Constitutional validity of sec 50C

CONSTITUTIONAL VALIDITY OF SECTION 50C OF IT ACT, 1961

RATIO DECIDENDI

The provision of section 50C is validly enacted and not hit by
legislative incompetence of Central Legislature.


IN THE HIGH COURT OF MADRAS

K. R. Palanisamy

v.

Union of India

Writ Petition No. 4387 of 2003

August 5, 2008

RELEVANT EXTRACTS:

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17. Let us consider the legislative competence of the Parliament in
inserting the provision Section 50C in the Income-tax Act. It is
obvious from the reading of the above provision and rather it is not
disputed that the same is inserted to prevent large scale
undervaluation of the real value of the property in the sale deed so
as to defraud revenue the Government legitimately entitled to by
pumping in black money. The impugned provision has been incorporated
to check such evasion of tax by undervaluing the real properties.
Article 246 of the Constitution of India gives exclusive power to
the Parliament to make law in respect of the matters enumerated in
List I of VII Schedule (Union List). Entry 82 List I of VII Schedule
empowers the Parliament to levy tax on income other than
agricultural income. The legislative competence of the Parliament in
enacting statute or inserting provision for arresting leakage of
income has been considered by the Apex Court in several cases. The
uniform opinion in all those cases is that the entries in the
legislative list should be construed more liberally and in their
widest amplitude and not in a narrow or restricted sense. Each
general word should be held to extend to all ancillary or subsidiary
matters which can fairly and reasonably be said to be comprehended
by it. The expression "income" as defined in the Income-tax Act
under Section 2(24) cannot be read back into Entry 82 of List 1 of
the VII Schedule to the Constitution. Even the said definition is an
inclusive one and has been expanding from time to time. Several
items have been brought within the definition from time to time by
various amending acts. The said definition cannot therefore be read
as exhaustive of the meaning of the expression "income" occurring in
Entry 82 of List I of the VII Schedule. The said Entry should be
widely and liberally construed so as to enable a Legislature to
provide by law for the prevention of evasion of Income Tax. Tax
could be evaded by breaking the law or could be avoided in terms of
the law. When there is a factual avoidance of tax in terms of law,
the Legislature steps into amend the income tax law to catch such an
income within the net of taxation. (See Punjab Distilling Industries
Vs. C.I.T., AIR 1965 SC 1862, (Constitution Bench), Balaji Vs.
C.I.T., AIR 1962 SC 123 (Constitution Bench), Bhagavandoss Jain VS.
Union of India, AIR 1981 SC 908 = (1981) 128 ITR 315, Asst. Director
of Inspector, Investigation Vs. A.BShanthi, AIR 2002 SC 2188 and
Union of India Vs. A.Sanyasi Rao, AIR 1996 SC 1219 = 219 ITR 330).
(bold supplied)

18. The Constitution Bench of the Apex Court in R.K.GARG VS. UNION
OF INDIA, (1981) 4 SCC 675 observed as follows:

"Another rule of equal importance is that laws relating to economic
activities should be viewed with greater latitude than laws touching
civil rights such as freedom of speech, religion etc. It has been
said by no less a person than Holmes, J. that the legislature should
be allowed some play in the joints, because it has to deal with
complex problems which do not admit of solution through any
doctrinaire or strait-jacket formula and this is particularly true
in case of legislation dealing with economic matters, where, having
regard to the nature of the problems required to be dealt with,
greater play in the joints has to be allowed to the legislature. The
court should feel more inclined to give judicial deference to
legislative judgment in the field of economic regulation than in
other areas where fundamental human rights are involved. Nowhere has
this admonition been more felicitously expressed than in Morey v..
Doud where Frankfurter, J. said in his inimitable style:

'In the utilities, tax and economic regulation cases, there are good
reasons for judicial self-restraint if not judicial deference to
legislative judgment. The legislature after all has the affirmative
responsibility. The courts have only the power to destroy, not to
reconstruct. When these are added to the complexity of economic
regulation, the uncertainty, the liability to error, the bewildering
conflict of the experts, and the number of times the judges have
been overruled by events # self-limitation can be seen to be the
path to judicial wisdom and institutional prestige and stability.'

The court must always remember that "legislation is directed to
practical problems, that the economic mechanism is highly sensitive
and complex, that many problems are singular and contingent, that
laws are not abstract propositions and do not relate to abstract
units and are not to be measured by abstract symmetry"; "that exact
wisdom and nice adaptation of remedy are not always possible" and
that "judgment is largely a prophecy based on meagre and
uninterrupted experience". Every legislation particularly in
economic matters is essentially empiric and it is based on
experimentation or what may one call trial and error method and
therefore it cannot provide for all possible situations or
anticipate all possible abuses. There may be crudities and
inequities in complicated experimental economic legislation but on
that account alone it cannot be struck down as invalid. The courts
cannot, as pointed out by the United States Supreme Court in
Secretary of Agriculture v. Central Reig Refining Company, be
converted into tribunals for relief from such crudities and
inequities. There may even be possibilities of abuse, but that too
cannot of itself be a ground for invalidating the legislation,
because it is not possible for any legislature to anticipate as if
by some divine prescience, distortions and abuses of its legislation
which may be made by those subject to its provisions and to provide
against such distortions and abuses. Indeed, howsoever great may be
the care bestowed on its framing, it is difficult to conceive of a
legislation which is not capable of being abused by perverted human
ingenuity. The court must therefore adjudge the constitutionality of
such legislation by the generality of its provisions and not by its
crudities or inequities or by the possibilities of abuse of any of
its provisions. If any crudities, inequities or possibilities of
abuse come to light, the legislature can always step in and enact
suitable amendatory legislation. That is the essence of pragmatic
approach which must guide and inspire the legislature in dealing
with complex economic issues".

19. Even the special provision, which provides for collection of
income-tax on profits and gains from trading in goods specified
under Section 44-AC and 206-C of the Income Tax Act on a presumptive
basis have been upheld by the Supreme Court in the case of UNION OF
INDIA AND ANOTHER VS. A.SANYASI RAO AND OTHERS, (1996) 3 SCC 465.

20. Even in the case of K.P.VARGHESE VS. INCOME-TAX OFFICER, (1981)
131 ITR 597, Section 52(2) of the Income-tax Act has not been struck
down on this ground. But it was only directed to be read down by
giving certain direction.

21. In the case of STATE OF RAJASTHAN VS. RAJASTHAN CHEMISTS
ASSOCIATION, reported in (2006) 6 SCC 773 relied on by the learned
counsel to contend that the impugned provision is hit by legislative
competence, the question with reference to Section 4A of the
Rajasthan Sales Tax Act as to whether the Maximum Retail Price (MRP)
which would be chargeable by a retailer when he sells the goods to
consumer can provide a basis for the wholesaler to levy tax, was
considered. While considering the issue with reference to the
definition to the terms "turnover", "taxable turnover" and "taxable
event", the Supreme Court has held that the MRP which a wholesaler
could charge in respect of scheduled formulations is fixed by
Control Order. In respect of scheduled formulations wholesaler is
required to leave at least 16% margin in the MRP for the retailers
and he is entitled to retain not more than 8% profit on the purchase
price. There being statutory interdiction against the wholesalers to
charge MRP from its buyer, the maximum retail price fixed on the
packet has no rational connection with the taxable sale effected by
the wholesalers and which becomes subject matter of charge as a
first point tax. In such event, there exists no nexus between the
measure of levy and subject of levy. We are of the view that the
above Judgment no way advance the case of the petitioner as to the
legislative competence of the Central Legislature to frame the
provision impugned.

22. For the foregoing reasons, and in the light of the judgments of
the Apex Court referred to above, we are of the considered view that
the provision impugned is validly enacted and not hit by legislative
incompetence of Central Legislature.