Ramjilal vs Income-Tax Officer, Mohindargarh

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Petition No. 135 of 1950

Decision Date: 12 January 1951

Coram: Hiralal J. Kania, Saiyid Fazal Ali, B.K. Mukherjea, Das

In the matter titled Ramjilal versus Income-Tax Officer, Mohindargarh, the Supreme Court of India rendered its judgment on 12 January 1951. The bench that heard the case included Justice Hiralal J. Kania, Justice Saiyid Fazal Ali and Justice B.K. Mukherjea. The judgment also records the names Das and Sudhi Ranjan as part of the bench composition, with Justice Kania identified as the Chief Justice, Justice Fazal Ali as a senior judge, and Justice Mukherjea as a puis-neuf judge. The decision is reported in 1951 AIR 97 and 1951 SCR 127 and has been cited in numerous subsequent Supreme Court reports, such as D 1952 SC 115 (7), D 1954 SC 297 (10), R 1955 SC 3 (5), F 1955 SC 661 (6), RF 1959 SC 149 (52), R 1959 SC 395 (28), RF 1961 SC 65 (5, 37), RF 1961 SC 232 (16, 37), R 1961 SC 552 (32), RF 1962 SC 1006 (34, 72, 75, 80, 81), O 1962 SC 1563 (15), RF 1962 SC 1621 (12, 31, 44, 46, 122, 165), R 1963 SC 630 (25), R 1966 SC 619 (7), R 1970 SC 470 (33), RF 1971 SC 870 (10), D 1974 SC 1105 (12). The issues raised in the petition concerned several constitutional provisions, namely Articles 14, 31(1), 32 and 265 of the Constitution of India, together with the Patiala and East Punjab States Union General Provisions (Administration) Ordinance (No XVI of 2005). The petitioner questioned the legality of a uniform income-tax law introduced on 20 August 1948, alleging that assessments were being made at different rates in different former princely states, thereby violating the principle of equality before the law and the right not to be deprived of property except under lawful authority. The petitioner also sought protection under Article 32 against the tax assessment, raising the question of whether the ordinance could be applied retrospectively to income accrued before 20 August 1948. The headnote of the judgment explained that Section 3(1) of the Ordinance, which became effective on 2 February 1949 and revived an earlier ordinance in force from 20 August 1948, stipulated that from that appointed day all laws existing in Patiala State would apply mutatis mutandis to the territories of the Union, subject to the condition that any proceedings pending before courts or other authorities of the Covenanting States would be disposed of according to the law that governed such proceedings immediately before 20 August 1948. At the time, the Covenanting State of Kapurthala possessed an income-tax law with a lower tax rate than the Patiala Income-Tax Act, whereas the Covenanting State of Nabha had no income-tax law at all. Consequently, for the accounting year ending 12 April 1948, assessors in Kapurthala were taxed at the lower rates fixed by the Kapurthala Income-Tax Act, in accordance with the proviso in Section 3 of the Ordinance concerning pending proceedings. Assessors in Nabha, however, were taxed at the higher rates prescribed by the Patiala Act because no income-tax law existed in Nabha on 20 August 1948 and therefore no tax proceedings were pending there. The petitioner, who was an assessee residing in Nabha, was subsequently assessed under the Patiala Act.

The petitioner was an assessee who lived in the State of Nabha and who had been assessed for income tax under the Patiala Income-Tax Act. He filed an application under Article 32 of the Constitution seeking a writ of certiorari to set aside the assessment. He argued that his fundamental right to equality before the law and equal protection of the laws, guaranteed by Article 14, was denied because he was taxed at a higher rate than the assess-ees of Kapurthala, who were taxed at a lower rate. He further contended that the Ordinance which introduced the Patiala Income-Tax Act in Nabha was enacted only on 20 August 1948 and therefore could not be given retrospective effect to levy tax on income that had accrued in the fiscal year ending 12 April 1948. On this basis he claimed that his right under Article 31(1) – that no person shall be deprived of his property except by authority of law – was being infringed.

The Court held that any difference in tax rates between the assess-ees of Kapurthala and those of Nabha did not arise from the Ordinance. The distinction was due to the factual circumstance that Nabha had no income-tax law in force on 20 August 1948, and consequently there were no pending assessment proceedings against any Nabha assess-ees. The provision that pending proceedings should be concluded according to the law applicable at the time the liability arose and the proceeding began was therefore a reasonable classification of assess-ees. Such classification was permissible under the equal-protection requirement of Article 14. The Court further observed that Article 965 of the Constitution provides that no tax shall be levied or collected except by authority of law. Accordingly, Clause (1) of Article 31 deals with deprivation of property that is not the imposition or collection of tax. Since the right conferred by Article 265 is not a right under Part III of the Constitution, it cannot be enforced under Article 129.

The matter was placed before the Supreme Court under original jurisdiction as Petition No. 135 of 1950. It was an application under Article 32 for the issuance of a writ of certiorari and a writ of prohibition. Counsel for the petitioner represented his interests, while counsel for the respondent, the Attorney General for India, appeared on behalf of the State. The judgment was delivered on 12 January 1951. The Court described the application as a test case, noting that the decision would affect the rights of many other individuals whose situations were similar to that of the petitioner. The Court found no serious dispute regarding the material facts and proceeded to consider the petitioner's claims about the violation of his fundamental rights under Articles 14 and 31.

In this matter the Court observed that the Punjab States, among them Patiala and Nabha, entered into a covenant with the concurrence and guarantee of the Government of India for the purpose of uniting and integrating their territories into a single State that would possess a common executive, legislature and judiciary and would be known as the Patiala and East Punjab States Union, hereinafter referred to as the Pepsu. By virtue of article III(6) of the covenant the then Ruler of Patiala was appointed the first President, or Raj Pramukh, of the Council of Rulers and was required to hold that office for the remainder of his lifetime. Article VI of the covenant set out the procedure for the transfer of administration from each Ruler to the Raj Pramukh. It required that, as soon as practicable and in any event no later than 20 August 1948, each Ruler should surrender the administration of his State to the Raj Pramukh. Upon such surrender, the article stipulated that (a) all rights, authority and jurisdiction belonging to the Ruler that related to the Government of the Covenanting State would vest in the Union and could thereafter be exercised only in accordance with the provisions of the covenant or the Constitution to be framed thereunder; (b) all duties and obligations of the Ruler relating to the Government of the Covenanting State would devolve upon the Union and would be discharged by it; (c) all assets and liabilities of the Covenanting State would become the assets and liabilities of the Union; and (d) any military forces of the Covenanting State would become the military forces of the Union. Article X provided for the formation of a Constituent Assembly that was to frame a unitary constitution for the Union within the framework of the covenant and the Constitution of India. The same Assembly was also to function as the interim Legislature of the Union until an elected legislature could be constituted. The proviso to clause (2) of Article X stated that, until a Constitution framed by the Constituent Assembly came into operation after receiving the assent of the Raj Pramukh, the Raj Pramukh would have the power to make and promulgate Ordinances for the peace and good government of the Union or any part thereof, and that any such Ordinance would, for a period not exceeding six months from its promulgation, have the same force as an Act passed by the Constituent Assembly, although any such Ordinance could be controlled or superseded by any such Act. The Union was inaugurated on 15 July 1948, and thereafter the Raj Pramukh assumed administration of the various Covenanting States. The administration of Nabha State was transferred to the Raj Pramukh on 20 August 1948. On that same day, exercising the powers vested in him, the Raj Pramukh promulgated Ordinance No 1 of 2005, entitled the Patiala and East Punjab States Union (Administration) Ordinance, 2005. The Court noted that the relevant provisions of this Ordinance included a clause providing that the Ordinance would extend to the territories of the Covenanting States from the date on which the administration of any such State was transferred to the Raj Pramukh.

The Ordinance declared that it would apply to the territories comprising the Covenanting States from the moment the administration of any of those States was transferred to the Raj Pramukh. It provided that, as soon as the Raj Pramukh assumed control of a Covenanting State, every law, ordinance, act, rule, regulation, notification, Hidayat and Firman-i-Shahi that had the force of law in Patiala State on the commencement date of the Ordinance would automatically apply mutatis mutandis to the territory of that State. Simultaneously, all laws that had been in force in the Covenanting State immediately before that date were to be repealed. However, the Ordinance expressly preserved any proceedings of any nature that were pending on that date in the courts or offices of the Covenanting State, directing that such proceedings must be disposed of in accordance with the laws then governing those proceedings in the respective State, notwithstanding any other provision of the Ordinance or any other Ordinance. Section 6 of the same Ordinance dealt with the adaptation of the laws mentioned in Section 3 and stipulated, among other things, that any reference in those laws to “Patiala State” or similar terminology would be interpreted as a reference to the State of the Union. Subsequently, a notification identified as No. 35 dated 27-May-1948 and signed by the Revenue Secretary announced that the Patiala Income-Tax Act of 2001 and the rules made thereunder had come into force in the various Covenanting States as of 20 August 1948, thereby repealing any earlier law on the subject in those States, except insofar as pending proceedings were concerned. It was noted that, prior to that date, Nabha State possessed no law imposing income-tax on its subjects. On 14 November 1948, the Commissioner of Income-Tax issued Notification No. 4 dated 29 July 1948, informing that persons residing in the Covenanting States of Nabha and Nalagarh would henceforth be assessed to income-tax under the Patiala Income-Tax Act, 2001, and that such persons whose income reached the taxable limit should maintain regular and proper accounts for audit purposes by the Income-Tax Department. On 2 February 1949, Ordinance 1 of 2005 was repealed and replaced by Ordinance No. XVI of 2005, promulgated by the Raj Pramukh and titled the Patiala and East Punjab States Union General Provisions (Administration) Ordinance, 2006. Section 3(1) of this new Ordinance reads: “3. (1) As from the appointed day, all laws and rules, regulations, bye-laws and notifications made thereunder, and all other provisions having the force of law, in Patiala State on the said day shall apply mutatis mutandis to the territories of the Union and all laws in force in the other Covenanting States immediately before that day shall cease to have effect; Provided that all suits, appeals, revisions applications, reviews, executions and other proceedings, or any of them, whether Civil or Criminal or …”

The Ordinance stated that any revenue pending in the courts or before authorities of any Covenanting State must be dealt with, despite any contrary provision in the Ordinance, according to the laws governing such proceedings that were in force in that Covenanting State immediately before the appointed day. Section 2(a) defined the “appointed day” as the fifth day of Bhadon, 2005, which corresponded to 20 August 1948. The Ordinance also contained a provision for adaptation that was similar to section 6 of Ordinance 1 of 2005. In addition, reference had to be made to Ordinance No. 1 of 2006, known as the Finance Ordinance, which was promulgated on 13 April 1949 and came into force on the same date. Section 5 of that Finance Ordinance introduced several amendments to the Patiala Income Tax Act, 2001; it recast sections 3 and 34 of that Act and added a new provision identified as section 23B. Section 6 of the Finance Ordinance read as follows: “For the assessment year beginning on the first day of Baisakh, 2006, that is, in respect of the accounting of income, profits and gains of the preceding year ending on the last day of Chet, 2005, (a) income-tax shall be charged at the rates specified in Part I of the Second Schedule to this Ordinance, and (b) rates of super tax shall, for the purposes of section 55 of the Patiala Income Tax Act, 2001, be specified in Part II of the Second Schedule to this Ordinance.” Within this legislative framework the facts giving rise to the present petition were to be considered. The petitioner was a resident of Ateli in the district of Mohindargarh, which at that time was part of the former Nabha State but later became incorporated in PEPSU. He had been carrying on his business in Ateli for many years under the name and style of Raghunath Rai Ram Parshad and had never paid any income tax because no law imposing such tax existed in the Nabha State. On 20 October 1949, he received a notice issued under sections 22(2) and 88 of the Patiala Income Tax Act, 2001, directing him to file a return for the income-tax year 2006 (13 April 1949 to 12 April 1950) and to disclose his income for the preceding year (13 April 1948 to 12 April 1949). He filed the required return on 4 December 1949, and an assessment of income tax was made against him on 15 February 1950. Subsequently, on 23 May 1950, he received another notice issued under section 34, calling upon him to file a return for the year ending on the last day of Chet 2005, namely the period from 13 April 1948 to 12 April 1949. In that return he was required to specify his income for the previous year, which was the year 2004 (13 April 1947 to 12 April 1948). It appeared that the petitioner, together with other assessees from Ateli and Kanina, submitted a petition before the Income Tax Officer on 9 July 1950, requesting that the officer not proceed with the assessment for the year 2005, but on July

On 13 May 1950 the Income Tax Officer, relying on his own judgment, made an assessment of the petitioner under section 34(4) read with section 22(4) of the Income Tax Act. The petitioner, together with other similarly situated assessee, appealed to the Income Tax Commissioner and also approached the Central Board of Revenue in New Delhi, but none of those attempts succeeded. There is no record that the petitioner filed any formal appeal under the Patiala Income Tax Act against the assessments for either of the two assessment years, namely 2005 and 2006. Consequently, on 10 August 1950 the petitioner instituted the present petition before this Court under article 32 of the Constitution, seeking a writ of certiorari to set aside the assessments of his income for the fiscal years 2004 and 2005 and also to obtain ancillary relief. While this petition was pending, the tax authorities issued a notice under section 46 warning that a penalty would be imposed if the tax remained unpaid. The petitioner’s principal contention is that the assessments violate his fundamental right to equality before the law and to equal protection of the laws guaranteed by article 14 of the Constitution. He set out his grievances in paragraphs 10 and 11 of his petition. He alleges that the people of Kapurthala, which forms part of Pepsu, were directed to pay income tax for periods prior to 20 August 1948 at the lower rate fixed by the Kapurthala Income Tax Act, whereas the people of Nabha, who had not been subject to any income-tax liability before that date, were required to pay at the higher Patiala rate. He argues that this differential treatment is discriminatory and contravenes article 14. Paragraph 10 of the affidavit filed by Sardar Gurbax Singh, the Additional Director of Inspection (Income Tax), New Delhi and former Commissioner of Income Tax, Punjab and Pepsu, refutes this allegation. The affidavit states that for the assessment year 2005, assessable persons in Kapurthala whose cases were pending as of 20 August 1948 were indeed assessed under the Kapurthala Income Tax Act at the rates prescribed therein. However, for the assessment year 2006, the provisions of the Patiala Income Tax Act and the rates fixed under it were uniformly applied throughout Pepsu, including Kapurthala. The petitioner’s reply does not deny this statement, and therefore the Court is inclined to accept it as correct. The assessment of Kapurthala assessable persons for the year 2005 at the old Kapurthala rate was clearly made under the proviso to section 3 of Ordinance No. 1 of 2005, a provision that was reproduced in the proviso to section 3(1) of Ordinance No. XVI of 2006, both of which mandated that all pending proceedings be concluded according to the law applicable at the time the proceedings were initiated.

In the present case the Court observed that there was no assessment pending against any taxpayer in the former State of Nabha on the date of 20 August 1948 because, before that date, the Nabha State had not enacted any Income Tax Act. Consequently, there was no occasion to complete any pending tax proceeding against any Nabha assessee, and therefore no grievance of discrimination could arise on that ground. The Court held that any apparent discrimination did not stem from the two Ordinances mentioned earlier but rather from the factual circumstance that the Nabha State lacked an income-tax statute and consequently had no pending assessments. The Court further stated that the statutory rule requiring that pending proceedings be concluded according to the law in force at the time the right or liability arose and at the time the proceeding commenced represents a reasonable legislative classification of assessees. Such a classification is permissible under the equal-protection guarantee of Article 14 and admits no exception. Accordingly, the Court found that the alleged violation of fundamental rights under Article 14 was wholly unfounded. Counsel for the petitioner, Dr Tek Chand, then argued that the administration of the Nabha State had been taken over by the Raj Pramukh only on 20 August 1948 and that the Patiala law, including the Patiala Income Tax Act, 2001, had become operative from that same date. On that basis, he contended that assessing tax on the petitioner’s income which accrued before 20 August 1948 was illegal, not authorized by the Ordinances, and that the State’s attempt to collect such tax infringed the petitioner’s fundamental right to property protected by Article 31(1) of the Constitution, which states, “No person shall be deprived of his property save by authority of law.” The Court noted that the wording of Article 31(1) reproduces subsection (1) of section 299 of the Government of India Act, 1935, except for the omission of the words “in British India.” The Court then referred to Article 265, located in Part XII, Chapter I of the Constitution, which provides that no tax shall be levied or collected except by authority of law. The Court observed that the Government of India Act, 1935 contained no comparable provision in its finance chapter. If the collection of taxes were already covered by Article 31(1), the separate provision of Article 265 would be redundant. Therefore, the Court concluded that Article 31(1) is intended to protect against deprivation of property other than by taxation, while taxation is dealt with separately in Article 265. The Court further remarked that, in the United States, the power to tax is treated as distinct from police power or eminent domain, and that the Indian Constitution similarly treats taxation as a separate matter from compulsory acquisition of property.

The Court observed that the Constitution had made an independent provision that gave protection against taxation except by authority of law. When the learned counsel for the petitioner was asked whether this was not the correct position, he failed to provide any cogent or convincing answer to defeat the conclusion that had been placed before him. In the Court’s opinion, the protection against the imposition and collection of taxes except by authority of law derived directly from article 265 and was not secured by clause (1) of article 31. Because article 265 was not situated in Chapter III of the Constitution, the protection it afforded could not be characterized as a fundamental right that could be enforced by an application under article 32 before this Court. The Court clarified that it was not saying that the right guaranteed by article 265 could not be enforced; rather, the Court stated that such a right could be enforced through the appropriate legal proceedings. The Court further explained that the present application, insofar as it claimed to be founded upon article 32 read with article 31(1), was misconceived and therefore had to fail. The entire argument of the petitioner’s counsel was based on the premise that protection against the imposition and collection of taxes except by authority of law was guaranteed by article 31(1). He attempted to show that the Pepsu Ordinances, when correctly interpreted, could not impose any income tax retrospectively; that the Income Tax Officer, relying on an erroneous view of the law, had wrongly assessed tax on income that accrued before 20 August 1948; and that, as a result, the petitioner was facing a deprivation of property that was not authorised by law. The Court held that, given its view that the protection against taxation except by authority of law was secured by article 265 and not by article 31(1), the questions raised by the petitioner’s counsel did not arise in the present application, and no opinion on those questions needed to be expressed. The Court noted that those issues could be addressed only in appropriate proceedings and not in an application under article 32. Consequently, the Court found that the petition failed on the simple ground that no fundamental right of the petitioner had been infringed, either under article 14 or under article 31(1). The petition was therefore dismissed with costs. The Court recorded that the petition was dismissed. The agent for the appellant was identified as Naunit Lal and the agent for the respondent was identified as P. A. Mehta.