PETITIONER: THE AMALGAMATED TEA ESTATE CO. LTD. ETC. Vs. RESPONDENT: STATE OF KERALA DATE OF JUDGMENT02/04/1974 BENCH: DWIVEDI, S.N. BENCH: DWIVEDI, S.N. RAY, A.N. (CJ) REDDY, P. JAGANMOHAN GOSWAMI, P.K. SARKARIA, RANJIT SINGH CITATION: 1974 AIR 849 1974 SCR (3) 820 1974 SCC (4) 415 CITATOR INFO : R 1975 SC 583 (36) ACT: Constitution of India, Art. 14--Classification test if inflexible and doctrinaire. Kerala Agricultural Income Tax Act, 1950--If imposition of graduated tax between domestic and foreign companies violates Art. 14. HEADNOTE: The petitioners, two foreign companies, had been assessed to agricultural income tax under the Kerala Agricultural Income-tax Act, 1950 as amended. by the Amendment Act of 1970. The Act has fixed a graduated scale on agricultural income tax to a minimum of 65% on domestic companies and a flat rate of 75% of the total income on foreign companies. The petitioners contended that this discrimination between a domestic company and a foreign company was violative of Art. 14 of the Constitution because the classification was not base, on any intelligible differentia and the differentia, if any, had no rational relation to the purpose sought to be achieved by the taxing statute and that it treats as unequal, companies which are equally circumstanced. Dismissing the petitions, HELD : (1) The impugned provisions of the Amending Act, 1970 were not violative of Art. 14. The impugned legislation, in order to get the green light from Art 14, should satisfy the classification test evolved by this Court namely (1) the classification should be passed on an intelligible differentia and (2) the differentia should bear a rational relation to the purpose of the legislation. [822 F] , (2) The classification test is, however, not inflexible and doctrinaire. It gives due regard to the complex necessities and intricate problems of government. As revenue is the first necessity of the State and as taxes are raised for various purposes and by an adjustment of diverse elements, the Court grants the State greater choice of classification in the field of taxation than in other spheres. [822 G] Khandige Sham Bhat v. Agricultural Income-tax Officer, A.I.R. 1963 S.C. 591 and Kasargod Ravi verma Rajah v, Union of India [1969] 3 S.C.R. 827, referred to. (3) On a challenge to a statute on the ground of Art. 14 the court would raise a presumtion in favour of its constitutionality. Consequently one who challenged the satute bears the burden of establishing that the statute is clearly violative of Art. 14. [823 B] Charanjit Lal v. Union of India, [1950] S.C. R. 869 at p. 879 per Fazal Ali J. and State of West Bengal v. Anwar Ali Sarkar, [1952] S.C.R. 284 at p. 303. referred to. (4) It is not possible to hold on. the meagre facts presented before the court that domestic companies and foreign companies carrying on agriculture in the State of Kerala are equaly circumstanced. [823 G] D. P. Joshi V. State of Madhya Bharat, [1955] 1 S.C.R. 1215, at P. 1228, Hans Muller of Nurenburg v. Superintendent Presidency fail, Calcutta, [1955] 1 S.C.R. 1284, K. T. Moopil Nair v. State of Kerala [1961] 3 S.C.R. 77 and State of Kerala, v. Haji K. Kutty Naha, A.I.R. 1959 S.C. 378, referred to. JUDGMENT:
ORIGINAL JURISDICTION : Writ Petitions Nos. 2 and 9 of 1971.
Under Article 32 of the Constitution for the enforcement of
fundamental rights.
821
G. B. Pai, O. C. Mathur, D. N. Misra, J. B. Dadachanji and
Ravinder Narain, for the petitioners.
L. N. Misra, Solicitor General of India and A. G.
Pudissary, for the respondent.
The Judgment of the Court was delivered by
DWIVEDI, J.-The two petitioners have been assessed to
Agricultural Income-tax by the State of Kerala under the
Agricultural Incometax Act, 1950 (hereinafter called the
Act) as amended by the Agricultural Income-tax (Amendment)
Act, 1970. The assessment is made at the rate of 75 per
cent of their total income. They challenge the assessment
on the ground that s. 2(hh) and (kk) and clauses (2) and (3)
of Part I to the Schedule of the Kerala Agricultural Income-
tax (Amendment) Act, 1970 are violative of Art. 14 of the
Constitution.
It will facilitate appreciation of the facts and the
constitutional question in this case if the taxing
provisions are noticed at this stage.
The Agricultural Income-tax Act was passed in 1950. In the
beginning, the Act was known as the Travancore-Cochin
Agricultural Income-tax Act. Later as a result of the
State’s reorganisation, the Act was renamed simply as
Agricultural Income,-tax Act, 1950. According to the
preamble, the Act was made to provide for levy of tax on
agricultural income in the State of Kerala. Till the
Amending Act of 1970, all companies were liable to pay tax
according to their total income. The tax is chargeable
under s. 3. Sub-section (1) thereof provided that the
agricultural income at the rate or rates specified in the
schedule to the Act shall be charged at the total agri-
cultural income of the previous year of every person. It
was a graduated rate. Section 2(h) of the Amending Act of
1970 has redefined a ‘Company’ as “a domestic company or a
foreign company.” Section 2(hh) defines a ‘domestic company’
;is “a company formed and registered under the Companies
Act, 1956 … and includes a company formed and registered
under any law relating to companies formerly in force in any
part of India.” It is necessary that the registered office
of the Company should be in India. Section 2(kk) defines a
‘foreign company’ as ‘a foreign company within the meaning
of. s.591 of the Companies Act, 1956 …. and includes any
foreign association whether incorporated or not which the
Government, may, by general or special order, declare to be
a foreign company for the purposes of this Act.”
Clause (2) of Part I of the Schedule to the Amending Act,
1970, provides for the rate of taxation chargeable from a
‘domestic company.’ It is this :
A. Where the total agricultural income does
not exceed Rs. 25,000-45 per cent of the total
agricultural income
B. Where the total agricultural income
exceeds. Rs. 25,000 but does not exceed Rs. 1
lakh-50 per cent of the total agricultural
income
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C. Where the total agricultural income exceeds
Rs. 1 lakh but does not exceed Rs. 3 lakhs-55
per cent of the total agricultural income
D. Where the total agricultural income
exceeds, Rs. 3 lakhs but does not exceed Rs.
10 lakhs.-60 per cent of the total agricultural income E. Where the total agricultural income exceeds Rs. 10 lakhs.-65 per cent of t he total agricultural income.
The provisos to various alphabetical clauses have been
omitted here from as they are not material. Clause (3). of
Part I of the Schedule provides for the rate of tax
chargeable from a foreign company. The rate fixed is 75 per
cent of the total agricultural income.
It is obvious from the review of the aforesaid provisions
that while in the case of domestic companies a graduated
scale is fixed, in the case of foreign companies a flat rate
is fixed. Secondly, while the maximum rate of tax in the
case of a domestic company is 65 per cent of the total
income, it is 75 per cent in case of all foreign companies.
The petitioners’ contention is that this discrimination
between a domestic company and a foreign company is
violative of Art. 14 of the Constitution. The
classification for the purposes of taxation is not based on
any intelligible differentia; and the differentia, if any,
has no rational relation to the purpose sought to be
achieved by the taxing statute. Reliance is placed on
Wheeling Steel Corporation v. C. Emory Glander,(1) where the
U.S.A. Supreme Court has said : “After a State has chosen to
domesticate foreign corporations, they are entitled to equal
protection with the State’s own corporate progeny, at least
to the extent that their property is entitled to an equally
favourable ad valorem tax basis.”
It may be pointed out that the Indian Income-tax Act also,
makes a distinction between a domestic company and a foreign
company. But that circumstance per se would not help the
State of Kerala. The impugned legislation, in order to get
the green light from Art. 14, should satisfy the
classification test evolved by this Court in a catena of
cases. According to that test (1) the classification should
be based on an inteliligible differentia and (2) the
differentia should bear a rational relation to the purpose
of the legislation.
The classification test is, however, not inflexible and
doctrinaire. It gives due regard to the complex necessities
and intericate problems of government. Thus, as revenue is
the first necessity of the State and as taxes are raised for
various purposes and by an adjustment of diverse elements,
the Court grants the State greater choice of classification
in the field of taxation, than in other spheres. According
to Subba Rao J., “(The courts in view of the inherent
complexity of fiscal adjustment of diverse elements, permit
a larger discretion to the Legislature in the matter of
classification, so long as it adheres to the fundamental
principles underlying the said doctrine. The power of the
Legislature
(1) 93 Law. Edn. 1544.
823
to classify is of wide range and flexibility so that it
can adjust its system of taxation in all proper and
reasonable ways.” Khandige Sham Bhat v. Agricultural Income-
tax Officer, Kasargod(1) ; Ravi Verma Rajah v. Union of
India ( 2)
Again, on a challenge to a statute on the ground of Art. 14,
the Court would generally raise a presumption in favour of
its constitutionality. Consequently, one who challenges the
statute, bears the burden of establishing that the statute
is clearly violative of Art. 14. “(T)he presumption is
always in favour of the constitutionality of an enactment
and the burden is upon him who attacks it to show that there
is a clear transgression of the constitutional principle.”
[see Charanjit Lal v.Union of India(3).
The reason why a statute is presumed to be constitutional is
that the Legislature is the best judge of the local
condition and circumstances and special needs of various
classes of persons. “(T)he Legislature is the best judge of
the needs of particular classes and to estimate the degree
of evil so as to adjust its legislation according to the
exigency found to exist.” (Charanjit Lal (supra) at page 933
per Das J.)
Speaking in the same vein, Patanjali Sastri, C.J. observed :
“(The Legislatures) alone know the local conditions and
circumstances which demanded the enactment of such a law,
and it must be remembered that “legislatures are ultimate
guardians of the liberties and welfare of the people in
quite as great a degree as the courts.” [See State of West
Bengal v. Anwar Ali Sarkar (4 )]
The contention of the petitioners would have to be examined
in the light of the foregoing considerations.
The only relevant statement of fact in the petitions is that
the petitioners are Joint Stock Companies with limited
liability and have been incorporated in the United Kingdom.
One of them has its registered office in Scotland, and the
other in England. Both of them carry on business also in
this country, and particularly in the State of Kerala. In
Kerala their main business is one of cultivation and
marketing of plantation crops such as tea. It is also
alleged that the impugned statute seeks to treat as unequal
companies which are equally circumstanced. No other facts
are disclosed in the petitions. No comparison is made
between the domestic companies and foreign companies
carrying on agriculture in Kerala in regard to their
financial standing. Magnitude of their, business inside and
outside the country, the, fertility of the land owned by
them and the quality of the plantation crops raised by them.
It is not possible to hold on the meagre facts presented
before us that domestic companies and foreign companies
carrying on agriculture in the State of Kerala are equally
circumstanced.
(1) A.I.R. 1963 S.C. 591. (2) [1969] S. C. R 827
(3) [1950] S. C. R. 869 at P. 879 per Fazal Ali J.
(4) [1952] S. C. R. 284 at p. 303
824
There is no denying the fact that for various reasons a
domestic company may be treated differently from a foreign
company in the field of taxation. According to Art. 48 of
the Constitution, it is a fundamental obligation of the
State to make “endeavour to organise agriculture and animal
husbandry on ,modern and scientific lines and to take steps
for preservation and improving the breeds … of cows and
calves and other milch and draught cattle.” So it may be
safely presumed that the State of Kerala should be striving
to improve agriculture and animal husbandry within its
boundaries. It may also be presumed that in so doing it
must be investing considerable money and skill. The State
is, therefore, entitled to raise revenue by taxation for
investment in agriculture and animal husbandry. So it could
reasonably demand 75 per cent of total income as tax from a
foreign company. It could demand the same amount of tax
from a domestic company also. But the rate of tax on them
is lesser. But the tax relief given to them is riot proved
to be arbitrary or unreasonable. It may be that the domes-
tic companies own land which is less fertile or produce
inferior quality of plantation crops while the foreign
companies own more fertile land and produce superior quality
of plantation crops. In that case, the domestic companies
would not be able to withstand the competition of the
foreign companies and would not survive. The State might
have chosen to give the domestic companies protection
against the foreign companies. And there seems to be yet
another good reason for this. The entire income earned by a
domestic company from business inside as well as outside
India will remain in India. But a good part of the income
earned by the petitioners inside India would be drained out
of India to the United Kingdom in the shape of dividends,
etc. Under the Foreign Exchange Regulation Act, 1947, it is
open to a foreign company to transmit money out of India
with the permission of the Reserve Bank of India. It is
thus evident that a greater part of the income and skill of
the domestic companies is likely to be utilised in improving
agriculture within the State. It will not be so in the case
of foreign companies.
On these considerations it cannot be said that the
classification of companies into domestic and foreign
companies has no rational relation to the purpose of the
impugned provisions.
Our view receives strong support from the Court’s opinion in
D. P. Joshi v. State of Madhya Bharat(1). That case related
to the question of admission of students in a Medical
College in the State of Madhya Bharat. According to a
direction of the State of Madhya Bharat, all students
admitted to the College were required to pay a prescribed
fee. But students who were not bona fide residence of
Madhya Bharat were also required to pay capitation fee of
Rs. 15001-. A student who was riot a bona fide resident of
Madhya Bharat challenged the capitation
fee as being violative of Art. 14. The majority of the
Court overruled the contention. Speaking for the Court,
Venkatarama Ayyar J. said
“The object of the classification underlying
the impugned rule was clearly to help to some
extent students who residents of Madhya Bharat
in the prosecution of their studies,
(1) [1955] 1 S. C. R. 1215 at p. 1228.
825
and it cannot be disputed that it is quite a
legitimate and laudable objective for a State
to encourage education within its borders.
Education is a State subject, and one of the
directive principles declared in Part IV of
the Constitution is that the State should make
effective provision for education within the
limits of its economy …. The State has to
contribute for the unkeep and the running of
its educational institutions. We are in this
petition concerned with a Medical College, and
it is well-known that it requires considerable
finance to maintain such as institution. If
the State has to spend money on it, is it
unreasonable that it should so order the
educational system that the advantage of it
would to some extent at least enure for the
benefit of the, State ? A concession given to
the “residents of the State in the matter of
fee is obviously calculated to serve that end,
as presumaably some of them might, after
passing out of the College,,, settle down as
doctors and serve, the needs of the locality.
The classification is thus based on a ground
which has a reasonable relation to the subject
matter of the legislation, and is in
consequence not open to attack. It has been
held in the State of Punjab v. Ajaib Singh and
others(1) that a classification might validly
be made on a geographical basis. Such a
classification would be eminently just and
reasonable, where it relates to education
which is the concern primarily of the State.
The contention, therefore, that the rule
imposing capitation tee is in contravention of
article 14 must be rejected.”
Wheeling Steel Corporation (supra) cannot, in our view,
assist the petitioners. Firstly, the foreign corporation
there was a corporation incorporated and registered in a
State within the U.S.A. Here the petitioner companies are
incorporated not in any part of India but in the United
Kingdom. Secondly, while there the taxing State has chosen
“to adopt” the petitioning foreign corporation, here there
is, no evidence to show that the petitioners were permitted
to carry on business in the State of Kerala by the choice of
that State. In all probability they had set up their
business in that State before India became a Sovereign
Republic. Thirdly, there the taxing State was trying to tax
the property of a foreign corporation admitted in the State.
Here the State of Kerala is not taxing the property, but the
income, of the petitioners from their agricultural property.
In Hans Muller of Nurenbug v. Superintendent, Presidency
Jail, Calcutta(2), this Court upheld the classification of
foreigners into those who are British subjects and those who
are not British subjects for the purpose of preventive
detention. The Court said there : “(1) is easily
understandable that the reasons of State may make it
desirable to classify foreigners into different groups.”
K. T. Moopil Nair v. State of Kerala(3) and State of
Kerala v. Haji K. Kutty Naha(4) deal with taxing statutes.
In the first case.
(1) [1953] S.C.R. 254. (2) [1955] 1 S.C.R. 1284.
(3)[1961]3 S.C.R. 77. (4) A.I.R. 1969 S.C. 378.
826
the, State of Kerala had imposed a uniform tax levy on land.
The taxing provisions were struck down as violative of Art.
14 because according to the Court there was no
classification of persons for the purpose of taxation. In
the other case, a uniform building tax was imposed on
buildings according to their floor area. The taxing pro-
visions were struck down as being discriminatory for total
lack of any classification of persons or buildings. The
impugned Act of 1970 does not suffer from this vice. So
these cases also do not help the petitioners.
We are of opinion that the impugned provisions of the
Amending Act of 1970 are not violative of Art. 14. The
petitions are accordingly dismissed with costs. One set.
P.B.R.
Petitions dismissed.
827
