Seth Banarsi Das Etc. vs Wealth Tax Officer, Special Circle Meerut

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 124 to 129 of 1964

Decision Date: 08 December 1964

Coram: P.B. Gajendragadkar, M. Hidayatullah, J.C. Shah, S.M. Sikri, R.S. Bachawat

In this case the Supreme Court of India delivered its judgment on 8 December 1964. The matter was styled Seth Banarsi Das Etc. versus Wealth Tax Officer, Special Circle Meerut. The opinion was written by Chief Justice P B Gajendragadkar and was heard by a bench comprising P B Gajendragadkar, M Hidayatullah, J C Shah, S M Sikri and R S Bachawat. The decision was reported in 1965 AIR 1387 and in the Supreme Court Reporter as 1965 SCR (2) 355. Subsequent citations of the judgment included RF 1967 SC1176 (9), R 1969 SC 59 (3), R 1972 SC 1061 (99,171,174), R 1972 SC 2119 (3) and RF 1981 SC1269 (3). The statutory provision under consideration was section 3 of the Wealth‑Tax Act, 1957 (No 27 of 1957), which made Hindu undivided families chargeable to wealth tax. The appellants questioned whether that provision was ultra vires the Constitution of India, Seventh Schedule, List 1, Entry 86.

The petitioners, who were Hindu undivided families, challenged the levy of wealth tax on the ground that section 3 of the Wealth‑Tax Act, insofar as it brought Hindu undivided families within its charge, exceeded the constitutional competence conferred by Entry 86 in List 1. Their writ petitions had been dismissed by the High Court, but a certificate of fitness was granted and they appealed to the Supreme Court. The petitioners put forward four principal contentions. First, they argued that Entry 86 did not enumerate Hindu undivided families as possible assessors and that the word “individuals” used therein did not cover groups of persons. Second, they maintained that the composition of a Hindu undivided family was fluctuating, and that the shares of coparceners in the family’s capital assets could increase or decrease, making it impossible to fix a definitive asset value for the entire accounting year unless a partition took place. Third, they submitted that Entry 86 should be read restrictively because, unlike Entry 82, it expressly identified the assessable entities and, by separately mentioning companies, introduced a limitation on the meaning of “individuals”. Fourth, they contended that income‑tax legislation had always drawn a distinction between individuals and Hindu undivided families, and that such a distinction must be presumed to have been observed in the framing of Entry 86. The Court examined case law, including Commissioner of Income‑tax, Madhya Pradesh & Bhopal v Sodra Devi and Damayanti Sahni v Commissioner of Income‑tax, and concluded that the impugned provision was valid because Parliament was competent to legislate with respect to Hindu undivided families under Entry 86. The Court explained that the term “individuals” in Entry 86 was intended to encompass groups of individuals such as Hindu undivided families, noting that the Constitution‑makers were fully aware that many Hindu citizens lived in such families and that it would be inconceivable for the term “individuals” to have been introduced to exclude this large and extensive class of taxpayers. Accordingly, the Court held that section 3 was within parliamentary competence and was not ultra vires the Constitution.

The Court referred to the decision reported in volume thirty‑two of the Indian Tax Reports at page six hundred fifteen, and stated that a group of individuals whose assets are to be assessed for wealth tax is naturally understood to be a unit of persons who own those assets jointly. The Court explained that variations in the individual rights of members of such a group, whether those rights increase or decrease, do not affect the question of whether the term “individuals” is sufficiently broad to cover groups of persons. The Court then emphasized that the entries in the Constitution’s legislative lists must be given their broadest possible meaning and should not be interpreted narrowly or restrictively. In support of this proposition, the Court cited the decision of the United Provinces v. Mst. Atiqa Begum and Others, reported in the 1940 Federal Court Reports at page one hundred ten, and observed that nothing in the context of Entry eighty‑six introduces any element of limitation when construing the word “individuals.” The Court noted that Entry eighty‑two is phrased in broader terms than Entry eighty‑six because Entry eighty‑two deals with the Parliament’s power to tax income, limiting only agricultural income, whereas Entry eighty‑six concerns taxes on the capital value of assets and therefore required the Constitution‑makers to specify whose assets would be taxed. Consequently, each entry must be interpreted independently, and a restrictive reading of Entry eighty‑six cannot be justified merely because Entry eighty‑two is broader. The Court further rejected the argument that a restrictive interpretation of “individuals” is warranted because companies are not mentioned in that term, observing that the Constitution‑makers deliberately included a separate reference to companies to ensure that corporate capital would also be subject to tax.

The Court observed that legislative history showing a distinction between “individuals” and Hindu undivided families in the wealth‑tax statutes does not provide material assistance in construing Entry eighty‑six, because a word appearing in an organic constitutional document does not have to receive the same construction as it does in ordinary statutes. The Court cited the earlier decisions of Navinchandra Mafatlal v. The Commissioner of Income‑tax, Bombay City, reported in the 1955 Supreme Court Reports at page eight hundred twenty‑nine, and Navnitlal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income‑tax, Bombay, reported in the 1965 Supreme Court Reports at page nine hundred nine, to support this view. The judgment proceeded to list the civil appellate jurisdiction, noting that the appeals numbered one hundred twenty‑four to one hundred twenty‑nine of 1964 arose from the Allahabad High Court’s judgment and decree dated March twenty‑third, 1961, in civil miscellaneous writs numbered two thousand one hundred twenty‑seven, two thousand one hundred twenty‑eight and two thousand nine hundred eighty‑zero to two thousand nine hundred eighty‑three of 1959. Counsel for the appellants in civil appeals one hundred twenty‑four and one hundred twenty‑five were N. C. Chatterjee and J. B. Agarwala. Counsel for the appellant in civil appeal one hundred twenty‑six was A. V. Viswanatha Sastri together with J. P. Goyal. Counsel for the appellants in civil appeals one hundred twenty‑seven to one hundred twenty‑nine was J. P. Goyal. The Solicitor‑General, S. V. Gupte, appeared with R. Ganapathy Iyer, R. H. Dhebar and B. R. G. (names omitted for brevity).

K. Achar appeared for the respondents in all six appeals, and the judgment was delivered by Chief Justice Gajendragadkar. The central legal issue that the appeals presented was whether section 3 of the Wealth‑Tax Act, 1957, which sought to impose a wealth‑tax charge on the net wealth of a Hindu undivided family at the rates specified in the Schedule, was constitutionally valid. The appellants, each of whom was a Hindu undivided family, had been assessed under section 3 and challenged the assessment on the ground that the section exceeded Parliament’s legislative authority. Their writ petitions were heard by a Special Bench of the Allahabad High Court consisting of Justices Gurtu, Upadhya and Jagdish Sahai. Both Justices Gurtu and Jagdish Sahai dismissed the appellants’ objection and upheld the validity of the contested provision. Justice Jagdish Sahai reasoned that the provision fell within Parliament’s competence because it could be enacted under Entry 86 of List 1 of the Seventh Schedule to the Constitution. Justice Gurtu concurred with the conclusion of validity but based his reasoning on Entry 97 of List 1 read in conjunction with Article 248 of the Constitution. In contrast, Justice Upadhya held that neither Entry 86 nor Entry 97 conferred the necessary legislative power on Parliament to enact the provision, and therefore he concluded that the provision was ultra vires and the tax imposed on the appellants was invalid. The majority view of the Bench led to the dismissal of the writ petitions. After that decision, the appellants obtained certificates from the High Court and, relying on those certificates, brought their appeals before the Supreme Court. The Wealth‑Tax Act had been enacted in 1957 to provide for the levy of wealth tax. Section 3 of that Act stipulated that, subject to the other provisions of the Act, a tax—referred to as wealth‑tax—would be charged for each financial year beginning on the first day of April 1957 on the net wealth as of the valuation date of every individual, Hindu undivided family and company, at the rates specified in the Schedule. The constitutional provisions relevant to the question were: Entry 86 of List 1, which dealt with taxes on the capital value of assets, exclusive of agricultural land, of individuals and companies, and taxes on the capital of companies; Entry 97 of List 1, which covered any other matter not enumerated in List II or List III, including any tax not mentioned in those lists; and Article 248, which provided that Parliament had exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List, and that this power included the authority to impose a tax not mentioned in either list.

The appellants argued that the term “individuals” appearing in Entry 86 of List I cannot be interpreted to include Hindu undivided families. They maintained that the taxes Parliament may levy under this entry are limited to individuals and companies, and therefore cannot be imposed on a group of individuals such as a Hindu undivided family. Although a Hindu undivided family is composed of several coparceners who are each individuals, the appellants stressed that the challenged provision seeks to levy wealth tax on the capital value of the assets of the Hindu undivided family as a whole, not on the separate individuals. Consequently, they contended that the tax falls outside the scope of Entry 86. The appellants further submitted that, if Hindu undivided families are excluded from Entry 86, they likewise cannot be taxed under Entry 97, because Entry 97 deals with matters other than those listed in Entries 1 to 96 of List I as well as those enumerated in Lists II and III. Since wealth tax is specifically mentioned in Entry 86, the appellants argued that Entry 97 cannot be used to justify the tax on Hindu undivided families. Regarding Article 248, the appellants maintained that it must be read together with Entry 97, and that if wealth tax on the assets of a Hindu undivided family is outside both Entry 86 and Entry 97, then the residuary legislative power granted to Parliament by Article 248 cannot be invoked to validate the provision. This line of reasoning formed the basis of their challenge to the validity of the impugned provision.

The respondent, represented by the Wealth Tax Officer, sought to uphold the validity of the challenged provision primarily by relying on Entry 86 of List I. The respondent argued that the expression “individuals” in Entry 86 should be given a broad construction that encompasses groups of individuals, thereby bringing Hindu undivided families within its ambit. As an alternative, the respondent contended that Entry 97, being a residuary entry, would cover any matter not enumerated in List II or List III, including any tax not specified in those lists. The respondent further explained that the word “matter” in Entry 97 does not refer to taxes already listed in Entry 86; rather, it designates the subject‑matter about which Parliament intends to legislate under Entry 97. Consequently, if the capital value of the assets of a Hindu undivided family were held to be excluded from Entry 86, the respondent submitted that it would nevertheless fall within the scope of Entry 97, because the tax would then be a matter not enumerated elsewhere. With respect to Article 248, the respondent asserted that this article confers a residuary legislative power on Parliament that is independent of the entries in the Seventh Schedule, and therefore, even if the provision could not be justified under Entry 86 or Entry 97, Parliament could still rely on Article 248 to enact the wealth‑tax provision. These arguments framed the respondent’s position in defending the legality of the impugned provision.

The respondent asserted that Entry 97 of List I satisfied the condition laid down in that entry because the subject matter of the impugned provision had not been listed in List II or List III. Regarding Article 248, the respondent argued that this article confers a residuary legislative power on Parliament and must be interpreted separately from the entries in the Seventh Schedule. In other words, even if the impugned provision could not be upheld by linking it to Entry 86 or Entry 97 in List I, Parliament could still rely on the authority granted by Article 248 to enact the tax in question. This overall dispute formed the substance of the controversy between the parties before the Court.

The first issue for the Court to resolve was whether the impugned provision could be matched with Entry 86. In interpreting the word “individuals” used in that entry, the Court emphasized that the terms employed in the entries of the Seventh Schedule must be given their broadest possible meaning. The Court quoted the observation of Chief Justice Gwyer in The United Provinces v. Mst. Atiqa Begum and Others, stating that none of the items in the Lists should be read narrowly or restrictively, and that each general term should be understood to include all ancillary or subsidiary matters that can fairly be said to fall within its scope. The Court added that it is unwise to attempt to pre‑enumerate every matter that might be covered by a general description; instead, each case should be decided as it arises before the Court.

The Court also referred to a well‑established rule of construction that it is unreasonable to impose a limitation on the interpretation of a particular entry by comparing it with another entry in the same List. While determining the extent of the area covered by an entry, the Court must interpret the relevant words in a natural way and grant them their widest possible meaning. The purpose of the entries is to delineate the legislative competence of the respective legislative bodies, and therefore a narrow or restrictive approach to interpretation would be inappropriate.

The appellants contrasted Entry 86 with Entry 82, contending that the contrast revealed a limitation that should be read into Entry 86. Entry 82 deals with taxes on income other than agricultural income and, according to the appellants, confers an unlimited power to tax income without reference to “individuals” or “companies.” In contrast, Entry 86 specifically authorises a tax on the capital value of assets of “individuals” and companies. The appellants argued that this wording introduced a limitation, because it specifies the class of persons whose assets may be taxed, unlike Entry 82, which does not refer to the assessee at all.

The entry lists “individuals and companies” as the persons subject to the tax, and that enumeration itself imposes a limitation on the scope of the power. The appellants argue that, because companies are mentioned separately, the word “individuals” cannot be read to include companies; they further contend that “individuals” must refer only to natural persons and not to groups of persons such as Hindu undivided families. The Court is not persuaded by this line of reasoning. It observes that Entry 82, which deals with taxes on income other than agricultural income, does not refer to any particular assessees, because its purpose is merely to recognize Parliament’s competence to tax income, subject only to the agricultural‑income exclusion. By contrast, Entry 86 deals with taxes on the capital value of assets, and the Constitution‑makers therefore found it necessary to specify whose assets were liable to such tax, which explains the inclusion of both “individuals” and “companies.” The Court notes that the separate mention of companies may allow an interpretation that “companies” are not subsumed under “individuals,” or it may simply reflect a precautionary measure to ensure that corporate capital is clearly covered. Nevertheless, the Court finds it difficult to accept the proposition that the term “individuals” cannot at the same time encompass groups of individuals such as Hindu undivided families. It points out that the plural form “individuals” does not carry any special significance, because Section 13(2) of the General Clauses Act, 1897 provides that words in the singular include the plural and vice‑versa. The appellants’ argument rests on the assumption that the Constitution‑makers intended to exclude the capital value of Hindu undivided families from taxation, and based on that assumption they claim that the impugned provision cannot be sustained under Entry 86, nor under Entry 97 of List I, nor under Article 248. The Court finds this assumption untenable. It holds that, on its face, there is no basis to presume that the drafters of the Constitution intended to leave Hindu undivided families out of a tax on the capital value of assets. No rational justification for such an exclusion can be identified. Moreover, the appellants contend that the capital value of the assets of Hindu undivided families would never become the subject of wealth tax, because they are groups of individuals and therefore, according to the appellants, should fall outside Entry 86, making the individuals comprising such families immune from the levy.

The Court observed that the group of coparceners forming a Hindu undivided family is not a fixed set of persons; it is a fluctuating body whose respective shares in the family’s capital assets may rise or fall during the financial year, and those shares cannot be precisely determined for the whole accounting year unless the family is formally partitioned. In the Court’s view, this situation, at first sight, appears to conflict with the purpose of Entry 86, because the term “individuals” would seem incapable of covering such variable groups unless the word could be interpreted to exclude groups of individuals altogether. The Court noted that, although wealth‑tax legislation may levy tax on the capital value of the assets of Hindu undivided families by way of aggregating the assets of the individual coparceners and then imposing tax on the total, the method of assessment and the rate of tax are matters left to the legislature and therefore do not influence the enquiry into whether Parliament has the competence to enact the law. The Court further emphasized that it is unnecessary to argue that groups of individuals whose assets are collectively subject to wealth tax are somehow different from other groups of individuals that own assets together as a unit. The fact that the rights of the individual members of such a group may increase or decrease does not affect the question of whether the expression “individuals” in Entry 86 is wide enough to include groups of individuals. The Court found no indication in the text of Entry 86 of any restriction or limitation that would prevent interpreting “individuals” to include such groups. While ordinarily each individual would be taxed on the capital value of his or her separate assets, the Court held that when individuals unite to form a group that collectively owns capital assets, there is no clear reason to deem that the power to tax those assets falls outside the scope of Entry 86.

The Court also considered the argument that the meaning of the word “individuals” should be informed by the legislative history of tax statutes. In support of that contention, reference was made to Section 3 of the Indian Income‑Tax Act, 1922 (No. XI of 1922). That provision, inter alia, states that where a Central Act provides that income‑tax shall be charged for any year at any rate, the tax at that rate shall be levied for that year in accordance with the provisions of the Income‑Tax Act with respect to the total income of the preceding year of every individual, Hindu undivided family, company, local authority, every firm, other association of persons, the partners of a firm, or the members of an association taken individually. The argument advanced was that Section 3 recognises that the term “individual” does not include a Hindu undivided family, since the latter is mentioned separately. It was further pointed out that this distinction between an individual and a Hindu undivided family has been acknowledged in earlier Income‑Tax Acts, such as the definition of “person” in Section 3(7) of the 1886 Act and the exceptions listed in Section 5(i)(f) of the same Act, which treat income earned by a member of a Hindu undivided family as taxable when the family itself is liable to tax. The Court noted that the appellants relied on this historical separation to argue that “individuals” in Entry 86 should be read narrowly to exclude Hindu undivided families. However, the Court concluded that considerations of legislative history in tax statutes do not have a material bearing on the construction of the word “individuals” in Entry 86, and that the power to levy wealth tax on the capital value of assets owned by a Hindu undivided family remains within Parliament’s competence under Entry 86.

In the earlier Income‑tax Acts, Section 3(7) of Act 11 of 1886 defined the term “person” to include a firm and a Hindu undivided family, and Section 5(i)(f) of the same Act, which set out exceptions to the charging provision of Section 4, referred to any income that a person derives as a member of a company, a firm, or a Hindu undivided family when the company, the firm, or the family itself is liable to tax. Relying on the distinction drawn by those tax statutes between an individual and a Hindu undivided family, the appellants argued that the word “individuals” in Entry 86 should not be read to include a Hindu undivided family. Even assuming that the legislative history of tax legislation supports a separation between individuals and Hindu undivided families, the Court observed that such a consideration does not have material relevance for interpreting the word “individuals” in Entry 86. The Court noted that while tax legislation may, for convenience or other valid reasons, differentiate between individuals and Hindu undivided families, it is not proper to presume that the term “individuals” appearing in a constitutional provision must necessarily be given the same construction. To illustrate this point, the Court referred to the traditional concept of income as recognized by tax law. It cited the decision in Navinchandra Mafatlal v. The Commissioner of Income Tax, Bombay City, [1955] 1 S.C.R. 829, 857, where the Court held that the traditional concept of income does not allow a restriction or limitation when interpreting the word “income” in Entry 54 of List 1 of the Seventh Schedule to the Government of India Act, 1935, which corresponds to Entry 82 in List 1 of the Seventh Schedule to the Constitution. In that case, the validity of a tax on capital gains was challenged on the ground that capital gains could not be regarded as income, and thus Entry 54 did not justify the tax. The Court rejected that contention, holding that the word “income” in Entry 54 must be given the widest possible meaning and therefore could include a capital gain. The Court explained that this conclusion was not based on any legislative practice in India, the United States, or the Commonwealth of Australia, but “because such was the normal concept and connotation of the ordinary English word ‘income’. Its natural meaning embraces my profit or gain which is actually received.” The Court further referenced Navnitlal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income‑tax, Bombay, where it considered the validity of section 12(IB) read with section 2(6A)(e) of the Indian Income‑tax Act, 1922 (No. 11 of 1922) as it stood in 1955, and examined whether Parliament could treat a loan received by a shareholder as his income for tax purposes.

In this case, the Court observed that although Parliament could not choose to tax as income an item that could not reasonably be regarded as a citizen’s income, it could still levy a tax on a loan received by a shareholder if it was satisfied that the loan could be rationally construed as that shareholder’s income, and that in considering this question it would be inappropriate to apply the test traditionally prescribed by the Income‑tax Act. Accordingly, the Court held that the legislative history cited by the appellants concerning the meaning of the word “individuals” did not provide any material assistance for interpreting the term “individuals” in Entry 86. Turning to Entry 86, the Court asked whether, on a fair and reasonable construction, the word “individuals” could be limited strictly to single persons and be excluded from groups of individuals. The Court noted that if the purpose of the Entry was to enable Parliament to tax the capital value of assets, it would be unreasonable to impose a limitation on the meaning of “individuals” that would prevent taxation of assets owned by groups of individuals. The Court explained that when individuals form a group that owns capital assets, it is difficult to understand why the value of those assets should be excluded from the legislative field covered by Entry 86. The Court further observed that the Constitution‑makers were fully aware that Hindu citizens commonly form Hindu undivided families, and that if the objective was to tax the capital value of assets, it would be inconceivable that the word “individuals” was inserted in the Entry with the intent of excluding the large area represented by Hindu undivided families. Consequently, the Court was satisfied that the impugned section was valid because Parliament was competent to legislate with respect to Hindu undivided families under Entry 86. The Court also referred to several High Court judgments that consistently interpreted Entry 86 in the same manner, citing Mahavirprasad Badridas v. M. S. Yagnik, Second Wealth‑tax Officer, C‑11 Ward, Bombay; N. V. Subramanian v. Wealth Tax Officer, Eluru; P. Ramabhadra Raju v. Union of India; Sarjerao Appasaheb Shitole v. Wealth Tax Officer, A. Ward, Belgaum; and Rajah Sir M. A. Muthiah Chettiar v. Wealth Tax Officer, Special Investigation Circle ‘A’, Madras.

In this case, the Court observed that the earlier reported decisions demonstrated that the validity of the impugned provision had been contested before various High Courts on the ground that a Hindu undivided family constituted an association, and therefore the capital value of its assets could not be taxed under Entry 86. That contention naturally raised the issue of the true legal character and status of a Hindu undivided family, and the Courts had rejected the argument that such families were merely associations. Because that specific argument had not been raised before this Court, the Court stated that it did not consider it necessary to examine the matter further.

Before concluding the appeals, the Court referred to an earlier decision of this Court in which the interpretation of the word “individual” had been required. The earlier case was Commissioner of Income‑tax, Madhya Pradesh and Bhopal v. Sodra Devi; Damayanti Sahni v. Commissioner of Income‑tax, which concerned the construction of section 16(3) of the Indian Income‑Tax Act, 1922. That subsection provided that, in computing the total income of any individual for assessment purposes, the items specified in clauses (a) and (b) must be included. The Court had to determine the meaning of “individual” in that context. According to the majority opinion, although the term “individual” is narrower than the term “assessee,” it does not refer only to a human being; rather, it is broad enough to encompass a group of persons forming a unit. Justice Bhagwati, speaking for the majority, held that the word “individual” includes a corporation created by statute, such as a university or a bar council, as well as trustees of a baronetcy trust incorporated by a Baronetcy Act, and it would also include a minor or a person of unsound mind. The present Court cited that decision solely to illustrate that “individual” had been interpreted to include a collective of persons.

Having concluded that Entry 86 expressly covers Hindu undivided families, the Court found that the impugned provision was valid on the basis of that entry. Consequently, the Court held that it was unnecessary to examine whether the provision could also be sustained under Entry 97 or under Article 248 of the Constitution. On that basis, the Court dismissed the appeals, ordered them to be dismissed with costs, and entered the order that the appeals were dismissed. (1) 32 I.T.R. 615.