and has permitted a very wide latitude in classification for taxation.' This principle was approved by this court in East India Tobacco Co. v. State of Andhra Pradesh. Applying it, the court observed :

'If a State can validly pick and choose one commodity for taxation and that is not open to attack under article 14, the same result must follow hen the State picks out one category of goods and subjects it to taxation.' This indicates a wise range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rate or rates applicable. If production must always be taken into account there will have to be a settlement for every year and the tax would become a kind of income-tax.

The next principle is that the burden of proving discrimination is always heavy and heavier still when a taxing statute is under attack. This was also observed in the same case of this court approving the dictum of the Supreme Court of the United States in Madden v. Kentucky :

'In taxation even more than in other fields, legislatures possess the greatest freedom in classification. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it.' As Rottschaefer said in his Constitutional Law at page 668 :

'A statute providing for the assessment of one type of intangible at its actual value while other intangibles are assessed at their face value does not deny equal protection even when both are subject to the same rate of tax. The decisions of the Supreme Court on this field have permitted a State legislature to exercise an extremely wide discretion in classifying property for tax purposes so long as it refrained from clear and hostile discrimination against particular persons or classes.' The burden is on a person complaining of discrimination. The burden is of providing not possible 'inequality' but hostile 'unequal' treatment. This is more so when uniform taxes are levied. It is not proved to us how the different plantations can be said to be 'hostilely or unequally' treated. A uniform wheel tax on cars does not take into account the value of the car, the mileage it runs, or in the case of taxis, the profits it makes and the miles per gallon it delivers. An Ambassador taxi and a Fiat taxi give different out turns in terms of money and mileage. Cinemas pay the same show fee. We do not take a doctrinnaire view of equality. The legislature has obviously thought of equalising the tax through a method which is inherent in the tax scheme. Nothing has been said to show that there is inequality much less 'hostile treatment'. All that is said is that the State must demonstrate equality. That is not the approach. At this rate nothing can ever be proved to be equal to another.'

16. Similarly in Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay where certain provisions of the Bombay Buildings Repairs and Reconstruction Board Act (47 of 1969) were challenged on the ground of they being in contravention of article 14, the Supreme Court summarized the principles emerging from the different decisions where fiscal statutes have been challenged on the ground of they being in violation of the equality clause. In paragraph 15 of the judgment, the court laid down as under :

'It is well recognised that a legislature does not have to tax everything in order to tax something. It can pick and choose districts, objects, persons, methods and even rates of taxation as long as it does so reasonably. (Willis, Constitutional Law of the United States, 587). A taxing statute is not invalid on the ground of discrimination merely because other objects could have been but are not taxed by the legislature : Venugopala Ravi Varma Rajah v. Union of India. When a statute divides the objects of tax into groups or categories, so long as there is equality and uniformity within each group, the tax cannot be attacked on the ground of its being discriminatory, although due to fortuitous circumstances or a particular situation some included in a class or group may get some advantage over others, provided of course they are not sought out for special treatment :- [Khandige Sham Bhat v. Agricultural Income-tax Officer]. Likewise, the mere fact that a tax falls more heavily on some in the same group or category is by itself not a ground for its invalidity, for then hardly any tax, for instance, sales tax and excise tax, can escape such a charge : (Twyford Tea Co. Ltd. v. State of Kerala).'

17. In the light of the aforesaid principles, we have, therefore, to consider whether the first ground of attack has any substance in it. As stated by us above, what the legislature has tried to achieve by sections 49 and 50 is that it has classified the assessees owning depreciable assets into two groups, namely, (i) assessees purchasing or acquiring the assets themselves from their own funds, and (ii) assessees acquiring depreciable assets as successors to the original owners free of cost. The classification is, in our view, intelligible enough and it has got a rational basis, namely, that the assessees owning depreciable assets in their own right as being the purchasers of the assets themselves and the assessees acquiring depreciable assets as successors free of cost. It cannot be said that this classification is no classification at all or is an aimless or arbitrary classification. As stated above, in the fiscal statute the legislature has a wider latitude in the matters of classification and, as laid down by the Supreme Court in Twyford Tea Co. Ltd. v. State of Kerala, the burden of proving that there is discrimination in fiscal matters is heavier on the person complaining about it as he has not to prove merely that there is an inequality but he has also to prove that there is hostile unequal treatment. We have not been pointed out any material from which it can be said that there is inequality much less hostile treatment. In that view of the matter, therefore, the entire petition challenging the particular provisions is misconceived, as held in Southern Roadways Private Ltd. v. Union of India. The assessee-company owned a fleet of buses and carried on the business of transport and the Income-tax Officer dis-allowed development rebate on the transport vehicles owned by the petitioner-company in that case under the second proviso to section 10(2) (vib) of the Income-tax Act and in a petition challenging the action of the Income-tax Officer on the ground that the said proviso offends article 14, the court held that there is nothing in the Constitution which prevents the legislature from choosing the objects of taxation from amongst various classes of machinery for purposes of giving development rebate.

18. In spite of our view, as stated above, we have heard Mr. Shah on the second ground of attack, namely, that this classification has no reasonable nexus with the object of legislation. It should be noted that Mr. Shah has not made a grievance and, on the contrary, has indeed conceded that the petitioners do not want to challenge the basis of the cost of acquisition, viz., market value as on January 1, 1954, in the case of the depreciable assets acquired by the assessees in any of the modes mentioned in section 49 as arbitrary. Mr. Shah made a strenuous effort to persuade us that the object of this complex of section 48 onwards is to levy and collect capital gains tax and, therefore, this classification, assuming that there is a classification by section 50 of the Act, into two groups as described above, has no reasonable relation with the objective of the provisions contained in section 48 onwards relating to capital gains. In support of this contention Mr. Shah relied on the decision of the Supreme Court in Nagpur Improvement Trust v. Vithal Rao, where the court was concerned with the vires of the provisions contained in clause (3) (a) to section 23 and a proviso to section 23(2) of the Land Acquisition Act on the ground of breach of the equality clause contained in article 14. What the legislature sought to achieve by addition of these new provisions was that the owner whose land was acquired under the Improvement Act was paid compensation not according to the market value of the land but the market value according to the use to which the land was put at the date with reference to which the market value was to be determined in that clause. In other words, if the land was being used for agricultural purposes, even though it might have a potential value as a building site, the potential value was to be ignored according to the new provisions, and it also deprived the owner of the solatium at the statutory rate which he would have got if the land had been acquired under the Land Acquisition Act. Having regard to the provisions of the Act, the court was of the opinion that the authority under the Act to acquire a property was the Government and not the improvement trust. That being so, the provisions enabled the State Government to decide as to whether the land should be acquired under the Land Acquisition Act or under the Nagpur Improvement Trust Act. In that context, the court observed in paragraphs 24 and 25 as under :

'What can be reasonable classification for the purpose of determining compensation if the object of the legislation is to compulsorily acquire land for public purposes

It would not be disputed that different principles of compensation cannot be formulate for lands acquired on the basis that the owner is old or young, healthy or ill, tall or short, or whether the owner has inherited the property or built with his own efforts or whether the owner is a politician or an advocate. Why is this sort of classification not sustainable Because the object being to compulsorily acquire for a public purpose, the object is equally achieved whether the land belongs to one type of owner or another type.'

19. Mr. Shah has relied heavily on the words in the above paragraph 25 of the decision of the Supreme Court as underlined by us. We are of the opinion that this observation of the Supreme Court does not lend any assistance to the cause of the petitioner herein. In the first instance, it should be borne in mind that the court in this case of Nagpur Improvement Trust v. Vithal Rao was not dealing with a fiscal measure. Secondly, the court having first found that, as the Government was the authority to pick and choose whether it should proceed for purposes of acquisition under the Improvement Trust Act or under the Land Acquisition Act, and if it decides to proceed under the Improvement Trust Act, the Government can ignore the potential value of the land and deprive the owner of the statutory solatium which would have been otherwise available to the owner while making a claim for compensation under the Land Acquisition Act. Mr. Shah has urged in view of the said paragraph 25 of the decision of the Supreme Court in Nagpur Improvement Trust's case that the classification made here with reference to the mode of acquisition, namely, whether the depreciable assets belonged to the assessee as he himself being a purchaser, and the assessee being the successor and acquiring the property free of cost either by inheritance, gift or otherwise; the classification, in the submission of Mr. Shah, cannot have any bearing with the object of the legislation, namely, the capital gains. We are not inclined to accept this submission of Mr. Shah for the simple reason that in the matter of classification in a fiscal statute, as held by the Supreme Court in Twyford Tea Co. Ltd. v. State of Kerala the legislature has wider latitude and in such classification, if the tax is sought to be levied on the property on the basis of its real value or the depreciated value, the matter is solely within the discretion of the legislature and its legislative wisdom. The classification, as stated by us, is based on a rational basis, namely, whether the assessee who is owning, and has acquired depreciable assets from his own fund and has earned and enjoyed the depreciation allowance on the said assets; while the mere fact that a tax falls more heavily on some in the same 49, the assessees have not enjoyed the depreciation on such assets, as that depreciation allowance might have been enjoyed by the previous owner. Mr. Shah, therefore, pointed out if that is really the basis for the classification, then in the case of an exchange of property the transferee might not have enjoyed the depreciation allowance himself and even then the does not get a benefit of the option of selecting the market value as on January 1, 1954, or its original price or the cost of acquisition to its original owner as the persons acquiring depreciable assets in any of the modes mentioned in section 49 get. We do not think that by this fortuitous circumstance alone, it can be said that this classification is bad or that it has no reasonable relationship to the object of the impugned provisions contained in the legislation, namely, the capital gains. As has been said by the Supreme Court in Vivian Joseph Ferreira's case when a statute divides the objects of tax into groups or categories so long as there is equality and uniformity within each group, the tax cannot be attacked on the ground of its being discriminatory, although due to fortuitous circumstances or in a particular situation, some included in a class or group may get some advantage over others; provided, of course, they are not sought out for special treatment. Likewise, the mere fact that a tax falls more heavily on some in the same group or category is by itself no ground for its invalidity, for then hardly any tax, for instance, sales tax and excise tax, can escape such a charge. In our opinion, this classification has got reasonable relation with the object of the legislation, namely, capital gains. The basis of different treatment given to this larger class of assessees owning depreciable assets which has been classified into two groups, namely, assessees acquiring depreciable assets themselves and assessees acquiring depreciable assets as successors in any of the modes under section 49, appears to be that the assessees in the first group have earned and enjoyed the depreciation themselves, while the assessees in the second group who are in the nature of successors have not enjoyed the depreciation allowance and the property may have come to them not of their volition and, therefore, they should not be placed on the same footing and, therefore, some benefit should be given to them in the nature of giving an option to them to select as to whether they should adopt for the purposes of computation of capital gains the basis of either the fair market value as on January 1, 1954, or the original cost of acquisition to the previous owner as adjusted by the depreciation, if any, earned by the assessees. In that view of the matter, therefore, we think that the second ground of Mr. Shah should also be rejected.

20. The result is that this petition deserves to be dismissed. The rule should be discharged. There should be no order as to costs in this application.

21. This takes us to the consideration of the Income-tax Reference No. 26 of 1971. The facts have been set out above while setting out the facts of the special civil application. The question which has been referred to us is as under :

'Whether, on the facts and the circumstances of the case, the applicant was entitled to substitute the value as on January 1, 1954, as the cost of acquisition of the buildings and machinery ?'

22. We have set out the relevant sections 48, 49 and 50. On the plain reading of section 50, we think that it is only those assessees who acquired depreciable assets in any one of the modes prescribed under section 49 that have the benefit of option to select either the fair market value of the assets on January 1, 1954, or the cost of acquisition by the previous owner. It is an admitted position that the applicant-company is not an assessee acquiring depreciable assets in any of the modes mentioned in section 49 and clearly, therefore, this case falls within section 50(1) and, therefore, in case of the applicant-company for purposes of computation of capital gains tax adjusted written down value as defined in clause (6) of section 43 of the Act would be the cost of acquisition of the assets. We do not think that there are any justifying grounds for us to interfere with the order of the Tribunal which has confirmed the order of the Appellate Assistant Commissioner as well as the Income-tax Officer. In that view of the matter, therefore, we answer the question in the negative as under :

On the facts and circumstances of the case, the applicant was not entitled to substitute the value as on January 1, 1954, as the cost of acquisition of the buildings and machinery.

23. The applicant-company will pay the costs of this reference to the Commissioner of Income-tax.


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