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PETITIONER: THE AMALGAMATED TEA ESTATE CO.  LTD.  ETC.

       Vs.

RESPONDENT: STATE OF KERALA

DATE OF JUDGMENT02/04/1974

BENCH: DWIVEDI, S.N. BENCH: DWIVEDI, S.N. RAY, A.N. (CJ) REDDY, P. JAGANMOHAN GOSWAMI, P.K. SARKARIA, RANJIT SINGH

CITATION:  1974 AIR  849            1974 SCR  (3) 820  1974 SCC  (4) 415  CITATOR INFO :  R          1975 SC 583  (36)

ACT: Constitution  of  India,  Art.  14--Classification  test  if inflexible and doctrinaire. Kerala  Agricultural Income Tax Act, 1950--If imposition  of graduated   tax  between  domestic  and  foreign   companies violates Art. 14.

HEADNOTE: The petitioners, two foreign companies, had been assessed to agricultural  income  tax  under  the  Kerala   Agricultural Income-tax  Act,  1950 as amended. by the Amendment  Act  of 1970.   The Act has fixed a graduated scale on  agricultural income  tax to a minimum of 65% on domestic companies and  a flat  rate of 75% of the total income on foreign  companies. The petitioners contended that this discrimination between a domestic company and a foreign company was violative of Art. 14  of the Constitution because the classification  was  not base,  on any intelligible differentia and the  differentia, if any, had no rational relation to the purpose sought to be achieved  by  the  taxing  statute and  that  it  treats  as unequal, companies which are equally circumstanced. Dismissing the petitions, HELD : (1) The impugned provisions of the Amending Act, 1970 were not violative of Art. 14.  The impugned legislation, in order to get the green light from Art 14, should satisfy the classification  test  evolved by this Court namely  (1)  the classification   should   be  passed  on   an   intelligible differentia  and (2) the differentia should bear a  rational relation to the purpose of the legislation. [822 F] , (2)  The classification test is, however, not inflexible and doctrinaire.  It gives due regard to the complex necessities and  intricate  problems of government.  As revenue  is  the first  necessity  of the State and as taxes are  raised  for various  purposes and by an adjustment of diverse  elements, the Court grants the State greater choice of  classification in the field of taxation than in other spheres. [822 G] Khandige  Sham  Bhat  v.  Agricultural  Income-tax  Officer,

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A.I.R. 1963 S.C. 591 and Kasargod Ravi verma Rajah v,  Union of India [1969] 3 S.C.R. 827, referred to. (3)  On  a challenge to a statute on the ground of  Art.  14 the  court  would  raise  a  presumtion  in  favour  of  its constitutionality.   Consequently  one  who  challenged  the satute bears the burden of establishing that the statute  is clearly violative of Art. 14. [823 B] Charanjit  Lal v. Union of India, [1950] S.C. R. 869  at  p. 879  per Fazal Ali J. and State of West Bengal v. Anwar  Ali Sarkar, [1952] S.C.R. 284 at p. 303. referred to. (4)  It  is  not  possible  to hold  on.  the  meagre  facts presented  before  the  court that  domestic  companies  and foreign  companies carrying on agriculture in the  State  of Kerala are equaly circumstanced. [823 G] D.   P.  Joshi V. State of Madhya  Bharat, [1955]  1  S.C.R. 1215, at P. 1228, Hans Muller of Nurenburg v. Superintendent Presidency  fail,  Calcutta,  [1955] 1 S.C.R.  1284,  K.  T. Moopil Nair v. State of Kerala [1961] 3 S.C.R. 77 and  State of  Kerala,  v. Haji K. Kutty Naha, A.I.R.  1959  S.C.  378, referred to.

JUDGMENT: ORIGINAL JURISDICTION : Writ Petitions Nos. 2 and 9 of 1971. Under Article 32 of the Constitution for the enforcement  of fundamental rights.                             821 G.   B. Pai, O. C. Mathur, D. N. Misra, J. B. Dadachanji and Ravinder Narain, for the petitioners.  L.  N.  Misra,  Solicitor  General  of  India  and  A.   G. Pudissary, for the respondent. The Judgment of the Court was delivered by DWIVEDI,  J.-The  two  petitioners  have  been  assessed  to Agricultural  Income-tax  by the State of Kerala  under  the Agricultural  Incometax  Act, 1950 (hereinafter  called  the Act)  as amended by the Agricultural Income-tax  (Amendment) Act,  1970.   The assessment is made at the rate of  75  per cent  of their total income.  They challenge the  assessment on the ground that s. 2(hh) and (kk) and clauses (2) and (3) of Part I to the Schedule of the Kerala Agricultural Income- tax  (Amendment) Act, 1970 are violative of Art. 14  of  the Constitution. It  will  facilitate  appreciation  of  the  facts  and  the constitutional   question  in  this  case  if   the   taxing provisions are noticed at this stage. The Agricultural Income-tax Act was passed in 1950.  In  the beginning,  the  Act  was  known  as  the  Travancore-Cochin Agricultural  Income-tax  Act.   Later as a  result  of  the State’s  reorganisation,  the  Act  was  renamed  simply  as Agricultural  Income,-tax  Act,  1950.   According  to   the preamble,  the  Act was made to provide for levy of  tax  on agricultural  income  in  the State  of  Kerala.   Till  the Amending  Act of 1970, all companies were liable to pay  tax according  to  their total income.  The  tax  is  chargeable under  s.  3.  Sub-section (1)  thereof  provided  that  the agricultural  income at the rate or rates specified  in  the schedule  to  the Act shall be charged at  the  total  agri- cultural  income of the previous year of every  person.   It was  a graduated rate.  Section 2(h) of the Amending Act  of 1970  has redefined a ’Company’ as "a domestic company or  a foreign company." Section 2(hh) defines a ’domestic company’ ;is  "a  company formed and registered under  the  Companies Act,  1956 ... and includes a company formed and  registered under any law relating to companies formerly in force in any

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part  of India." It is necessary that the registered  office of the Company should be in India.  Section 2(kk) defines  a ’foreign  company’ as ’a foreign company within the  meaning of.  s.591 of the Companies Act, 1956 .... and includes  any foreign  association whether incorporated or not  which  the Government, may, by general or special order, declare to  be a foreign company for the purposes of this Act." Clause  (2) of Part I of the Schedule to the  Amending  Act, 1970,  provides for the rate of taxation chargeable  from  a ’domestic company.’ It is this :               A.    Where the total agricultural income does               not exceed Rs. 25,000-45 per cent of the total               agricultural income               B.    Where  the  total  agricultural   income               exceeds.  Rs. 25,000 but does not exceed Rs. 1               lakh-50  per  cent of the  total  agricultural               income               822               C. Where the total agricultural income exceeds               Rs.  1 lakh but does not exceed Rs. 3 lakhs-55               per cent of the total agricultural income               D.    Where  the  total  agricultural   income               exceeds,  Rs. 3 lakhs but does not exceed  Rs.               10   lakhs.-60   per   cent   of   the   total               agricultural income               E.    Where  the  total  agricultural   income                             exceeds Rs. 10 lakhs.-65 per cent of t he  total               agricultural income. The  provisos  to  various alphabetical  clauses  have  been omitted here from as they are not material.  Clause (3).  of Part  I  of  the  Schedule provides  for  the  rate  of  tax chargeable from a foreign company.  The rate fixed is 75 per cent of the total agricultural income. It  is obvious from the review of the  aforesaid  provisions that  while  in the case of domestic companies  a  graduated scale is fixed, in the case of foreign companies a flat rate is  fixed.  Secondly, while the maximum rate of tax  in  the case  of  a  domestic company is 65 per cent  of  the  total income, it is 75 per cent in case of all foreign companies. The  petitioners’  contention is  that  this  discrimination between  a  domestic  company  and  a  foreign  company   is violative   of   Art.   14   of   the   Constitution.    The classification for the purposes of taxation is not based  on any  intelligible differentia; and the differentia, if  any, has  no  rational  relation  to the  purpose  sought  to  be achieved  by  the  taxing statute.  Reliance  is  placed  on Wheeling Steel Corporation v. C. Emory Glander,(1) where the U.S.A. Supreme Court has said : "After a State has chosen to domesticate foreign corporations, they are entitled to equal protection with the State’s own corporate progeny, at  least to the extent that their property is entitled to an  equally favourable ad valorem tax basis." It  may be pointed out that the Indian Income-tax Act  also, makes a distinction between a domestic company and a foreign company.   But that circumstance per se would not  help  the State of Kerala.  The impugned legislation, in order to  get the   green   light  from  Art.  14,  should   satisfy   the classification  test  evolved by this Court in a  catena  of cases.  According to that test (1) the classification should be  based  on  an  inteliligible  differentia  and  (2)  the differentia  should bear a rational relation to the  purpose of the legislation. The  classification  test is, however,  not  inflexible  and doctrinaire.  It gives due regard to the complex necessities

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and intericate problems of government.  Thus, as revenue  is the first necessity of the State and as taxes are raised for various  purposes and by an adjustment of diverse  elements, the Court grants the State greater choice of  classification in the field of taxation, than in other spheres.   According to  Subba  Rao  J., "(The courts in  view  of  the  inherent complexity of fiscal adjustment of diverse elements,  permit a  larger  discretion to the Legislature in  the  matter  of classification,  so  long as it adheres to  the  fundamental principles  underlying the said doctrine.  The power of  the Legislature (1)  93 Law.  Edn. 1544. 823 to   classify  is of wide range and flexibility so  that  it can adjust its system of taxation   in   all   proper    and reasonable ways." Khandige Sham Bhat v. Agricultural Income- tax  Officer,  Kasargod(1) ; Ravi Verma Rajah  v.  Union  of India  ( 2) Again, on a challenge to a statute on the ground of Art. 14, the  Court would generally raise a presumption in favour  of its constitutionality.  Consequently, one who challenges the statute,  bears the burden of establishing that the  statute is  clearly  violative of Art. 14.   "(T)he  presumption  is always  in favour of the constitutionality of  an  enactment and the burden is upon him who attacks it to show that there is  a clear transgression of the constitutional  principle." [see Charanjit Lal v.Union of India(3). The reason why a statute is presumed to be constitutional is that  the  Legislature  is  the  best  judge  of  the  local condition  and  circumstances and special needs  of  various classes of persons.  "(T)he Legislature is the best judge of the  needs of particular classes and to estimate the  degree of  evil  so as to adjust its legislation according  to  the exigency found to exist." (Charanjit Lal (supra) at page 933 per Das J.) Speaking in the same vein, Patanjali Sastri, C.J. observed : "(The  Legislatures)  alone know the  local  conditions  and circumstances  which demanded the enactment of such  a  law, and  it must be remembered that "legislatures  are  ultimate guardians  of  the liberties and welfare of  the  people  in quite  as great a degree as the courts." [See State of  West Bengal v. Anwar Ali Sarkar (4 )] The contention of the petitioners would have to be  examined in the light of the foregoing considerations. The only relevant statement of fact in the petitions is that the  petitioners  are  Joint Stock  Companies  with  limited liability and have been incorporated in the United  Kingdom. One  of them has its registered office in Scotland, and  the other  in England.  Both of them carry on business  also  in this  country, and particularly in the State of Kerala.   In Kerala  their  main  business  is  one  of  cultivation  and marketing  of  plantation  crops such as tea.   It  is  also alleged that the impugned statute seeks to treat as  unequal companies  which are equally circumstanced.  No other  facts are  disclosed  in  the petitions.  No  comparison  is  made between   the  domestic  companies  and  foreign   companies carrying  on  agriculture  in  Kerala  in  regard  to  their financial standing.  Magnitude of their, business inside and outside  the  country, the, fertility of the land  owned  by them and the quality of the plantation crops raised by them. It  is  not possible to hold on the meagre  facts  presented before  us  that domestic companies  and  foreign  companies carrying  on agriculture in the State of Kerala are  equally circumstanced. (1) A.I.R. 1963 S.C. 591.        (2) [1969] S. C. R 827

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(3)  [1950] S. C. R. 869 at P. 879 per Fazal Ali J. (4)  [1952] S. C. R. 284 at p. 303 824 There  is  no denying the fact that for  various  reasons  a domestic  company may be treated differently from a  foreign company  in the field of taxation.  According to Art. 48  of the  Constitution,  it is a fundamental  obligation  of  the State to make "endeavour to organise agriculture and  animal husbandry on ,modern and scientific lines and to take  steps for  preservation and improving the breeds ... of  cows  and calves  and  other milch and draught cattle." So it  may  be safely presumed that the State of Kerala should be  striving to  improve  agriculture  and animal  husbandry  within  its boundaries.   It  may also be presumed that in so  doing  it must  be investing considerable money and skill.  The  State is,  therefore,  entitled to raise revenue by  taxation  for investment in agriculture and animal husbandry.  So it could reasonably demand 75 per cent of total income as tax from  a foreign  company.   It could demand the same amount  of  tax from  a domestic company also.  But the rate of tax on  them is lesser.  But the tax relief given to them is riot  proved to be arbitrary or unreasonable.  It may be that the  domes- tic  companies  own land which is less  fertile  or  produce inferior  quality  of  plantation crops  while  the  foreign companies own more fertile land and produce superior quality of  plantation crops.  In that case, the domestic  companies would  not  be  able to withstand  the  competition  of  the foreign  companies and would not survive.  The  State  might have  chosen  to  give  the  domestic  companies  protection against  the foreign companies.  And there seems to  be  yet another good reason for this.  The entire income earned by a domestic  company  from business inside as well  as  outside India  will remain in India.  But a good part of the  income earned by the petitioners inside India would be drained  out of  India to the United Kingdom in the shape  of  dividends, etc.  Under the Foreign Exchange Regulation Act, 1947, it is open  to  a foreign company to transmit money out  of  India with  the  permission of the Reserve Bank of India.   It  is thus evident that a greater part of the income and skill  of the domestic companies is likely to be utilised in improving agriculture within the State.  It will not be so in the case of foreign companies. On   these  considerations  it  cannot  be  said  that   the classification  of  companies  into  domestic  and   foreign companies  has  no rational relation to the purpose  of  the impugned provisions. Our view receives strong support from the Court’s opinion in D. P. Joshi v. State of Madhya Bharat(1).  That case related to  the  question  of admission of  students  in  a  Medical College  in  the  State of Madhya Bharat.   According  to  a direction  of  the  State of  Madhya  Bharat,  all  students admitted  to the College were required to pay  a  prescribed fee.   But  students  who were not bona  fide  residence  of Madhya  Bharat were also required to pay capitation  fee  of Rs. 15001-.  A student who was riot a bona fide resident  of Madhya Bharat challenged the capitation fee  as  being  violative of Art. 14.  The majority  of  the Court overruled the contention.   Speaking  for  the  Court, Venkatarama Ayyar J. said               "The  object of the classification  underlying               the impugned rule was clearly to help to  some               extent students who residents of Madhya Bharat                             in the prosecution of their studies,               (1)   [1955] 1 S. C. R. 1215 at p. 1228.               825

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             and  it cannot be disputed that it is quite  a               legitimate and laudable objective for a  State               to  encourage  education within  its  borders.               Education  is a State subject, and one of  the               directive  principles declared in Part  IV  of               the Constitution is that the State should make               effective  provision for education within  the               limits  of its economy .... The State  has  to               contribute  for the unkeep and the running  of               its educational institutions.  We are in  this               petition concerned with a Medical College, and               it is well-known that it requires considerable               finance  to maintain such as institution.   If               the  State  has to spend money on  it,  is  it               unreasonable  that  it  should  so  order  the               educational  system that the advantage  of  it               would  to some extent at least enure  for  the               benefit of the, State ? A concession given  to               the  "residents of the State in the matter  of               fee is obviously calculated to serve that end,               as  presumaably  some  of  them  might,  after               passing  out of the College,,, settle down  as               doctors and serve, the needs of the  locality.               The  classification is thus based on a  ground               which has a reasonable relation to the subject               matter   of   the  legislation,  and   is   in               consequence  not open to attack.  It has  been               held in the State of Punjab v. Ajaib Singh and               others(1) that a classification might  validly               be  made  on  a geographical  basis.   Such  a               classification  would  be eminently  just  and               reasonable,  where  it  relates  to  education               which  is the concern primarily of the  State.               The  contention,  therefore,  that  the   rule               imposing capitation tee is in contravention of               article 14 must be rejected." Wheeling  Steel  Corporation (supra) cannot,  in  our  view, assist  the petitioners.  Firstly, the  foreign  corporation there  was  a corporation incorporated and registered  in  a State  within the U.S.A. Here the petitioner  companies  are incorporated  not  in any part of India but  in  the  United Kingdom.  Secondly, while there the taxing State has  chosen "to  adopt" the petitioning foreign corporation, here  there is, no evidence to show that the petitioners were  permitted to carry on business in the State of Kerala by the choice of that  State.   In  all probability they  had  set  up  their business  in  that  State before India  became  a  Sovereign Republic.  Thirdly, there the taxing State was trying to tax the property of a foreign corporation admitted in the State. Here the State of Kerala is not taxing the property, but the income, of the petitioners from their agricultural property. In  Hans  Muller of Nurenbug v.  Superintendent,  Presidency Jail,  Calcutta(2), this Court upheld the classification  of foreigners into those who are British subjects and those who are  not  British  subjects for the  purpose  of  preventive detention.    The  Court  said  there  :  "(1)   is   easily understandable  that  the  reasons  of  State  may  make  it desirable to classify foreigners into different groups." K.   T.  Moopil  Nair  v. State of Kerala(3)  and  State  of Kerala  v. Haji K. Kutty Naha(4) deal with taxing  statutes. In the first case. (1) [1953] S.C.R. 254.    (2) [1955] 1 S.C.R. 1284. (3)[1961]3 S.C.R. 77.    (4) A.I.R. 1969 S.C. 378.  826 the, State of Kerala had imposed a uniform tax levy on land.

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The taxing provisions were struck down as violative of  Art. 14   because   according   to  the  Court   there   was   no classification  of persons for the purpose of taxation.   In the  other  case,  a uniform building  tax  was  imposed  on buildings  according to their floor area.  The  taxing  pro- visions  were struck down as being discriminatory for  total lack  of  any classification of persons or  buildings.   The impugned  Act  of 1970 does not suffer from this  vice.   So these cases also do not help the petitioners. We  are  of  opinion that the  impugned  provisions  of  the Amending  Act  of 1970 are not violative of  Art.  14.   The petitions are accordingly dismissed with costs.  One set. P.B.R. Petitions dismissed. 827