ADAR TEA PRODUCE CO. LTD. Vs ASSISTANT COMMISSIONER OF INCOME TAX

@JUDGMENTTAG-ORDER

The above writ petitions are for a writ of declaration to declare section 12 of the Finance Act, 1995 as ultra vires, illegal and void of the Constitution of India.

2. Section 12 of the Finance Act, 1995 has amended the definition of `plant'' in section 43 of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') with retrospective effect from which date the Act came into force by excluding tea bushes or livestock from the scope of definition of the term ''plant''. The assessment year with which we are concerned in both the writ petitions is 1994-95. The petitioners have challenged the validity of the provisions of the Act, and hence, in my view, it is not necessary to notice the result of the assessment proceedings in detail. However, to determine the question that arises in the writ petitions, it would suffice to state that the petitioners have claimed depreciation allowable under the Act in respect of opening balance of the tea bushes at the beginning of the year and in respect of additions made during the year at the rate of 25 per cent. According to the petitioner, the petitioner filed its return of income claiming depreciation on tea bushes treating them to be plants and claimed depreciation permissible u/s 32 of the Act. However, the claim of the petitioner for depreciation has become inadmissible due to the modification of definition of the term ''plant'' in section 43(3) as amended by the Finance Act, 1995 with retrospective effect and the result was that the petitioner became liable to tax on income computed without allowing the claim for depreciation made by the petitioner in respect of additional value of the plant. The petitioner has questioned the amendment on the ground that it was totally unconstitutional and void and the additional liability has been created by the retrospective effect given to the amendment is bad in law. The petitioner has raised number of grounds challenging the validity of the amendment.

3. A common counter affidavit was filed on behalf of the respondents stating that the retrospective amendment made to section 43(3) excluding tea bushes from the scope of plant is perfectly in order and it does not suffer from any infirmity.

4. Mr. G. Sarangan, the learned senior counsel appearing for the petitioner submitted that the expression, ''plant.'' is defined in section 43(3) in an inclusive manner and he referred to the decision of the Supreme Court in the case of Scientific Engineering House (P) Ltd. Vs. Commissioner of Income Tax, Andhra Pradesh, and submitted that the expression ''plant'' would include any apparatus to a businessman where he is carrying on business in respect of stock and trade and the tea bushes should also be regarded as ''plant''. He submitted that tea bushes have element of durability and they are assets for the assessee to carry on his business. He, therefore, submitted that tea bushes satisfy all the tests of a ''plant'' as laid down by the Supreme Court in Scientific Engg. House (P) Ltd.''s case (supra). The learned senior counsel also referred to a decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. Sri Krishna Bottlers Pvt. Ltd., and submitted that the expression, ''plant'' should be given a wide meaning. The learned senior, counsel submitted that tea bushes satisfy the various tests of the plant. He also referred to a decision in the case of Earl of Derby v. Aylmer 6 TC 665, and submitted that even prior to the enactment of the Act, tea bushes have been regarded as ''plant'' and there are no reasons to modify the definition of the term ''plant'' to exclude tea bushes with retrospective effect. The learned senior counsel also referred to the decision of the Supreme Court in the case of D. Cawasji and Co., Mysore Vs. State of Mysore and Another, and submitted that the amendment made with retrospective effect sought to nullify the various orders passed by Tribunals holding that tea bushes are plants and hence, the amendment made by section 12 of the Finance Act should be declared as invalid and unconstitutional. The learned senior counsel for the petitioner also referred to the memorandum of the Finance Bill explaining the reasons for the amendment wherein it has been stated that with the result of the judicial pronouncements, double deduction was claimed on tea bushes; one as replacement cost and another as depreciation allowance and to deny the double deduction in respect of replacement cost as well as depreciation allowance, the Legislature have amended section 43(3) excluding tea bushes from the scope of the definition ''plant''. He submitted that it is not uncommon in the Act to claim depreciation on capital assets and claim revenue expenditure on repairs on the same assets and there is no question of any double deduction as the deduction granted under two different provisions cannot be regarded as double deduction. The learned senior counsel submitted that since the Legislature have proceeded on a mistaken notion that there is a double deduction in the case of tea bushes by grant of depreciation, the amendment made should be declared as invalid and unconstitutional.

5. Mr. S.V. Subramaniam, the learned senior counsel appearing for (the respondents submitted that under rule8(2)of the Income Tax Rules, 1962, the deduction is granted in respect of expenditure incurred on replacement of old tea bushes and such deduction is granted in lieu of depreciation and if depreciation is also granted on the cost of tea bushes, it would amount to grant of double deduction. The learned senior counsel submitted that the legislature has regulated the grant of depreciation in the case of tea bushes and this court should be slow to interfere with the Legislature wisdom in excluding tea bushes from the scope of the term ''plant''. The learned senior counsel submitted that under the Act, the grant of deduction is statutory and when the Legislature in its wisdom has provided deduction only for replacement cost, section 43(3) cannot be held to be invalid because of the exclusion of tea bushes from the scope of the term ''plant''. The learned senior counsel referred to the decision of a Single Judge of this court in the case of Dollar Co. Private Ltd. Vs. Union of India and others, .

6. I have carefully considered the submissions of the learned counsel for the parties. Section 43(3) defines the expression, ''plant'' in an inclusive manner and the term, ''plant'' as defined prior to the amendment made by the Finance Act, 1995 reads as under:

"(3) ''Plant'' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of the business or "profession"

An amendment was introduced by section 12 of the Finance Act and the expression ''plant'' in section 43(3) was amended and after the amendment, section 43(3) reads as under:

"(3) ''plant'' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of the business or profession but does not include tea bushes or livestock;"

The reason for the above amendment is explained in the Notes on Clauses of the Finance Bill, 1995 vide (1995) 212 ITR 298 and 299 and the relevant Notes on clauses read as under:

"Clause 12 seeks to amend sub-section (3) of section 43 of the Income Tax Act relating to definition of ''plant'' for purposes of sections 28 to 41.

It is proposed to exclude tea bushes from the ambit of the definition of ''plant''. This amendment is being made to override certain judicial pronouncements. It is also proposed to exclude livestock from the ambit of the definition of ''plant'',

This amendment will take effect retrospectively from 1-4-1962, and will, accordingly, apply in relation to assessment year 1962-63 and subsequent years."

The memorandum explaining the provisions of the Finance Bill, 1995 explaining the reason for amendment reads as under:

"Under sub-section (3) of section 43 the term ''plant'' includes ship, vehicles, books, scientific apparatus and surgical equipment used for the purposes of business or profession.

In certain judicial pronouncements, it has been held that the term ''plant'' includes tea bushes and, therefore, they would also be eligible for depreciation u/s 32. Rule 8(2) of the Income Tax Rules, already provides for a deduction in respect of the expenditure incurred on replacement of old tea bushes by an assessee. The deduction under rule 8(2) is allowed in lieu of depreciation. As a result of the judicial pronouncements, double deduction is now being claimed on the tea bushes-once as replacement cost and then as depreciation allowance.

With a view to setting at rest the aforesaid controversy, section 43(3) is being amended to provide that the term ''plant'' will not include tea bushes and livestock.

The proposed amendments will take effect, retrospectively, from 1-4-1962, and will, accordingly, apply in relation to assessment year 1962-63 and subsequent years." - (1995) 212 ITR 356

7. In this connection, it is useful to refer to rule 8(2) and the relevant rule reads as under:

"Income from the manufacture of tea.-(1) Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and 40 per cent of such income shall be deemed to be income liable to tax.

(2) In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (30) of section 10, is not includible in the total income."

8. The reason for the amendment of the definition of the term ''plant'' in section 43(3) to exclude tea bushes is that under rule 8(2) the expenditure incurred by an assessee on replacement of old tea bushes is allowed as a deduction and the deduction under rule 8(2) is granted in lieu of depreciation. Some of the Tribunals have taken the view that tea bushes should also be regarded as ''plant'' and on the basis of the orders of the Tribunals, deductions were claimed on the cost of tea bushes towards depreciation. Since two deductions were claimed; one towards the cost of replacement of old bushes; and another as depreciation, the Legislature in its wisdom thought that only one deduction should be permitted and to put an end to the controversy arising in the whole, the definition of the term ''plant'' in section 43(3) was amended excluding tea bushes and livestock from its scope.

9. In my view, whatever might have been the view of the Tribunal in its various orders on the scope of the definition of the term ''plant'' as regards tea bushes prior to the amendment, whether the expression, ''plant'' has to be construed in a wide manner and whether tea bushes satisfy all tests laid down for the plant in various decisions of the Supreme Court and they qualify themselves to be regarded as plant, after the introduction of the definition of the term ''plant'' excluding tea bushes from the scope ''plant'', tea bushes cannot be regarded as a plant at all. In this connection, it is relevant to refer to the following observation of Rowlatt, J. in Earl of Derby''s case (supra). The learned Judge while considering the question whether a horse can be regarded as a plant held as under:

"I do not know whether a horse used for traction comes within that or whether it does not, but I am clearly of opinion that the diminished value of a breeding animal, merely due to the fact that having lived a year it is a year nearer its end, and therefore, is from that point of view less valuable, is not within this section. You need not take only the case of an animal; you may take the case of the value of a prolific tree. Of course, I am only dealing with the ideal. You have here an article which you are not wearing out by use. 1 neglect any question of abuse of the animal. You are not wearing it out by use. You have got an article whether it be an animal or a vegetable article, the life of which is only a limited term of years. As the years go on you take the produce and the reproduction of that animal, and when the years come to an end the animal or the tree or whatever it is, dies or is killed because it is no longer worth keeping. That diminished value, by reason of the efflux of time year by year of an animal or a tree, does not seem to me to be diminished value by reason of wear and tear; it is simply diminished value because you have invested your money in a source of production which is a wasting source of production, and I think it is not within these words."

10. Applying the above principles, there is no wear and tear of tea bushes in the course of a year. The tea bushes may become wasting assets, but the diminished value is not due to any wear and tear as understood for the grant of depreciation. The next question that arises is whether the provisions contained in section 43 (3) excluding tea bushes from the scope of the definition of plant should be declared as unconstitutional and void. It is well-settled by the Supreme Court that an enactment can be declared as unconstitutional on the following two grounds. The Supreme Court in the case of (1996) (3) SCC 709, particularly paragraph 43, has laid down the following proposition of law:

"A law made by Parliament or the Legislature can be struck down by courts on two grounds and two grounds alone, viz. (1) lack of legislative competence and (2) violation of any of the fundamental rights guaranteed in part III of the Constitution or of any other constitutional provisions. There is no third ground. We do not wish to enter into a discussion of the concepts of procedural unreasonableness and substantive unreasonableness - concepts inspired by the decisions of United States Supreme Court. Even in U.S.A., these concepts and in particular the concept of substantive due process have proved to be of unending controversy, the latest thinking tending towards a severe curtailment of this ground (substantive due process). The main criticism against the ground of substantive due process being that it seeks to set up the courts as arbiters of the wisdom of the legislature in enacting the particular piece of legislation. It is enough for us to say that by whatever name it is characterized, the ground of invalidation must fall within the four corners of the two grounds mentioned above. In other words, say, if an enactment is challenged as violative of Article 14, it can be struck down only if it is found that it is violative of the equality clause/equal protection clause enshrined therein. Similarly, if an enactment is challenged as violative of any of the fundamental rights guaranteed by clauses (a) to (g) of Article 19(1), it can be struck down only if it is found not saved by any of the clauses (2) to (6) of Article 19 and so on. No enactment can be struck down by just saying that it is arbitrary or unreasonable. Some or other constitutional infirmity has to be found before invalidating an Act. An enactment cannot be struck down on the ground that court thinks it unjustified. Parliament and the Legislatures, composed as they are of the representatives of the people, are supposed to know and be aware of the needs of the people and what is good and bad for them. The court cannot sit in judgment over their wisdom. In this connection, it should be remembered that even in the case of administrative action, the scope of judicial review is limited to three grounds, viz. (i) unreasonableness, which can more appropriately be called irrationality (ii) illegality and (iii) procedural impropriety (see Council of Civil Service Unions v. Minister for Civil Service (1985) AC 374 : (1984) 3 All ER 935 : (1984) 3 WLR 1174] which decision has been accepted by this court as well). The applicability of doctrine of proportionality even in administrative law sphere is yet a debatable issue. (See the opinions of Lords Lowry and Ackner in R. v. Secy. of State for Home Deptt. ex P. Brind [(1991) AC 696 : (1991) 1 All ER 720] AC at pp. 766-67 and 762.] It would be rather odd if an enactment were to be struck down by applying the said principle when its applicability even in administrative law sphere is not fully and finally settled, it is one thing to say that a restriction imposed upon a fundamental right can be struck down if it is disproportionate, excessive or unreasonable and quite another thing to say that the court can strike down enactment if it thinks it unreasonable, unnecessary or unwarranted."

11. Mr. G. Sarangan, the learned senior counsel in his fairness has not submitted that the amendment made is not beyond the legislative powers and it is also not his case that it offends any of the provisions of the article in part III of the Constitution of India. His submission is that the Legislature have proceeded on a mistaken notion that double deduction was granted and to rectify the anomaly, section 43(3) was amended with retrospective effect. In my view, a valid legislation cannot be declared as invalid merely because the Parliament might have proceeded on some wrong assumption and it is not a ground to invalidate the provisions of a statute. It is well-settled that the beliefs and assumptions of the Legislature do not make the law. Though the beliefs and assumptions of the Legislature do not make the law, equally a wrong assumption made by the Legislature for making the law will not undo the law validly made. The learned authors Kanga and Palkhiwala in their book, the Law and Practice of Income Tax, eighth edn., vol. I, at page 3, have made the following observations :

"Our duty ... is to find out what the Legislature must be taken to have really, meant by the expressions which it has used, without necessarily attributing to a precise appreciation of the technical appropriateness of its language. Per Viscount Simon LC, City of London IT Commrs. v. Gibbs 24 TC 221, 244 (HL), 10 ITR Supp. 121, 132, Gautam Sarabhai and Others Vs. Commissioner of Income Tax, Gujarat, , Commissioner of Income Tax, Tamil Nadu-I Vs. Simpson and Company, . An omission on the part of the Legislature should not be readily inferred - Commissioner of Income Tax, Central, Calcutta Vs. National Taj Traders, . The court is entitled, and indeed bound, when construing the terms of any provision found in a statute, to consider the context - CGT v. Getti Chettiar (1964) 82 ITR 605, Ramsay v. IR 54 TC 101, 184 (HL), Commissioner of Income Tax Vs. Casino (Pvt.) Ltd., , Commissioner of Income Tax, Gujarat III Vs. Natu Hansraj, ; Gopal Industrial Estate and Others Vs. Income Tax Officer, Ward "E" (Revenue), Bhavnagar and Others, and any other parts of the Act which throw light upon the intention of the Legislature and which may serve to show that the particular provision ought not to be construed as it would be if considered alone and apart from the rest of the Act - Per Lord Herschell, Colquhoun v. Brook; 2 TC 490,500(HL); The Commissioner of Income Tax, Bombay City I, Bombay Vs. Narsee Nagsee and Co., Bombay, , Commissioner of Income Tax, Central, Calcutta Vs. National Taj Traders, ,, Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, ; K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, , Commissioner of Income Tax Vs. Gopal Investors'' Corporation Private Ltd., , COMMISSIONER OF INCOME TAX, BIHAR and ORISSA Vs. MAHARAJA VISWESWAR SINGH., , RAMCHANDRA MARDARAJ DEO Vs. COLLECTOR OF COMMERCIAL TAXES, ORISSA., ; Additional Commissioner of Income Tax, Gujarat Vs. Santosh Industries, . But the court must disregard any assumption of the Legislature as to the prevailing law, if it is mistaken, though the result might be that the Legislative provision cannot be given the effect intended by Parliament: ''the beliefs or assumptions of those who frame Acts of Parliament cannot make the law'' - Per Lord Radeliffe, IR v. Dowdall 33 TC 259, 287 (HL), Davies v. Davies TC 273,294 (HL), Davies Jenkins & Co. Ltd. V. Davies (Inspector of Taxes) (1974) 72 ITR 444 ; Income Tax Officer, Distt. II(ii), Kanpur and Others Vs. Shri Mani Ram etc., , Ayrshire v. IR 27 TC 331 (HL), (1948) 16 ITR Supp.80 See also Commissioner of Income Tax Vs. Saroop Krishan, .

That apart, I am not able to accept the contention of the learned counsel for the petitioner that there is no double deduction by the grant of depreciation. As already seen, rule 8(2) provides that while computing income from the manufacture of tea, the entire replacement cost of tea bushes is allowed as a deduction and once the entire cost of replacement by infilling tea bushes is allowed, the grant of depreciation on the same tea plant would amount to double deduction on the same expenditure. The learned senior counsel referred to some of the provisions of the Act and submitted that under the provisions of the Act, both the depreciation and the revenue expenditure would be allowable with reference to the same machinery. In my view, the analogy is not quite accurate as the deduction for depreciation is granted on the capital cost and the revenue expenditure is allowed as business expenditure. In other words, the deductions are not given with reference to the same expenditure but they are given with reference to different kinds of expenditure, or more particularly, two different expenditure altogether. However, in the case of replacement by infilling tea bushes, on the same expenditure the deduction is granted under rule 8(2) and depreciation is also claimed on the cost of tea bushes planted. Therefore, it cannot be said that the Legislature have proceeded on wrong assumption in the matter of grant of double deduction. No doubt, it may be true that in the case where tea estates are purchased or acquired, there may not be double deduction, but the Legislature in its wisdom has thought that the assessee when he is a purchaser of a tea estate should be content to get deduction in cases where there is a replacement of tea bushes by in filling tea bushes. Therefore, I am not able to accept the submission of the learned senior counsel appearing for the petitioner that the basic assumption of the Legislature that there is a possibility of double deduction is erroneous.

12. Moreover, under the Act, the gross income is subject to deductions allowable by the Act and the deductions can be claimed only if they are provided in the Act. In other words, the deductions are statutory in nature and there is no general right to get the deduction. Therefore, when the Legislature in its wisdom have proceeded on the basis that double deduction should not be granted on the same expenditure and regulated the grant of deduction on the said expenditure, I am of the view that the exclusion cannot be declared to be invalid under the provisions of the Constitution of India. Though the petitioner may not be able to claim deduction at the time of purchase or acquisition of tea estate, when the entire tea bushes are replaced in a systematic manner during the course of years, the petitioner may become eligible to get deduction on the infilling charges incurred for replacing tea bushes. The Parliament, in my view, has regulated the grant of deduction and prevented the claim for double deduction. Hence, I am unable to accept the submission of the learned senior counsel for the petitioner that the section as amended is invalid in the eye of law.

13. In this connection, it is profitable to refer to two decisions of the Supreme Court. The first is the decision in the case of Federation of Hotel and Restaurant Association of India, etc., Vs. Union of India (UOI) and Others, wherein the Supreme Court has pointed out the scope of the taxation power of the Parliament and made the following observation:

"It is now well-settled that though taxing laws are not outside article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy, the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment, what is looked into is not its phraseology. but the real effect of its provisions. A Legislature does not, as an old saying goes, have to tax everything in order to be able to tax something.

If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this court on the matter have permitted the Legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes."

The next decision is the decision of the Supreme Court in the case of Hoechst Pharmaceuticals Ltd. and Others Vs. State of Bihar and Others, wherein the Supreme Court pointed out that the economic wisdom of a tax is within the exclusive province of the Legislature and the court should not interfere when the Legislature in its wisdom has made a provision of law. In view of the decisions of the Supreme Court, I am unable to accept the submission of the learned senior counsel for the petitioner that the section is invalid.

14. The next question that arises is whether the section suffers from infirmity on the ground that full retrospective effect has been given from the date of enactment of the Act. The power of the Parliament to make a law with prospective or retrospective effect is not questioned. The learned senior counsel for the petitioners submitted that the expression ''plant'' has been construed in a broad manner and there is no justifiable reason to unsettle the settled law with retrospective effect. As already observed, the learned senior counsel referred to the decision of the Supreme Court in D. Cawasji & Co''s case (supra) in considering the question whether the retrospective effect given to the definition of the term ''plant'' by the Finance Act, 1995 is correct or not, it is necessary to bear in mind that the cases of both the petitioners relate to the assessment year 1994-95 and by virtue of the retrospective effect to the amendment, the petitioner is not prejudiced. Further, when rule 8(2) was enacted the Legislature thought that the assessee would be entitled to only one deduction, i.e., in respect of expenditure incurred on the replacement cost of tea bushes. By virtue of various judicial pronouncements, the expression ''plant'' was widened and some Benches of the Tribunal have taken the view that tea bushes should also be regarded as plant. Hence, to set at rest the controversy whether tea bushes should be regarded as plant or not, section 43(3) has been amended with retrospective effect so that there may not be any controversy in the claim for depreciation. Further, by virtue of the said amendment, the assessees would not be affected in a great manner as the power to reopen an assessment is regulated by other provisions of the Act and insofar as those cases which were pending on the basis of the decisions of the Tribunal, the assessments have not reached the stage of finality. Since the Legislature have stepped in to rectify the defect as soon as some of the Tribunals have rendered decisions holding that tea bushes should also be regarded as plant, the retrospective effect given to the definition for the term ''plant'' excluding tea bushes cannot be said to be in any way unreasonable or arbitrary. I do not find any reason to accept the submissions of the learned senior counsel for the petitioner in this regard.

15. In the result, the writ petitions are liable to be dismissed, and accordingly, they are dismissed. The respondents are entitled to costs of a sum of Rs. 1,000 one set.