Relationship between The Constitution of India and The Income Tax Law
CA. Shashank Mehta
The author is a member of the Institute. He can be reached at shashankmehta1695@gmail.com and eboard@icai.in.
“Dr. Babasaheb Ambedkar once quoted ‘Constitution is not a mere lawyer’s document, it is a vehicle of life, and its spirit is always the spirit of age.’ Being qualified Chartered Accountants, we are well versed with the law of Income Tax, however, the very premise of this law (in fact any Indian Law) lies in the ‘Constitution of India’. Thus, before interpreting or enforcing any statute one should always refer the Constitution to determine the validity of such law or provisions thereof. This write-up is an attempt to identify certain Articles of the Constitution which empowers the legislature to enact taxation laws, the legislative procedure for its enactment and how the provisions of the Income Tax Act, 1961 has link to the Fundamental Rights which have been bestowed upon us by the Constitution. Read on…”
A. Brief Introduction: The Constitutional Tree of Tax Law
In India the constitution is regarded as the ‘Mother Law’ or the ‘Law of the land’ i.e. the supreme law. Hereunder, an effort is made to focus upon the basics of the ‘Constitution of India’ and its nexus to the ‘Income-tax Act’. If we symbolize the constitutional aspect of the Income Tax Law as a fully grown tree, then we can classify these constitutional aspects as the following three major parts of a tree:
(i) The Crown (Branches & Leaves)
Power to levy and collect taxes under Articles 265, 270, 271, 285, 289, and distribution of powers between Parliament and State Legislatures under Articles 245 & 246.
(ii) The Stem / Trunk
Procedural aspects for enacting a statute: Legislative powers of Lok Sabha, Money Bills (Art. 109, 110), Finance Bills (Art. 117), and Presidential Ordinances (Art. 123).
(iii) The Roots
The foundational source of validity: The Preamble of the Constitution and Fundamental Rights under Part III (Articles 13, 14, 19(1)(g), and 27).
B. Brief History of Taxation in India
Taxation system in India persists since ancient times. There are traces of well elaborated and planned taxing scriptures in Kautilya’s (Chanakya) Arthasastra pertaining to 300 B.C. when the Mauryan Empire was at its glory. In the first chapter of Arthashastra, Chanakya quoted “Kosha Moolo Danda”, meaning – ‘revenue is the backbone of administration’, which is also a part of the official logo of the Income Tax Department of India. Also in 5th Century A.D., classical Sanskrit writer Kalidas, praising King Dalip, stated: “It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold”.
“There are traces of well elaborated and planned taxing scriptures in Kautilya’s (Chanakya) Arthasastra pertaining to 300 B.C. when the Mauryan Empire was at its glory. In the first chapter of Arthashastra, Chanakya quoted ‘Kosha Moolo Danda’; meaning – ‘revenue is the backbone of administration’, which is also a part of the official logo of the Income Tax Department of India.”
Thus, taxation system in India is not a recent concept but has its roots stretched deep in Indian history. However, a codified taxing structure was introduced by Sir James Wilson in the year 1860 in India’s First Union Budget. The Indian Income-tax Act of 1860 was enforced to meet the losses sustained by the British government on account of the military mutiny of 1857. Thereafter, new income tax statutes were passed in the years 1886 and 1918 for comparatively shorter periods of time. Then, ‘The Income Tax Act, 1922’ was introduced, which is referred to even today for various judicial pronouncements. Post-independence, in consultation with the Ministry of Law, the ‘Income-tax Act, 1961’ was enacted, which was brought into force from April 01, 1962.
C. Brief Introduction of ‘The Constitution of India’
The Indian Constitution was adopted on November 26, 1949 [celebrated as ‘Samvidhan Divas’]. As per Article 394, some of the Articles were given immediate effect. However, the majority of Articles became operative from January 26, 1950. The provisions relating to Citizenship, elections, provisional parliament, temporary and transitional provisions were given immediate effect i.e. November 16, 1949. The rest of the constitution came into force on 26th January, 1950 and this date is referred to in the Constitution as the date of its commencement, celebrated across India as ‘Republic Day’.
The Indian Constitution is the longest written constitution of all sovereign countries. The original Constitution was handwritten by Prem Behari Narain Raizada using beautiful calligraphy. As per Article 393, this Constitution is called the ‘Constitution of India’ (hereafter referred to as ‘the Constitution’).
D. Broad Areas Covered: (i) The Crown – Power to Levy & Collect Taxes
1.1 Article 265: Taxes Not to be Imposed Save by Authority of Law
As per Article 265 under Part XII of the Constitution, no tax can be levied or collected except by the authority of law, implying that in India for levying any tax a dedicated legislation or a law is required to be enacted. A tax without any legislation/law shall be regarded as unconstitutional.
Thus, in order to levy income tax, a dedicated law named the Income-tax Act, 1961 was enacted by the parliament which came into force w.e.f. 01/04/1962.
However, when one refers to Section 4 of the Income-tax Act, 1961, it provides that income tax can be charged in respect of the total income, when any Central Act enacts that income-tax shall be charged for an assessment year at any rate or rates. Thus, the Income-tax Act, 1961 in itself does not provide for the rate of taxation, instead it provides that only if any Central Act enacts that income tax shall be charged at specified rates; only then income tax at such specified rates shall be charged on the total income of a person for an assessment year.
It is for this reason, every year, generally in the month of February ‘Union Budget’ is presented wherein one of the agendas is the introduction of the ‘Finance Bill’, which is subsequently enacted in accordance with the provisions of the constitution and is referred to as the ‘Finance Act’.
Extract of Section 2(1) of Finance Act, 2020: “Subject to the provisions of sub-sections (2) and (3), for the assessment year commencing on the 1st day of April, 2020, income-tax shall be charged at the rates specified in Part I of the First Schedule and such tax shall be increased by a surcharge, for the purposes of the Union, calculated in each case in the manner provided therein.”
From the conjoint reading of the above provisions, under Part I of the First Schedule of the Finance Act, the rates of tax are specified. Section 2 of the Finance Act spells the charge of such rate as income tax for a particular assessment year. Once the Finance Act is enacted, section 4 of the Income-tax Act, 1961 provides for the Charge of Tax on a person’s total income for a particular assessment year.
Q1. What if the Finance Act is not enacted for a particular year? Whether there would be no Income Tax payable for that year?
As per Section 294 of the Income-tax Act, 1961, in case where as on the 1st day of April provisions have not yet been enacted by a Central Act (Finance Act) for an assessment year, the Income-tax Act, 1961 will still remain in force until the Finance Act is enacted. However, till that time, the provisions of tax can either be one of the following, whichever is more favourable to the assessee:
(a) Provision of the Act in force during the preceding assessment year; or
(b) The provision proposed in the Finance Bill (which is yet to be enacted).
Q2. Whether tax can be levied by way of notification / circulars or rule?
In the decision of the Hon’ble Supreme Court in ACIT vs. Bharat V. Patel [2018] 404 ITR 37 (SC), it was held that a Circular cannot be used to introduce a new tax provision in a statute which was otherwise absent.
Furthermore, in CIT vs. McDowell & Co. Ltd. [2009] 314 ITR 167 (SC), the Supreme Court laid down that the term ‘Law’ in the context of Article 265 means an Act of the Legislature and cannot comprise an executive order or rule without express statutory authority.
1.2 Article 271 & Article 270: Surcharge and Distribution of Taxes
As per Article 271, Parliament has the power to levy surcharge on duties/taxes (except on GST) for the purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India. Thus, even the Surcharge levied by the Finance Act on Income Tax derives its power from Article 271 of the Constitution.
As per Article 270, duties, taxes and cess (including income tax) levied by the Union under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States. Thus, Income Tax collected by the Central Government is subsequently apportioned to the State Governments.
However, as per Article 271, surcharge (including that collected on income tax) is earmarked exclusively for the Consolidated Fund of India – it cannot be distributed or shared with the State Governments.
1.3 Article 285 & 289: Exemption of Government Property from Taxation
Broadly, these articles provide that the Union cannot charge tax on the property and income of a State Government. Further, the State cannot charge tax on the property of the Union, except where Parliament passes specific legislation in this respect.
It is on account of these Articles that the ‘Central Government’ or the ‘State Government’ are neither included in the definition of the term ‘person’ u/s 2(31) nor as an ‘assessee’ u/s 2(7) of the Income-tax Act, 1961.
1.4 Article 245 & 246: Distribution of Legislative Powers & Agricultural Income
a) Territorial Jurisdiction (Article 245): Parliament has power to make laws for the whole or any part of India, whereas State Legislatures make laws for the whole or any part of the State.
b) Legislative Jurisdiction (Article 246 & Seventh Schedule):
- Article 246(1) – List I (Union List): Parliament has exclusive powers to make laws with respect to matters in List I. Entry No. 82 of the Union List reads: “Taxes on income other than agricultural income.”
- Article 246(2) – List III (Concurrent List): Both Parliament and State Legislatures have concurrent powers.
- Article 246(3) – List II (State List): State Legislatures have exclusive powers. Entry No. 46 reads: “Taxes on agricultural income.”
Thus, Parliament has exclusive power to make laws relating to Income Tax (except agricultural income). That is why the Income-tax Act, 1961 and annual Finance Acts are passed by Parliament and not by State Legislatures.
Q1. Can the Parliament impose Tax on agricultural income?
No. Entry No. 82 of the Union List specifically excludes the jurisdiction of Parliament to make laws in such respect. Any attempt by Parliament would be ultra-vires and unconstitutional.
Q2. Section 10(1) of the Income-tax Act, 1961 exempts ‘agricultural income’. What would be the implication if no such exemption is provided?
If specific exemption had not been provided under Section 10(1), it might have fallen under the definition of ‘income’ u/s 2(24). However, because the Constitution is supreme, Parliament cannot tax it; imposing tax on it would be ultra-vires.
Q3. Who has the power to make law relating to income tax on agricultural income?
Entry No. 46 of the State List empowers the State Legislature to levy tax on agricultural income. However, presently, no State in India has enacted laws imposing income tax on agricultural income.
E. Broad Areas Covered: (ii) The Stem / Trunk – Enacting a Taxing Statute
A Bill is a draft statute which becomes law after being passed by both Houses of Parliament and assented to by the President. Under Article 109 and Article 110(1), a bill dealing with the imposition, abolition, remission, alteration or regulation of any tax is construed as a ‘Money Bill’. Under Article 117, a bill relating to matters specified in clauses (a) to (f) of Article 110(1) is a ‘Finance Bill’. Thus, every Finance Bill is a Money Bill, but every Money Bill may not be a Finance Bill.
Powers of the President to Promulgate Ordinances: Article 123
Recent examples include the Taxation Laws (Amendment) Ordinance, 2019 and The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020. Conditions governing Ordinances:
- Parliament must not be in session;
- President must be satisfied that circumstances exist rendering immediate action necessary;
- An Ordinance has the same force and effect as an Act of Parliament;
- Ordinance ceases to operate 6 weeks after reassembly of Parliament or earlier if disapproved by resolutions of both Houses;
- President has power to withdraw the Ordinance at any time.
F. Broad Areas Covered: (iii) The Roots – Preamble & Fundamental Rights
Unless the roots are nurtured properly, the tree won’t stand on its own. Similar is the situation with any Law enacted in India – unless the Law is within the ambit and in accordance with the Preamble and Chapter III of the Constitution, it won’t survive.
a) Preamble of the Constitution:
“WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens: JUSTICE, social, economic and political; LIBERTY of thought, expression, belief, faith and worship; EQUALITY of status and of opportunity; and to promote among them all FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation; IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, do HEREBY ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION.”
In Kesavananda Bharati vs. State of Kerala [(1973) 4 SCC 225], the Supreme Court laid down the ‘Basic Structure Doctrine’: Parliament can amend the Preamble under Article 368, but cannot alter the basic structure. In A.K. Gopalan vs. State of Madras (1950) and Re Berubari Union (AIR 1960 SC 845), the Court affirmed that the Preamble states the key objects and aids legal interpretation when statutory language is ambiguous.
b) Chapter III: Fundamental Rights & Taxation Validity
Any tax law which is prejudicial to Fundamental Rights is unconstitutional and void: