1. Messrs. Thirumal and Co., Ltd., referred to in this judgment as the assessee, is a private limited company carrying on the business of Managing Agents of another company, called Thirumagal Mills Ltd. For the assessment year 1956-57, corresponding to the previous year ending 31st March 1956, the assessee was assessed on a total income of Rs. 1,20,863. The paid up capital of the assessee company is Rs. 2000. A dividend of Rs. 60,000 was declared by the assessee to be distributed to its share-holders. The dividend thus declared and distributed was clearly in excess of six per cent of its paid up capital. The Income-tax Officer, Vellore, who made the assessment applied the provisions of the Finance Act of 1956 and reduced the amount of rebate of super tax from four annas in the rupee to which normally the assessee would be entitled. That part of the dividend which exceeded six per cent but did not exceed ten per cent of the paid up capital suffered a reduction of rebate at the rate of two annas per rupee and the other part of the dividend which exceeded ten per cent of the paid up capital suffered a reduction of rebate at the rate of three annas per rupee. This computation by the Income-tax Officer was in accordance with the provisions of the Finance Act of 1956, Schedule I, Part II Group D, second proviso, sub-para (b). The assessee preferred an appeal to the Appellate Assistant Commissioner and urged the contention that the Income-tax Officer erred in applying the provisions of tile Finance Act in the matter of reducing the rebate under clause (b) of the Second Proviso. This contention failed and the Appellate Authority dismissed the appeal. The assessee went up on a further appeal before the Income-tax Appellate Tribunal, Madras. Before the Tribunal the assessee urged that the provisions of the Finance Act under which the Department reduced the rebate were in conflict with the provisions of Section 23-A of the Indian Income-tax Act, that while the assessee was obliged to declare a certain percentage of dividend out of its total income Under Section 23A of the Act, it lost the benefit of rebate by its reduction under Clause,(b) of the Second proviso of the Finance Act, and that therefore the full benefit of rebate ought to have been granted by the Department. It is quite obvious that the assessee's contention as urged before the department and before the Appellate Tribunal is unintelligible and meaningless. It is not surprising that the Appellate Tribunal dismissed the assessee's appeal. On an application under Section 66(1) of the Indian Income-tax Act, the Tribunal has referred the following question for our consideration :
'Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in sustaining the reduction of the rebate to the corporation tax by Rs. 11,222-8-0 on the assessee company for the assessment year 1956-57?'
(Corporation tax means only the super tax in the case of a company).
2. In the Form in which the question is referred to us, it can be answered only in one way, that is against the assessee. The provisions of the Finance Act which have been invoked by the Department to allow less of rebate to the assessee than what it would be ordinarily entitled to by reason of its having distributed as dividend more than six per cent of its paid up capital are quite clear, and the Department would be failing in its duty if the assessee had been granted rebate of super tax at the rate of four annas per rupee on its total income. But the question that is now raised before us is that the provisions of the Finance Act in so far as they were put ire operation against the assessee are ultra vires and unconstitutional being by violation of the equality clause of the Constitution. The target of attack is the First Schedule, Part II, Group D, Second proviso, sub-paragraph (b) in the Finance Act of 1956. We shall now set out that portion of the Finance Act Which is under challenge-
Rates of Super tax.... ...... ...... ......D. In the case of every company RateOn the whole of total income ...... six annas and nine pies in the rupeeProvided that-
(i) a rebate at the rate of five annas per rupee of the total income shall be allowed in the case of any company which :
(a) in respect of its profits liable to tax under the Income-tax Act for the year ending on the 31st day of March 1957, has made the prescribed arrangements for the declaration and payment within the territory of India, of the dividends payable out of such profits and for the deduction of super-tax from dividends in accordance with the provisions of Sub-section (3-D) of Section 18 of the Act; and
(b) is a public company with total income not exceeding Rs. 25,000 to which the provisions of Section 23A cannot be made applicable;
(ii) a rebate at the rate of four annas per rupee of the total income shall be allowed in the Case of any company which satisfies the condition (a) but not condition (b) of the preceding clause; and
(iii) a rebate at the rate of three annas and six pies per rupee on so much of the total income as consists of dividends from a subsidiary Indian company, and a rebate at the rate of one anna per rupee on any other income included in the total income shall be allowed in the case of any company not entitled to a rebate under either of the preceding clauses:
Provided further that:
(i) the amount of the rebate under clause (1) or clause (ii), as the case may be, of the preceding proviso shall be reduced by the sum, if any, equal to the amount or the aggregate of the amounts, as the case may be, computed as hereunder:
(a) on the amount representing the at the rateface value of any bonus shares or of twothe of two amount of any bonus annas perbonus issued to its share-holders rupeeduring the previous year rupee with aview to increasing the paid up capital, except to the extent to whichsuch bonus shares or bonus have beenissued out of the premiums received incash on the issue of its shares; and(b) in addition, in the case of acompany referred to in clause (ii) ofthe preceding proviso which hasdistributed to its share-holders during the previous year dividendsin excess of six per cent of its paidup capital, not being dividends payableat a fixed rate--on that part of the said dividends at the ratewhich of two exceeds six per cent but of twodoes not of two exceed ten per cent annas per of the paid up capital; rupeeon that part of the said dividends at the ratewhich exceeds ten per cent of the paid- of threeup capital; annas perrupee..... ...... ...... ...... ...... ......Explanation: For the purposes of Paragraph 3 of this part (i) the expression 'paid up capital' means the paid up capital (other than capital entitled to a dividend at a fixed rate) of the company as on the first day of the previous year relevant to the assessment for the year ending on the 31st day of March 1957, increased by any premiums received in cash by the company on the issue of its shares, standing to the credit of the share premium account as on the first day of the previous year aforesaid;
(ii) the expression 'dividend' shall be deemed to include any distribution included in the expression 'dividend' as defined in Clause (6-A) of Section 2 of the Income-tax Act;............'
Every company is chargeable to super-tax on the whole of its total income at the rate of six annas nine pies in the rupee. But there is a provision of rebate, and that is the subject-matter of the first proviso. A public company which is not governed by Section 23-A of the Income-tax Act, and which has total income not exceeding Rs. 25000 and which has made the prescribed arrangements, for the declaration of the payment in India of dividends payable out of profits liable to be taxed under the Act for the year ending 31st of March 1957 and for the deduction of super tax from dividends in accordance with Section 18(3-D) is eligible for rebate at the rate of five annas per rupee of the total income. A public company with an income exceeding Rs. 25000 and a private company whatever be its income which has made all prescribed arrangements for declaration and payment of dividend and for deduction of super tax as referred to above can get rebate of only four annas in the rupee. A company not falling within the two categories, the one earning a rebate of five annas per rupee and the other earning a rebate of four annas in the rupee is entitled to a rebate at the rate of Rs. 0-3-6 per rupee on so much of the total income as consists of dividends from a subsidiary Indian company and of a rebate at the rate of Rs. 0-1-0 per rupee on any other income included in its total income. These are all rebates from the levy of super tax at the rate of six annas nine pies in the rupee.
3. It is Clause (b) of the Second Proviso that is challenged as offending the equality Clause of the Constitution. It is urged on behalf of the assessee that discrimination is apparent and is writ large on the face of this statutory provision and such discrimination cannot be defended on the basis of classification as there is in fact no classification and if there is any such classification it is plainly unreasonable, arbitrary and illogical.
4. Discrimination is made out in this manner. Two companies both falling within clause (ii) of the first Proviso and earning the identical amount of income do not get the same rebate as four annas in the rupee, if one of them distributes to its share-holders dividends in excess of six per cent of its paid up capital (not being dividends payable at a fixed rate) and the other does not do so. It is pointed out that if a private company with a capital of five laks earns Rs. 30,000 and distributes it as dividends it would earn a rebate of four annas in the rupee in the matter of payment of super tax but another company earning the same amount of Rs. 3000 and distributing it as dividend would not obtain the same rebate if its paid up capital is one lakh of rupees. So, it is urged, there is discrimination. The further argument is that classification on the basis of the paid up capital is not legitimate or reasonable in a scheme of income taxation as what is taxed is income, profits or gains, and that there cannot be different treatment of imposing tax burden on the same amount of income in the hands of different assessees based upon the capital investment and the ratio which the income bears to that investment. There is in short and in essence a challenge on the constitutionality of the impugned provisions.
5. Mr. Swaminathan, learned counsel for the assessee, was at pains to point out that while Section 23-A of the Act taxes undistributed income of a company the Finance Act of 1956 indirectly taxes distributed dividends by reducing the rebate, and that the cumulative effect of these provisions places the assessee in a sad plight. Assuming that the tax payer is hit hard on all sides, and that avoidance of one front of taxation squarely attracts tax in another aspect, it is not a germane consideration in discussing the questions whether the statute is really discriminatory in its scope and character. Be it noted that the harshness is not discrimination, and the distribution of tax burden by the Legislature resulting in different incidence of taxation is not by itself arbitrary or unreasonable.
6. It must be conceded that the equality clause of the Constitution is not aimed to compel the Government to use its taxing powers in such a way as to tax all or none or to tax anything or nothing. Necessarily the taxing power is excluded only sectionally, affecting groups or classes of persons. This does not by itself amount to discrimination against the taxed subjects. But it would be a denial of equal protection if similar tax subjects are meted out dissimilar treatment. This equality of treatment need only be substantial and not mathematical. It is obvious that classification is inherent in the exercise of taxing power. The limits of permissible classifications so as not to transgress the equal protection clause can never be precisely formulated and the Courts are contented to say that there shall be no unreasonable classification. Nor is there any uniform basis of classification. A good classification with respect to one tax may not be approved with respect to another. While a tax of shares of stock owned by Corporation was upheld on the ground that the classification of Corporate and non-corporate character was valid, a tax gross earnings of operation of taxi cabs was held invalid on the ground that such a classification was unreasonable.
7. It has never been held that progressively graduated income-taxes offend the equal protection clause. Such taxes have been sustained universally.
'It is generally held that an issue under the equal protection clause must be decided in respect of the general classification rather by the chance incidence of the tax upon particular tax payers (Colgate v. Harvey, (1935) 80 Law Ed 299).' A classification that is in general reasonable does not become invalid as applied to a particular case merely because it might effect an unreasonable result therein (Rottscheffeur American Constitution page 667).
8. A tax payer cannot legitimately complain of discrimination because of the incidence of taxation being more against him than another, who is also within the same taxing enactment. The Legislature determines the mode of distribution of tax burden. Such determination which certainly results in classification should not be wholly whimsical and be unrelated even remotely to the objects and purposes of the tax measure. A classification that effects distribution of tax in proportion to the ability of the subject to pay is valid (Alward v. Johnson, (1930) 75 Law Ed 496). It is not uncommon to find the State using the taxing power for implementing and developing a pattern of social policy. A classification calculated to promote such a policy can be sustained (Ft. Smith Lumber Co. v. Arkansas, (1919) 64 Law Ed 396, Heisler v. Thomas Colliery Co., 67 Law Ed 237) .
9. The strenuous arguments of the learned counsel for the assessee have failed to convince us that there is at all any discrimination as urged by him. A company earning the same profit as another company whose capital investment is very much less than its capital investment must in one sense be said to earn less than the latter company. If a company with a capital investment of Rs. 50000 earns Rs. 10000 by way of income, and another company with a capital investment of only Rs. 2,000 earns the same amount of Rs. 10,000, the latter company can be said to earn more than the other company. It cannot be said that these two companies are similarly placed and must attract the same incidence of taxation. It is true that the Indian Income-tax Act taxes only the income, profits and gains but the source of income, namely, the capital which is the income yielding nucleus cannot altogether be dissociated from the income, and cannot be discarded in determining the taxation of the income. The Vice of discrimination comes in only where the taxed subject can compare himself to another taxed subject, and if there can be no effective or substantial comparison there would be no substratum to found an argument based upon discrimination. We are prepared to say that a company which distributes dividends in excess of six per cent of its paid up capital is not similarly placed as a company, which distributes dividends amounting to less than six per cent of its paid up capital. Even if it can be said that it is sufficient similarity that both are companies and that they cannot become dissimilar by reason only of the fact, namely, that the company distributing dividend in excess of six per cent of its paid up capital, and the other not so doing, the difference in treatment meted out by the statute in regard to the assessment of the two companies can well be defended on the ground of permissible and reasonable classification. Learned counsel for the assessee submitted, for obvious reasons, that the first proviso is valid and proper as otherwise the assessee would not be entitled to the rebate of four annas per rupee. His only contention was that the second proviso, particularly Clause (b) thereof, is unconstitutional. In our opinion both the provisos have got to be read together and they constitute a well-knit integrated system of granting of rebates from super tax in respect of companies. The groups, classes and categories contained in this proviso cannot be condemned as being arbitrary divisions created in a freakish manner by the Legislature as they are sufficiently related to the object and purpose of the levy of income-tax and super tax under the Indian Income-tax Act.
10. Mr. Swaminathan relied upon the decision in Schsinger v. Wisconsin, (1925) 70 Law Ed 557 in support of his contention that classification for purposes of taxation must rest upon some reasonable distinction. This is a well settled proposition of law, and in our opinion, does not require any citation of authority. The question whether there is any classification wherever there is apparent discrimination and if so whether such classification is reasonable or not would depend upon the terms of the particular impugned statute and its objects and purposes.
11. The decision in Stewart Dry Goods Co. v. Lewise, (1934) 79 Law Ed 1054 was also cited by the learned counsel. It was held in that case that a gross sales-tax which classifies vendors for the imposition of a varying rate of taxation solely by reference to the volume of their transactions was in denial of the equal protection of the laws and in violation of the Fourth Amendment of the American Constitution. That case is not of any assistance to decide the question now in issue before us. It is however interesting to note that the learned Judges who decided that case distinguished a gross sales tax imposed with reference to the value of the transaction from income-tax. The State defended the statute in that case basing itself on the analogy of Income-tax Act. At page 1059 Roberts, J. observed thus:
'The assertion that a graduated income tax, like the graduated sales tax under consideration, ignores the varying rates of return upon investments of those carrying on similar enterprises is obviously inaccurate. An income levy by its very nature, assumes equality of treatment, because the burden of the exaction varies with increase or decrease of return on capital invested and that the comparative success or failure of the enterprise...... As we have said, the statute does not purport to levy a tax on incomes. Plainly it does not in fact do so. A merchant having a gross business of $ 1000,000, but a net loss, must pay a greater tax than one who has a gross business of $ 4,00,000, and realises a substantial net profit. The record discloses such a situation.'
12. In our opinion that decision turned peculiarly on the terms of the particular enactment, the constitutionality of which was called in question. Reference was also made to a recent decision of the Supreme Court in K. T. Moopil Nair v. State of Kerala, : 3SCR77 . The head-note to that decision need only be referred to :
'A taxing statute 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 of 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. We have only applied this principle in deciding the present case. We are clearly of opinion that there is no discrimination ex facie in the matter of reduction of rebate under clause (b) of the second proviso and even if any discrimination were to be discerned, it is based upon a rational and reasonable classification having regard to the object of the taxing statute.
14. The question is answered against the assessee who will pay the costs of the department. Counsel's fee Rs. 250.