JUDGMENT
P.P. Naolekar, J.
1. This order shall also govern disposal of Miscellaneous Petition No, 441 of 1985 (Sir Sarupchand Hukamchand Pvt. Ltd. v. Union of India).
2. Petitioner No. 1 is a company incorporated and registered under the Indian Companies Act, 1956, and petitioner No. 2 holds equity shares in the said company and is also its managing director.
3. Petitioner No. 1 company filed wealth-tax returns for the assessment years 1984-85 and 1985-86 under the Wealth-tax Act, 1957 (Act No. 27 of 1957), before the Wealth-tax Officer raising various factual and legal contentions for claiming exemption from the Wealth-tax Act, which are pending consideration.
4. The petitioners have in this petition challenged the constitutional validity of Section 40 of the Finance Act, 1983, on the ground that it violates Article 14 of the Constitution of India. According to the petitioners, the first petitioner is a “closely-held company”, that is not a company in which the public are substantially interested within the meaning of the provisions of Section 2(18) of the Income-tax Act, 1961. The wealth-tax was leviable on companies under the Wealth-tax Act, 1957. Section 3 of the Wealth-tax Act, 1957, is the charging section under which tax is levied for every assessment year commencing on and from the first day of April, 1957, in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in Schedule I thereof. By virtue of Section 13 of the Finance Act, 1960, it was provided that notwithstanding anything contained in the Wealth-tax Act, 1957, no tax shall be charged in respect of the net wealth of a company for any financial year commencing on or after the first day of April, 1960.
5. By Section 40 of the Finance Act, 1983, it was, however, provided that notwithstanding anything contained in Section 13 of the Finance Act, 1960, wealth-tax shall be charged under the Wealth-tax Act for every assessment year commencing on or from the first day of April, 1984, in respect of the net wealth on the corresponding valuation date of every company, not being a company in which the public are substantially interested, at the rate of two per cent. of such net wealth. Thus, by virtue of Section 40 of the Finance Act, 1983, wealth-tax was leviable on the net wealth of the company which is a “closely-held company”.
6. In the speech of the Finance Minister, it is said (see [1983] 140 ITR (St.) 25, 32) :
“It has come to my notice that some persons have been trying to avoid personal wealth-tax liability by forming closely-held companies to which they transfer many items of their wealth, particularly jewellery, bullion and real estate. As companies are not chargeable to wealth-tax, and the value of the shares of such companies does not also reflect the real worth of the assets of the company, those who hold such unproductive assets in closely-held companies are able to successfully reduce their wealth-tax liability to a substantial extent. With a view to circumventing tax avoidance by such persons, I propose to revive the levy of wealth-tax in a limited way in the case of closely-held companies. Accordingly, I am proposing the levy of wealth-tax in the case of closely-held companies at the rate of two per cent. …”
7. As per the petitioners, the speech clearly shows the intention of the Legislature in introducing the levy of wealth-tax on closely-held companies and was for the purpose of bringing into the net of wealth-tax the value of those assets which have been transferred to closely-held companies with a view to avoid wealth-tax. But the charging provision is wide enough to cover even those closely-held companies which need not possess such assets as are transferred to them by some other persons with a view to avoid taxation. The charging section encompasses all closely-held companies without any rational classification as to one who possess assets as are transferred to them with a view to avoid taxation and those who are genuinely carrying on the business without such transfer. The provisions of Section 40 of the Finance Act, 1983, are thus arbitrary and offend Article 14 of the Constitution of India on the ground of lack of rational classification. This provision is also bad by which companies are artificially classified as defined in Section 2(18) of the Income-tax Act and “closely-held companies”.
8. Under Section 40 of the Finance Act, 1983, wealth-tax is levied at the rate of two per cent. over the net wealth of the company in which the public are not substantially interested. The Explanation to Section 40 imports the meaning of the words “company in which the public are substantially interested” from Clause (18) of Section 2 of the Income-tax Act. It is a negative definition. Section 2(18) of the Income-tax Act, 1961, enumerates the companies in which public are substantially interested. Section 2(l8)(b) reads as under :
“if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely :-
(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ;
(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent; of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by –
(a) the Government, or
(b) a corporation established by a Central, State or Provincial Act, or
(c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.
Explanation.–In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words ‘not less than fifty per cent.’, the words ‘not less than forty per cent.’ had been substituted.”
9. Thus, a private company as defined in the Companies Act, 1956 (1 of 1956), shall not be a company in which the public are substantially interested and, therefore, will be a company from whom wealth-tax can be charged by virtue of Section 40 of the Finance Act, 1983.
10. Under Section 3 of the Companies Act, 1956 (1 of 1956), there are three types of companies, i.e., existing company, private company and public company. Private company means a company which, by its articles, restricts the right to transfer its shares, if any ; limits the number of its members to fifty not including persons who are in the employment of the company; and persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased ; and prohibits any invitations to the public to subscribe for any shares in, or debentures of, the company. Thus, the Companies Act itself defines three different types of companies and the private company is defined in Section 3 of the Companies Act. The private company is a company in which the public are not substantially interested and as such is a “closely-held company”.
11. The equal protection of the laws provision in our constitution prohibits a discrimination by the State against its own citizens as well as to one in their favour in imposing the wealth-tax. The wealth-tax is uniform as it is equal upon all companies belonging to the described class upon which it is imposed, namely, the companies who are closely-held companies. It cannot be said to be discriminatory. Equal protection cannot be said to be denied by the statute which operates alike on all persons and property similarly situated or by proceedings for the assessment and collection of taxes which follows the course usually pursued in the State.
12. There is a marked distinction between a private company and a public company. A private company enjoys the privilege in regard to formation of a company by persons, allotment of shares without issuing a prospectus, non-application of Section 81 of the Companies Act as regards issue of further capital, restriction on the commencement of business contained in Section 149, relaxation from holding the statutory meeting as required by Section 165, demand of poll by the members, limited number of directors which need not be more than two, non-restriction on appointment of directors, etc. Private companies, public companies and existing companies are a class by themselves and application of the provisions of the Wealth-tax Act to private companies alone does not entail discrimination between the companies.
13. It is well-settled that the speech of the Minister introducing the Bill could be relied upon to find out the object behind introduction of the Bill as held in K.P. Varghese v. ITO [1981] 131 ITR 597 (SC). Therefore, we can look into the speech of the Finance Minister whereunder he has given some of the reasons for levying wealth-tax on closely-held companies at the rate of two per cent. It is the contention of the petitioners that there was no transfer of interest in the property of the company from the directors of the company and, therefore, there is no attempt on the part of the directors or the persons interested in the formation of a closely-held company to avoid wealth-tax and bringing into the net such companies who are carrying on their legitimate business along with the companies who are trying to avoid wealth-tax by transfer of assets by the directors of closely-held companies is arbitrary and is not based on a rational classification.
14. It is true in the speech of the Finance Minister it has been stated that to stop tax evasion by transferring assets to closely-held companies, a provision has been introduced levying wealth-tax on such companies. But it has also been said that the tax is levied on closely-held companies because their share capital does not reflect the real worth of the assets of the company and that they hold unproductive assets. It is also to be taken note that under the Companies Act there are lots of privileges available to closely-held companies, which are not available either to public companies or existing companies. It is clear from the speech of the Finance Minister that wealth-tax at the rate of two per cent. on the net wealth represented by the value of specified assets, such as, jewellery, gold, bullion, buildings and lands owned by such companies has been levied and the buildings used by the company as factory, godown, warehouse, hotel or office for the purposes of its business or as residential accommodation for its low paid employees are excluded from the net wealth, which goes to show that the wealth-tax has been levied on a reasonable basis.
15. A taxation Act will only be struck down as violative of Article 14 of the Constitution of India if there is no reasonable basis behind the classification made by it, or if the same class of property, similarly situated, is subjected to unequal taxation. Taxation will not be discriminatory if, within the sphere of its operation, it affects alike all persons similarly situated. It merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed. (Reliance is placed on Spences Hotel Put. Ltd. v. State of West Bengal [1991] 2 SCC 154). The Legislature has jurisdiction and authority to classify property, trade, profession and events for imposition of tax equally and uniformly and as such the discretion exercised by the Legislature cannot be challenged on the ground that it discriminates and infringes Article 14 of the Constitution of India. Wealth-tax of two per cent. has been uniformly charged on all closely-held companies. Therefore, there can be no distinction drawn between the closely-held companies where property has been transferred or where property has not been transferred by other companies or by its directors, because that is not the only reason for levying wealth-tax on every closely-held company. A closely-held company has been treated as a class apart and tax has been levied on them. There is a reasonable basis for charging wealth-tax only from the closely-held companies and the action of the Legislature is well within its competence. We do not find any discrimination or arbitrariness, as complained of by the petitioners and Section 40 of the Finance Act, 1983 cannot be attacked on that count.
16. Consequent to the aforesaid discussion, the petitions fail and are dismissed with costs of Rs. 750 each.
