THE AMALGAMA'MlD TEA ESTATE CO. LTD. ETC.

A v.

STATE OF KERALA

April 2, 1974 [A. N. RAIY, C.J., P. JAGANMOllAN REDDY, s. N. DWJVEDI,

P. K. GOSWAMI AND R. S. SARICARIA, 1J, J

Constit11tion of India. A.rt. 14-Classificati"n test if inflexible and doctrlnairi.

Kera/a Agric11/t11ral Income Tax Act, 1950-lf imposition of graduated .ta.T betwttll don1t.stic and foreign companies violates Art. 14.

The petitioners, two foreign companies, had been assessed to agricultural income tax under the Kerala Agricultural Income-tax Act, 1950 , M amended by the Amendment Act of 1970. n1e Act has fixed a graJ\1ated scaJe on 3Ji:ri:ulhtral income tax to a minimum of 65% on domestic companies anJ a flat rate: of 75% of. the total incorne on foreign companies. The petitioner.1 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 bsed 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 : (I) The impugned provisions of the Amending Act, 1970 were not violative of Art. 14.

The impuJ!; ned legislation, in order to get tht: green light from Art 141 should satisfy the classification test evolved by this Court namely

(I) the classification should be passed on an intelligible differenlia 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 doctFinuire.

Jt gives do.1e regard to the complex necessities and intricate -problems of government.

As revenue is the first necessity of the State and as taxes arc l'aised for various purposes and bv an adiustment of diverse elements, the Court grants the State greater choice of classification in the field of taxation than in other spheres.

[822 G]

Kl1andi1:e Sham Bhat \'. Auricu/tura/ /11conie-tax Officer, 1\.l.R. 1963 S.C. 591 and Kasargod Ravi Ver1na Rajall v. Union of /11dia [19691 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 salute h!ars th: burden of eitab'.ishing that the statu~. is clearly' violative of Art. 14. [823 BJ

Cl1ara11jl1 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 pre!iented before the court that domestic companies and foreign companies carrying on agriclllture in the S'tate of Kerala are equaly circumstanced. [823 0]

D. P. Jo.lii v. State of 1'1Cldlir11 l}lwrat, [1955], 1 S.C.R .. 1215, at p. 1228, Hu11x. Muller of Nurenburg v. Super1111e11dent Pre.ndencJ. Jail, Calcutla, [1955] 1 S.C.R. 1284, K. T. Moopil Nair v. State of Kerala t1961] 3 S.C, R. 77 and

late of Kerala, v. Haji K. K11tty Nalw, A.l.R. 1959 S.C. 378, referred to.

ORIGINAL JURISDICTION: Writ Petitions Nos. 2 and 9 of 1971.

Under Article 32 of the Constitution for the enforcement of fundamental rights.

AMAL. TEA ESTATE\', KER.ALA (Dwivtdi, /.) 821

A G. B. Pai, 0. C. Mathur, D. N. Misra, J. B. DaJaclw11ji and Rmirider Narain, for the petitioners

L. N. Misra, Solicitor General of India and A. G. P11dissary, for the respondent.

The Judgment of the Court was delivered by

B Dw1vE01, J.-Thc two petitioners have been assessed to Agricultural Income-tax by the State of Kerala under the Agricultural Incometa• 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 Pan I to the Schedule of the Kcrala Agricultural Jncome- C tax (Amendment) Act, 1970 are violative of Art. 14 o{ the Constitution.

it will facilitate appreciation of the facts and the constitutional qu .... stlon 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 Travancorc-Cochin Agricultural Income-tax Act.

Later as a result of the State'-; 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 o[ Kerala. Tilt the Amending Act of l 970, all companies were liable to pay tax according to their total income.

The tax is chargeable under s. 3.

Sub-section. (l) thereof provided that the agricultural incon1c at the rate or rates specified in the schedule to the Act shall be charged oa the total agricultural income ofthe previous year of every person. It was a grnduated 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' as "'a company fonncd and registered under the Companies Act, 1956 ... and includes a company 'formed and registered under any law relating to companies formerly in force in any part of India." lt 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 CC\mpanics Act, 1956 .... and includes any foreign association whether incorporated o_r 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 fron1 a 'do1nestic co1npany.' It is this :

A. Where the total agricultural_ incon1c docs not exceed

Rs. 25,000-45 per cent of the total agricultural income

B. Where the total agricultural income exceeds. Rs. 25,000

but docs nol exceed Rs. 1 lakh-50 per cent of the total

g:ricultural inco1nc

C. Where the total agricultural income exceeds Rs. l 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 the total agricultural income.

The provisos to vai-ious 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 agricultriral income.

It is obvious from the review of the aforesaid provisions that while C in the case of domestic companies a graduated scale is fixed, in the ca..e 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 D 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 pwpose ought to be achieved by the taXing statute. Reliance is placed on Wheeling Steel Corporation v. C. Emory G/ander, P) where the U.S.A. Supreme Court has said: "After a State has chosen to domesticate foreign corporations, they arc entitled to equal protection with the State's own corporate progeny, at least to E 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 Kera!a. The impugned legislation, in order to get the green light from Art. 14, F should satisfy the classification test evolved by this Court in a catena of cases. According to that test ( 1) the class.ification should be based on an inte!iligible differentia and (2) the differentia should bear a rational relation to the purpose of the legislation.

The classification test is, however, not inflexible and doctrinaire.

It gives due regard to the complex necessities and intericatc problem• G 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. Accorging to Subba Rao J.,, "(T) he 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 H principles underlying the said doctrine.

The power of the Legislature

(I) 93 Law. Edn. 1544.

AMAL. TEA ESTATE v. KERALA Wwivedi, !.) 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.Agricu/t11ral /iicome-tax Officer, Kasargod('); Ravi Verma Rajah v.

Union of India(').]

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)l1e presumption is always i11 favour of the constitutionality of an enact,-

ment 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(').] .

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 classe.s 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 Btngql v. Anwar Ali Sarkar(').]

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 onbusiness also in this coun(fy, and particularly in the State ¢ Kerala.

In Kerala their main business is oneof 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. Magni tude of their business inside a.nd 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.T.R. 1963 S.C. 591.

(2) (1969! S. C. R 827 ()) (1950] S. C'. R. 869 at p, 879 per Fazal AH .T.

(4) [19521 S. C.R. 284 at p, 303

There is no denying the fact that for various reasons a domestic A company may be 1rr.ated 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 modem 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 b~ safely presumed that the State of Kerala shOuld be striving to improve agriculture and B

anim~I husbandry within 11s boundaries. It may also be presumed that in so doing it mu!)t be 1nvesttng 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 c 11ot proved to be arbitrary or unreasonable.

It may be that the domestic companies own land which is less fertile or produce inferior quality of plantation crops while the foreign companies own 1no.re fertile land and produce superior quality of plantation crops.

In that case. the domest'c companies would not be able to withstand the compctitic!l1 or

the foreign con1punics rind would not survive. 1hc State might have chosen to give the domstic con1panies protection against the foreign D companies.

And there seems to be yet another good reason for this.

The entire income earned by a domestic company fron1 business insid~

as well as outsido 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, l 94 7. it is open to a forcig;1 company to transmit money out of India with the permission of the E.

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 forcig11 co1npanics.

On these considerations it cannot be said that the cla>Sification ot c.ompanics into domestic and foreign con1panies has no rational rcJation 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 Bilarat(I). That case related to the question of admission of students in a Medical College in the Sta!e 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 btJna fide residence of Madhya Bharat were also requ; rcd to pay capitation fe.o of Rs. 1500/-.

A student who was not a hona fide resident of Madhya Bharat challenged the capitation fee as being violative of Art. J4_ The majority of the Court overruled the contention.

Speaking for the Court, Vcnkatarama Ayyar J. said :

'The object of the classification underlying the impugned rule was cleerly to help to some extent students who residents of Madhya Bharat in the prosecution of their studies,

(t) lt955] t S. C.R. 1215 ot P. t228.

' '

AMAL. TEA ESTATE v. KERALA <Dwivedi, J,) 825

and it cannot be disputed that it is quite a legitimate and laudable objective for a State to encourage education within Us borders.

Education is a State subject, and one of the directive principles declared in Pan IV of the Constitution 1s 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 Medioal 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 presuma- 2bly 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 rea sonable 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(') 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 1s 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 Kcrala is not taxing the property, but the income, of the petitioners from their agricultural property.

In Haus Mu!/er of Nurenbug v. Su, perintendent, Presidency Jail, Calcutta('). this Court upheld the classification of foreigners into those who are British subjects and those who arc not British subjects for the purpose of preventive detention.

The Court said there : "(I )t is casih understandable that the reasons of State may make it desirable tO. classify foreigners into different groups."

K. T. llfoopi/ Nair v. State of Kera/a(') and State .of Kera/a v. l/aji K. Kully Naha(') deal with taxing statutes. In the first cos~.

{l J [1953] S.C.R. 254.

(JI [1961] J S.C.R. 77. (2)

[1955! I S.C.R. 11~4.

(4) A.l.R. 1969 S.C. JW.

the State oj Kerala had imposed a uniform tax levy on land.

The A taxing pr, ovisions 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 provisions 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 B pctitiOncrs.

We are of opinion that the impugned provisions of the Amending Act of 1970 are not violative of Art. 14.

The petitions arc accordingly disn1isscd with costs. One set.

P.B.R.

Petitions disn1issed.