2002 PLP 1764 (PTD)

Subsection (1): Where the Assessing Officer is satisfied that the purpose or effect of any arrangement is directly or indirectly‑, (a) to alter the incidence of any tax which is payable by or which would otherwise have been payable by any person; (b) to relieve any person from any liability to pay tax or to make a return under this Act; or (c) to reduce or avoid any liability imposed or which would otherwise have been imposed on any person by this Act; he may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the arrangement and make such adjustments as he considers appropriate, including the computation or recomputation of gains or profits, or the imposition of liability to tax, so as to counteract any tax advantage obtained or obtainable by that person from or under that arrangement. Subsection (2): In this section, `arrangement' means any Scheme, trust, grant, understanding, covenant, agreement, disposition, transaction and includes all steps by which it is carried into effect. , Subsection (3): This section shall apply to any Arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act but, shall not apply to any arrangement carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of ‑tax. Proviso: Provided that the Assessing Officer cannot take any action under this section without the previous approval of the Commissioner. It is suggested that the Board may issue cleat instructions that the provision should not be invoked in case of ordinary commercial transactions including normal claims of expenses and allowances, and involving transactions of tax mitigation where the reduction in tax is derived from the provisions of the Act and not through any `arrangement'. For example, contributions to provident fund, donations to recognised charity which an assessee makes with a view to obtain the benefit of incentive provisions would riot be covered by the anti‑avoidance law. The Board may clarify the correct import of these provisions`` having regard to the caveats indicated above, qualifying these provisions." The Budget Speech of the Finance Minister was to the following effect (see (1992) 194 ITR (St.) 1. 17): "

60. It is said that the child is the father of man, but same of our taxpayers have converted children into tax shelters for their fathers. The tax law provides for clubbing of income from gifts given by parents but this does not apply to other income, including income from other gifted assets, and the practice of cross gifting is widely used to evade clubbing. The Chelliah Committee has recommended that in order to plug this loophole, which accounts for a substantial leakage of Revenue, the income of a minor child should be clubbed with that of the parent. There is merit in this suggestion and I propose to accept it. Recognising, however, the existence of a number of child prodigies, especially child artistes in our country, I propose to exclude their professional income, as also any wage income of minors, from the purview of such clubbing. The practice of clubbing the income of minor children with that of the parent for tax purposes is in vogue in a number of countries." It is submitted that the tax avoidance necessarily involves overt acts on the part of the assessee and the earlier proviso contained in section 64(1) had covered all possible situation whereby the income of a parent could be diverted to a minor. The, new provisions of section 64(lA) now covers all income of the minor (with the exception of earned income) irrespective of the fact whether there is a nexus between the earning of such income and the overt act of the parent. The provisions of section 64(1A) did not distinguish between avoidance and acceptable income. It is submitted that if the income of minor is clubbed with the parent then such income is liable to be taxed at a higher slab and a larger slice of the estate of the minor goes in taxes, Reliance is placed on the judgment given in the case of Hoeper v. Tax Commission (284 US 206‑221), where it was observed that a husband c9nnot, consistently with the due process and equal protection clause of the 14th amendment, be taxed by a State on the combined total of his and his wife's incomes as shown by separate returns, where her income is her separate property and, by reason of the tax being graduated, its amount exceeded the sum of the taxes which would have been due had their separate incomes been separately assessed. The directive principles enshrined under Article 45 of the Constitution of India contemplated free and compulsory education and other Articles of the Constitution provide for the welfare particularly for the minor which cannot be whittled down by causing a burden on the minor as observed in Unni Krishnan (J. P.) v. State of A.P., AIR 1993 SC 2178; (1993) 1 SCC

645. Section 64(lA) was inserted by the Finance Act, 1992, from April 1, 1993, i.e., the assessment year 1993‑

94. The validity of this provision was challenged before the Patna High Court in the case of Syed Ashori Hadi Ali Augustine Imam v. Union of India (1994) 209 ITR 746, it was observed that the provisions of section 64(lA) are for the purpose of checking the evasion of tax and the Legislature is competent to enact such a provision for imposition of tax. The provisions were held intra vires entry

82. List I of the Seventh Schedule and not violative of Article 14 of the Constitution. It was also observed that there is inherent complexity in fiscal adjustment of diverse elements, permitting a large discretion to the Legislature in the matter of classification so long as it adheres to the fundamental principles underlying the said doctrine. The provisions of section 64(lA) were considered machinery provisions relating to computation of income. The Full Bench of the Madras High Court in the ease of K.M. Vijayan v. Union of India (1995) 215 ITR 371, also examined the validity of section 64(lA) in this matter it was alleged that there is no attempt at classification in the provisions of section 64(lA) and lack of classification itself created inequality and is violative of Article 14 of the Constitution of India. It was observed that in order to pass the test of permissible classification under Article 14, the classification must not be arbitrary, artificial or evasive but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the Legislature. There is no palpable arbitrariness in section 64(lA) hence it does not offend Article 14 of the Constitution of India. The provisions for clubbing the property judicially separated wife) with .the property of her husband were upheld in the case of Jeet Singh v. State of U.P. (1993) 1 SCC

325. In Howard de Walden (Lord) V. IRC 1942) 1, All ER 287 (CA), at page 289, Lord Greene observed: "For years a battle of manoeuver has been waged between the Legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that battle, the Legislature has often been worsted by the skill, determination and resourcefulness of its opponents, of whom the present appellant has not been the least successful, It would not shock us in the least to find that the Legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayers who plays with fire to complain of burn fingers." The validity of the provisions of section 16 of the Act of 1922 and the provisions of sections 64/65 of the Act have also been upheld in the following cases. Section 16(3)(a)(i) and (ii) of the 1922 Act?????? Balaji v. ITO (1961) 43 ITR 393 (SC); S. corresponding to section 64(l) (i) and (ii)?????????? Srinivasan v. CIT (1967) 63 ITR 273 (SC); Smt. Shreekunwarded Daga v. T.G. ??????????? Trivedi, ITO (1972) 85 ITR 451 (Bom.) ??????????? and EN. Narasa Reddy v. ITO (1960) 39 ??????????????????????????????????????????????????????????????????????? ITR 629 (AP). ??????????? Section 16(3)(a)(iv) of the 1922 Act,??????????????? G.K. Devarajulu Naidu v. CIT (1963) 48 corresponding to section 64(1)(iv)???????????????????? ITR 756 (Mad.). Section 64(1)(iii)?????????????????????????????????????????????? K. Krishnaveni v. AAC of I.T. (1985) 151 ??????????????????????? ITR 83 (Mad.) Section 64(I)(A)?????????????????????????????????????????????? Syed Askari Hadi Ali Augustine Imam v. ??????????? Union of India (1994) 209 ITR 746 (Patna). In B.M. Amina Umma v. ITO (154) 26 ITR 137 (Mad.), the provisions of section 16(3)(a)(ii) admission of a minor to the benefits of partnership in which his parent is a partner was held not violative of Article 14 of the Constitution. In Ganga Sugar Corporation Ltd. v. State of U.P. (1980) 45 STC 36 (SC), it was observed (page 50): "It is well‑established that the modern State, in exercising its sovereign powers of taxation, has to deal with complex factors relating to the objects to be taxed, the quantum to be levied, the conditions subject to which the levy has to be made, the social and economic policies which the tax is designed to subserve, and what not. In the famous words of Holmes, J., in Bain Peanut Co. v. Pinson (1930) 282 US 499, 510; `We must remember that the machinery of Government would not work if it were not allowed a little play in its joints'... Fine‑tuning to attain perfect equality may be a fiscal ideal but, in the rough and tumble of work‑a‑day economics, the practical is preferred to the ideal, provided glaring caprice or gross disparity does not make the levy arbitrary or frolicsome. Article 14 is not intellectual chess unrelated to actual impact or the wear and tear of life but even handed justice with some play in the joints." In Punjab Distilling Industries Ltd. v. CIT (1965) 57 ITR 1 (SC), it was observed that tax can be evaded by breaking the law or can be avoided in terms of the law. The entries in the legislative lists were held to' be construed liberally and in their widest amplitude, and not in a narrow or restricted sense. Each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended by it. It is submitted that the minor's rights are to be protected rather than creating a burden on them. Reliance is placed on the judgment given in the case of Kakumanu Pedasubhayya v. Kakumanu Akkamma AIR 1958 SC.1042, where it Was observed that (page 1049): "Now the theory is that the sovereign as parens patriae has the power, and is indeed under a duty to protect the interests of minors, and that function has devolved on the Courts. In the discharge of that function, therefore; they have the power to control all proceedings before them wherein minors are concerned. They, can appoint their own officers to protect their interests, and stay proceedings if they consider that they are vexatious. In Halasbury's Laws of England, VOL XXI, page 216, para. 478, it is stated as follows: 'Infants have always been treated as specially under the protection of the sovereign, who, as parens patriae, had the charge of the persons not capable of looking after themselves. This jurisdiction over infants was for formerly delegated to and exercised by the Lord Chancellor; through him it passed to the Court of Chancery, and is now vested in the Chancery Division of the High Court of Justice. It is independent of the question whether the infant has any property or not'." . In Balaji v. ITO (1961) 43 ITR 393 (SC), the provisions of section 16(3)(a)(i) and (ii) for inclusion of the wife's or minor child's share of profits of the firm in which assessee is a partner were challenged. It was considered that the provisions were enacted by the Legislature to prevent evasion of tax. For infringement of Article 14 of the Constitution of India it was observed that there are two conditions laid down for passing the test of permissible classification. (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 a rational relation to the object sought to be achieved by the' statute in question. Making the provisions for clubbing the income of the wife and of minor children it was observed that the Legislature has selected ,for the purpose of classification only that group of persons who in fact are used as a cloak to perpetrate found on taxation. It was further observed that 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 wife's or children's 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. Op the basis of this it is submitted that a minor who was liable to tax or at a lower rate of tax is subject to a higher rats of tax which is ultimately to be borne by them and thus a higher burden is created. The apex Court while upholding the provisions observed as under (page 398): "But it (the relevant provision of the Income‑tax Act which enabled the share of each partner of a registered firm to add to his other income for being charged as part of his total income) gave an effective handle to evade taxation in another direction. A husband or 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." In Sardar Baldev Singh v. CIT (1960) 40 ITR 605 (SC.), it was observed (page 615): "Under entry 54 a law could, of course, be passed imposing a tax on a person on his own income. It is not disputed that under that entry a law could also be passed to prevent a person from evading the tax payable on his own income. As is well‑known the legislative entries have to be read in a very wide manner and so as to include all subsidiary and ancillary, matters. So, entry 54 should be read not only as authorizing the imposition of a tax but also as authorizing an enactment which prevents the tax imposed being evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances. Experience has shown that attempts to evade the tax are often made," The provisions of section 16 of the Act of 1922 and sections 64/65 of the Act of 1961 have been amended from time to time may be on the basis of the interpretation given by the Courts or looking to the financial needs and plugging the loophole of drainage of Revenue which according to the Legislature should have been received by the Government. So far as the jurisdiction to enact a law providing for taxation it is not in dispute that the provisions of entry 82, list I of the Seventh Schedule authorise Parliament to make an enactment on the taxes on income. The tax which has been levied is on income and cannot be said that it is not an income. In whose hand the income is to be taxed is a machinery provision which authorises the authorities under the Act to compute the income in a particular manner. The income of the minor for the purpose of taxation has been considered to be income of the parent. The Legislature would have provided a procedure of separate assessment of the minor and parent. It could have been provided that the slab applicable after including the income of the parent will be applicable for the income of the minor. It was only to reduce the procedural requirement such .a provision is enacted. The contention that the provisions of section 64(lA) are unworkable in a case where the parents are childless, the finances of the minor are under the control of trustee or guardian, etc. has also no force because once a legal fiction is created it has to be carried to its ultimate object and conclusion. It may not be in the strict sense evasion of tax but it is one of the modes which the legislation has considered and which is adopted to circumvent the liability of tax. Under section 64(IA), in computing the total income of any individual the income of the minor child is sought to be included. Under the Income‑tax Act, a Hindu undivided family is considered to be a separate entity. For the purpose of rate of tax earlier there were different rates of taxes prescribed for specified and unspecified Hindu undivided families. The Legislature is competent to provide a different rate of tax as well and it could have been provided for assessment of an individual who is having a minor child earning income separately. It is thus a provision for computation of income of an individual whose minor child is having income and that by itself constitutes a different class. Instead of providing a separate slab, it is provided that the income of such minor would be included in the income of the individual. There is no lack of competence in the Legislature for providing such a legislation. The object sought to be achieved is to tax the income and simply because by including the income of the minor in the hand of either of the parents which has been subjected to a higher tax burden, it cannot be considered to be unconstitutional. As observed above, the provisions of section 64(lA) are machinery provisions. It was on the basis of the expert opinion, the Legislature considered to' 'plug the loophole having tremendous scope of tax avoidance by having shown the income through the children by an individual. It is not necessary that there should be in all cases evasion or avoidance of tax When the provisions are made to block the loophole for any possible tax avoidance, the Legislature is competent to have a eider field of discretion not only for the substantive provision but for procedural provisions as well. The decisions relied on by learned counsel for the petitioners are not of any assistance as the competence of the Legislature is not challenged and it is only on the basis of Article 14 of the Constitution of India with reference to the special status of the minor validity of the provisions have been challenged. There is no hostile discrimination between those minors whose income is not included with the income of their parents as they may not be assessable at all or may be assessable at a lower rate of tax as the individual whose minor children is having income have been considered a different class by themselves. Even the Expert Committee has considered it to be a method for avoidance of tax. In view of the judgment given in the case of Balaji v. ITO (1961) 43 ITR 393 (SC), if the Legislature has selected for the purpose of classification a group of persons who are in fact used as a cloak to perpetrate fraud on taxation the provisions cannot be considered to be violative of Article 14 of the Constitution of India. Petitions accordingly stand dismissed. M.B.A./720/FC?????????????????????????????????????????????????????????????????????????????????? Petition dismissed.