Narayana Pillai, J.
1. The challenge in these petitions filed lender Article 226 of the Constitution by a public limited company, the Lord Krishna Bank Ltd., and two of its directors, is to the validity of four assessment orders passed under the Income-tax Act, 1961 (43 of 1961), for short ' the Act', and relating to the years 1964-65, 1966-67, 1968-69 and 1969-70. The orders in respect of the years 1964-65 and 1966-67 relate to reassessment and those in respect of the remaining years to the original assessment itself. The challenge made is on the basis that Section 2(18) read with Section 2(41) and Section 104 read with Section 108 of the Act and the provisions of the Finance Act, 1964 (5 of 1964), authorising levy of super-tax at a rate higher than 25 per cent, of the total income, the Finance Act, 1966 (13 of 1966), authorising levy of income-tax at a rate higher than 55 per cent., the Finance Acts, 19 of 1968 and 14 of 1969, authorising levy of income-tax at the rate of 65 per cent, of the total income of a company which does not fall within the definition of ' company in which the public are substantially interested ' are void as they offend Articles 14 and 19(1)(c) and (f) of the Constitution.
2. The Act makes a distinction between companies ' in which the - public are substantially interested '', for short ' widely held companies ', and those ' in which the public are not substantially interested ', for short 'closely held companies. ' In respect of undistributed income all companies are under the provisions of the Act liable to pay additional income-tax, but widely held companies are excluded from such liability. For closely held companies rates higher than those for widely held companies for assessment of tax have been fixed by the Finance Acts. In the Finance Act of 1964, for all companies other than the Life Insurance Corporation of India, the rate of super-tax on the total income was fifty-five per cent. A rebate was given to widely held companies at the rate of 37'5 per cent, of the total income. No such rebate was given to closely held companies. Even among closely held companies, as regards the rates of tax, a distinction was made in the Finance Acts of 1966, 1968 and 1969 between industrial companies and other companies. In the Finance Act of 1966, while the rate of income-tax on total income fixed for a widely held company was 45 per cent, where the total income did not exceed Rs. 25,000 and 55 per cent, where the total income exceeded Rs. 25,000, for a closely held company other than an industrial company, the rate was 65 per cent, of the total income and for a closely held industrial company, 55 per cent, where the total income did not exceed Rs. 10 lakhs and 60 per cent, on the rest. In the Finance Acts of 1968 and 1969, while the rate of income-tax fixed for a widely held company was 45 per cent, where the total income did not exceed Rs. 50,000 and 33 per cent, where it exceeded Rs. 50,000, the rate fixed for a closely held company which was not an industrial company was 65 per cent, on the total income and for a closely held company which was an industrial company 55 per cent, on the total income where it did not exceed Rs. 10 lakhs and 60 per cent, on the balance.
3. The material portions in the aforesaid sections of the Act read :
' 2. In this Act, unless the context otherwise requires, -- ......
(18). . . --A company is said to be a company in which the public are substantially interested-
(a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent, of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank ; or
(b) if it is not a private company as denned in the Companies Act, 1956, and
(i) its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent, of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by-
(a) the Government, or
(b) a corporation established by a Central, State or Provincial Act, or
(c) any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the condition laid down in Clause (b) of Section 108 (hereinafter in this Clause referred to as the subsidiary company), or
(d) the public (not being a director, or a company to which this clause does not apply) ;
(ii) the said shares were at any time during the relevant previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to other members of the public ; and
(iii) the affairs of the company, or the shares carrying more than fifty per cent, of its total voting power were at no time, during the relevant previous year, controlled or held by five or less persons.
Explanation 1.--In computing the number of five or less persons aforesaid,--
(i) the Government or any corporation established by a Central, State or Provincial Act or company to which this clause applies [ or the subsidiary company of such company] shall not be taken into account, and (ii) persons who are relatives of one another, and persons who are nominees of any other person together with that other person, shall be treated as a single person. ......
(41) ' relative', in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual :......'
4. Section 104:
' (1) Subject to the provisions of this section and of sections 105, 106, 107 and 107-A, where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or Section 144, be liable to pay income-tax at the rate of-
(a) fifty per cent., in the case of an investment company,
(b) thirty-seven per cent, in the case of a trading company, and
(c) twenty-five per cent., in the case of any other company, on the distributable income as reduced by-
(i) the amount of dividends actually distributed, and (ii) any expenditure actually incurred bona fide for the purposes of the business, but not deducted in computing the income chargeable under the head ' profits and gains of business or profession ' being-
(a) a bonus or gratuity paid to an employee,
(b) legal charges,
(c) any such expenditure as is referred to in Clause (c) of Section 40,
(d) any expenditure claimed as a revenue expenditure but not allowed to be deducted as such and not resulting in the creation of an asset or enhancement in the value of an existing asset.........,..'
5. Section 108 :
' Nothing contained in Section 104 shall apply-
(a) to any company in which the public are substantially interested ; or
(b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.'
6. The Companies Act makes a distinction between private and public companies but not between widely held and closely held companies. Private company in that Act is one which by its articles restricts the right to transfer its shares, if any, limits the number of its members to 50 and prohibits invitation to the public to subscribe for its shares or debentures. All other companies are public. All private companies are closely held companies. All companies owned by Government or the Reserve Bank of India or in which they or a corporation owned by the Reserve Bank of India hold not less than 40 per cent, of the shares are widely held companies. Public companies the affairs of which or the shares in which carrying more than 50 per cent, of its total voting power were at no time during the relevant previous year controlled or held by five or less persons are also widely held companies. Besides them, some other public companies are also widely held companies provided they satisfy certain conditions regarding ownership and transferability in respect of their shares carrying not less than 50 per cent, of the voting power. As regards ownership, it should have been acquired unconditionally and was throughout the relevant previous year beneficially held by the Government or a corporation established by Central or State Act or it should have been so acquired and held by any other public company or by any subsidiary company of such company and the whole of the share capital of such subsidiary company had been held by the parent company or by its nominees throughout the previous year. As regards transferability, the condition to be satisfied is that those shares were during the relevant previous year freely transferable in recognised stock exchanges. In considering the number of persons controlling the affairs of the company or holding its shares carrying more than 50 per cent, of its total voting power, persons who are relatives of one another and persons who are nominees of any other person together with that person would be treated as a single person. In relation to an individual tne expression ' relative ' means besides husband, wife, brother or sister, lineal ascendants and descendants as well. All companies which are not widely held companies are closely held companies.
7. It is clear from the decisions of the Supreme Court in State of West Bengal v. Anwar Ali Sarkar, A.I.R. 1952 S.C. 75, Budhan Choudhry v. State of Bihar, A.I.R. 1955 S.C. 191, Bidi Supply Co. v. Union of India, [1956] 29 I.T.R. 717; [1956] S.C.R. 267 (S.C.). Ram Krishna Dalmia v. Justice S. R, Tendolkar, A.I R. 1958 S.C. 538. Khandige Sham Bhat v. Agricultural Income-tax Officer, [1963] 48 I.T.R, (S.C.J 21; [1963] 3 S.C.R. 809(S.C.). State of Andhra Pradesk v. Nalla Raja Reddy A.I.R. 1967 S.C. 1458, S. K. Dutta, Income-tax Officer v. Lawrence Singh Ingty, [1968] 68 I.T.R. 272; [1968] 2 S.C.R. 165 (S.C.) and State of Kerala v. Haji K. Kutty, A.I.R. 1969 S.C. 378 that in order to pass the test of permissible classification under Article 14 of the Constitution two conditions have to be fulfilled. They are, that 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 that that differentia must have a rational relation to the object sought to be achieved by the statute in question. It is necessary that there should be a nexus between the basis of classification and the object of the statute under consideration.
8. What is contended here is that the classification of companies into widely held and closely held is artificial and irrational and without any basis and that it has no economic or financial justification, that is, no justification from the point of view of public finance. The constitution of a company is irrelevant for tax purposes. The definition of ' relative ' in the Act is arbitrary. If the object of the classification is to prevent accumulation of profits and tax avoidance, that can be achieved better by other means of legislation. In the English Finance Act of 1965, there is a corresponding classification of companies into widely held and closely held. As regards the main effect of the tax structure prevailing there, there is criticism that it only encourages retention as opposed to distribution of profits. So goes the argument of counsel appearing for the petitioners.
9. There was this classification in the previous Indian Income-tax Act. Section 23A was included in that Act by an amendment in 1930. That section empowered the Income-tax Officers to assess companies to super-tax on undistributed income and that in the case of closely held companies alone. The constitutional validity of that section arose for consideration in several decisions and it was held that it did not offend Articles 14 and 19(1)(f). C. W. Spencer v. Income-tax Officer, Madras, [1957] 31 I.T.R. 107, 126 ; 27 Comp. Cas. 15 (Mad.) is a decision to that effect of the Madras High Court. It was observed there :
' The legal fiction enacted by Section 23A does correspond to reality, if the veil of the legal personality of the corporate person, the company, is pierced, in order to look at the real person behind that corporate personality............The basic assumption that underlies Section 23A is the identityof the interests of the shareholders and the controlled company. That assumption is founded on reality. The shareholder created a veil of a corporate personality as legally distinct from his juristic personality. That was legal. The legislature countered that with a legal fiction. That was also legal. If both are forgotten the taxpayer and the tax-gatherer proceed on the realities of the situation. The profits are taxed.'
10. That decision was followed by the Calcutta High Court in Sardar Surjit Singh v. Commissioner of Income-tax, [1963] 50 I.T.R. 417 (Cal.) and the Bombay High Court in Keshardeo Shrinivas Morarka v. Commissioner of Income-tax, [1963] 48 I.T.R. 404 (Bom.), Indian Steel & Wire Products Ltd. v. Commissioner of income-tax, [1966] 62 I.T.R. 334 (Cal.) is another decision of the Calcutta High Court to the same effect. It was argued in that case that there was no rational basis for fixing the percentages of shareholders in a company which would give a clue to the test as to when the public would be said to be substantially interested in it and that therefore Section 23A was violative of Article 14. That argument was repelled. It was held there that there was no arbitrariness behind the fixing in the section of the percentages of shareholding. As regards the object of section 23 A, it was considered by the Supreme Court in Sardar Baldev Singh v. Commissioner of Income-tax, [1960] 40 I.T.R. 605, 616 ; [1961] 1 S.C.R. 482 (S.C.).. The Supreme Court observed :
' The group can do what it likes with the affairs of the company, of course, within the bounds of the Companies Act. It lies solely in its hands to decide whether a dividend shall be declared or not. When, therefore, in spite of there being money reasonably available for the purpose, it decides not to declare a dividend it is clear that it does so because it does not want to take the dividend. Now it may not want to take the dividend if it wants to evade payment of tax thereon. Thus by not declaring the dividend the persons constituting the group in control could evade payment of super-tax, which, of course, is a form of income-tax. They would be able to evade the super-tax because super-tax is payable on the dividend in the hands of the shareholders even though it may have been paid by the company on the profits out of which the dividend is paid, and because the rate at which super-tax is payable by a company may be lower than the rate at which that tax is payable by other assessees. By providing that, in the circumstances mentioned in it, the available assessable income of a company would be deemed to have been distributed as dividend and be taxable in the hands of the shareholders as income received by them, the section would prevent the members of such a group from evading by the exercise of their controlling power over the company, payment of tax on income that would have come to them. .....
It is further quite clear that in the absence of a provision like Section 23A, it is possible so to manipulate the affairs of a company of this kind as to prevent the undistributed profits from ever being taxed and experience seems to have shown that this has often happened. The following passage from Simon's Income Tax, second edition, volume 3, page 341, fully illustrates the situation : ' Generally speaking, surtax is charged only on individuals, not on companies or other bodies corporate. Various devices have been adopted from time to time to enable the individual to avoid surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a ' one-man company '. The individual transferred his assets, in exchange for shares, to a limited company, specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for tax purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distribution was in his own control. The balance of the income, which was not so distributed, remained with the company to form, in effect, a fund of savings accumulated from income which had not immediately attracted surtax. Should the individual wish to avail himself of the use of any part of these savings he could effect this by borrowing from the company, any interest payable by him going to swell the savings fund ; and at any time the individual could acquire the whole balance of the fund in the character of capital by putting the company into liquidation. '
11. The section prevents the evasion of tax by, among others, the means mentioned by Simon.
12. It is true that when Section 23A was in the predecessor Act, there was no definition there of the word ' relative ' as meaning husband, wife, brother or sister or any lineal ascendant or descendant of an individual in relation to him or her. But that cannot make any difference. The definition of ' relative ' as it is now given in the present Act is natural. In the case of such relative, it is only natural to assume that, on account of the close relationship, he or she would ordinarily act only as per the desires of the particular individual, human nature being what it is.
13. As Article 265 provides that tax can be levied and collected only by authority of law, taxation laws also are not immune from attack on the ground of violation of fundamental rights. But taxing statutes stand on a footing different from other statutes, the reason being that in the matter of taxation the legislature has discretion to pick and choose objects, persons and rates for taxation. In the application of Article 14, there is, therefore, not the same rigour in taxing statutes as the other statutes. In Willis on Constitutional Law, page 587, it is stated as follows:
' A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably..................The SupremeCourt has been practical and has permitted a very wide latitude in classification for taxation '
and in Weavers Constitutional Law, Article 275, at page 405 :
' The Fourteenth Amendment was not designed to prevent a State from establishing a system of taxation or from effecting a change in its system in all proper and reasonable ways nor to require the States to adopt an ironclad rule of equality to prevent the classification of property for purposes of taxation or the imposition of different rates upon different classes. '
14. As regards taxing statutes, the Supreme Court said in Khandige Sham Bhat v. Agricultural Income-tax Officer, Kasaragod :
'..... .the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature fn the matter of classification, so long as it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of ' wide range and flexibility ' so that it can adjust its system of taxation in all proper and reasonable ways. '
15. In Kunnathat Thathunni Moopil Nair v. State of Kerala, A.I.R. 1961 S.C. 552, 557:
' It must, therefore, be held that a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in Article 14, though the courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in a way that the courts might think more just and equitable. '
16. In Venugopala Ravi Varma Rajah v. Union of India, [1969] 74 I.T.R. 49,55 ; [1969] 3 S.C.R. 829 (S.C.):
' Tax laws are aimed at dealing with complex problems of infinite variety necessitating adjustment of several disparate elements. The courts accordingly admit, subject to adherence to the fundamental principles of the doctrine of equality, a large play to legislative discretion in the matter of classification. The power to classify may be exercised so as to adjust the system of taxation in all proper and reasonable ways; the legislature may select persons, properties, transactions and objects, and apply different methods and even rates for tax, if the legislature does so reasonably. If the classification is rational, the legislature is free to choose objects of taxation, impose different rates, exempt classes of property from taxation, subject different classes of property to tax in different ways and adopt different modes of assessment. A taxing statute may contravene Article 14 of the Constitution if it seeks to impose on the same class of property, persons, transactions or occupations similarly situate incidence of taxation, which leads to obvious inequality . ..
It is for the legislature to determine the objects on which tax shall be levied, and the rates thereof. The courts will not strike down an Act as denying the equal protection of laws merely because other objects could have been, but are not, taxed by the legislature....'
and in Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay, [1972] 1 S.C.C. 70; A.I.R. 1972 S.C. 845, 851:
' In view of the inherent complexity of fiscal adjustment of diverse elements a larger discretion has to be permitted to the legislature for classification so long as there is no transgression of the fundamental principles underlying the doctrine of classification .... a legislature does not have to tax everything in order to tax something. It can pick and choose districts, objects, persons, methods and even rates of taxation as long as it does so reasonably. A taxing statute is not invalid on the ground of discrimination merely because other objects could have been but are not taxed by the legislature .... Likewise, the mere fact that a tax falls more heavily on some in the same group or category is by itself not a ground for its invalidity, for then hardly any tax, for instance, sales tax and excise tax, can escape such a charge.'
17. The passage quoted above from Venugopala Ravi Varma Rajah v. Union of India was followed by the same court in T. G. Venkataraman v. State of Madras, [1970] 25 S.T.C. 196; A.I.R. 1970 S.C. 508. In the latter case, as a result of certain legislative and executive measures, sales of cane jaggery were made liable to tax under the Madras General Sales Tax Act and sales in palm jaggery remained exempt from sales tax and the question was whether such classification and exemption were valid. After quoting the above passage from Venugopala Ravi Varma Rajah v. Union of India the Supreme Court held that, in imposing liability to tax on sales of cane jaggery and exempting palm jaggery, no unlawful discrimination denying the guarantee of equal protection was practised.
18. It is true that the Companies Act does not make a distinction between widely held and closely held companies. But that does not mean that there is no real distinction between the two types of companies. The objects of the two Acts, the Companies Act and the Income-tax Act, are different. Unlike closely held companies, in the case of widely held companies, public have a predominant voice in their management. For tax evasion it is not unusual to find companies resorting to ploughing back or accumulation of profits. That is not easy in the case of companies where public have a predominant voice in the management. In the case of closely held companies, such accumulation only helps a few individuals or families. That is not in the notional interest. The classification of companies as widely held and closely held is not peculiar to this country. It is there in the corresponding English Act also. In the tax systems of most of the advanced countries, there is regulation of accumulation of undistributed profits. Even here this classification of companies as widely held and closely held was in the previous Act. From the economic point of view, accumulation of profits is unhealthy for the nation. It also opens up avenues for evasion of higher personal tax liability. The object o the enactment and the justification for the provision is mentioned in the counter-affidavit thus:
'... . the reasons for laying down a test control depending uponthe relationship of the members of the company is based on historicalfacts. A perusal of the history of growth of established industrial housesin India will amply show that in the earlier stages distribution of shares incompanies was confined exclusively to the members of a particular familywho could afford to invest their surplus funds. Practically, all the largeindustrial houses and the majority of the dominant undertakings havebeen developed under the then existing managing agency system whichpartook of the nature of family or group management .... This sort of management which characterised the industrial scene in India, today presupposes close identity of views between members of the family and their collaterals who all act in unison. It was, therefore, only natural that while determining the members of the public these people who, more often than not, work in complete unison should be treated as one person for purposes of computation of tax. There is, therefore, nothing arbitrary or irrational in such grouping which is wholly based on historical facts. As Section 104 is an anti-evasion measure, persons who are relatives of one another in the manner denned in Section 2(18) had necessarily to be grouped as one person to make the measure really effective .... taking into account the pattern by which control over industries is exercised by closely knit families and the fact that, normally, in accordance with human nature, members of a family do tend to act in concert, when it is to their common advantage, the test of relationship is extremely relevant and is not an extraneous consideration. .... Section 104 does not stand as a bar to anybody to enable him to associate with others in the formation of a company. What it does provide is that if the distribution of shares of any company is not sufficiently widespread, the company will have to pay some additional tax. Having regard to the economic objective of the State to bring about reduction in the inequalities of wealth amongst different sections of the public the classification of companies between widely-held and closely-held is fully justifiable.'
19. Economic developments involve differentiations and divisions. Tendencies to create monopolies have to be discouraged to prevent concentration of wealth to the common detriment. In the national interest there is reason for differentiating between widely held and closely held companies. There is, therefore, justification for the policy behind the higher rates of tax for closely held companies. Any way, it is not for the courts to evaluate the wisdom of the policy behind legislative classifications.
20. It was submitted that, from the economic aspect, high incidence of taxhas an adverse effect upon the capacity and psychology of the taxpayer,for it may affect his willingness to work, to save and to take risks andthus have important reactions upon national production. That is not anabsolutely correct statement. Taxation as a whole brings net profits tothe community. Community as a whole benefits by it. Income-tax comesonly out of the margin of profit. High taxation may often lead to greatereffort in order to maintain the net standard of living at the original point.It is probable that sudden changes in taxation do affect the willingness totake risk directly, but tolerance sets in rapidly.
21. It was argued that, if it was the object of the classification to prevent accumulation of profits and tax evasion, that could have been achieved by more efficacious methods. Critics of the method adopted in the Act ask ;
Is this the right method Does not a better one exist Will the administrative and procedural complications that must ensue be more than counterbalanced by the gains It is not in the province of the court to say as to what is the best method to achieve any financial or economic objective or as to what is the most satisfactory method of tax collection.
22. When the validity of a provision regarding classification is challenged under Article 14, the court is only concerned with the question whether the classification is reasonable. There is an intelligible differentia in the classification challenged here : the classification into closely held companies and widely held companies is quite reasonable. It has also a rational relation to the object sought to be achieved by the legislation. It does not lead to ' obvious inequality ' in the incidence to taxation among companies similarly situate : a classification for purposes of taxation is open to attack under Article 14 only if it leads to such 'obvious inequality'. There is, therefore, no merit in the attack based on Article 14,
23. No restriction is placed by the Act on any citizen for association with others in the formation of a company, whether widely held or closely held. The Act also places no restraint on him in the acquisition or holding or disposal of property. Therefore, there is no merit in the attack based on Article 19(1)(c) and (f) of the Constitution also.
24. In O.P. No. 3453 of 1969, the assessment order sought to be quashed is that for the year 1968-69. According to the first petitioner the amount mentioned in that order as depreciation allowance is wrong, there are other errors also apparent from the record and application has already been filed to the appropriate authority for rectification of the mistake. That application shall be disposed of on the merits. It is made clear that this judgment would not stand in the way of the same.
25. For the reasons mentioned already, these original petitions are dismissed but, in the circumstances, without costs.