Section 40(3) of the Finance Act, 1983 is Constitutional: Bombay HC [Read Judgment]

In Indian Express Newspapers & Anr. vs. Inspecting Assistant Commissioner  & Ors. a division bench of the Bombay High Court held that Section 40(3) of the Finance Act, 1983 to be constitutionally valid.

Section 40(3) of the said Act was passed by the then Parliament to revive the levy of wealth tax in the case of closely held companies.  According to the Section 40(3), all lands and buildings which are not used for business purposes by companies and in which public are not substantially interested can be charged under the Wealth Tax Act.

The petitioner, Indian Express Newspapers, engage in the business of printing and publishing newspapers. Out of the profits earned from the business, the petitioner acquired three properties in Mumbai, Hyderabad & Talegaon.  After the enactment of Section 40(3) of the Finance Act, 1983, the petitioners received notices from the respondents directing them to file its returns of wealth for assessment. On failure by the petitioner, notices of the penalty were issued. The petitioner decided to challenge the constitutional validity of Section 40(3).

Dr. Chandrachud, Counsel for the Petitioners, argued that Section 40(3) of the Act is unconstitutional as  it brings to tax all lands and buildings (to the extent not used for the purposes of the business) owned by a company in which public are not substantially interested, as it has no relation to the object of the Act. He further submitted that the object of the Act as evident from the speech of the Finance Minister while introducing the Bill was to bring to tax all lands and buildings which have been transferred by members of closely held companies to such companies. According to him, the object was not to bring to tax the lands and buildings of the companies which have been organically acquired by the companies in which the public are not substantially interested i.e. out of its own profits while running the business. The object of Section 40(3) of the Act was to bring to tax lands and building transferred to it from its members. Thus, the counsel submitted that Section 40(3) of the Act as arbitrary and violative of Article 14 of the Constitution of India.

The Additional Solicitor General pointed out that the onus is much higher on the petitioner while challenging the constitutional validity of an enactment as there is always a presumption about the constitutionality of the provision enacted by the legislature.

The division bench comprising of Justice Sandeep K. Shinde and Justice M.S. Sanklecha relied on the case of R.K. Garg Vs. Union of India, in which the Supreme Court held that the court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation.

Upholding the Constitutional validity of Section 40(3) the bench observed “The Parliament has decided to bring to tax the land and buildings not used for the purposes of business and owned by the companies in which the public are not substantially interested. The Parliament has thus made a reasonable classification between the companies in which public are substantially interested from the companies in which public are not substantially interested. This classification cannot be found fault with because the petitioners want further classification to have been done by the Parliament.”