Case: Balaji Vs. Income Tax Officer, Special Investigation Circle

The petitioner, Balaji, his six sons, and his wife, by name Godawaribai, constituted a joint Hindu family. The family was a trading family and it had, besides business in money-lending, considerable agricultural lands. On November 23, 1946, two of his sons became divided from the family. In the year 1951, through the intervention of mediators the other members of the family were also divided and another major member started a separate business on his own. Thereafter, the petitioner and his wife formed themselves into a partnership to carry on their business and admitted their three minor sons to the benefits thereof. On September 22, 1952, a partnership deed was executed giving an equal share to each of the partners. On the basis of the partnership deed, in respect of the assessment year 1952-53 the petitioner filed two applications before the Income-tax Officer, Wardha, one under S. 25A of the Act for recognizing the partition, and the other under S. 26A for registration of the firm. Both the applications were finally ordered by the Income-tax Appellate Tribunal, Bombay, by its order dated September 3, 1958, that is, the partition was recognized and the firm was granted registration. For the assessment years 1953-54 and 1954-55 also, the Income-tax Department registered the firm under S. 26A of the Act. The assessment proceedings in respect of the said three years are pending before the concerned Income-tax authorities. For the assessment year 1955-56 also, the Income-tax Officer allowed the registration of the firm, but determined the total income of the petitioner at Rs. 2,44,625 as against the total income returned by him at Rs. 58,232. The disparity arose because, while the assessee excluded from his total income the income of the partnership falling to the shares of his wife and three minor sons, the Income-tax Officer included the share income of his wife and three minor sons in the said business in the total income of the petitioner.

Reasoning: A husband or a father could nominally take his wife or his minor sons in partnership with him so that the tax burden might be lightened, for if the income was divided between a number of people, the income derived by an individual therefrom might fall under the limits of taxable income or under a less onerous slab. This device enables an assessee to secure the entire income of the business but at the same time to evade income-tax which he would have otherwise been liable to pay. The Income-tax Enquiry Commission of 1936 made certain recommendation to prevent evasion of tax in such cases. The Legislature accepted those recommendations and the loopholes were sought to be plugged by enacting the said sub-section-Sub-section (3) (a) (i) and (ii) was therefore enacted for preventing evasion of tax and was well within the competence of the Federaldecisions of this Court permitted classification if there was reasonable basis for the differentiation. It was held that what Art. 14 prohibited was class legislation and not reasonable classification for the purpose of legislation. Two conditions were laid down for passing the test of permissible classification, namely, (i) the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (ii) that the differentia must have rational relation to the object sought to be achieved by the statute in question. Under the impugned sub-section, an individual is taxed on the income of his wife or his minor children, if he carries on business in partnership with his wife or if he admits his minor sons to the benefits of the partnership whereas an individual, if he carries on business in partnership with a third party, whether a man or a woman, or even with his major children or if he and his wife or children carry on business separately, will be liable only to pay tax on his share of the partnership income, that is, for the purpose of this sub-section, the former is put in a category different from the latter. It cannot be said that there is no differentia between the twosaid differentia has no rational relation to the object sought to be achieved by the statute in question. It was asked how, from the standpoint of imposition of tax, the difference between an individual and his wife doing business in partnership and between an individual and his wife doing business separately, and an individual doing business in partnership with his wife and an individual doing business in partnership with a third party, male or female, and between an individual who has admitted his minor children to the partnership business and an individual who is doing business in partnership with his major children or outsiders, would have any reasonable basis. This argument ignores the object of the legislation. We have held that the object of the legislation was to prevent evasion of tax.A similar device would not ordinarily be resorted to by individuals by entering into partnership with persons other than those mentioned in the sub-section, as it would involve a risk of the third party turning round and asserting his own rights. The Legislature, therefore, selected for the purpose of classification only that group of persons who in fact are used as a cloak to perpetrate fraud onis a greater scope for fraudulent evasion by constituting fictitious partnership along with ones wife and minor children than in a case of separate income of the spouses derived from different sources. That apart, the present social and economic position of women in India as compared with their compeers in America, even as it existed in 1931, is so low that it would be inappropriate to apply the decision made in America to a similar case arising in India. A wife in India, particularly if she be illiterate - a large majority of them are illiterate - would ordinarily be in economic matters a tool in the hands of her husband. Many things are done in her name without her knowledge of the same. When the Legislature of this country, which is assumed to know the conditions of the people and their requirements, with the awareness of this particular widespread fraudulent device in the matter of evasion of taxes, made a law to prevent the said fraud, it is difficult for this Court in the absence of any counterbalancing circumstances to hold, on the analogy drawn from American decisions, that the need for such a law is not in existence. On the contrary, there is a direct decision of the Madras High Court in 1954-26 I T R 137 : (AIR 1954 Mad l120), sustaining the said provision on the ground of reasonable16 (3) (a) of the Act must, therefore, pass both the tests and if it violates any of the provisions of Art. 19, to the extent it is inconsistent with the said provisions, it will be void. This view is in consonance with that expressed by this Court in K. Thathunni Moopil Nair v. State of Kerala, (Petns. Nos. 13 to 24, 42 and 46 to 54 of 1958, D/- 9-12-1960) : (AIR 1961 SC 552  ). There, the petitioners impugned the constitutionality of the Travancore-Cochin Land Tax Act, XV of 1955, as amended by the Travancore-Cochin Land Tax (Amendment) Act, X of 1957, and Sinha, C. J., speaking for the Court held that the Act was void as infringing not only Art. 14 of the Constitution but also Art. 19 (1) (f) thereof. The learned Chief Justice, after considering the relevant provisions of the Act and having regard to the unreasonable nature of the restrictions, came to the conclusion that the provisions of the Act were unconstitutional, viewed from the angle of the provisions of Art. 19 (1) (f) of the Constitution.13. We cannot, therefore, accept the broad contention of the learned Additional Solicitor General that a tax law cannot be questioned on the ground that it infringes Art. 10 of thescope of the provisions is limited only to a few of the intimate members of a family who ordinarily are under the protection of the assessee and are dependants of him. The persons selected by the provisions, namely, wife and mirror children. cannot also be ordinarily expected to carry on their business independently with their own funds, when the husband or the father is alive and when they are under his protection. Doubtless some of the said partnerships may be genuine and the wife or minor children may have contributed capital to the business; but the provisions do not in any way affect their rights and even the liability inter se between the husband and the wife or the minor children, as the case may be, in respect of the tax paid. It is true that in computing the total income of an individual for the purpose of assessment, their income in their capacity as partners shall be included in the income of the individual; but the section does not prevent the husband or the father, as the case may be, from debiting against them in the partnership accounts that part of the tax referable to the share or shares of their income. It may be that a father or a husband may have to pay tax at a higher rate than ordinarily he would have to pay if the addition of the wifes or childrens income to his own brings his total income to a higher slab. But it may not necessarily be so in a case where the income of the former is not appreciable; even if it is appreciable, he can debit a part of the excess payment to his wife and children. In short, the firm, though registered, would be treated as a distinct unit of assessment, with the difference that, unlike in the case of a registered firm, the entire income of the unit is added to the personal income of the father or the husband, as the case may be. This mode of taxation may be a little hard on a husband or a father in the case of genuine partnership with wife or minor children, but. that is offset, to a large extent, by the beneficent results that flow there from to the public, namely, the prevention of evasion of income-tax, and also by the fact that, by and large, the additional payment of tax made on the income of the wife or the minor children will ultimately be borne by them in the final accounting between them. In these circumstances, we cannot say that the provisions of S. 16 (3) of the Act impose an unreasonable restriction on the fundamental rights of the petitioner under Art.19 (1) (f) and (g) of the Constitution.