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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 It was repealed  and   replaced  by   the  Special   Bearer   Bonds (Immunities and  Exemptions) Act, 1981.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

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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

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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

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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

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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

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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

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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

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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]

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    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

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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

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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

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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

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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

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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

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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.

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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     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

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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

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                        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

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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

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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

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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

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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 999 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 1000 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

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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

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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. 1003