1. The petitioner herein was a partner of three partnership firms, M/s. Gnanam and Company, M/s. Jaya Sugar and M/s. Jaya Agencies and had earned a share income of Rs. 18,235 in the assessment year 1976-77. In the same assessment year, her minor son, K. Jayakumaran, was admitted to the benefits of the firm of M/s. Jakay Agencies in which the petitioner was not a partner up to the period ending September 30, 1975, and earned a share income of Rs. 14,174. Her another minor son, K. Jayachandran, was also admitted to the benefits of the firm, M/s. Jaya Sugars, up to the period ending September 30, 1975, when the petitioner was not a partner in that firm and earned a share income of Rs. 9,877 in the same assessment year. While making an assessment of the petitioner's total income for the assessment year 1976-77, the ITO, the second respondent herein, included the income earned by the above two minor sons totalling about Rs. 24,051 along with the petitioner's income on the basis of the amendment brought in the year 1975 to s. 64 of the I.T. Act, 1961.
2. Aggrieved by the order of the ITO, the petitioner preferred an appeal to the first respondent, the AAC of Income-tax, contending that the income earned by her minor sons cannot be clubbed with her income as the amendment to s. 64 is not applicable to the assessment year 1976-77, and that even if the amendment is taken to be applicable to the assessment year 1976-77, the notification No. S.O. 475(e) dated September 5, 1975, appointing different dates for bringing into force the various provisions of the amending Act will be invalid and void as it will have a retrospective effect so as to impose the liability on the income which was earned before the notification was issued. The said contention of the petitioner was rejected by the first respondent on the ground that the law applicable to income-tax assessment is the law as it stands in the year of assessment and not the law which was in force during the year in which the income was earned and that in any even it is beyond the scope of the AAC's power to decide the vires of any of the provisions of the notification.
3. Thereafter, the petitioner has come before this court raising substantially the following three contentions : (1) The amendment to s. 64 is not applicable to the assessment year 1976-77, (2) if the amendment is construed as applicable to the assessment year 1976-77, then the notification No. S.O. 475(e) dated September 5, 1975, will be invalid and void as it will have a retrospective effect so as to impose a liability on the income earned before the notification was issued, and (3) s. 64(1)(iii) as amended by the Taxation Laws (Amendment) Act, 1975, is unconstitutional and void as there is no legislative competence for Parliament to enact a law so as to tax the income earned by one person in the hands of another.
4. To appreciate the above contentions urged by the petitioner, it is necessary to refer to the relevant statutory provisions. Section 64(1)(ii), which alone is relevant for the purpose of the present discussion, originally stood thus :
'(1) In computing the total income of any individual, there shall be included all such income as arise directly or indirectly - ...
(ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm which such individual is a partner.'
5. In its place, the following was substituted :
'64. (1)(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm.'
by the Taxation Laws (Amendment) Act, 1975, which effect from April 1, 1976. Thus, prior to the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. Thus, prior to the Taxation Laws (Amendment) Act, 1975, the income arising to a minor child from admission in the benefits of the partnership could be included in the partner's total income only if the parent (also) was a partner in the the firm. But after the amendment of s. 64 in 1975, even if the parent is not a partner in the firm in which the minor child is admitted to the benefits of the partnership, the income arising therefrom to the minor child is includible in the parent's income. The petitioner is aggrieved by the resultant position that has been brought about by the amendment to s. 64(1). Section 1(2) of the Amending Act enabled the Central Government to appoint different dates for bringing into force the different sections of the Act and in exercise of that power the Central Government issued the notification No. S.O. 475(e) dated September 5, 1975, wherein the amendment to s. 64(1) was brought into force on April 1, 1976. The first contention advanced by the learned counsel for the petitioner is that the amendment can be operative for the income earned after April 1, 1976, it will not apply for the assessment year 1976-77, ending March 31, 1976, that if the amendment were to be taken as applicable to the assessment year 1976-77, it will amount to giving a retrospective effect to the amendment and that such a retrospective effect is not contemplated by the provisions of the Amending Act, either expressly or by necessary intendment. The second contention urged by the learned counsel for the petitioner is that the amended provision in s. 64(1)(iii) is constitutionally invalid for the parent is forced to pay the tax due by the minor child arising out of his being admitted to the benefits of the partnership with which the parent has no connection, and the Constitution of India does not permit the State to levy income-tax on an individual on an income of another person. It is said that the amended provision in s. 64(1)(iii) infringes the doctrine of equality before law guaranteed under article 14 of the Constitution of India, the there is a hostile discrimination between an individual who has earned income by having been admitted to the benefits of a partnership and who earned income otherwise than by being admitted to the benefits of the partnership.
6. According to the Revenue, the new provision brought in by s. 13 of the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, was brought in as per the recommendation of the Direct Taxes Enquiry Committee headed by the former Chief Justice of India, Mr. Justice Wanchoo, which received the assent of the President on August 7, 1975, and, it will, therefore, apply for the assessment year 1976-77 with which we are concerned in the present writ petition. As regard the contention that the amended provision will be operative only for the income earned by the assessee subsequent to April 1, 1976, the submission made by the Revenue in its counter-affidavit is this : The appointed date April 1, 1976, in the notification would refer to the commencement of the assessment year 1976-77, and not the previous year 1976-77, as assumed by the petitioner, that it is well-established that under the Indian law, though the subject of the charge is the income of the previous year, the law to be applied is that in force in the assessment year unless otherwise stated or implied, and that any amendment which is in force at the beginning of the relevant assessment year will apply though the amendment is made after the income under assessment is earned. As regards the second question, the Revenue has averred in its counter that it has already been held by the Supreme Court in Balaji v. ITO : 43ITR393(SC) and by this court in Devarajulu Naidu v. CIT : 48ITR756(Mad) , that the provisions of s. 64 did not contravene article 19(1)(f) and (g) of the Constitution or article 14, as the said section was designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements and other devices, that the scope of the provisions is limited only to a few intimate members of the family who ordinarily are under the protection of the assessee and are dependent on him, that the law designed to meet the aforesaid tendency to prevent evasion and avoidance of tax is perfectly valid in law and that the reasons urged by the petitioner for holding the amended s. 64(1)(iii) to be ultra vires are not tenable at all in view of the decisions above referred to and the decision of the Supreme Court in Tulsidas Kilachand v. CIT : 42ITR1(SC) and Sevantilal Maneklal Sheth v. CIT : 68ITR503(SC) . In the face of these rival contentions of the opposing parties, we have to consider the first question whether the amended provision in s. 64(1)(iii) is constitutionally valid, and (2) Whether the said provision is operative for the assessment year 1976-77
7. Section 16(3)(a)(i) and (ii) of the Indian I.T. Act, 1922, was earlier challenged as infringing the fundamental right of equality before law and also as violating article 19(1)(f) and (g) of the Constitution. The Supreme Court in Balaji v. ITO : 43ITR393(SC) held that Entry 54 of the Federal Legislature 'taxes on income other than agricultural income' which is identical with item 82 of List I of the Seventh Schedule of the Constitution 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 and that if it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances, and therefore, the said entry can sustain a law made to prevent evasion of tad. The challenge based on violation of the doctrine of equality before law enshrined in article 14 of the Constitution was also rejected by the Supreme Court on the ground that from the standpoint of imposition of tax, the difference between an individual and his wife doing business in partnership and an individual and his wife doing business separately and an individual doing business in partnership with his wife and an individual doing business in partnership with a third party, made or female, and between an individual 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 a reasonable basis of classification and that is consistent with the object of the Legislation which is to prevent evasion of tax. Therefore, the Legislation was justified in selecting 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 argued before the Supreme Court that there might be a genuine partnership between an individual and his wife and, therefore, there is no reasonable relation between the classification and the object sought to be achieved at any rate to the extent of those genuine cases. The Supreme Court dealing with this submission observed that there is no classification between genuine and non-genuine cases, that the classification is between cases of partnership between husband, wife and/or minor children, whether genuine or not, and partnerships between others, and that in demarcating a group, the net was cast a little wider, but it was necessary, as any further sub-classification as genuine and non-genuine partnerships might defeat the purpose and that will not make the classification itself bad. The Supreme Court quoted with approval the following observation of Rajagopalan J., speaking for the Bench, is Amina Umma v. ITO : 26ITR137(Mad) :
'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.'
8. In Chairman, C. B. D. T. v. Malhotra : 128ITR543(Delhi) , the Delhi High Court has pointed out that the basic presumption is that the Legislature does not intend to enact legislation which operates oppressively and unreasonably, and the retrospective laws will generally have such operation, and that in the absence of any indication in the statute that the Legislature intended it to operate retrospectively, it must not be given retrospective effect, and if perchance any reasonable doubt exists, it should be resolved in favour of prospective operation. In CIT v. Prem Bhai Parekh : 77ITR27(SC) of the Indian I.T. Act, 1922, came up for consideration and the Supreme Court held that before an income can be held to come within the ambit of s. 16(3), it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of his wife or minor children, that the connection between the transfer of assets and the income must be proximate and the income in question must arise as a result of the transfer and not in some manner connected with it and, therefore, the income arising to minors out of a partnership firm cannot be included in the total income of the father when there is no nexus between such income and the assets which are transferred by the assessee to minors. This decisions has been relied on by the learned counsel for the assessee in support of his contention that the mere fact that the minor son of the assessee is a partner in a firm, his income cannot be brought to charge under s. 64, unless there is a nexus between the income and the parent or the parent's assets. It is said that in so far as the amended provision in s. 64 is concerned, bringing to charge the income of the minor from the partnership firm in which neither of the parents has any interest is beyond the legislative competence as it is not open to the Legislature to treat the income of the minor as the income of the parent. The said decision of the Supreme Court was rendered with reference to the language used in s. 16(3) which proceeded on the basis of a nexus between the income and the assets transferred by the parent out of which the income was earned. That decision which was rendered with reference to the language used in s. 16(3) cannot be of any help here. Here the Legislature has proceeded to treat the income of the minor from the partnership to the benefits of which he has been admitted without reference to any interest of the parent in the partnership. But as has been held by the Supreme Court while dealing with the unamended provisions in s. 64 of the 1961 Act, if the Legislature feels that there is a possibility of evasion of one's income by showing it as the minor's income and to avoid such an evasion the clubbing of income earned by a minor through a particular source with the income of the father cannot be said to fall outside the legislative power to enact a law on income-tax. It is no doubt true that unlike s. 64(1)(iii) prior to its amendment where the clubbing of income of the minor who has been admitted to the benefits of the partnership in which his parent is a partner with the income of the parent was based on a nexus between the income of the minor from the partnership and the interest of the parent in the partnership. But the present provision is to the effect that where even if the parent is not a partner, if a minor has been admitted to the benefits of a partnership and the income is derived therefrom that income should be clubbed with that of the parent and no nexus is contemplated by the section. It is because of this the assessee contends that it is open to the Legislature to tax an individual on the income of another individual. Normally, a minor can be admitted only to the benefits of the partnership and he is not liable to meet the losses of the firm. While such is the legal position, if a minor is to be admitted to the benefits of the partnership without any obligation on his part to meet the losses of the firm, there should be some motive for the other partners to admit the minor to the benefits of the partnership, and it is possible that the Legislature felt that it is only at the instance of the parent, the partners have admitted the minor to the benefits of the partnership without any obligation on his part to bear the losses and that might have been taken as a sufficient nexus for taking the income of the minor as the income of the parent. It is said that the provision deals with only the income of the minor through a partnership to the benefits of which the minor has been admitted and the income of the minor from other sources has not been so clubbed with that of the parent and, therefore, the income of the minor from different sources are treated differently and this amounts to hostile discrimination. It is said that if one minor gets an income from other sources and another minor gets income from a partnership to the benefits of which he has been admitted, then the latter category of income alone is subject to tax while the former is left out and this also amounts to irrational classification, and that any differentia between the two categories of income must have a rational relation to the object sought to be achieved by the statute in question. As pointed out in Balaji v. ITO : 43ITR393(SC) , the object of the amendment was to prevent evasion of tax and the Legislature might have thought that a similar device would not ordinarily be resorted by individuals whose minor sons are earning income from other sources and not from partnerships to the benefits of which they have been admitted. Having regard to the fact that the object of the provision was to prevent evasion of tax, the Legislature appears to have selected for the purpose of classification only that group of persons who are likely to use the partnership as a cloak to perpetrate fraud on taxation. Therefore, the principle laid down in that case applies to this case as well. In Sardar Baldev Singh v. CIT : 40ITR605(SC) , the Supreme Court had pointed out that the power to legislate on tax also includes a power to enact a provision to prevent evasion of tax. Therefore, the constitutional validity of the amended provision cannot successfully be challenged.
9. In Navnit Lal C. Javeri v. Sen, AAC of I.T. : 56ITR198(SC) , the Supreme Court, while considering the constitutional validity of ss. 2(6A)(e) and 12(1B) of the Indian I.T. Act, 1922, held that it did not contravene the fundamental rights under article 19(1)(f) and (g) of the Constitution and that if the Legislature realises that private controlled companies generally adopt the device of making advances or giving loans to their shareholders with the object of evading payment of tax, it can step in to meet this mischief and create a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him and that in making the fiction, the Legislature does not travel beyond the legislative field. In Venugopala Ravi Varma Rajah v. Union of India : 74ITR49(SC) , the Supreme Court again pointed out that it is for the Legislature to determine the objects on which the tax shall be levied and the rates thereof and the courts will not strike down an Act as denying the equal protection of the laws, merely because, other objects could have been, but are not, taxed by the Legislature. Therefore, it is not possible to accept the petitioner's contention that since the minor's income from other sources is not clubbed with that of the parent, the income earned by the minor from a partnership to the benefits of which he has been admitted cannot also be brought to charge as the income of the parent. As already stated, the income of the minor from a partnership has been taken as the income of the parent as the Legislature found that the creation of partnerships or admitting minors to the benefits of the partnership is one of the methods adopted to evade tax and as pointed out by the Wanchoo Committee, normally it is possible for a parent in one family to admit a minor from another family to the benefits of the partnership in his firm is consideration of the parent of the minor admitting to the benefits of the partnership the son of the former so that there will be cross or mutual advantage got by both the parents. It is only to plug the said loophole the Legislature came forward to say that if any minor has been admitted to the benefits of a partnership, the minor's income from that partnership should be taken to be the income of the parent. It is not, therefore, possible to say that the provision is ultra vires.
10. Coming to the question as to whether the section is prospective or not, it is seen that in this case though the Legislature brought into force the amended provision as and from April 1, 1976, that has to govern the previous year. In view of the fact that the amended law has come into force on April 1, 1976, it naturally applies to one accounting year preceding that date. Therefore, in this case, the assessment has been finalised on the basis of the law which was in force on April 1, 1976. Thus the statute itself has specifically declared that the law as on April 1, 1976, will govern the income earned for the previous year and there is no question of the statute being given retrospective effect, because the Legislature felt that the law enacted on a particular day should have effect from a prior date. Therefore, it is not possible to accept the petitioner's contention that the amendment has been given retrospective effect. As a matter of fact, we do not find that Amending Act to be retrospective. It merely says that the law as on April 1, 1976, will be applied for the previous year. Such a provision cannot be taken to be retrospective in character. The law does not come into operation retrospectively, but the law acting prospectively applies to certain stated facts which took place in the previous year. Therefore, we are not in a position to agree with the learned counsel for the petitioner that the law has been applied retrospectively in this case. This has been so held in CIT v. Mir Osman Ali Bahadur : 59ITR666(SC) and Reliance Jute and Industries Ltd. v. CIT : 120ITR921(SC) . In these decisions, it has been made clear that in the matter of imposition of income-tax, the law as on first April governs the previous year. Section 4 which imposes a charge on income itself says that the income of the previous year is to be taxed at the rate or rates provided in the annual Finance Act, which operates from first April of the succeeding year.
11. Thus both the points urged in this writ petition are rejected and the writ petition is, therefore, dismissed with costs. Counsel's fee Rs. 500.