1. This is an application under Article 226 of the Constitution by Messrs. Seth Sukhlall Chandanmull, described as a Hindu undivided family governed by Mitakshara School of Hindu Law, and of which Indra Kumar Karnani is pleaded AS the Karta. In this application the petitioner asks for a Writ of Certiorari upon the Income-tax Officer, Companies District II, Calcutta, and the Union of India, represented by the Commissioner of Income-lux to quash the assessment proceedings.
2. The Income-tax Officer by his order dated 17-2-1956 assessed the income at Rs. 1,59,248/-, and it is alleged that he ignored the claim of the petitioner for the sum of Rs. 4,000/- as deductible allowance for earned income and disallowed a sum of Rs. 26,195-0-0 which was interest supposed to have been paid to Karnani Industrial Bank Ltd., for the overdraft taken by the petitioner from the Rank against security of property and that he is also supposed to have disallowed bad debts claimed by the petitioner as permissible deduction.
3. The main complaint of the petitioner is that in determining the sum payable by him on the basis of the assessment made, the Income-tax Officer applied the different rates of income-tax, surcharge and super-tax prescribed by the Finance Act of 1951 as applicable to the Finance Act, 1954 for the said assessment year. Dr. Pal appearing for the appellant has challenged the validity of progressive and graduated system of tax. His argument is that a progressive and graduated system of tax is unconstitutional. He has pressed no other point before me, and he has rightly and wisely not gone into disputed questions of fact.
4. Dr. Pal formulates his point in this way. According to him, under the Scheme of the Finance Acts, no income-tax shall be payable on a total income, which, before deduction of the allowance, if any, does not exceed the statutory exempted limit which is prescribed differently in different years. He contends that although the Indian Income-tax Acts levy taxes on all incomes of individuals, the annual Finance Acts charge different rates of income-tax, sur-tax and super-tax on the persons liable to be assessed under the Indian Income-tax Act differently and at rates varying in different years. His argument is that the Finance Acts, in so far as they impose different rates of tax upon the income of different persons, make an unreasonable classification between different persons and as such infringe the fundamental rights of the petitioner guaranteed by Article 14 of the Constitution. He also contends that in so far as the Finance Acts imposed different rates of taxes upon the income of the same person varying in different years, they are an arbitrary imposition of tax without any reasonable basis or classification and as such in violation of Article 14 of the Constitution. A perusal of the grounds of objection summarised in paragraph 25 of the petition makes it clear that this is the only point of complaint.
5. In support of his contention Dr. Pal relied on the article of Hackett in 25 Yale L. J. 427 under the title 'The constitutionality of the graduated Income-tax Law'. It is said there by the author that the constitutional power to levy a tax upon incomes of larger amounts a higher rate of tax than upon smaller incomes, is a question of very grave importance and that the additional income tax provided by the American Tariff Act of 1913 known as Surtax was in the opinion of a great many American lawyers in violation of the principle of equality which required that all taxable income, so far as the amount was concerned, should be treated alike.
6. He also relied on the observations of Willoughby on the Constitution of the United States, 2nd Edition, Vol. 3, Article 1282, where the learned author comments that State inheritance tax laws of the United States have been attacked on the ground of violating the requirements of equality and uniformity, because of their progressive features, and because of the exemptions allowed thereunder, but even then the learned author says 'In general, however, the laws have been upheld'.
7. A large number of American decisions have been collected by the author in that Article in the Yale Law Journal showing the decisions where the constitutionality of laws exempting small estates or discriminating between lineal and collateral descendants and between relatives and strangers and laying the tax according to a progressively increasing rate have all been upheld.
8. The case of Magoun v. Illinois Trust and Savings Bank, (1898) 170 US 283: 42 Law Ed 1037 (A) was cited by Dr. Pal. That was a case of Illinois Legacy and Inheritance taxes. McKenna }. comes to the conclusion in that case that imposition of different rates of taxes on classes based on lineal and collateral relationship to the testator or intestate made by Statute taxing inheritances depend on sensible and substantial distinctions and are not arbitrary. That case also decides that a collateral inheritance tax which does not impose a uniform rate but classifies legacies to strangers to blood and imposes higher rates on the larger sums, does not violate the constitutional rule of equality under the Fourteenth Amendment of the American Constitution. The other ratio of that American decision is that exemptions from a Statute taxing inheritances do not render its operation unequal. In fact this case is against Dr. Pal's contentions on every point. Brewer, J. who dissented from the majority opinion in that case expressed the view that it was a tax unequal on the ground that it was not proportioned to the amount of the estate and it was unequal because it was based upon classification purely arbitrary, to wit, that of wealth.
9. Two years later another case, Knowlton v. Moore, (1900) 178 U. Section 41 : 44 Law Ed 969 (B), came up before the American Supreme Court. That also was an inheritance tax case. The court upheld the Federal Inheritance Tax of 1898. The tax contained graduated rates based on the amount of inheritance. White, J. delivering the majority opinion elaborately discusses to dismiss the contention that the progressive rates by which rates are graded in accordance with the size of legacies or distributive shares at all violated the uniformity and equal protection clause of the American Constitution. Brewer, J. who was a member of that Court again dissented.
10. Dr. Pal invites me to accept the dissenting opinions of Brewer, J. and wanted to distinguish these American decisions on inheritance tax on the ground that the American Supreme Court in those cases proceeded on the basis that an inheritance tax was not a tax on property but on the right of succession. I am unable to accede to Dr. Pal's thesis. When a tax is challenged on the ground of unequal discrimination in violation of the constitutional principle of equality before the law or equal protection of the laws, it has to be tested by the consideration whether the difference or discrimination rests on a rational classification and not on the ground whether it is a lax on property or on succession. I shall presently state why in this instant case before me I consider the graduated rates of tax justified by the rule of reasonable classification as laid down by the Indian Supreme Court.
11. The first income-tax case to come up for decision on this point in the American Courts is Brushaber v. Union Pacific Railroad Co., reported in (1916) 240 US 1: 60 Law Ed 493 (C). In this case the American Supreme Court was for the first time confronted with progression in the form of income-tax with explicitly graduated rates. Chief Justice White by reference to Knowlton v. Moore (B) and speaking for a unanimous court summarily dismissed the argument that progressive rates of graduatedincome-tax at all violated the principle of constitutional equality.
12. All these American cases are definitely agairat the contention of the applicant.
13. Article 14 of the Indian Constitution provides that the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India. This constitutional provision for equali y belore the law or the equal protection of the laws has weathered many legal storms. It is unnecessary in this application to go through and discuss the numerous decisions on the point. Although greatly weather beaten, the main features of this constitutional doctrine of equality of law are sufficiently well settled to-day. It is enough to siate here, as was pointed out by Das, J. (as he then was) in the Supreme Court decision of State of West Bengal v. Anwar Ali Sarkar, : 1952CriLJ510 (D) that Article 14 of the Indian Constitution does not insist that every piece of legislation must have universal application and it does not take away from the State the power to classify persons for the purposes of legislation, but the classification must be rational, and in order to satisfy this test (i) the classification must be founded on an intelligible differencia which distinguished those that are grouped together from others, and (ii) that differentia must have a rational relation to the object sought to be achieved by the Act. The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them.
14. Applying those tests it seems to me that the progressive graduation of income-tax with different rates applying to different income groups or to different slabs of income far from being discriminatory is a just practical and reasonable system of classification. Obviously a flat rate applicable to different groups of income would be the most inequitable arrangement. It was pointed out by Bradley, J. in the Bell's Gap Bailroad Co. v. Commonwealth of Pennsylvania, (1890) 134 US 232: 33 Law Ed 892 (E) at p. 895 that the
'XIVth Amendment of the American Constitution was not intended to compel the States to adopt an iron rule of equal taxation. If that were its proper construction, it would not only supersede all those constitutional provisions and laws of some of the States, whose object is to secure equality of taxation, and which are usually accompanied with qualifications deemed material; but it would render nugatory those discriminations which the best interests of society require, which are necessary for the encouragement of needed and useful industries & the discouragement of intemperance and vice, and which every State, in one form or another, deems it expedient to adopt'.
15. In the present case, lie scheme of the graduation of the rates so far as the income-tax is concerned is based on such slabs as the exempted limit of the first Rs. 1500/-, the next Rs. 3,500/-with one rate, the next Rs. 5,000/- on a higher rate, the next Rs. 5,000/- on a still higher rate and thereafter the balance of the total income on a still further higher rate. Rates increase with the increase of incomes. It is a reasonable classification to my mind and can be justified both on the ground of abilityto pay as well as by the objective of reducing disparity of incomes in society. Within each group or slabs of income the rate applies uniformly and there is no discrimination. That being so, the scheme and the rates cannot be called unconstitutional or in violation of the constitutional clause of equal protection of laws or equality before the law according to the tests laid down by the Indian Supreme Court and by the American Supreme Court.
16. Similarly again the scheme and rates of super tax, in the present case are based on reasonable classification of income on the basis of higher and higher slabs of income. It is not necessary in my view that the basis of the scheme for the income-tax should also be the same as the basis of the scheme of the super tax in order to be reasonable. The constitutional doctrine of equality before the law or the equal protection of the laws is not violated by a reasonable classification and there is in my opinion no limit as to the classification so long as it has and observes a rational basis. For one purpose there can be a classification between class A and class B and for another purpose class B can be further subdivided into different classes, so long of course as the sub-division of B into further classes is reasonable and answers the tests laid down by Das, J. in the case quoted above. I read no constitutional inhibition in the Indian Constitution to suggest that once a class has been reasonably made that class cannot be further divided into reasonable sub-classes for achieving particular legislative policies and therefore I see no reason why the classification or classes made reasonably for purpose of income-tax cannot equally reasonably be re-classified or subdivided for the purposes of super tax.
17. I, therefore, hold that the Finance Act, 1951 as applicable to the Finance Act, 1954 under Section 2 of the Finance Act, 1954 is not ultra vires the Constitution and does not infringe the right of equality before the law or the equal protection of the laws. I hold further that the Finance Act is not ultra vires the Constitution and the rates imposed thereunder are neither discriminatory nor arbitrary.
18. For these reasons the application fails and is dismissed. The Rule is discharged and interim order, if any, vacated. There will be no order as to costs.