The Amalgamated Tea Estate Co. Ltd. Vs.
State of Kerala  INSC 77 (2 April 1974)
RAY, A.N. (CJ) REDDY, P. JAGANMOHAN GOSWAMI,
SARKARIA, RANJIT SINGH
CITATION: 1974 AIR 849 1974 SCR (3) 820 1974
SCC (4) 415
CITATOR INFO :
R 1975 SC 583 (36)
Constitution of India, Art.
14--Classification test if inflexible and doctrinaire.
Kerala Agricultural Income Tax Act, 1950--If
imposition of graduated tax between domestic and foreign companies violates
The petitioners, two foreign companies, had
been assessed to agricultural income tax under the Kerala Agricultural
Income-tax Act, 1950 as amended. by the Amendment Act of 1970. The Act has
fixed a graduated scale on agricultural income tax to a minimum of 65% on
domestic companies and a flat rate of 75% of the total income on foreign
The petitioners contended that this
discrimination between a domestic company and a foreign company was violative
14 of the Constitution because the classification
was not base, 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 : (1) The impugned provisions of the
Amending Act, 1970 were not violative of Art. 14. The impugned legislation, in
order to get the green light from Art 14, should satisfy the classification
test evolved by this Court namely (1) the classification should be passed on an
intelligible differentia 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 doctrinaire. It gives due regard to the complex
necessities and intricate problems of government. 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. [822 G] Khandige
Sham Bhat v. Agricultural Income-tax Officer, A.I.R. 1963 S.C. 591 and Kasargod
Ravi verma Rajah v, Union of India  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 satute bears the burden
of establishing that the statute is clearly violative of Art. 14. [823 B]
Charanjit Lal v. Union of India,  S.C. R. 869 at p.
879 per Fazal Ali J. and State of West Bengal
v. Anwar Ali Sarkar,  S.C.R. 284 at p. 303. referred to.
(4) It is not possible to hold on. the meagre
facts presented before the court that domestic companies and foreign companies
carrying on agriculture in the State of Kerala are equaly circumstanced. [823
G] D. P. Joshi V. State of Madhya Bharat,  1 S.C.R.
1215, at P. 1228, Hans Muller of Nurenburg v.
Superintendent Presidency fail, Calcutta,  1 S.C.R. 1284, K. T.
Moopil Nair v. State of Kerala  3
S.C.R. 77 and State of Kerala, v. Haji K. Kutty Naha, A.I.R. 1959 S.C. 378,
ORIGINAL JURISDICTION : Writ Petitions Nos. 2
and 9 of 1971.
Under Article 32 of the Constitution for the
enforcement of fundamental rights.
821 G. B. Pai, O. C. Mathur, D. N. Misra, J.
B. Dadachanji and Ravinder Narain, for the petitioners.
L. N. Misra, Solicitor General of India and
Pudissary, for the respondent.
The Judgment of the Court was delivered by
DWIVEDI, J.-The two petitioners have been assessed to Agricultural Income-tax
by the State of Kerala under the Agricultural Incometax 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 Part I to the Schedule of the Kerala Agricultural Incometax
(Amendment) Act, 1970 are violative of Art. 14 of the Constitution.
It will facilitate appreciation of the facts
and the constitutional question 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 Travancore-Cochin Agricultural
Income-tax Act. Later as a result of the State's 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 of Kerala. Till the Amending Act of 1970, all companies were liable
to pay tax according to their total income. The tax is chargeable under s. 3.
Sub-section (1) thereof provided that the agricultural income at the rate or
rates specified in the schedule to the Act shall be charged at the total agricultural
income of the previous year of every person. It was a graduated 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'
;is "a company formed 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." It 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 Companies
Act, 1956 .... and includes any foreign association whether incorporated or 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 from a 'domestic company.' It is this :
A. Where the total agricultural income does
not exceed Rs. 25,000-45 per cent of the total agricultural income B. Where the
total agricultural income exceeds. Rs. 25,000 but does not exceed Rs. 1 lakh-50
per cent of the total agricultural income 822 C. Where the total agricultural
income exceeds Rs. 1 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 t he total agricultural income.
The provisos to various 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 agricultural income.
It is obvious from the review of the
aforesaid provisions that while in the case of domestic companies a graduated
scale is fixed, in the case 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
The petitioners' contention is that this
discrimination between a domestic company and a foreign company is violative of
Art. 14 of 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 purpose sought to be achieved by the taxing statute.
Reliance is placed on Wheeling Steel Corporation v. C. Emory Glander,(1) where
the U.S.A. Supreme Court has said : "After a State has chosen to
domesticate foreign corporations, they are entitled to equal protection with
the State's own corporate progeny, at least to 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 Kerala. The impugned legislation, in order to get the green
light from Art. 14, should satisfy the classification test evolved by this
Court in a catena of cases. According to that test (1) the classification
should be based on an inteliligible 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
intericate problems 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. According to Subba Rao J.,
"(The 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 principles
underlying the said doctrine. The power of the Legislature (1) 93 Law. Edn.
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. Agricultural Incometax Officer,
Kasargod(1) ; Ravi Verma Rajah v. Union of India ( 2) 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)he presumption is always in favour of
the constitutionality of an enactment 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(3).
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 classes 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 Bengal v. Anwar Ali Sarkar (4 )] The
contention of the petitioners would have to be examined in the light of the
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 on business also in this
country, and particularly in the State of Kerala. In Kerala their main business
is one of 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.
Magnitude of their, business inside and 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.I.R. 1963 S.C. 591. (2)  S. C. R
827 (3)  S. C. R. 869 at P. 879 per Fazal Ali J.
(4)  S. C. R. 284 at p. 303 824 There
is no denying the fact that for various reasons a domestic company may be
treated 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 ,modern
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 be safely presumed that the State of Kerala should be striving to improve
agriculture and animal husbandry within its boundaries. It may also be presumed
that in so doing it must be investing 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 riot 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 more
fertile land and produce superior quality of plantation crops. In that case,
the domestic companies would not be able to withstand the competition of the
foreign companies and would not survive. The State might have chosen to give
the domestic companies protection against the foreign companies. And there
seems to be yet another good reason for this. The entire income earned by a
domestic company from business inside as well as outside 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, 1947, it is open to a foreign
company to transmit money out of India with the permission of the 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 foreign companies.
On these considerations it cannot be said
that the classification of companies into domestic and foreign companies has no
rational relation 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 Bharat(1). That case related
to the question of admission of students in a Medical College in the State 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 bona fide residence of Madhya Bharat were also required
to pay capitation fee of Rs. 15001-. A student who was riot a bona fide
resident of Madhya Bharat challenged the capitation fee as being violative of
Art. 14. The majority of the Court overruled the contention. Speaking for the
Court, Venkatarama Ayyar J. said "The object of the classification
underlying the impugned rule was clearly to help to some extent students who
residents of Madhya Bharat in the prosecution of their studies, (1)  1 S.
C. R. 1215 at p. 1228.
825 and it cannot be disputed that it is
quite a legitimate and laudable objective for a State to encourage education
within its borders.
Education is a State subject, and one of the
directive principles declared in Part IV of the Constitution is 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 Medical
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 presumaably some of them might, after passing
out of the College,,, settle down as doctors and serve, the needs of the
The classification is thus based on a ground
which has a reasonable 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(1) 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 is 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 Kerala is not taxing the
property, but the income, of the petitioners from their agricultural property.
In Hans Muller of Nurenbug v. Superintendent,
Presidency Jail, Calcutta(2), this Court upheld the classification of
foreigners into those who are British subjects and those who are not British
subjects for the purpose of preventive detention. The Court said there :
"(1) is easily understandable that the reasons of State may make it
desirable to classify foreigners into different groups." K. T. Moopil Nair
v. State of Kerala(3) and State of Kerala v. Haji K. Kutty Naha(4) deal with
In the first case.
(1)  S.C.R. 254. (2)  1 S.C.R.
(3)3 S.C.R. 77. (4) A.I.R. 1969 S.C.
826 the, State of Kerala had imposed a
uniform tax levy on land.
The taxing provisions 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 petitioners.
We are of opinion that the impugned
provisions of the Amending Act of 1970 are not violative of Art. 14. The
petitions are accordingly dismissed with costs. One set.