PETITIONER:
R.K. GARG ETC. ETC.
Vs.
RESPONDENT:
UNION OF INDIA & ORS. ETC.
DATE OF JUDGMENT20/10/1981
BENCH:
GUPTA, A.C.
BENCH:
GUPTA, A.C.
CHANDRACHUD, Y.V. ((CJ)
BHAGWATI, P.N.
FAZALALI, SYED MURTAZA
SEN, AMARENDRA NATH (J)
CITATION:
1981 AIR 2138 1982 SCR (1) 947
1981 SCALE (3)1601
CITATOR INFO :
F 1982 SC 710 (32)
R 1983 SC 937 (37)
R 1984 SC1130 (46)
RF 1985 SC 551 (32)
RF 1985 SC 724 (13)
R 1987 SC 251 (33)
R 1990 SC 334 (98)
RF 1992 SC1033 (39)
ACT:
Special Rcarer Bonds (Immunities and Exemptions)
ordinance, 1981 and Special Bearer Bonds (Immunities and
Exemptions) Act, 1981-Constitution validity of-Whether
infringes Art. 14-Act whether puts a premium on dishonesty.
Constitution of India, 1950.
Art. 14-Validity of classification-How to be
determined.
Art. 32-Judicial review-Discharge of-Principles to be
followed.
Art. 123-ordinance making power of President-Whether
can extend to tax laws.
Interpretation of statutes-Legislation on economic
matters-Effect of crudities, inequities and possibilities of
abuse-Whether renders legislation invalid.
HEADNOTE:
The Special Bearer Bonds (Immunities and Exemptions)
ordinance, 1981 was promulgated on January 12,1981. It was
repealed and replaced by the Special Bearer Bonds
(Immunities and Exemptions) Act, 1981. The Act received the
Presidential assent on March 27,1981. Section 1(3) of the
Act stated that the Act was deemed to have come into force
on January 12, 1981. The provisions of the ordinance and the
Act were similar except section 4(2) of the Act which was
worded slightly differently from the corresponding provision
of The ordinance. The Act provided for certain immunities to
holders of Special Bearer Bonds, 1981, and for certain
exemptions from direct taxes in relation to such Bonds and
for matters connected therewith. The object and purpose for
which the Act was passed was to canalise for productive
purposes black money, which had become a serious threat to
the national economy and to provide for certain immunities
and exemptions to render it possible for persons in
possession of black money to invest the same in the said
Bonds.
Section 3 of the Act provided for certain immunities to
a person who had subscribed to or otherwise acquired Special
Bearer Bonds. Clause (a) protected such a person from being
required to disclose for any purpose whatsoever the I nature
and source of acquisition of the Special Bearer Bonds.
Clause (b) prohibited the commencement of any inquiry or
investigate on against a person on the
948
ground of his having subscribed to or otherwise acquired the
Special Bearer Bonds. Clause (c) provided that the fact of
subscription to or acquisition of Special Bearer Bonds shall
not be taken into account and shall be inadmissible in
evidence in any proceedings relating to any offence or the
imposition of any penalty. Sub-section (2) of section (3)
provided that the immunity granted under sub-section (1)
shall not be available in relation to prosecution for any
offence punishable under Chapter 9 or Chapter 17 of the
Indian Penal Code or the Prevention of Corruption Act, 1957
or other similar law.
Section 4 provided that without prejudice to the
provisions of section 3 subscription to, or acquisition of
Special Bearer Bonds by any person shall not be taken into
account for the purpose of any proceedings under the Income-
tax Act, 1961, the Wealth-tax Act 1957 or the Gift-tax Act,
1958 and that no person who has subscribed to or has
otherwise acquired the said Bonds shall be entitled to (a)
claim any set-off under the Income-tax Act or to reopen any
assessment or reassessment made under that Act on the ground
that he has subscribed to or has otherwise acquired the said
Bonds; (b) that any asset which is includible in his net
wealth for any assessment year under the Wealth-tax Act has
been converted into such bonds, and (c) that any asset held
by him represents the consideration received for the
transfer of such Bonds.
In their writ petitions to this Court assailing the
constitutional validity of the ordinance and the Act it was
contended on behalf of the petitioners that: (I) since the
ordinance had the effect of amending the tax laws it was
outside the competence of the President under Article 123,
that the subject matter of the ordinance was in the nature
of a Money Bill which could be introduced only in the House
of the People and passed according to the procedure provided
in Articles 109 and 110, the President had no power under
Article 123 to issue the ordinance by passing the special
procedure provided in Articles 109 and 110 for the passing
of a Money Bill and (2) that the provisions of the Act were
violative of Article 14 of the Constitution.
It was also contended: (a) that Special Bearer Bonds
would fetch a much higher value in the black market than
that originally subscribed and this would enable a larger
amount of black money to be legalised into white than what
was originally invested in subscription to special bearer
bonds, (b) an abuse which special bearer bonds might lend
themselves to was that if special bearer bonds are sold and
the sale proceeds are utilised in meeting expenditure, the
assessee would not be precluded by section 4 clause (c) from
explaining the source of the expenditure to be the sale
consideration of special bearer bonds and by resorting to
this strategy, white money can be accumulated as capital
while expenditure is met out of black money received by way
of consideration for sale of special bearer bonds, (c)
Section 4 clause (c) operates only in relation to a period
before the date of maturity of special bearer bonds and
after the date of maturity the holder of special bearer
bonds can sell such bonds, and, without running any risk
disclose the consideration received by him as his white
money, because section 4 clause (c) being out of the way, he
can account for the possession of such money by showing that
he has received it as consideration for sale of special
bearer bonds and so far as the purchaser is concerned. if he
has Paid the consideration out of his black money, he can
claim
949
the immunity granted under section 3 sub-section (1) and his
black money would be converted into white, (d) the Act is
unconstitutional as it offends against morality by according
to dishonest assessees who have evaded payment of tax.
immunities and exemptions which are denied to honest tax-
payers. Those who have broken the law and deprived the State
of its legitimate dues are given benefits and concessions
placing Them at an advantage over those who have observed
the law and paid the taxes due from them and this is clearly
immoral and unwarranted by the Constitution.
Dismissing the petitions,
^
HELD :
[Per majority Chandrachud, C. J., Bhagwati, Fazal Ali &
Amarendra Nath Sen, J.J.]
[Gupta, J, dissenting]
None of the provisions of The Special Bearer Bonds
(Immunities and Exemption) Act, 1981 is violative of Article
14 and its constitutional validity must be upheld. [989 B]
l(i). There is no substance in The contention that the
President has no power under Article 123 to issue an
ordinance amending or altering the tax laws and that the
ordinance was outside the legislative power of the President
under that Article. [967 E]
l(ii). Under Article 123 legislative power is conferred
on the President exercisable when both Houses of Parliament
are not in session. It is possible that when neither House
of Parliament is in session, a situation may arise which
needs to be dealt with immediately and for which there is no
adequate provision in the existing law and emergent
legislation may be necessary to enable the executive to cope
with the situation. Article 123, therefore, confers powers
on the President to promulgate a law by issuing an ordinance
to enable the executive to deal with the emergent situation
which might well include a situation created by a law being
declared void by a Court of law. The legislative power
conferred on the President under the Article is not a
parallel power of legislation. This power is the clearest
indication that the President is invested with this
legislative power only in order to enable the executive to
tide over an emergent situation which may arise whilst The
Houses of Parliament are not in session. The conferment of
such power may appear to be undemocratic but it is not so,
because The executive is clearly answerable to the
legislature and if the President, on the aid and advice of
the executive, promulgates an ordinance in misuse or abuse
of this power, the legislature can not only pass a
resolution disapproving the ordinance but can also pass a
vote of no confidence in the executive There is in the
theory of Constitutional Law complete control of the
legislature over the executive, because if the executive
misbehaves or forfeits the confidence of the legislature, it
can be thrown out by the legislature. [954 E-G, 965 G-966 B]
1(iii). If parliament can by enacting legislation after
or amend tax laws, equally can the President do so by
issuing an ordinance under Article 123. There have been
numerous instances where the President has issued an
ordinance replacing with retrospective effect a tax law
declared void by the High Court or
950
this Court. Even offences have been created by ordinance
issued by the President under Article 123 and such offences
committed during the life of the ordinance have been held to
be punishable despite the expiry of the ordinance. [967 B-C]
State of Punjab v. Mohar Singh [1955] 1 SCR 893,
referred to.
2(i). Certain well established principles have been
evolved by Courts as rules of guidance in discharge of their
constitutional function of judicial review. The first rule
is that there is always a presumption in favour of the
constitutionality of a statute and the burden is upon him
who attacks it to show that there has been a clear
transgression of the constitutional principles. The
presumption of constitutionality is indeed so strong that in
order to sustain it, the Court may take into consideration
matters of common knowledge, matters of common report, the
history of the times and may assume every state of facts
which can be conceived existing at the time of Legislation.
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. 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. [969 A-G]
Morey v. Dond, 354 US 457, referred to.
2(ii). 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 adoption of remedy are not f; always
possible and that "judgment is largely a prophecy based on
meagre and uninterpreted experience". Every legislation
particularly in economic matters is essentially empiric and
it is based on experimentation or what one may 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. [970 C.D]
Secretary of Agriculture v. Central Reig Refining
Company, 94 Lawyers' Edition 381. referred to.
2(iii). The court must adjudge the constitutionality of
legislation by the generality of its provisions and not by
its crudities or inequities or by the possibilities of abuse
of any of its provision. 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. [970 G-H]
3(i). It is clear that Article 14 does not forbid
reasonable classification of persons, objects and
transactions by the legislature for the purpose of attaining
specific ends. What is necessary in order to pass the test
of permissible classification under Article 14 is that the
classification must not be arbitrary, artificial or evasive
but must be based on some real and substantial distinction
bearing
951
a just and reasonable relation to the object sought to be
achieved by the legislature.
3(ii). The validity of a classification has to be
judged with reference to the object of the legislation and
if that is done, there can be no doubt that the
classification made by the Act is rational and intelligible
and the operation of the provisions of the Act is rightly
confined to persons in possession of black money.
4(i). The Preamble of the Act makes it clear that the
Act is intended to canalise for productive purposes black
money which has become a serious threat to the national
economy. It is an undisputed fact that there is considerable
amount of black money in circulation which is unaccounted or
concealed and therefore outside the disclosed trading
channels. It is largely the product of black market
transactions and evasion of tax. The abundance of black
money has in fact given rise to a parallel economy operating
simultaneously and competing with the official economy. This
parallel economy has over the years grown in size and
dimension and even on a conservative estimate, the amount of
black money in circulation runs into some thousand crores.
The menace of black money has reached such staggering
proportions that it is causing havoc to the economy of the
country and poses a serious challenge to the fulfillment of
objectives of distributive justice and setting up of an
egalitarian society.
4(ii). The first casualty of the evil of black money is
the Revenue because it loses the tax which should otherwise
have come to the exchequer. The generation of black money
through tax evasion throws a greater burden on the honest
tax payer and leads to economic inequality and concentration
of wealth in the hands of the unscrupulous few in the
country. It also leads to leakage of foreign exchange,
making balance of payments rather distorted and unreal and
tends to defeat the economic policies of the Government by
making their implementation ineffective, particularly in the
field of credit and investment. Urgent measures were
required to be adopted for preventing further generation of
black money as also for unearthing existing black money so
that it can be canalised for productive purposes with a view
to effective economic and social planning.
4(iii). The Government introduced several changes in
the administrative set up of the tax department from time to
time with a view to strengthening the administrative
machinery for checking tax evasion. The Government also
amended section 37 of the Indian Income Tax Act, 1922 with a
view to conferring power on the tax authorities to carry out
searches and seizures and this power was elaborated and made
more effectual under the Income Tax Act, 1961. The Voluntary
Disclosure Scheme of 1951 was made to facilitate the
disclosure of suppressed income by affording certain
immunities from penal provisions, Nearly a decade and a half
later a second scheme of voluntary disclosure was introduced
by section 68 of the Finance Act, 1965, popularly known as
the sixty forty scheme which was a little more successful.
Closely following on the heels of this scheme came another
under section 24 of the Finance (No. 2) Act 1965-'Block
Scheme' according to which tax was payable at rates
applicable to the block of concealed income disclosed and
not at a flat rate as under the sixty-forty scheme. Then
came the Taxation Laws (Amendment and Miscellaneous
Provisions) ordinance 1965 followed by an Act which provided
for exemption from
952
tax in certain cases of undisclosed income invested in
National Defence Gold Bonds 1980. Later on, the Voluntary
Disclosure of Income and Wealth ordinance 1975 which was
followed by an Act introduced a scheme of voluntary
disclosure of income and wealth and provided certain
immunities and exemptions. All these legal and
administrative measures were introduced by the Government
and did not have any appreciable effect with regard to the
problem of black money which continued unabated
4 (iv). All efforts to detect black money and to
uncover it having failed and the problem of black money
being an obstinate economic issue which was defying
solution, the impugned legislation providing for issue of
Special Bearer Bonds was enacted with a view to mopping up
black money and bringing it out in the open, so that,
instead of remaining concealed such money may become
available for augmenting the resources of the State and
being utilised for productive purposes so as to promote
effective social and economic planning. This was the object
for which the Act was enacted and it is with reference to
this object that it is to be determined whether any
impermissible differentiation is made in the Act.
4 (v). The whole object of the impugned Act is to
induce those having black money to convert it into white
money by making it available to the State for productive
purposes, without granting in return any immunity in respect
of such black money if it could be detected through the
ordinary processes of taxation laws without taking into
account the fact of purchase of Special Bearer Bonds.
4 (vi). The acquisition or possession of Special Bearer
Bonds would not therefore afford any protection to a public
servant against a charge of corruption or to a person
committing any offence against property. Equally this
immunity would not be available where what is sought to be
enforced is a civil liability other than liability by way of
tax. The immunity granted in respect of subscription to or
acquisition of Special Bearer Bonds is a severely restricted
immunity and this is the bare minimum immunity necessary in
order to induce holders of black money to bring it out in
the open and invest it in Special Bearer Bonds
5. Section 4(c) is calculated to act as a strong
deterrent against negotiability of Special Bearer Bonds for
disclosed or 'white' money. The immunily granted under the
provisions of the Act, limited as it is, extends only to the
person who is for the time being the holder of Special
Bearer Bonds and the person who has transferred the Special
Bearer Bonds for black money has no immunity at all and all
the provisions of tax laws are available against him for
determining his true income or wealth and therefore no one
who has purchased Special Bearer Bonds with a view to
earning security against discovery of unaccounted money in
his hands would ordinarily barter away that security by
again receiving black money for the Special Bearer Bonds.
Even if special bearer bonds are transferred against receipt
of black money it will not have the effect of legalising
more black money into white because the black money of the
seller which had become white on his subscribing to or
acquiring special bearer bonds would again be converted into
black money and the black money paid by the
953
purchaser by way of consideration would become white by
reason of being converted into special bearer bonds.
6. No assessee would ever admit that he incurred
expenditure out of black money received as consideration for
sale of special bearer bonds because it would be impossible
for him to establish receipt of black money from the
purchaser and if he is unable to do so, the amount of the
expenditure, would by reason of section 69C of the Income-
tax Act, 1961 be deemed to be his concealed income liable to
tax. Even if it is assumed that in some rare and exceptional
cases the assessee may be able to establish that he sold
special bearer bonds against receipt of black money the
purchaser would straight away run into difficulties because
the evidence furnished by the assessee would in such a case
clearly establish that the purchaser had black money and he
paid it to the assessee by way of consideration and he would
in that event be rendered liable to tax and penalty in
respect of such black money. C
7. Howsoever special bearer bonds may be transferred
and for whatever consideration only a limited amount of
black money namely The amount originally subscribed for the
special bearer bonds or at the most the amount representing
the face value of the special bearer bonds would be
legalised into white money and the supposedly free
negotiability of special bearer bonds would not have the
effect of legalising more black money into while or
encouraging further generation of black money.
8. When experience shows that the legislation as framed
has proved inadequate to achieve its purpose of mitigating
an evil or there are cracks and loopholes in it which are
being taken advantage of by the resourcefulness and
ingenuity of those minded to benefit themselves at the cost
of the State or the others, the legislature can and most
certainly would intervene and change The law. But the law
cannot be condemned as invalid on the ground That after a
period of ten years it may lend itself to some possible
abuse.
9. It is obvious that the Act makes a classification
between holders of black money and the rest and provides for
issue of special bearer bonds with a view to inducing
persons belonging to the former class to invest their
unaccounted money in purchase of special bearer bonds, so
that such money which is today Lying idle outside the
regular economy of the country is canalised into productive
purposes. The object of the Act being to unearth black money
for being utilised for productive purposes with a view to
effective social and economic planning, there has
necessarily to be a classification between persons
possessing black money and others and such classification
cannot be regarded as arbitrary or irrational.
10. The validity of a classification has to be judged
with reference to The object of the legislation and if that
is done, there can be no doubt that the classification made
by the Act is rational and intelligible and the operation of
the provisions of the Act is rightly confined to persons in
possession of black money.
11. The legislature had obviously only two
alternatives: either to allow the black money to remain idle
and unproductive or to induce those in possession
954
of it to bring it out in the open for being utilised for
productive purposes. The first alternative would have left
no choice to the government but to resort to deficit
financing or lo impose a heavy dose of taxation. The former
would have resulted in inflationary pressures affecting the
vulnerable sections of the society while the latter would
have increased the burden on the honest tax payer and
perhaps led to greater tax evasion. The legislature
therefore decided to adopt the second alternative of coaxing
persons in possession of black money to disclose it and make
it available to the government for augmenting its resources
for productive purposes and with that end in view enacted
the Act providing for issue of special bearer bonds.
12. It would be outside the province of the court to
consider if any particular immunity or exemption is
necessary or not for the purpose of inducing disclosure of
black money. That would depend upon diverse Fiscal and
economic considerations based on practical necessity and
administrative expediency and would also involve a certain
amount of experimentation on which the Court would be least
fitted to pronounce. The Court would not have the necessary
competence and expertise to adjudicate upon such an economic
issue. The Court cannot possibly assess or evaluate what
would be the impact of a particular immunity or exemption
and whether it would serve the purpose in view or not. There
are so many imponderables that would enter into the
determination that it would be wise for the court not to
hazard an opinion where even economists may differ.
13. The court must while examining the constitutional
validity of a legislation "be resilient, not rigid, forward
looking, not static, liberal, not verbal" and the court must
always bear in mind the constitutional proposition "that
courts do not substitute their social and economic beliefs
for the judgment of legislative bodies".
14. The court must defer to legislative judgment in
matters relating to social and economic policies and must
not interfere, unless the exercise of legislative judgment
appears to be palpably arbitrary.
[ Per A.C. Gupta, J. dissenting ]
1. The Special Bearer Bonds (Immunities and Exemptions)
ordinance, 1981 and the Special Bearer Bonds (Immunities and
Exemptions) Act, 1981 are invalid on the ground that they
infringe Article 14 of the Constitution. [1002 A]
2 The Act puts a premium on dishonesty without even a
justification of necessity-that the situation in the country
left no option. [1000 H-1001 A]
3. The basis on which the holders of Special Bearer
Bonds have been classified to give certain advantage to one
class and deny them to the other, has no rational nexus with
the object of the Act. [996 A]
4 (i). Article 14 forbids class legislation but permits
classification-Permissible classification, it is well
established, must satisfy two conditions viz. (i) li that
The classification must be founded on an intelligible
differential which distinguishes those that are grouped
together from others and: (2) that the
955
differential must have a rational relation to the object
sought to be achieved by A the Act. [993 G-994 A]
4 (ii). The differential that is the basis of
classification and the object of the Act are distinct
things, it is not enough that the differential should have a
nexus with the object, but it should also be intelligible.
The presence of some characteristics in one class which are
not found in another is the difference between the two
classes, but a further requirement is that this differential
must be intelligible. If the basis of classification is on
the face of it arbitrary in the sense that it is palpably
unreasonable it is not possible to call the differential
intelligible. [997 B-C]
The State of West Bengal v. Anwar Ali Sarkar, [1952]
SCR 284; E. P. Royappa v. State of Tamil Nadu and another,
[1974] 2 SCR 348 and Maneka Gandhi v. Union of India, [1978]
2 SCR 621, referred to.
5. The preamble of the Act takes note of the fact that
black money has become a serious threat to national economy
and says that to make economic and social planning effective
it is necessary to canalise this black money for productive
purposes. The Act however does not define black money. [990
F]
6. The immunities provided by the impugned Act are
clearly for the benefit of those who have acquired the Bonds
with black money. Clauses (a), (b) and (c) of section 3(1)
provide for these immunities "notwithstanding anything
contained in any other law for the time being in force".
None of These immunities is required by a person who has
paid 'white' money, that is, money that has been accounted
for to acquire the Bonds. To a person who has disclosed the
source of acquisition of the Bonds, These immunities are of
no use. Section 4 makes it clear that the immunities
conferred by the Act are of use only to those who have
acquired the Bonds with unaccounted money. [994 B-D]
7. The impugned Act denies to those who have acquired
the bonds not with black money any relief under the Income-
tax Act or the Wealth-tax Act or any benefit in any other
way claimed on the ground that they are holders of Special
Bearer Bonds, and the relief and the benefit denied to them
have been made available to those who have acquired the
Bonds with black money by ignoring the source of acquisition
in their case. [995 C-D]
8. The Act distinguishes between two classes of holders
of Special Bearer Bonds; tax evaders and honest tax-payers.
The object is to canalise black money for productive
purposes to make economic and social planning effective. If
the exemptions and immunities conferred by the Act are
sufficiently attractive to induce tax-evader to acquire
Special Bearer Bonds, they will remain as attractive even if
all these benefits were granted to those who will pay white
money for the Bonds. Denial of these benefits to those who
have acquired the Bonds with money which has been accounted
for does not in any way further the object of canalisation
of black money for productive purposes. The discrimination
in favour of black money therefore seems to be obvious. [995
E-F]
9. Terms like 'reasonable', 'just' or 'fair' derive
their significance from the existing social conditions.
Expressions like a 'reasonable and fair price' or 'fair
956
and equitable restitution' means nothing, except in
conjunction with the social conditions of the time. That
action is called 'reasonable' which an informed,
intelligent, just minded civilised Man could rationally
favour. [998 F-G]
Quaker City Cab Co. v. Commonwealth of Pennsylvania 72
Law. Ed. 927, referred to.
10. What is arbitrary and offends Article 14 cannot be
called intelligible. It is clear from the provisions of the
Act that the advantage which the tax evaders derive from the
immunities provided by the Act are not available to those
who have acquired the Bonds with 'white money' The Act
promises anonymity and security for tax-evaders. No question
can be asked as to the nature and source of acquisition or
possession of the Bonds. The Bonds can be transferred freely
and passing of the Bonds from hand to hand is likely to
operate as parallel currency and be used for any kind of
transaction. [999 F-G]
11. The Act discloses a scheme which enables tax-
evaders to convert black money into white after 10 years and
in the meantime use the Bonds as parallel currency
initiating a chain of black money investments. There is no
provision in the Act requiring that on maturity of the Bonds
their holders would have to disclose their identity, which
means that if after 10 years black money which had taken the
shape of Special Bearer Bonds goes underground again and
retain its colour, there is nothing to prevent it. There is
nothing in the scheme to halt generation of black money
which threatens the national economy. Some people by
successful evasion manoeuvres are able to throw the burden
of taxation off their own shoulders which means a greater
burden on the honest tax payers and this leads to economic
imbalance. [1000 B-D]
12. Any law that rewards law breakers and tax dodgers
is bound to invite criticism. No law can be struck down only
on the ground that it is unethical. However, there cannot be
and there never has been a complete separation of law and
morality. Historical and ideological differences concern the
extent to which the norms of the social order are absorbed
into the legal order. The principle of reasonableness is an
essential element of equality. The concept of reasonableness
does not exclude notions of morality and ethics. It cannot
be disputed that in the circumstances of a given case
considerations of morality and ethics may have a bearing on
the reasonableness of the law in question. [1001 B-D]
JUDGMENT:
ORlGlNAL JURISDICTION: Writ Petition Nos. 355, 360,
863, 994 & 3624 of 1981.
(Under article 32 of the Constitution of India)
Petitioner in person in WP. No. 350/81
R.K Garg, A.R. Gupta, Brij Bhushan, Miss Renu Gupta and
S.K Jain for the Petitioner in W.P. 360/81.
957
Soli J. Sorabjee, Harish Salve, S.K Dholakia & Mrs.
Ranjana Anand for the Petitioners in W.P. 863/81.
Soli J. Sorabjee, Harish Salve, P.H. Parekh, R.
Karanjawala. K.K. Lahiri & R. Swamy for the Petitioner in
W.P. 994/81.
R.S. Sodhi for the Petitioner in WP 3624/81.
L.N. Sinha, Attorney General in WPs. 355 & 360/81.
K Parasaran, Sol. General in WPs. 863 & 994/81.
K. S. Gurumoorthi & Miss A. Subhashini for the
Respondents.
U.N. Banerjee for the intervener-Mr. K.B. Kastia
V.J. Francis for the intervener-All India L.I.C.,
Employees Federation.
The following Judgments were delivered
BHAGWATI, J. These writ petitions raise a common
question of law relating to the constitutional validity of
the Special Bearer Bonds (Immunities and Exemptions)
ordinance, 1981 (hereinafter referred to as the ordinance)
and the Special Bearer Bonds (Immunities and Exemptions) Act
1981 (hereinafter referred to as the Act). The principal
ground on which the constitutional validity of the ordinance
and the Act is challenged is that they are violative of the
equality clause contained in Article 14 of the Constitution.
There is also one other ground on which the ordinance is
assailed as constitutionally invalid and it is that the
President had no power under Article 123 of the Constitution
to issue the ordinance and the ordinance is therefore ultra
vires and void. We shall first deal with the latter ground
since it can be disposed of briefly, but before we do so, it
would be convenient to refer to the relevant provisions of
the Act. It is not necessary to make any specific reference
to the provisions of the ordinance since the provisions of
the Act are substantially a reproduction of the provisions
of the ordinance.
On 12th January 1981, both Houses of Parliament not
being in session, the President issued the ordinance in
exercise of the power conferred upon him under Article 123
of the Constitution. The ordinance was later replaced by the
Act which received the assent of the President on 27th March
1981, but which was brought
958
into force with retrospective effect from 12th January 1981
being the date of promulgation of the ordinance. The Act is
a brief piece of legislation with only a few sections but
the ascertainment of their true meaning and legal effect has
given rise to considerable controversy between the parties
and hence it is necessary to examine the provisions of the
Act in some detail. The long title of the Act describes it
as an Act “to provide for certain immunities to holders of
Special Bearer Bonds 1991 and for certain exemptions from
direct taxes in relation to such Bonds and for matters
connected therewith” and the provisions enacted in the Act
are proceeded by a Preamble which indicates the object and
purpose of the Act in the following words:
Whereas for effective economic and social planning
it is necessary to canalise for productive purposes
black money which has become a serious threat to the
national economy;
And whereas with a view to such canalisation the
Central Government has decided to issue at par certain
bearer bonds to be known as the Special Bearer Bonds,
1991, of the face value of ten thousand rupees and
redemption value, after ten years, of twelve thousand
rupees;
And whereas it is expedient to provide for certain
immunities and exemptions to render it possible for
persons in possession of black money to invest the same
in the said Bonds;
Sections 3 and 4 are extremely material since on their true
interpretation depends to a large extent the determination
of the question relating to the constitutional validity of
the Act and they may be reproduced as follows:
3. (1) Notwithstanding anything contained in any other
law for the time being in force:-
(a) no person who has subscribed to or has otherwise
acquired Special Bearer Bonds shall be required to
disclose, for any purpose whatsoever, the nature
and source of acquisition of such Bonds;
(b) no inquiry or investigation shall be commenced
against any person under any such law on the
ground that
959
such person has subscribed to or has otherwise acquired
Special Bearer Bonds; and
(c) the fact that a person has subscribed to or has
other wise acquired Special Bearer Bonds shall not
be taken into account and shall be inadmissible as
evidence in any proceedings relating to any
offence or the imposition of any penalty under any
such law.
(2) Nothing in sub-section (1) shall apply in relation
to prosecution for any offence punishable under Chapter IX
or Chapter XVII of the Indian Penal Code, the Prevention of
Corruption Act, 1947 or any offence which is punishable
under any other law and which is similar to an offence
punishable under either of those Chapters or under that Act
or for the purpose of enforcement of any civil liability.
Explanation : For the purposes of this sub-section “civil
liability” does not include liability by way
of tax under any law for the time being in
force.
4. Without prejudice to the generality of the
provisions of section 3, the subscription to, or acquisition
of, Special Bearer Bonds by any person shall not be taken
into account for the purpose of any proceedings under the
Income-tax Act, 1961 (hereinafter referred to as the Income-
tax Act), the Wealth-tax Act 1957 (hereinafter referred to
as the Wealth-tax Act), or the Gift-tax Act, 1958
(hereinafter referred to as the Gift-tax Act) and, in
particular, no person who has subscribed to, or has
otherwise acquired, the said Bonds shall be entitled-
(a) to claim any set-off or relief in any assessment,
reassessment appeal, reference or other proceeding
under the Income-tax Act or t reopen any
assessment or reassessment made under that Act on
the ground that he has subscribed to or has
otherwise acquired the said Bonds;
(b) to claim, in relation to any period before the
date of maturity of the said Bonds, that any asset
which is includible in his net wealth for any
assessment year under the Wealth-tax Act has been
converted into the said Bonds: or
960
(c) to claim, in relation to any period before the
date of maturity of the said Bonds, that any asset
held by him or any sum credited in his books of
account or other wise held by him represents the
consideration received by him for the transfer of
the said Bonds.
We shall analyse the provisions of these two sections when
we deal with the arguments advanced on behalf of the parties
and that will largely decide the fate of the challenge
against the constitutional validity of the Act, but in the
meanwhile we may proceed to summarise the remaining
provisions of the Act. Section S amends the Income-tax Act
1961 by providing that the definition of “capital asset” in
section 2 clause (14) shall not include that Special Bearer
Bonds issued under the Act so that any profit arising on
sale of the Special Bearer Bonds would not be liable to
capital gains tax and it also excludes from the computation
of the total income of the assessee, premium on redemption
of the Special Bearer Bonds by introducing a new sub-clause
in section 10 clause (15). Section 5 sub-section (I) of the
Wealth Tax Act 1957 is also amended by section 6 so as to
exclude the Special Bearer Bonds from the net wealth of the
assessee liable to wealth tax. Section 7, by amending
section S sub-section (I) of the Gift-tax Act 1958 exempts
gifts of Special Bearer Bonds from the incidence of gift
tax. Section 8 confers powers on the Central Government to
make order removing any difficulty which may arise in giving
effect to the provisions of the Act and section 9 sub-
section (1) repeals the ordinance, but since the Act is
brought into force with effect from the date of promulgation
of the ordinance, sub-section (2) of section 9 provides that
notwithstanding the repeal of the ordinance, anything done
or any action taken under the ordinance shall be deemed to
have been done or taken under the corresponding provisions
of the Act.
Having set out the provision of the Act-and be it noted
again that the provisions of the ordinance were
substantially in the same terms as the provisions of the
Act-we may now proceed to consider the challenge against the
constitutional validity of the ordinance on the ground that
the President had no power to issue the ordinance under
Article 123 of the Constitution. There were two limbs of the
argument under this head of challenge; one was that since
the ordinance had the effect of amending the tax laws, it
was outside the competence of the President under Article
123 and the other was that the subject matter of the
ordinance was in the nature
961
of a Money Bill which could be introduced only in the House
of the A People and passed according to the procedure
provided in Articles 109 and 110 and the President had
therefore no power under Article 123 to issue the Ordinance
by-passing the special procedure provided in Art. 109 and 1
10 for the passing of a Money Bill. There is, as we shall
presently point out, no force in either of these two
contentions, but we may point out straightaway that both
these contentions are 1 academic, since the Act has been
brought into force with effect from the date of promulgation
of the Ordinance and sub-section (2) of section 9 provides
that anything done or any action taken under the Ordinance
shall be deemed to have been done or taken under the
corresponding provisions of the Act and the validity of
anything done or any action taken under the Ordinance is
therefore required to be judged not with reference to the
Ordinance under which it was done or taken, but with
reference to the Act which was, by reason of its
retrospective enactment, in force right from the date of
promulgation of the Ordinance and under which the thing or
action was deemed to have been done or taken. It is in these
circumstances wholly unnecessary to consider the
constitutional validity of the Ordinance, because even if
the Ordinance be unconstitutional, the validity of anything
done or any action taken under the Ordinance, could still be
justified with reference to the provisions of the Act. This
would seem to be clear on first principle as a matter of
pure construction and no authority is needed in support of
it, but if any were needed, it may be found in the decision
of this Court in Gujarat Pottery Works v. B.P. Sood,
Controller of Mining Leases for India and Ors. There the
question was whether the Mining Leases (Modification of
Terms) Rules, 1956 (hereinafter referred to as the 1956
Rules) made under Mines and Minerals (Regulation and
Development) Act, 1948 (referred to shortly as 1948 Act)
were void as being inconsistent with the provisions of the
1948 Act and if they were void, they could be said to be
continued by reason of section 29 of the Mines and Minerals
(Regulation and Development) Act, 1957 (hereinafter called
the 1957 Act). This Court sitting in a Constitution Bench
held that the 1956 Rules were not inconsistent with the
provisions of the 1948 Act and were therefore valid, but
proceeded to observe that even if the 1956 rules were void
as being inconsistent with the provisions of the 1949 Act,
they must by reason of section 29 of the 1957 Act be deemed
to have been made under that Act and
962
their validity and continuity must therefore be determined
with reference to the provisions of the 1957 Act and not the
provisions of the 1948 Act and since there was no
inconsistency between the 1956 Rules and the provisions of
the ]957 Act, the 1956 Rules could not be faulted as being
outside the power of the Central Government. Raghubar Dayal,
J. speaking on behalf of the Court articulated the reason
for taking this view in the following words:
“Even if the rules were not consistent with the
provisions of the 1948 Act and were therefore void, we
do not agree that they could not have continued after
the enforcement of the 1957 Act. Section 29 reads:
‘All rules made or purporting to have been
made under the Mines and Minerals (Regulation and
Development) Act, 1948, shall, in so far as they
relate to matters for which provision is made in
this Act and are not inconsistent therewith, be
deemed to have been made under this Act as if this
Act had been in force on the date on which such
rules were made and shall continue in force unless
and until they are superseded by any rules made
under this Act.’
The effect of this section is that the rules which were
made or purported to have been made under the 1948 Act in
respect of matters for which rules could be made under the
1957 Act would be deemed to have been made under the 1957
Act as if that Act had been in force on the date on which
such rules were made and would continue in force. The Act of
1957 in a way is deemed to have been in force when the
modification rules were framed in 1956. The 1956 rules would
be deemed to be framed under the 1957 Act and therefore
their validity and continuity depends on the provisions of
the 1957 Act and not of the 1948 Act.”
In this connection we may refer to the case reported as
Abdul Majid v. P.R. Nayak, A.I.R. 1951 Bom. 440. In that
case section 58 of Act XXXI of 1950 repealed Ordinance No.
XXVII of 1949 and provided as follows:
‘The repeal by this Act by the Administration of
Evacuee Property Ordinance 1949 (XXVII of 1949) shall
not affect the previous operation thereof, and subject
thereto, anything done or any action taken in the
exercise of any power conferred by or under that
963
Ordinance shall be deemed to have been done or taken in
the exercise of the powers conferred by or under this
Act, as if this Act were in force on the day on which
such thing was done or action was taken.’ Section 58
was construed thus:
‘The language used in s. 58 is both striking and
significant. It does not merely provide that the orders
passed under the Ordinance shall be deemed to be order
passed under the Act, but it provides that the orders
passed under the Ordinance shall be deemed to be orders
under this Act as if this Act were in force on the day
on which certain things were done or action taken.
Therefore the object of this section is, as it were, to
antedate this Act so as to bring it into force on the
day on which a particular order was passed which is
being challenged. In other words, the validity of an
order is to be judged not with reference to the
Ordinance under which it was passed, but with reference
to the Act subsequently passed by Parliament.’
The rules have not been challenged to be ultra vires
the 1957 Act in the instant case.”
The same process of reasoning which appealed to this Court
in upholding the validity of the 1956 Rules must apply
equally in the present case and the validity of anything
done or any action taken under the Ordinance must be judged
with reference to the provisions of the Act and not of the
Ordinance. It would therefore be academic for us to consider
whether the Ordinance was within the Ordinance-making power
of the President under Article 123 and ordinarily we would
have resisted the temptation of pronouncing on this issue
because it is a self-restraining rule of prudence adopted by
this Court that “the court will not formulate a rule of
constitutional law broader than is required by the precise
facts to which it is to be applied.” But since considerable
argument was advanced before us in regard to this issue we
do not think it would be right on our part to refuse to
express our view upon it.
The Ordinance was issued by the President under Article
123 which is the solitary Article in chapter III headed
“Legislative Powers of the President.” This Article provides
inter-alia as follows:
964
123 (1) If at any time, except when both Houses of
Parliament are in session, the President is
satisfied that circumstances exist which render it
necessary for him to take immediate action, he may
promulgate such Ordinances as the circumstances
appear to him to require.
(2) An Ordinance promulgated under this article shall
have the same force and effect as an Act of
Parliament, but every such Ordinance:-
(a) shall be laid before both Houses of
Parliament and shall cease to operate at the
expiration of six weeks from the reassembly
of Parliament, or, if before the expiration
of that period resolutions disapproving it
are passed by both Houses, upon the passing
of the second of those resolutions: and
(b) may be withdrawn at any time by the
President.
(3) If and so far as an Ordinance under this article
makes any provision which Parliament would not
under this Constitution be competent to enact, it
shall be void.
It will be noticed that under this Article legislature power
is conferred on the President exercisable when both Houses
of Parliament are not in session. It is possible that when
neither House of Parliament is in session, a situation may
be arise which needs to be dealt with immediately and for
which there is no adequate provision in the existing law and
emergent legislation may be necessary to enable the
executive to cope with the situation. What is to be done and
how is the problem to be solved in such a case ? Both Houses
of Parliament being in recess, no legislation can be
immediately undertaken and if the legislation is postponed
until the House of Parliament meet damage may be caused to
public weal. Article 123 therefore confers powers on the
President to promulgate a law by issuing an Ordinance to
enable the executive to deal with the emergent situation
which might well include a situation created by a law being
declared void by a Court of law. “Grave public inconvenience
would be caused”, points out Mr. Seervai in his famous book
on Constitutional Law, if on a statute like the Sales-tax
Act being declared void, “no machinery existed whereby a
valid law could
965
be promulgated to take the place of the law declared void ‘.
The President is thus given legislative power to issue an
Ordinance and since under our constitutional scheme as
authoritatively expounded by this Court in Shamsher and Anr.
v. State of Punjab, the President cannot act except in
accordance with the aid and advice of his Council of
Ministers, it is really the executive which is invested with
this legislative power. Now at first blush it might appear
rather unusual and that was the main thrust of the criticism
of Mr. R.K Garg on this point that the power to make laws
should have been entrusted by the founding fathers of the
Constitution to the executive, because according to the
traditional outfit of a democratic political structure, the
legislative power must belong exclusively to the ejected
representatives of the people aud vesting it in the
executive, though responsible to the legislature, would be
undemocratic, as it might enable the executive to abuse this
power by securing the passage of an ordinary bill without
risking a debate in the legislature But if we closely
analyse this provision and consider it in all its aspects,
it does not appear to be so starting, though we may point
out even if it were, the Court would have to accept it as
the expression of the collective will of the founding
fathers. It may be noted, and this was pointed out forcibly
by Dr. Ambedkar while replying to the criticism against the
introduction of Article 123 in the Constituent Assembly-that
the legislative power conferred on the President under this
Article is not a parallel power of legislation. It is a
power exercisable only when both Houses of Parliament are
not in session and it has been conferred ex-necessitate in
order to enable the executive to meet an emergent situation.
Moreover, the law made by the President by issuing an
Ordinance is of strictly limited duration. It ceases to
operate at the expiration of six weeks from the reassembly
of Parliament or if before the expiration of this period,
resolutions disapproving it are passed by both Houses, upon
the passing of the second of those resolutions. This also
affords the clearest indication that the President is
invested with this legislative power only in order to enable
the executive to tide over an emergent situation which may
arise whilst the Houses of Parliament are not in session.
Further more, this power to promulgate an Ordinance
conferred on the President is co-extensive with the power of
Parliament to make laws and the President cannot issue an
Ordinance which Parliament cannot enact into a law. It will
therefore be seen that legislative power has been conferred
on
966
the executive by the constitution makers for a necessary
purpose and it is hedged in by limitations and conditions.
The conferment of such power may appear to be undemocratic
but it is not so, because the executive is clearly
answerable to the legislature and if the President, on the
aid and advice of the executive, promulgates an Ordinance in
misuse or abuse of this power, the legislature cannot only
pass a resolution disapproving the Ordinance but can also
pass a vote of no confidence in the executive. There is in
the theory of constitutional law complete control of the
legislature over the executive, because if the executive
misbehaves or forfeits the confidence of the legislature, it
can be thrown out by the legislature. Of course this
safeguard against misuse or abuse of power by the executive
would dwindle in efficacy and value according as if the
legislative control over the executive diminishes and the
executive begins to dominate the legislature. But
nonetheless it is a safeguard which protects the vesting of
the legislative power in the President from the charge of
being an undemocratic provision. We might profitably quote
here the words of one of us (Chandrachud, J, as he then was)
in the State of Rajasthan v. Union of India where, repelling
the contention of the petitioner that the interpretation
which the Union of India was inviting the Court to place on
Article 356 would impair the future of democracy by enabling
the Central Government to supersede a duly elected State
Government and to dissolve its legislature without prior
approval of Parliament, the learned Judge said-
“…. there may be situations in which it is
imperative to act expeditiously and recourse to the
parliamentary process may, by reason of the delay
involved, impair rather than strengthen the functioning
of democracy. The constitution has therefore provided
safety-valves to meet extraordinary situations. They
have an imperious garb and a repressive content but
they are designed to save, not destroy democracy. The
fault, if any, is not in the meeting of the
Constitution but in the working of it.”
These words provide a complete answer to the criticism
of Mr. R.K. Garg.
Now once it is accepted that the President has
legislative power under Article 123 to promulgate an
Ordinance and this legis-
967
lative power is co-extensive with the power of the
Parliament to make laws, it is difficult to see how any
limitation can be read into this legislative power of the
President so as to make it ineffective to alter or amend tax
laws. If Parliament can by enacting legislation alter or
amend tax laws, equally can the President do so by issuing
an Ordinance under Article 123. There have been, in fact,
numerous instances where the President has issued an
Ordinance replacing with retrospective effect a tax law
declared void by the High Court or this Court. Even offences
have been created by Ordinance issued by the President under
Article 123 and such offences committed during the life of
the Ordinance have been held to be punishable despite the
expiry of the Ordinance. Vide: State of Punjab v. Mohar
Singh. lt may also be noted that Clause (2) of Article 123
provides in terms clear and explicit that an Ordinance
promulgated under that Article shall have the same force and
effect as an Act of Parliament. That there is no qualitative
difference between an Ordinance issued by the President and
an Act passed by Parliament is also emphasized by clause (2)
of Article 367 which provides that any reference in the
Constitution to Acts or laws made by Parliament shall be
construed as including a reference to an Ordinance made by
the President. We do not therefore think there is any
substance in the contention of the petitioner that the
President has no power under Article 123 to issue an
Ordinance amending or altering the tax laws and that the
Ordinance was therefore outside the legislative power of the
President under that Article.
That takes us to the principal question arising in the
writ petitions namely, whether the provisions of the Act are
violative of Article 14 of the Constitution. The true scope
and ambit of Article 14 has been the subject matter of
discussion in numerous decisions of this Court and the
propositions applicable to cases arising under that Article
have been repeated so many times during the last thirty
years that they now sound platitudinous. The latest and most
complete exposition of the propositions relating to the
applicability of Article 14 as emerging from “the avalanche
of cases which have flooded this Court” since the
commencement of the Constitution is to be found in the
Judgment of one of us (Chandrachud, J. as he then was) in
Re: Special Courts Bill. It not only contains a lucid
statement of the propositions arising under Article 14, but
being a decision given by a Bench of seven Judges of this
968
Court, it is binding upon us. That decision sets out several
propositions delineating the true scope and ambit of Article
14 but not all of them are relevant for our purpose and
hence we shall refer only to those which have a direct
bearing on the issue before us.
They clearly recognise that classification can be made
for the purpose of legislation but lay down that:
1. The classification must not be arbitrary but must
be rational, that is to say, it must not only be
based on some qualities or characteristics which
are to be found in all the persons grouped
together and not in others who are left out but
those qualities or characteristics must have a
reasonable relation to the object of the
legislation. In order to pass the test, two
conditions must be fulfilled, namely, (1) that the
classification must be founded on an intelligible
differentia which distinguishes those that are
grouped together from others and (2) that
differentia must have a rational relation to the
object sought to be achieved by the Act.
2. 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. In short,
while Article 14 forbids class discrimination by
conferring privileges or imposing liabilities upon
persons arbitrarily selected out of a large number
of other persons similarly situated in relation to
the privileges sought to be conferred or the
liabilities proposed to be imposed, it does not
forbid classification for the purpose of
legislation, provided such classification is not
arbitrary in the sense above mentioned.
It is clear that Article 14 does not forbid reasonable
classification of persons, objects and transactions by the
legislature for the purpose of attaining specific ends. What
is necessary in order to pass the test of permissible
classification under Article 14 is that the classification
must not be “arbitrary, artificial or evasive” but must be
based on some real and substantial distinction bearing a
just and reasonable relation to the object sought to be
achieved by the legislature. The question to which we must
therefore address ourselves is whether the classification
made by the Act in the present case
969
satisfies the aforesaid test or it is arbitrary and
irrational and hence A violative of the equal protection
clause in Article 14.
Now while considering the constitutional validity of a
statute said to be violative of Article 14, it is necessary
to bear in mind certain well established principles which
have been evolved by the courts as rules of guidance in
discharge of its constitutional function of judicial review.
The first rule is that there is always a presumption in
favour of the constitutionality of a statute and the burden
is upon him who attacks it to show that there has been a
clear transgression of the constitutional principles. This
rule is based on the assumption, judicially recognised and
accepted, that the legislature understands and correctly
appreciates the needs of its own people, its laws are
directed to problems made manifest by experience and its
discrimination are based on adequate grounds. The
presumption of constitutionality is indeed so strong that in
order to sustain it, the court may take into consideration
matters of common knowledge, matters of common report, the
history of the times and may assume every state of facts
which can be conceived existing at the time of legislation.
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 doctrine
or straight 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 legislature judgement 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. Dond 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
970
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 adaption of
remedy are not always possible and that “judgment is largely
a prophecy based on meagre and uninterpreted experience”.
Every legislation particularly in economic matters is
essentially empiric and it is based on experimentation or
what one may 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.
971
With these prefatory observations, we may now proceed
to examine the constitutional validity of the Act. The
Preamble of the Act which “affords useful light as to what
the statute intends to reach” or in other words “affords a
clue the scope of the statute” makes it clear that the Act
is intended to canalise for productive purposes black money
which has become a serious threat to the national economy.
It is an undisputed fact that there is considerable amount
of black money in circulation which is unaccounted or
concealed and therefore outside the disclosed trading
channels. It is largely the product of black market
transactions and evasion of tax. Indeed, as pointed out by
the Direct Taxes Enquiry Committee headed by Mr. Wanchoo,
retired Chief Justice of India “tax evasion and black money
are closely and inextricably interlinked.” The abundance of
black money has in fact given rise to a parallel economy
operating simultaneously and competing with the official
economy. This parallel economy has over the years grown in
size and dimension and even on a conservative estimate, the
amount of black money circulation runs into some thousand
crores. The menace of black money has now reached such
staggering proportions that it is causing havoc to the
economy of the country and poses a serious challenge to the
fulfilment of our objectives of distributive justice and
setting up of an egalitarian society. There are several
causes responsible for the generation of black money and
they have been analysed in the Report of the Wanchoo
Committee. Some of the principal causes may be summarised as
follows: (1) high rates of taxation under the direct tax
laws: they breed tax evasion and generate black money; (2)
economy of shortages and consequent controls and licences
leading to corruption for issuing licences and permits and
turning blind eye to the violation of controls; (3)
donations of black money encouraged by political parties to
meet election expenses and for augmenting party funds and
also for personal purposes; (4) Corrupt business practices
such as payments of secret commission, bribes, money, pugree
etc. which need keeping on hand money in black; (5)
ineffective administration and enforcement of tax laws by
the authorities and (6) deterioration in moral standards so
that tax evasion is no longer regarded as immoral and
unethical and does not carry any social stigma. These causes
need to be eliminated if we want to eradicate the evil of
black money. But whether any steps are taken or not for
removing these causes with a view to preventing future
generation of black money, the fact remains that today there
is considerable amount of black money, unaccounted and
concealed? in the hands of a few persons
972
and it is causing incalculable damage to the economy of the
country.
The first casualty cf this evil of black money is the
revenue because it loses the tax which should otherwise have
come to the exchequer. The generation of black money through
tax evasion throws a greater burden on the honest tax payer
and leads to economic equality and concentration of wealth
in the hands of the unscrupulous few in the country. In
addition, since black money is in a way ‘cheap’ money
because it has not suffered reduction by way of taxation,
there is a natural tendency among those who possess it to
use it for lavish expenditure and conspicuous consumption.
The existence of black money is to a large extent
responsible for inflationary pressures, shortages, rise in
prices and economically unhealthy speculation in
commodities. It also leads to leakage of foreign exchange,
making our balance of payments rather distorted and unreal
and tends to defeat the economic policies of the Government
by making their implementation ineffective, particularly in
the field of credit and investment. Moreover, since black
money has necessarily to be suppressed in order to escape
detection, it results in immobilisation of investible funds
which would otherwise be available to further the economic
growth of the nation and in turn, foster the welfare of the
common man. It is therefore no exaggeration to say that
black money is a cancerous growth in the country’s economy
which if not checked in time is certain to lead to chaos and
ruination. There can be no doubt that urgent measures are
therefore required to be adopted for preventing further
generation of black money as also for unearthing existing
black money so that it can be canalised for productive
purposes with a view to effective economic and social
planning.
Now this problem of black money corroding the economy
of the country is not a new or recent problem. It has been
there almost since the Second World War and it has been
continuously engaging the attention of the Government. The
Government has adopted various measures in the past with a
view to curbing the generation of black money and bringing
it out in the open so that it may become available for
strengthening the economy. For instance, the Government
introduced several changes in the administrative set up of
the tax department from time to time with a view to
strengthening the administrative machinery for checking tax
evasion. The Government also amended section 37 of the
Indian Income Tax Act 1922 with a view to conferring power
on the tax authorities to carry out searches and seizures
and this power was elaborated and made more
973
effectual when the Income Tax Act 1961 came to be enacted.
Quite apart from these legal and administrative measures
taken for the purpose of curbing evasion of tax, certain
steps were also taken to tackle the black money built up out
of past evasions. In 1946, just at the close of the Second
World War, high denomination notes were demonetised so as to
bring within the net of taxation black money earned during
the War. This was followed by the enactment of the Taxation
of Income Investigation Commission Act 1947. Then came the
Voluntary Disclosure Scheme of 1951, popularly known as
Tyagi Scheme, to facilitate the disclosure of suppressed
income by affording certain immunities from the penal
provisions. This scheme was however not successful because
it helped to unearth only Rs. 70.20 crores of black money.
Thereafter, nearly a decade and a half later, a second
scheme of voluntary disclosure was introduced by section 68
of the Finance Act 1965. This scheme, popularly known as the
sixty-forty scheme, enabled the tax evaders to disclose
suppressed income by paying 60% of the concealed income as
tax and bringing the balance of 40% into their books. This
scheme was a little more successful than the earlier one,
but it could help to net only about Rs. 52.1 l crores of
black money. Closely following on the heels of this scheme
came another scheme under section 24 of the Finance (No. 2)
.Act 1965 popularly known as the ‘Block Scheme’ according to
which tax was payable at rates applicable to the block of
concealed income disclosed and not at a fiat rate as under
the sixty-forty scheme. This scheme received a slightly
better response and the income disclosed under it amounted
to about Rs. 145 crores. Then came the Taxation Laws
(Amendment and Miscellaneous Provisions) Ordinance 1965
followed by an Act in identical terms, which provided for
exemption from tax in certain cases of undisclosed income
invested in National Defence Gold Bonds 1980. We shall have
occasion to consider the broad scheme of this Act a little
later, but for the time being as we may point out that the
scheme as envisaged in this Act was very closely similar to
the scheme under the impugned Act. Subsequent to this Act
followed the Report of the Wanchoo Committee and as a result
of the recommendations made in this Report certain penal
provisions contained in the Income Tax Act 1961 were made
more severe and rigorous. Then came the Voluntary Disclosure
of Income and Wealth Ordinance 1975 which was followed by an
Act in the same terms. This legislation introduced a scheme
of voluntary disclosure of income and wealth and provided
certain immunities and exemptions. The record before us does
not show as to what was the concealed income and wealth
disclosed pursuant to this scheme. But it is an indisputable
fact
974
that the adoption of these stringent legal and
administrative measures as also the introduction of these
different voluntary disclosure schemes did not have any
appreciable effect and despite all these efforts made by the
Government, the problem of black money continues unabated
and has assumed serious dimensions. It may be possible to
say and that was the criticism of Mr. R.K. Garg-that the
enforcement machinery of the tax department is not as
effective as it should be and no serious effort has been
made to eliminate the other causes of generation of black
money, but whatever may be the failures of the political and
administrative machinery and we are not here concerned to
inquire into that question nor are we competent to express
any opinion upon it-the fact remains that there is
considerable amount of black money in the hands of persons
which is causing havoc to the economy of the country and
seriously prejudicing mobilisation of resources for social
and economical reconstruction of the nation.
It was to combat this menacing problem of black money
and to unearth black money lying secreted and outside the
ordinary trade channels that the Act was enacted by
Parliament. It was realised that all efforts to detect black
money and to uncover it had failed and the problem of black
money was an obstinate economic issue which was defying
solution and the impugned legislation providing for issue of
Special Bearer Bonds was therefore enacted with a view to
mopping-up black money and bringing it out in the open, so
that, instead of remaining concealed and idle, such money
may become available for augmenting the resources of the
state and being utilised for productive purposes so as to
promote effective social and economic planning. This was the
object for which the Act was enacted and it is with
reference to this object that we have to determine whether
any impermissible differentiation is made by the Act so as
to involve violation of Article 14.
We may now turn to examine the provisions of the act.
Section 3 sub-section (1) provides certain immunities to a
person who subscribed to or otherwise acquired Special
Bearer Bonds, Clause (a) protects such a person from being
required to disclose, for any purpose whatsoever, the nature
and source of acquisition of the Special Bearer Bonds.
Clause (b) prohibits the commencement of any inquiry or
investigation against a person on the ground of his having
subscribed to or otherwise acquired the Special Bearer
Bonds. And clause (c) provides that the fact of subscription
to or acquisition of Special Bearer Bonds shall not be taken
into account
975
and shall be inadmissible in evidence in any proceedings
relating to any offence or the imposition of any penalty. It
will be seen that the immunities granted under section 3,
sub-section (1) are very limited in scope. They do not
protect the holder of Special Bearer Bonds from any inquiry
or investigation into concealed income which could have been
made if he had not subscribed to or acquired Special Bearer
Bonds. There is no immunity from taxation given to the black
money which may be invested in Special Bearer Bonds. That
money remains subject to tax with all consequential
penalties, if it can be discovered independently of the fact
of subscription to or acquisition of Special Bearer Bonds.
The only protection given by section 3, sub-section 1 is
that the fact of subscription to or acquisition of Special
Bearer Bonds shall be ignored altogether and shall not be
relied upon as evidence showing possession of undisclosed
money. This provision relegates the Revenue to the position
as if Special Bearer Bonds had not been purchased at all. If
without taking into account the fact of subscription to or
acquisition of Special Bearer Bonds and totally ignoring it
as if it were non-existent, any inquiry or investigation
into concealed income could be carried out and such income
detected and unearthed, it would be open to the Revenue to
do so and it would be no answer for the assessee to say that
this money has been invested by him in Special Bearer Bonds
and it is therefore exempt from tax or that he is on that
account not liable to prosecution and penalty for
concealment of such income. This is the main difference
between the impugned Act and the Taxation Laws (Amendment
and Miscellaneous Provisions) Act, 1965. Under the latter
Act, where gold is acquired by a person out of his
undisclosed income, which is the same thing as black money,
and such gold is tendered by him as subscription for the
National Defence Gold Bonds, 1980, the income invested in
such gold is exempted from tax, but where Special Bearer
Bonds are purchased out of undisclosed income under the
impugned Act, the income invested in the Special Bearer
Bonds is not exempt from tax and if independently of the
fact of purchase of the Special Bearer Bonds and ignoring
them altogether, such income can be detected, it would be
subject to tax. The entire machinery of the taxation Laws
for inquiry and investigation into concealed income is thus
left untouched and no protection is granted to a person in
respect of his concealed income merely because he has
invested such income in Special Bearer Bonds. It is
therefore incorrect to say that as soon as any person
purchases Special Bearer Bonds, he is immunised against the
processes of taxation laws. Here there is no amnesty granted
in respect of any
976
part of the concealed income even though it be invested in
Special Bearer Bonds. The whole object of the impugned Act
is to induce those having black money to convert it into
‘white money’ by making it available to the State for
productive purposes, without granting in return any immunity
in respect of such black money, if it could be detected
through the ordinary processes of taxation laws without
taking into account the fact of purchase of Special Bearer
Bonds. Now it is true and this was one of the arguments
advanced on behalf of the petitioner-that if black money
were not invested in Special Bearer Bonds but were Lying in
cash, it could be seized by the tax authorities by carrying
out search and seizure in accordance with the provisions of
the tax laws and this opportunity to detect and unearth
black money would be lost, if such black money were invested
in Special Bearer Bonds, because even if Special Bearer
Bonds were seized, they cannot be relied upon as evidence of
possession of black money. But this argument of the
petitioner that the detection and discovery of black money
would thus thwarted by the conversion of black money into
Special Bearer Bonds is highly theoretical and does not take
into account the practical realities of the situation. If it
had been possible to detect and discover a substantial part
of the black money in circulation by carrying out searches
and seizures, there would have been no need to enact the
impugned Act. It is precisely because, inspite of
considerable efforts made by the tax authorities including
carrying out of searches and seizures, the bulk of black
money remained secreted and could not be unearthed, that the
impugned Act had to be enacted. Moreover, actual seizure of
black money by carrying out searches is not the only method
available to tax administration for detecting and
discovering black money. There are other methods also by
which concealment of income can be detected and these are
commonly employed by the tax authorities in making
assessment of income or wealth. Close and searching scrutiny
of the books of account may reveal that accounts are not
properly maintained, unexplained cash credits may provide
evidence of concealment and so too unaccounted for
investments or lavish expenditure; information derived from
external sources may indicate that income has been concealed
by resorting to stratagems like suppression of sales or
understatement of consideration; and existence of assets in
the names of near relatives may give a lead showing
investment of undisclosed income. All these methods and many
others would still remain available to the tax authorities
for detecting undisclosed income and bringing it to tax
despite investment in Special Bearer Bonds. The taxable
income of the holder of Special Bearer Bonds
977
would not stand reduced by the amount invested in the
purchase of Special Bearer Bonds and it would be open to the
Revenue to assess such taxable income in the same manner in
which it would do in any other case, employing the same
methods and techniques of inquiry and investigation for
determining the true taxable income. The only inhibition on
the Revenue would be that it would not be entitled to call
upon the assessee to disclose for the purpose of assessment,
the nature and source of acquisition of the Special Bearer
Bonds and in making the assessment, the investment in the
Special Bearer Bonds would have to be left wholly out of
account and the Revenue would not be entitled to rely upon
it as evidence of possession of undisclosed money. This is
the only limited immunity granted under section 3 sub-
section (1) and even this limited immunity is cut down by
the provision enacted in subsection (2) of section 3. This
sub-section says that the immunity granted under sub-section
(1) shall not be available in relation to prosecution for
any offence punishable under Chapter IX or Chapter XVII of
the Indian Penal Code or the Prevention of Corruption Act
1947 or any other similar law. If therefore an inquiry or
investigation is sought to be made against a public servant
in respect of an offence under Chapter IX of the Indian
Penal Code or the Prevention of Corruption Act 1947 alleged
to have been committed by him, the acquisition or possession
of Special Bearer Bonds could be a ground for instituting,
such inquiry or investigation and it could also be an
admissible piece of evidence in a prosecution in respect of
such offence. The same would be the position in relation to
an inquiry, investigation or prosecution in respect of an
offence under Chapter XVlI of the Indian Penal Code. The
acquisition or possession of Special Bearer Bonds would not
therefore afford any protection to a public servant against
a charge of corruption or to a person committing any offence
against property. Equally this immunity would not be
available where what is sought to be enforced is a civil
liability other than liability by way of tax. It will thus
be seen that the immunity granted in respect of subscription
to or acquisition of Special Bearer Bonds is a severely
restricted immunity and this is the bare minimum immunity
necessary in order to induce holders of black money to bring
it out in the open and invest it in Special Bearer Bonds.
It is also necessary to note the further restrictions
provided in section 4 which are calculated to pre-empt any
possible abuse of the immunity granted in respect of
subscription to or acquisition of Special Bearer Bonds, This
section in its opening part affirms in
978
unmistakable terms that subscription to or acquisition of
Special Bearer Bonds shall not be taken into account in any
proceeding under the Income-tax Act 1961 or the Wealth-tax
Act 1957 or the Gift-tax Act 1958. If any investment in
Special Bearer Bonds has been made by the assessee, it is to
be ignored in making assessment on him under any of the
above-mentioned three tax laws, the assessment is to be made
as if no Special Bearer Bonds had been purchased at all The
process of computation of taxable income and assessment of
tax on it remains unaffected and is not in any way deflected
or thwarted by the investment in Special Bearer Bonds. The
position remains the same as it would have been if there
were no investment in Special Bearer Bonds. We have already
discussed the full implications of this proposition in the
preceding paragraph while dealing with section 3 and it is
not necessary to say anything more about it. Then,
proceeding further, after enacting this provision in the
opening part, section 4 branches off into three different
clauses, Clause (a) provides that no person who has
subscribed to or otherwise acquired Special Bearer Bonds
shall be entitled to claim any set off or relief in any
proceeding under the Income-tax Act 1961 or to reopen any
assessment or reassessment made under that Act on the ground
that he has subscribed to or otherwise acquired such Bonds.
The holder of Special Bearer Bonds is thus precluded from
claiming any advantage by way of set-off or relief or
reopening of assessment on the ground of having invested
undisclosed money in purchase of Special Bearer Bonds.
Clause (b) enacts another prohibition with a view to
preventing abuse of the immunity granted in respect of
Special Bearer Bonds and says that no person who has
subscribed to or otherwise acquired Special Bearer Bonds
shall be entitled to claim, in relation to any period before
the date of maturity of such Bonds, that any asset which is
includible in his net wealth for any assessment year under
the Wealth-tax Act has been converted into such Bonds. The
object of this provision is to preclude an assessee who is
sought to be taxed on his net wealth under the wealth-tax
Act from escaping assessment to tax on any asset forming
part of his net wealth by claiming that he has invested it
in purchase of Special Bearer Bonds. The investment in
Special Bearer Bonds would not grant immunity from
assessment to wealth lax to any asset which is found by the
taxing authorities, otherwise than by relying on the fact of
acquisition of Special Bearer Bonds, to belong to the
assessee and hence forming part of his net wealth . The
asset would be subjected to wealth tax despite the
investment in Special Bearer Bonds. Then follows clause (c)
979
which is extremely important and which effectively counters
the possibility of serious abuse to which the issue of
Special Bearer Bonds might otherwise have lent itself. It
provides that no person who has subscribed to or otherwise
acquired Special Bearer Bonds shall be entitled to claim, in
relation to any period before the date of maturity of such
Bonds, that any asset held by him or any sum credited in his
books of account or otherwise held by him represents the
consideration received by him for the transfer of such
Bonds. This provision precludes a person from explaining
away the existence of any asset held by him or any sum
credited in his books of account or otherwise held by him by
claiming that it represents the sale proceeds of Special
Bearer Bonds held by him. If at any time before the date of
maturity of the Special Bearer Bonds held by an assessee, it
is found that any asset is held by him or any sum is
credited in his books of accounts or is otherwise held by
him and he is required to explain the nature and source of
acquisition of such asset or sums of money, he cannot be
heard to say by way of explanation that such asset or sum of
money represents the consideration received by him for
transfer of the Special Bearer Bonds, even if that be
factually correct. This explanation, though true being
statutorily excluded, it would be impossible for the
assessee to offer any other explanation for the acquisition
of such asset or sum of money, because any such explanation
which might be given by him would be untrue and in the
absence of any satisfactory explanation in regard to the
nature and source of acquisition of such asset or sum of
money, the Revenue would be entitled to infer that such
asset has been acquired out of undisclosed income or that
such sum of money represents concealed income and hence the
value of such asset or such sum of money, as the case may
be, should be treated as undisclosed income liable to be
included in the taxable income of the assessee. Vide
sections 69, 69A and 69B of the Income-tax Act, 1961. It is
obvious that this provision is calculated to act as a strong
deterrent against negotiability of Special Bearer Bonds for
disclosed or ‘white’ money. No holder of Special Bearer
Bonds would dare to transfer his Bonds to another person
against receipt of disclosed or ‘white’ money, because he
will not be able to account for the consideration received
by him, the true explanation being statutorily unavailable
to him, and such consideration would inevitably be liable to
be regarded as his concealed income and would be subjected
to tax and penalties. Moreover, it is difficult to see why
anyone should want to invest disclosed or ‘white’ money in
the acquisition of Special Bearer Bonds. Ordinarily a person
would
980
go in for Special Bearer Bonds only for the purpose of
converting his undisclosed money into ‘white’ money and it
would be quite unusual bordering almost on freakishness for
anyone to acquire Special Bearer Bonds with disclosed or
‘white money’ when he can get only 2% simple interest on the
investment in Special Bearer Bonds, while outside he can
easily get anything between 15% to 40% yield by openly
dealing with his disclosed or ‘white’ money. The
transferability of Special Bearer Bonds against disclosed or
‘white’ money is thus, from a practical point of view,
completely excluded. The question may still arise whether
Special Bearer Bonds would not pass from hand to hand
against undisclosed or black money. Would they not be freely
negotiable against payment of undisclosed or black money ?
Now it may be conceded that a purchaser of Special Bearer
Bonds would undoubtedly be interested in acquiring such
Bonds by making payment of ‘black’ money, because he would
thereby convert his undisclosed or ‘black money’ into
‘white’ money. But it is difficult to understand why a
holder of Special Bearer Bonds should ever be interested in
selling such Bonds against receipt of ‘black money’.
Obviously he would have acquired such Bonds for the purpose
of converting his ‘black money’ into ‘white’ in order to
avoid the risk of being found in possession of ‘black money’
and if that be so, it is inexplicable as to why he should
again want to convert his ‘white money’ into ‘black’ by
selling such Bonds against receipt of ‘black money’. The
immunity granted under the provisions of the Act, limited as
it is extends only to the person who is for the time being
the holder of Special Bearer Bonds and the person who has
transferred the Special Bearer Bonds for black money has no
immunity at all and all the provisions of tax laws are
available against him for determining his true income or
wealth and therefore no one who has purchased Special Bearer
Bonds with a view to earning security against discovery of
unaccounted money in his hands would ordinarily barter away
that security by again receiving black money for the Special
Bearer Bonds. Furthermore, even if special bearer bonds are
transferred against receipt of black money, it will not have
the effect of legalising more black money into white,
because the black money of the seller which had become white
on his subscribing to or acquiring special bearer bonds
would again be converted into black money and the black
money paid by the purchaser by way of consideration would
become white by reason of being converted into Special
Bearer Bonds. The petitioners however expressed an
apprehension that special bearer bonds would fetch a much
higher value in the black market than that originally
subscribed and this would
981
enable a larger amount of black money to be legalised into
white than what was originally invested in subscription to
special bearer bonds. We do not think this apprehension is
well founded. It is true that once the date for original
subscription to special bearer bonds has expired, the only
way in which special bearer bonds could thereafter be
acquired would be by going in the open market and the number
of special bearer bonds in the market being necessarily
limited, they may fetch a higher value in black money from a
person who is anxious to convert his black money into white.
If the demand outreaches the limited supply, the price of
special bearer bonds in the black market may exceed the
amount originally invested in subscription to special bearer
bonds. But even so, the black money paid by the purchaser
for acquisition of special bearer bonds would not in its
entirety be converted into white, it would change its colour
from black to white only to the extent of the amount
originally subscribed for the special bearer bonds or at the
most, if we also take into account interest on such amount,
to the extent of the face value of the special bearer bonds,
because whatever be the amount he might have paid in black
money for acquisition of the special bearer bonds, the
holder of the special bearer bonds will get only the amount
representing the face value on maturity of the special
bearer bonds. It will thus be seen that howsoever special
bearer bonds may be transferred and for whatever
consideration, only a limited amount of black money, namely,
the amount originally subscribed for the special bearer
bonds or at the most the amount representing the face value
of the special bearer bonds would be legalised into white
money and the supposedly free negotiability of special
bearer bonds would not have the effect of legalising more
black money into white or encouraging further generation of
black money.
There was also one other abuse, said the petitioners,
to which special bearer bonds might lend themselves and it
was that if Special Bearer Bonds are sold and the sale
proceeds are utilised in meeting expenditure, the assessee
would not be precluded by section 4 clause (c) from
explaining the source of the expenditure to be the sale
consideration of the special bearer bonds and hence by
resorting to this strategy, white money can be accumulated
as capital while expenditure is met out of black money
received by way of consideration for sale of special bearer
bonds. We do not think there is any scope for such abuse;
the apprehension expressed by the petitioners is more
imaginary than real. It may be noted that in order to
sustain his explanation, the assessee would have to prove to
982
the satisfaction of the tax department that he had special
bearer bonds and that he sold them for a certain amount. Now
if he has received black money by way of consideration, it
is difficult to see how he would ever be able to establish
that he sold special bearer bonds for that particular amount
of black money. Would he be so fool-hardy as to admit that
he received the consideration in black money and even if he
does, would he ever be able to prove it? Who would believe
him even if he makes such an admission ? And when he has
bought special bearer bonds for the purpose of converting
his black money into white, why should he again reconvert it
into black by selling special bearer bonds for black money ?
The entire postulate of the argument of the petitioners is
theoretical and has no basis in reality. No assessee would
ever admit that he incurred expenditure out of black money
received as consideration for sale of special bearer bonds
because it would be impossible for him to establish receipt
of black money from the purchase and if he is unable to do
so, the amount of the expenditure would, by reason of
section 69C of the Income-tax Act, 1961, be deemed to be his
concealed income liable to tax. Even if we assume that in
some rare and exceptional case the assessee may be able to
establish that he sold special bearer bonds against receipt
of black money, the purchaser would straightaway run into
difficulties because the evidence furnished by the assessee
would, in such a case, clearly establish that the purchaser
had black money and he paid it to the assessee by way of
consideration and he would in that event be rendered liable
to tax and penalty in respect of such black money. This
would show the utter improbability bordering almost on
impossibility, of special bearer bonds being subjected to
any such abuse as is apprehended by the petitioners.
It was then urged on behalf of the petitioners that
section clause (c) operates only in relation to a period
before the date of maturity of special bearer bonds and
after the date of maturity, the holder of special bearer
bonds can sell such bonds, and, without running any risk,
disclose the consideration received by him as his white
money, because section 4 clause (c) being out of the way, he
can account for the possession of such money by showing that
he has received it as consideration for sale of special
bearer bonds and so far as the purchaser is concerned, if he
has paid the consideration out of his black money, he can
claim the immunity granted under section 3 sub-section (1)
and his black money would be converted into white. Thus the
black money Of the seller which had been converted into
white on his subscribing
983
to or otherwise acquiring special bearer bonds would remain
white and in addition, the black money of the purchaser
would also be converted into white by reason of his purchase
of special bearer bonds. This argument plausible though it
may seem. is in our opinion, fallacious and cannot be
sustained. It is a highly debatable issue whether, under the
provisions of the Act, special bearer bonds are at all
intended to be transferable after the date of maturity, for
the postulate of the legislation clearly seems to be that on
the date of maturity, special bearer bonds will be encashed.
It is indeed difficult to believe that anyone holding
special bearer bonds would keep them uncashed without
earning any interest from and after the date of maturity,
when they can be immediately encashed and the amount
received can be invested yielding interest ranging between
18 per cent to 40 per cent. Moreover, special bearer bonds
would cease to be exempt from wealth tax from and after the
date of maturity and they would therefore be includible in
the net wealth of the holder for the purpose of wealth tax
and if that be so, how would it benefit the holder to keep
them as part of his net wealth and pay wealth tax upon it
without earning any interest ? It is therefore extremely
unlikely that Special Bearer Bonds would remain uncashed
after the date of maturity and it would be equally
improbable that anyone should want to purchase Special
Bearer Bonds after the date of maturity when they do not
yield any interest but are still includible in the net
wealth for the purpose of liability to wealth tax. But let
us assume for the purpose of argument that in a given case
special bearer bonds are not encashed on the date of
maturity and they are lawfully transferred after the date of
maturity for a consideration paid by the purchaser. There
are two alternatives: the consideration may be paid by the
purchaser in white money or in black money. If the purchaser
pays the consideration in white money, no question of
conversion of further black money into white arises. rt
would be a straight open transaction to which no exception
can be taken. But let us consider what consequences would
ensue if he pays in black money. The seller would obviously
be interested in showing the consideration as his white
money and there may be no difficulty so far as he ii
concerned, because he would be able to explain the
possession of such money by claiming that he has received it
by way of consideration for sale of special bearer bonds.
Section 4 clause (c) will not stand in the way of his
offering that explanation. But so far as the purchaser is
concerned, he will run into serious difficulties. Even if
the immunity under section 3 sub-section (l) were available
to him after the date of maturity, he will still be in
trouble, because the disclosure made by
984
the seller would be the clearest evidence showing that the
purchaser had black money which he paid by way of
consideration to the seller, and this evidence, being
independent of the fact of acquisition of special bearer
bonds by the purchaser, would be admissible and the
purchaser would be liable to tax and penalty on the amount
of black money paid by him as consideration. We fail to see
how transfer of special bearer bonds after the date of
maturity, even if legally permissible, can be utilised for
the purpose of legalising black money into white. But we may
point out that if at any time after the date of maturity or
even before, it is found that there is some loophole in the
provisions of the Act or that special bearer bonds are
utilised for any dishonest or nefarious purpose or are being
perverted to any improper use, the legislature can always
step in and amend the Act or pass other appropriate
legislation with a view to preventing such abuse. It must be
remembered that every legislation is an experiment in
achieving certain desired ends and trial and error method is
inherent in every such experiment. Therefore, when
experience shows that the legislation as framed has proved
inadequate to achieve its purpose of mitigating an evil or
there are cracks and loopholes in it which are being taken
advantage of by the resourcefulness and ingenuity of those
minded to benefit themselves at the cost of the State or the
others, the legislature can and most certainly would
intervene and change the law. But the law cannot be
condemned as invalid on the ground that after a period of
ten years it may lend itself to some possible abuse.
We may now proceed to consider the constitutional
validity of the Act in the light of the above discussion as
regards the scope and effect of its various provisions. It
is obvious that the Act makes a classification between
holders of black money and the rest and provides for issue
of special bearer bonds with a view to inducing persons
belonging to the former class to invest their unaccounted
money in purchase of special bearer bonds, so that such
money which is today Lying idle outside the regular economy
of the country is canalised into productive purposes. The
object of the Act being to unearth black money for being
utilised for productive purposes with a view to effective
social and economic planning, there has necessarily to be a
classification between persons possessing black money and
others and such classification cannot be regarded as
arbitrary or irrational. It is of course true-and this must
be pointed out here since it was faintly touched upon in the
course of the arguments-that there is no legal bar enacted
in the Act against
985
investment of white money in subscription to or acquisition
of special bearer bonds. But the provisions of the Act
properly construed are such that no one would even think of
investing white money in special bearer bonds and from a
practical point of view, they do operate as a bar against
acquisition, whether by original subscription or by
purchase, of special bearer bonds with white money. We do
not see why anyone should want to invest his white money in
subscribing to or acquiring special bearer bonds which yield
only 2 per cent simple interest per annum and which are not
encashable for a period of not less than ten years. It is
true that special bearer bonds can be sold before the date
of maturity but who would pay white money for them and even
if in some rare and exceptional case, a purchaser could be
found who would pay the consideration in white money, no one
will dare to sell special bearer bonds for white money,
because of the disincentive provided in section 4 cl. (c).
The investment of white money in special bearer bonds is
accordingly, as a practical measure, completely ruled out
and the provisions of the Act are intended to operate only
qua persons in possession of black money. There is a
practical and real classification made between persons
having black money and persons not having such money and
this de facto classification is clearly based on
intelligible differentia having rational relation with the
object of the Act. The petitioners disputed the validity of
this proposition and contended that the classification made
by the Act is discriminatory in that it excludes persons
with white money from taking advantage of the provisions of
the Act by subscribing to or acquiring special bearer bonds.
But this contention is totally unfounded and we cannot
accept the same. The validity of a classification has to be
judged with reference to the object of the legislation and
if that is done, there can be no doubt that the
classification made by the Act is rational and intelligible
and the operation of the provisions of the Act is rightly
confined to persons in possession of black money.
It was then contended that the Act is unconstitutional
as it offends against morality by according to dishonest
assesses who have evaded payment of tax, immunities and
exemptions which are denied to honest tax payers. Those who
have broken the law and deprived the State of its legitimate
dues are given benefits and concessions placing them at an
advantage over those who have observed the law and paid the
taxes due from them and this, according to the petitioners
is clearly immoral and unwarranted by the Constitution. We
do not think this contention can be sustained. It is
necessary
986
to remember that we are concerned here only with the
constitutional validity of the Act and not with its
morality. Of course, when we say this we do not wish to
suggest that morality can in no case have relevance to the
constitutional validity of a legislation. There may be cases
where the provisions of a statute may be so reeking with
immorality that the legislation can be readily condemned as
arbitrary or irrational and hence violative of Article 14.
But the test in every such case would be not whether the
provisions of the statute offend against morality but
whether they are arbitrary and irrational having regard to
all the facts and circumstances of the case. Immorality by
itself is not a ground of constitutional challenge and it
obviously cannot be, because morality is essentially a
subjective value, except in so far as it may be reflected in
any provision of the Constitution or may have crystalised
into some well-accepted norm of special behaviour. Now there
can be no doubt that under the provisions of the Act certain
immunities and exemptions are granted with a view to
inducing tax evaders to invest their undisclosed money in
special bearer bonds and to that extent they are given
benefits and concessions which are denied to those who
honestly pay their taxes. Those who are honest and who
observe the law are mulcted in paying the taxes legitimately
due from them while those who have broken the law and evaded
payment of taxes are allowed by the provisions of the Act to
convert their black money into ‘white’ without payment of
any tax or penalty. The provisions of the Act may thus seem
to be putting premium on dishonesty and they may, not,
without some justification, be accused of being tinged with
some immorality, but howsoever regrettable or unfortunate it
may be, they had to be enacted by the legislature in order
to bring out black money in the open and canalise it for
productive purposes. Notwithstanding stringent laws imposing
severe penalties and vigorous steps taken by the tax
administration to detect black money and despite various
voluntary disclosure schemes introduced by the government
from time to time, it had not been possible to unearth black
money and the menace of black money had over the years
assumed alarming proportions causing havoc to the economy of
the country and the legislature was therefore constrained to
enact the Act with a view to mopping up black money so that
instead of remaining idle, such money could be utilised for
productive purposes The problem of black money was an
obstinate economic problem which had been defying the
Government for quite some time and it was in order to
resolve this problem that, other efforts having failed. the
legislature decided to enact the Act, even though the
987
effect of its provisions might be to confer certain
undeserved advantages on tax evaders in possession of black
money. The legislature had obviously only two alternatives;
either to allow the black money to remain idle and
unproductive or to induce those in possession of it to bring
it out in the open for being utilised for productive
purposes. The first alternative would have left no choice to
the government but to resort to deficit financing or to
impose a heavy dose of taxation. The former would have
resulted in inflationary pressures affecting the vulnerable
sections of the society while the latter would have
increased the burden on the honest tax payer and perhaps led
to greater tax evasion. The legislature therefore decided to
adopt the second alternative of coaxing persons in
possession of black money to disclose it and make it
available to the government for augment in, its resources
for productive purposes and with that end in view, enacted
the Act providing for issue of special bearer bonds. It may
be pointed out that the idea of issuing special bearer bonds
for the purpose of unearthing black money was not a brain
wave which originated for the first time in the mind of the
legislature in the year 1981. The suggestion for issue of
special bearer bonds was made as far back as 1950 by some of
the members of the provisional Parliament, notably those
belonging to the opposition and the government was
repeatedly asked why it was not issuing special bearer bonds
in order to absorb the liquidity and thereby control the
inflationary pressures in the country. Though the majority
of the members of the Wanchoo Committee expressed themselves
against the issue of special bearer bonds, Shri Chitale a
member of that Committee wrote a dissenting note in which he
suggested that special bearer bonds should be issued. We may
point out that the majority members of the Wanchoo Committee
were against issue of special bearer bonds for the purpose
of mopping up black money, because they apprehended certain
abuses to which special bearer bonds might be subjected, but
as we have already pointed out while discussing the true
meaning and legal effect of the provisions of the Act, we do
not think that there is any scope for such abuses, for the
legislature has, while enacting the provisions of the Act,
taken care to see that such abuses are reduced to the
minimum, if not eliminated altogether.
It is true that certain immunities and exemptions are
granted to persons investing their unaccounted money in
purchase of special bearer bonds but that is an inducement
which has to be offered for unearthing black money. Those
who have successfully evaded taxation and concealed their
income or wealth despite the stringent tax
988
laws and the efforts of the tax department are likely to
disclose their unaccounted money without some inducement by
way of immunities and exceptions and it must necessarily be
left to the legislature to decide what immunities and
exemptions would be sufficient for the purpose. It would be
outside the province of the court to consider if any
particular immunity or exemption is necessary or not for the
purpose of inducing disclosure of black money. That would
depend upon diverse fiscal and economic considerations based
on practical necessity and administrative expediency and
would also involve a certain amount of experimentation on
which the Court would be least fitted to pronounce. The
court would not have the necessary competence and expertise
to adjudicate upon such an economic issue. The court cannot
possibly assess or evaluate what would be the impact of a
particular immunity or exemption and whether it would serve
the purpose in view or not. There are so many imponderables
that would enter into the determination that it would be
wise for the court not to hazard an opinion where even
economists may differ. The court must while examining the
constitutional validity of a legislation of this kind, “be
resilient, not rigid, forward looking, not static, liberal,
not verbal” and the court must always bear in mind the
constitutional proposition enunciated by the Supreme Court
of the United States in Munn v. Illinois(l) namely, “that
courts do not substitute their social and economic beliefs
for the judgment of legislative bodies”. The court must
defer to legislative judgment in matters relating to social
and economic policies and must not interfere, unless the
exercise of legislative judgment appears to be palpably
arbitrary. The court should constantly remind itself of what
the Supreme Court of the United States said in Metropolis
Theater Co. v. City of Chicago,(2)”The problems of
government are practical ones and may justify, if they do
not require, rough accommodations, illogical it may be, and
unscientific. But even such criticism should not be hastily
expressed. What is best is not always discernible, the
wisdom of any choice may be disputed or condemned. Mere
errors of government are not subject to our judicial
review.” It is true that one or the other of the immunities
or exemptions granted under the provisions of the Act may be
taken advantage of by resourceful persons by adopting
ingenious methods and devices with a view to avoiding or
saving tax. But that cannot be helped because
989
human ingenuity is so great when it comes to tax avoidance
that it would be almost impossible to frame tax legislation
which cannot be abused. Moreover, as already pointed out
above, the trial and error method is inherent in every
legislative effort to deal with an obstinate social or
economic issue and if it is found that any immunity or
exemption granted under the Act is being utilised for tax
evasion or avoidance not intended by the legislature, the
Act can always be amended and the abuse terminated. We are
accordingly of the view that none of the provisions of the
Act is violative of Article 14 and its constitutional
validity must be upheld.
These were the reasons for which we passed our order
dated 2nd September, 1981 rejecting the challenge against
the constitutional validity of the ordinance and the Act and
dismissing the writ petitions. Since these writ petitions
are in the nature of public interest litigation, we directed
that there should be no order as to costs.
GUPTA, J. I was unable to share the view taken by the
majority in disposing of these writ petitions on September
2, 1981 that “neither the Special Bearer Bonds (Immunities
and Exemptions) ordinance, 1981 nor the Special Bearer Bonds
(Immunities and Exemptions) Act, 1981 is violative of Art.
14 of the Constitution”, and I made the following order on
the same day:-
“I have come to the conclusion that the Special
Bearer Bonds (Immunities and Exemptions) ordinance,
1981 and the Special Bearer Bonds (Immunities and
Exemptions) Act, 1981 violate Art. 14 of the
Constitution and are there- fore invalid. I would allow
the writ petitions with costs.
I shall give my reasons later.”
Here briefly are my reasons.
These five writ petitions question the constitutional
validity of the Special Bearer Bonds (Immunities and
Exemptions) ordinance, 1981 and Special Bearer Bonds
(Immunities and Exemptions) Act, 1981. The ordinance which
was promulgated by the President on January 1 2, 1981 was
repealed and replaced by the Act. The Act received the
President’s assent on March 27. 1981. Section I
990
(3) of the Act says that it shall be deemed to have come
into force on January 12, 1981. The Provisions of the
ordinance and the Act are similar except that section 4 (c)
of the Act is worded slightly differently from the
corresponding provision of the ordinance but the difference
is not material and I shall hereinafter refer to the
provisions of the Act only.
As the long title of the Act shows, it is “An Act to
provide for certain immunities to holders of Special Bearer
Bonds, 1991 and for certain exemptions from the direct taxes
in relation to such Bonds and for matters connected
therewith.” The purpose for which the Act was passed as
appearing from the preamble is:-
“Whereas for effective economic and social
planning it is necessary to canalise for productive
purposes black money which has become a serious threat
to the national economy:
And whereas with a view to such canalisation the
Central Government has decided to issue at par certain
bearer bonds to be known as the Special Bearer Bonds,
1991 of the face value of ten thousand rupees and
redemption value, after ten years, of twelve thousand
rupees;
And whereas it is expedient to provide for certain
immunities and exemptions to render it possible for per
sons in possession of black money to invest the same in
the said Bonds ;”
The preamble thus takes note of the fact that black
money has become a serious threat to national economy and
says that to make economic and social planning effective it
is necessary to canalise this black money for productive
purposes. The Act does not attempt to define black money.
The Direct Taxes Enquiry Committee set up by the Government
of India in 1970 with Shri K.N. Wanchoo, retired Chief
Justice of the Supreme Court of India, as Chairman explains
what the term black money means in its final report
submitted in December, 1971:
“It [black money] is, as its name suggests,
‘tainted’ money-money which is not clean or which has a
stigma attached to it.. Black is a colour which is
generally associated with evil. While it symbolises
something which
991
violates moral, social or legal norms, it also suggests
a veil of secrecy shrouding it. The term ‘black money’
consequently has both these implications. It not only
stands for money earned by violating legal provisions-
even social conscience-but also suggests that such
money is kept secret and not accounted for.
Today the term ‘black money’ is generally used to
denote unaccounted money or concealed income and/or
undisclosed wealth, as well as money involved in
transactions wholly or partly suppressed.”
The Act contains nine sections. The sections that are
relevant for the present purpose are set out below.
Immuni- 3. (1) Notwithstanding anything contained
ties other law for the time being in
force,-
(a) no person who has subscribed to or
has otherwise acquired special
Bearer Bonds shall be required to
disclose, for any purpose
whatsoever, the nature and source
of acquisition of such Bonds;
(b) no inquiry or investigation shall
be commenced against any person
under any such law on the ground
that such person has subscribed to
or has other wise acquired Special
Bearer Bonds; and
(c) the fact that a person has
subscribed to or has otherwise
acquired Special Bearer Bonds shall
not be taken into account and shall
be inadmissible as evidence in any
proceedings relating to any offence
or the imposition of any penalty
under any such law.
(2) x x x x
992
Acquisition.4. Without prejudice to the generality of
etc., of the provisions of section 3, the
Bonds not to subscription to, or acquisition of,
be taken into Special Bearer Bonds by any person
account for shall not be taken into account for the
certain proc- purpose of any proceeding under the
eedings. Income-tax Act, 1961 (hereinafter
referred to as the Income-tax Act), the
Wealth-tax Act, 1957 (hereinafter
referred to as the Wealth-tax Act) or
the Gift tax Act, 1958 (hereinafter
referred to as the Gift-tax Act) and, in
particular, no person who has subscribed
to, or has otherwise acquired, the said
Bonds shall be entitled-
(a) to claim any set-off or relief in
any assessment, re-assessment,
appeal, reference or other
proceeding under the Income-tax Act
or to reopen any, assessment or re-
assessment made under that Act on
the ground that he has subscribed
to or has otherwise acquired the
said Bonds:
(b) to claim, in relation to any period
before the date of maturity of the
said Bonds, that any asset which is
includible in his net wealth for
any assessment year under the
Wealth-tax Act has been converted
into the said Bonds; or
(c) to claim, in relation to any period
before the date or maturity of the
said Bonds, that any asset held by
him or any sum credited in his
books of account or otherwise held
by him represents the consideration
received by him for the transfer of
the said Bonds.
Amendment 5. In the Income-tax Act,- (a) in section
of Act 43 2, in clause (14), after sub clause Act
of 1961 (iv), the following sub-clause shall be
inserted, namely:- “(v) Special Bearer
Bonds, 1991 issued by the Central
Government,”
993
(b) in section 10, in clause (15), after
sub-cluase (ia), the following sub-
clause shall be inserted, namely:-
(ib) premium on the redemption of
Special Bearer Bonds, 1991 :” .
Amendment 6. In section of 5 of the Wealth-tax Act,
of Act 27 in sub-section (1), after clause (xvia),
of 1957. the following clause shall be inserted,
namely :-
(xvib) Special Bearer Bonds, 1991 ;” .
Amendment 7. In section 5 of the Gift-tax Act, in
of Act 18 sub-section (1), after clause (iiia),
of 1958 the following clause shall be inserted,
namely:-
(iiib) “of property in the form of Special
Bearer Bonds, 1991.”.”
The marginal notes against sections 5, 6, and 7
indicate that these sections are amendments respectively of
the Income-tax Act of 1961, Wealth-tax Act of 1957 and Gift-
tax Act of 1958. Section 5 excludes Special Bearer Bonds,
1991 from the capital asset of an assessee and exempts the
premium payable on the redemption of the Bonds from income-
tax. Section 6 exempts the Bonds from wealth-tax. Section 7
exempts from gift-tax property in the form of these Bonds.
The Act has been challenged mainly on the ground that
it infringes Art. 14 of the Constitution. Art. 14 forbids
class legislation but permits classification. Permissible
classification, it is well established, must satisfy two
conditions which Das J. enunciated in the State of West
Bengal v. Anwar Ali Sarkar(l) as follows:-
“(1) that the classification must be founded on an
intelligible differentia which distinguishes those
that are grouped together from others and,
994
(2) that the differentia must have rational relation.
to the object sought to be achieved by the Act.”
The immunities provided by the impugned Act are clearly for
the benefit of those who have acquired the Bonds with black
money. Clauses (a), (b) and (c) of Section 3 (1) provide for
these immunities “notwithstanding anything contained in any
other law for the time being in force.” Clause (a) states
that no holder of Special Bearer Bonds shall be required to
disclose for any purpose the nature and source of
acquisition of the Bonds. Clause (b) forbids commencement of
any enquiry or investigation under any law against a person
on the ground that he has subscribed to or otherwise
acquired the Bonds. Under clause (c) the fact that a person
has subscribed to or otherwise acquired Special Bearer Bonds
shall be inadmissible in evidence and cannot be taken into
account in any proceeding relating to any offence or the
imposition of any penalty under any law. None of these
immunities is required by a person who has paid ‘white’
money, that is, money that has been accounted for, to
acquire Bonds. To a person who has disclosed the source of
acquisition of the Bonds, these immunities are of no use.
Section 4 makes it clear that the immunities conferred by
the Act are of use only to those who have acquired the Bonds
with unaccounted money. Section 4 states that the fact that
one has subscribed to or otherwise acquired the Bonds shall
not be taken into account in any proceeding under the
Income-tax Act, 1961, the Wealth-tax Act, 1957 and the Gift-
tax Act, 1958 and goes on to provide specifically that no
one shall be entitled to:
(a) any manner of relief under the Income-tax Act on
the ground that he has acquired the Bonds; or
(b) claim that any asset belonging to him which formed
part of his net wealth in any period before the
maturity of the Bonds, has been converted into
such Bonds; or
(c) claim that any asset held by him or any sum of
money credited in his books of account or
otherwise held by him in the aforesaid period is
the consideration received by him for the transfer
of the Bonds.
Mr. Salve appearing for the petitioners in writ petitions
Nos. 863 and 994 of 1981 contended that section 4(c) did not
constitute an
995
absolute bar to the assessee seeking to prove that the said
sum or asset represents the sale price of Special Bearer
Bonds; on behalf of the Union of India it was asserted that
this was an absolute bar. In view of the conclusion I have
reached, I do not propose to decide the point and I shall
proceed on the basis that it is an absolute bar. It is
apparent from clauses (a) to (c) of section 4 that the
rights they deny affect only those who have disclosed their
source of acquisition of the Bonds. Those in whose case the
source of acquisition has not been detected are not affected
by the prohibition contained in section 4. The impugned Act
denies to those who have acquired the Bonds not with black
money any relief under the Income-tax Act or the Wealth-tax
Act or any benefit in any other way claimed by on the ground
that they are holders of Special Bearer Bonds, and the
relief and the benefit denied to them have been made
available to those who have acquired the Bonds with black
money by ignoring the source of acquisition in their case.
The Act thus distinguishes between two classes of
holders of Special Bearer Bonds: tax-evaders and honest tax-
payers. Has this classification a rational relation to the
object of the Act ? The object, as already noticed, is to
canalise black money for productive purposes to make
economic and social planning effective. If the exemptions
and immunities conferred by the Act are sufficiently
attractive to induce tax-evaders to acquire Special Bearer
Bonds, they will remain as attractive even if all these
benefits were granted to those who will pay ‘white’ money
for the Bonds. Denial of these benefits to those who have
acquired the Bonds with money which has been accounted for
does not in any way further the object of canalisation of
black money for productive purposes. The discrimination in
favour of black money therefore seems to be obvious. It was
however argued that no one would be inclined to invest
‘white’ money for Special Bearer Bonds which carry only 2
per cent annual interest. I do not think this is a
consideration which could justify the discrimination. Apart
from that, a return of 2 per cent simple interest per annum
is not a correct measure of the actual advantages conferred
by the Act. Taking into account the income-tax and the
wealth-tax savings if one did not have to pay any tax on the
amount with which Special Bearer Bonds were acquired-
purchasers of the Bonds with black money did not-and the tax
free premium on the Bonds, the actual return would be many
times more than 2 per cent simple interest per annum. It
must therefore be held that
996
the basis on which the holders of Special Bearer Bonds have
been classified to give certain advantages to one class and
deny them to the other, has no rational nexus with the
object of the Act.
The matter has another aspect. The classification of
holders of Special Bearer Bonds into tax-payers and tax-
evaders does disclose a basis. Would it be an acceptable
argument to say that this basis has a relation to the object
of the Act because the black money invested in Special
Bearer Bonds by tax-evaders could be utilised for productive
purposes for ten years and that both the conditions of a
valid classification were thus satisfied ? I am afraid not.
In State of West Bengal v. Anwar Ali Sarkar, (supra) Das J.
points out:
“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. In short while the Article [Art.
14] forbids class legislation in sense of making
improper discrimination by conferring privileges or
imposing liabilities upon persons arbitrarily selected
out of a large number of other persons similarly
situated in relation to the privileges sought to be
conferred or the liability proposed to be imposed, it
does not forbid classification for the purpose of
legislation.. ”
In Anwar Ali Sarkar’s case the constitutional validity of
the West Bengal Special Courts Act (X of 1950) constituting
special courts and empowering the state government to refer
‘cases’ ‘offences’ or ‘classes of cases’ or ‘classes of
offences’ to such courts was in question. The object of the
West Bengal Act was to provide for the speedier trial of
certain offences. Das J. Observes further:
“To achieve this object, offences or cases have to
be classified upon the basis of some differentia which
will distinguish those offences or cases from others
and which will have a reasonable relation to the
recited object of the Act. The differentia and the
object being, as I have said, different elements, it
follows that the object by itself cannot be the basis
of the classification of offences or the cases, for in
the absence of any special circumstances which may
distinguish one offence or one class of offences or one
class
997
of cases from another offence, or class of offences or
class of cases, speedier trial is desirable in the
disposal of all offences or classes of offences or
classes of cases.”
If the differentia, that is, the basis of
classification, and the object of the Act are distinct
things, it follows that it is not enough that the
differentia should have a nexus with the object, but it
should also be intelligible. The presence of some
characteristics in one class which are not found in another
is the difference between the two classes, but a further
requirement is that this differentia must be intelligible.
If the basis of classification is on the face of it
arbitrary in the sense that it is palpably unreasonable, I
do not think it is possible to call the differentia
intelligible. The following passage from the judgment of
Bose J. in Anwar Ali Sarkar’s case illustrates the point:
“I can conceive of cases where there is the utmost
good faith/and where the classification is scientific
and rational and yet which would offend this law. Let
us take an imaginary case in which a State legislature
considers that all accused persons whose skull
measurements are below a certain standard, or who
cannot pass a given series of intelligence tests, shall
be tried summarily whatever the offence on the ground
that the less complicated the trial the fairer it is to
their sub-standard of intelligence. Here is
classification. It is scientific and systematic. The
intention and motive are good. There is no question of
favouritism, and yet I can hardly believe that such a
law would be allowed to stand. But what would be the
true basis of the decision ? Surely simply this that
the Judges would not consider that fair and proper.”
The scope of Art. 14 was further elaborated in some of the
later decisions of this Court. This is what Bhagwati, J.
speaking for himself and Chandrachud and Krishna Iyer JJ, in
E.P. Royappa v. State of Tamil Nadu and another(l) says:
“We cannot countenance any attempt to truncate its
all-embracing scope and meaning, for to do so would be
to violate its activist magnitude. Equality is a
dynamic
998
concept with many aspects and dimensions and it cannot
be “cribed, cabbined and confined” within traditional
and doctrinaire limits. From a positivistic points of
view, equality is antithetic to arbitrariness. In fact
equality and arbitrariness are sworn enemies; one
belongs to the rule of law in a republic while the
other, to the whim and caprice of an absolute monarch.
Where an act is arbitrary it is implicit in it that it
is unequal both according to political logic and
constitutional law and is therefore violative of Art.
14.”
Bhagwati J. reiterates in Maneka Gandhi v. Union of India(l)
what he had said in Royappa’s case and adds:
“The principle of reasonableness, which legally as
well as philosophically, is an essential element of
equality or non-arbitrariness pervades Article 14 like
a brooding omnipresence . . . “
To pass the test of reasonableness if it was enough
that there should be a differentia which should have some
connection with the object of the Act, then these
observations made in Maneka Gandhi and Royappa would be so
much wasted eloquence. The decisions of this Court insist
that the differentia must be intelligible and the nexus
rational, and the observations quoted above would seem to be
appropriate only if we attach some significance to the words
‘intelligible’ and ‘rational’. The question however remains:
when is one justified in describing something as arbitrary
or unreasonable ? Terms like ‘reasonable’, ‘just’ or ‘fair’
derive their significance from the existing social
conditions. W. Friedmann in his “Legal Theory” (5th Ed. page
80) points out that expressions like “a reasonable and fair
price” or a “fair and equitable” restitution means nothing,
except in conjunction with the social conditions of the
time”. Brandeis J. in his opinion in Quaker City Cab Co. v.
Commonwealth of Pennsylvania(2) explains when a
classification shall be reasonable: ‘We call that action
reasonable which an informed, intelligent, just-minded,
civilized men could rationally favour.” Bose J. in Anwar Ali
Sarkar’s case says much the same
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thing in holing that the West Bengal Special Courts Act of
1950 offends Art. 14:
“We find men accused of heinous crimes called upon
to answer for their lives and liberties. We find them
picked out from their fellows, and however much the new
procedure may give them a few crumbs of advantage, in
the bulk they are deprived of substantial and valuable
privileges of defence which others, similarly charged,
are able to claim. It matters not to me, nor indeed to
them and their families and their friends, whether this
be done in good faith, whether it be done for the
convenience of government, whether the process can be
scientifically classified and labelled, or whether it
is an experiment in speedier trials made for the good
of society at large. It matters not how lofty and
laudable the motives are. The question with which I
charge myself is, can fair-minded, reasonable, unbiased
and resolute men, who are not swayed by emotion or
prejudice, regard this with equanimity and call it
reasonable, just and fair, regard it as that equal
treatment and protection in the defence of liberties
which is expected of a sovereign democratic republic in
the conditions which obtain in India today ?”
Keeping in mind these observations on what is
reasonable, is the basis on which the holders of Special
Bearer Bonds have been classified into two groups, honest
tax-payers and tax-evaders, intelligible ? What is arbitrary
and offends Art. 14, cannot be called intelligible. It is
clear from the provisions of the Act set out earlier that
the advantages which the tax-evaders derive from the
immunities provided by the Act are not available to those
who have acquired the Bonds with ‘white’ money. The Act
promises anonymity and security for tax-evaders. No question
can be asked as to the nature and source of acquisition or
possession of the Bonds. The Bonds can be transferred
freely, and the apprehension expressed by the petitioners
cannot he said to be baseless that passing from hand to hand
the Bonds are likely to operate as parallel currency and be
used for any kind of transaction. From a reading of the
preamble of the Act it does not seem that the object of the
Act was only to enable the Central Government to have some
use for 10 years of the black money which is said to have
“become a serious threat
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to the national economy”. As I read the preamble the purpose
of the Act is to unearth black money and use it for
productive purposes for effective economic and social
planning. If that be the object of the Act, it is difficult
to see how its provisions help to achieve the intended
purpose. The Act discloses a scheme which enables tax
evaders to convert black money into white after 10 years and
in the meantime use the Bonds as parallel currency
initiating a chain of black money investments There is no
provision in the Act requiring that on maturity of the Bonds
their holders would have to disclose their identity, which
means that if after 10 years black money which had taken the
shape of Special Bearer Bonds goes under-ground again and
retain its colour, there is nothing to prevent it. There is
nothing in the scheme to halt generation of black money
which threatens the national economy. Some people by
successful evasion manoeuvres are able to throw the burden
of taxation of their own shoulders which means a greater
burden on the honest tax-payers and this leads to economic
imbalance. On the effect of giving concessions to such
unscrupulous tax-evaders in preference to the honest tax-
payers, Mr. R.K. Garg appearing in person and Mr. Salve both
repeated what the Direct Taxes Enquiry Committee’s final
report says: “Resorting to such a measure would only shake
the confidence of the honest tax-payers in the capacity of
the Government to deal with the law breakers and would
invite contempt for its enforcement machinery.” The
petitioners submitted further that measures like the Special
Bearer Bonds scheme would tempt more people to evade taxes
and instead of serving a legitimate public interest would
grievously damage it.
It has been pointed out that there have been voluntary
disclosure schemes in the past. That is so, but none of them
is quite like the scheme in question which not only exempts
the unaccounted money in the shape of Special Bearer Bonds
from all taxes but provides also for a tax-free premium on
it. According to the petitioners, if the earlier schemes
have been conciliatory, the present scheme amounts to
capitulation to black money. I asked the Attorney General if
it was his case that all attempts to unearth black money had
failed and the present scheme was the only course open. His
answer was that was not his case The affidavit filed on
behalf of the Union of India also does not make such a case.
Clearly, the impugned Act puts a premium on dishonesty
without even a justi-
1001
fication of necessity-that the situation in the country left
no option.
The Act has been criticised as immoral and unethical.
Any law that rewards law breakers and tax dodgers is bound
to invite such criticism. Should the court concern itself
with questions of morality and ethics in considering the
constitutional validity of an Act ? of course no law can be
struck down only on the ground that it is unethical. However
as Friedmann in his “Legal Theory” (page 43) says: “There
cannot be-and there never has been-a complete separation of
law and morality. Historical and ideological differences
concern the extent to which the norlns of the social order
are absorbed into the general order.” It has been held by
this Court in Royappa and Maneka Gandhi that the principle
of reasonableness is an essential element of equality. The
concept of reasonableness does not exclude notions of
morality and ethics. I do not see how it can be disputed
that in the circumstances of a given case considerations of
morality and ethics may have a bearing on the reasonableness
of the law in question.
Having regard to the provisions of the impugned Act
which I have discussed above and the object of the Act to
which I have referred, is it possible to say that it is
reasonable to classify the E holders of Special Bearer Bonds
into honest tax-payers and tax-evaders for the purpose of
conferring benefits on the tax-evaders and denying them to
those who have honestly paid their taxes, especially when a
measure appeasing the tax-evaders to the extent the scheme
in question does is not claimed as unavoidable ? The
informed, fair-minded, civilized man on whose judgment both
Brandeis J. and Bose J. rely, would he have found the basis
of the classification intelligible ? The questions answer
themselves, the arbitrary character of the differentiation
is so obvious. I do not think it is possible to take the
rhetoric of Royappa and Maneka Gandhi seriously and find
that the Act passes the test of reasonableness.
What I have said above on the Special Bearer Bonds
scheme should not be read as an expression of opinion on the
wisdom of the government policy-that the scheme is not the
best in circumstances. My conclusion is based not on what
the policy of the government is but on what the equality
elause in Art. 14 requires.
1002
Having held that the Special Bearer Bonds (Immunities
and Exemptions) ordinance, 1981 and the Special Bearer Bonds
(Immunities and Exemptions) Act, 1981 are invalid on the
ground that they infringe Art. 14 of the Constitution, I do
not find it necessary to consider whether Special Bearer
Bonds (Immunities and Exemptions) ordinance, 1981 is outside
the ordinance making power of the President under Art. 123
of the Constitution.
N.V.K. Petitions dismissed.
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