R.K. Garg Vs. Union of India & Ors [1981] INSC 182 (20 October 1981)

GUPTA, A.C.

CHANDRACHUD, Y.V. ((CJ) BHAGWATI, P.N.

FAZALALI, SYED MURTAZA SEN, AMARENDRA NATH (J)

CITATION: 1981 AIR 2138 1982 SCR (1) 947 1981 SCALE (3)1601

CITATOR INFO :

F 1982 SC 710 (32) R 1983 SC 937 (37) R 1984 SC1130 (46) RF 1985 SC 551 (32) RF 1985 SC 724 (13) R 1987 SC 251 (33) R 1990 SC 334 (98) RF 1992 SC1033 (39)

ACT:

Special Rcarer Bonds (Immunities and Exemptions) ordinance, 1981 and Special Bearer Bonds (Immunities and Exemptions) Act, 1981-Constitution validity of-Whether infringes Art. 14-Act whether puts a premium on dishonesty.

Constitution of India, 1950.

Art. 14-Validity of classification-How to be determined.

Art. 32-Judicial review-Discharge of-Principles to be followed.

Art. 123-ordinance making power of President-Whether can extend to tax laws.

Interpretation of statutes-Legislation on economic matters-Effect of crudities, inequities and possibilities of abuse-Whether renders legislation invalid.

HEADNOTE:

The Special Bearer Bonds (Immunities and Exemptions) ordinance, 1981 was promulgated on January 12,1981. It was repealed and replaced by the Special Bearer Bonds (Immunities and Exemptions) Act, 1981. The Act received the Presidential assent on March 27,1981. Section 1(3) of the Act stated that the Act was deemed to have come into force on January 12, 1981. The provisions of the ordinance and the Act were similar except section 4(2) of the Act which was worded slightly differently from the corresponding provision of the ordinance. The Act provided for certain immunities to holders of Special Bearer Bonds, 1981, and for certain exemptions from direct taxes in relation to such Bonds and for matters connected therewith. The object and purpose for which the Act was passed was to canalise for productive purposes black money, which had become a serious threat to the national economy and to provide for certain immunities and exemptions to render it possible for persons in possession of black money to invest the same in the said Bonds.

Section 3 of the Act provided for certain immunities to a person who had subscribed to or otherwise acquired Special Bearer Bonds. Clause (a) protected such a person from being required to disclose for any purpose whatsoever the I nature and source of acquisition of the Special Bearer Bonds.

Clause (b) prohibited the commencement of any inquiry or investigate on against a person on the 948 ground of his having subscribed to or otherwise acquired the Special Bearer Bonds. Clause (c) provided that the fact of subscription to or acquisition of Special Bearer Bonds shall not be taken into account and shall be inadmissible in evidence in any proceedings relating to any offence or the imposition of any penalty. Sub-section (2) of section (3) provided that the immunity granted under sub-section (1) shall not be available in relation to prosecution for any offence punishable under Chapter 9 or Chapter 17 of the Indian Penal Code or the Prevention of Corruption Act, 1957 or other similar law.

Section 4 provided that without prejudice to the provisions of section 3 subscription to, or acquisition of Special Bearer Bonds by any person shall not be taken into account for the purpose of any proceedings under the Income- tax Act, 1961, the Wealth-tax Act 1957 or the Gift-tax Act, 1958 and that no person who has subscribed to or has otherwise acquired the said Bonds shall be entitled to (a) claim any set-off under the Income-tax Act or to reopen any assessment or reassessment made under that Act on the ground that he has subscribed to or has otherwise acquired the said Bonds; (b) that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Act has been converted into such bonds, and (c) that any asset held by him represents the consideration received for the transfer of such Bonds.

In their writ petitions to this Court assailing the constitutional validity of the ordinance and the Act it was contended on behalf of the petitioners that: (I) since the ordinance had the effect of amending the tax laws it was outside the competence of the President under Article 123, that the subject matter of the ordinance was in the nature of a Money Bill which could be introduced only in the House of the People and passed according to the procedure provided in Articles 109 and 110, the President had no power under Article 123 to issue the ordinance by passing the special procedure provided in Articles 109 and 110 for the passing of a Money Bill and (2) that the provisions of the Act were violative of Article 14 of the Constitution.

It was also contended: (a) that Special Bearer Bonds would fetch a much higher value in the black market than that originally subscribed and this would enable a larger amount of black money to be legalised into white than what was originally invested in subscription to special bearer bonds, (b) an abuse which special bearer bonds might lend themselves to was that if special bearer bonds are sold and the sale proceeds are utilised in meeting expenditure, the assessee would not be precluded by section 4 clause (c) from explaining the source of the expenditure to be the sale consideration of special bearer bonds and by resorting to this strategy, white money can be accumulated as capital while expenditure is met out of black money received by way of consideration for sale of special bearer bonds, (c) Section 4 clause (c) operates only in relation to a period before the date of maturity of special bearer bonds and after the date of maturity the holder of special bearer bonds can sell such bonds, and, without running any risk disclose the consideration received by him as his white money, because section 4 clause (c) being out of the way, he can account for the possession of such money by showing that he has received it as consideration for sale of special bearer bonds and so far as the purchaser is concerned. if he has Paid the consideration out of his black money, he can claim 949 the immunity granted under section 3 sub-section (1) and his black money would be converted into white, (d) the Act is unconstitutional as it offends against morality by according to dishonest assessees who have evaded payment of tax.

immunities and exemptions which are denied to honest tax- payers. Those who have broken the law and deprived the State of its legitimate dues are given benefits and concessions placing Them at an advantage over those who have observed the law and paid the taxes due from them and this is clearly immoral and unwarranted by the Constitution.

Dismissing the petitions, HELD :

[Per majority Chandrachud, C. J., Bhagwati, Fazal Ali & Amarendra Nath Sen, J.J.] [Gupta, J, dissenting] None of the provisions of The Special Bearer Bonds (Immunities and Exemption) Act, 1981 is violative of Article 14 and its constitutional validity must be upheld. [989 B] l(i). There is no substance in The contention that the President has no power under Article 123 to issue an ordinance amending or altering the tax laws and that the ordinance was outside the legislative power of the President under that Article. [967 E] l(ii). Under Article 123 legislative power is conferred on the President exercisable when both Houses of Parliament are not in session. It is possible that when neither House of Parliament is in session, a situation may arise which needs to be dealt with immediately and for which there is no adequate provision in the existing law and emergent legislation may be necessary to enable the executive to cope with the situation. Article 123, therefore, confers powers on the President to promulgate a law by issuing an ordinance to enable the executive to deal with the emergent situation which might well include a situation created by a law being declared void by a Court of law. The legislative power conferred on the President under the Article is not a parallel power of legislation. This power is the clearest indication that the President is invested with this legislative power only in order to enable the executive to tide over an emergent situation which may arise whilst The Houses of Parliament are not in session. The conferment of such power may appear to be undemocratic but it is not so, because The executive is clearly answerable to the legislature and if the President, on the aid and advice of the executive, promulgates an ordinance in misuse or abuse of this power, the legislature can not only pass a resolution disapproving the ordinance but can also pass a vote of no confidence in the executive There is in the theory of Constitutional Law complete control of the legislature over the executive, because if the executive misbehaves or forfeits the confidence of the legislature, it can be thrown out by the legislature. [954 E-G, 965 G-966 B] 1(iii). If parliament can by enacting legislation after or amend tax laws, equally can the President do so by issuing an ordinance under Article 123. There have been numerous instances where the President has issued an ordinance replacing with retrospective effect a tax law declared void by the High Court or 950 this Court. Even offences have been created by ordinance issued by the President under Article 123 and such offences committed during the life of the ordinance have been held to be punishable despite the expiry of the ordinance. [967 B-C] State of Punjab v. Mohar Singh [1955] 1 SCR 893, referred to.

2(i). Certain well established principles have been evolved by Courts as rules of guidance in discharge of their constitutional function of judicial review. The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. The presumption of constitutionality is indeed so strong that in order to sustain it, the Court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of Legislation.

Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. [969 A-G] Morey v. Dond, 354 US 457, referred to.

2(ii). The court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry" that exact wisdom and nice adoption of remedy are not f; always possible and that "judgment is largely a prophecy based on meagre and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. [970 C.D] Secretary of Agriculture v. Central Reig Refining Company, 94 Lawyers' Edition 381. referred to.

2(iii). The court must adjudge the constitutionality of legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provision. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation.

That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues. [970 G-H] 3(i). It is clear that Article 14 does not forbid reasonable classification of persons, objects and transactions by the legislature for the purpose of attaining specific ends. What is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be arbitrary, artificial or evasive but must be based on some real and substantial distinction bearing 951 a just and reasonable relation to the object sought to be achieved by the legislature.

3(ii). The validity of a classification has to be judged with reference to the object of the legislation and if that is done, there can be no doubt that the classification made by the Act is rational and intelligible and the operation of the provisions of the Act is rightly confined to persons in possession of black money.

4(i). The Preamble of the Act makes it clear that the Act is intended to canalise for productive purposes black money which has become a serious threat to the national economy. It is an undisputed fact that there is considerable amount of black money in circulation which is unaccounted or concealed and therefore outside the disclosed trading channels. It is largely the product of black market transactions and evasion of tax. The abundance of black money has in fact given rise to a parallel economy operating simultaneously and competing with the official economy. This parallel economy has over the years grown in size and dimension and even on a conservative estimate, the amount of black money in circulation runs into some thousand crores.

The menace of black money has reached such staggering proportions that it is causing havoc to the economy of the country and poses a serious challenge to the fulfillment of objectives of distributive justice and setting up of an egalitarian society.

4(ii). The first casualty of the evil of black money is the Revenue because it loses the tax which should otherwise have come to the exchequer. The generation of black money through tax evasion throws a greater burden on the honest tax payer and leads to economic inequality and concentration of wealth in the hands of the unscrupulous few in the country. It also leads to leakage of foreign exchange, making balance of payments rather distorted and unreal and tends to defeat the economic policies of the Government by making their implementation ineffective, particularly in the field of credit and investment. Urgent measures were required to be adopted for preventing further generation of black money as also for unearthing existing black money so that it can be canalised for productive purposes with a view to effective economic and social planning.

4(iii). The Government introduced several changes in the administrative set up of the tax department from time to time with a view to strengthening the administrative machinery for checking tax evasion. The Government also amended section 37 of the Indian Income Tax Act, 1922 with a view to conferring power on the tax authorities to carry out searches and seizures and this power was elaborated and made more effectual under the Income Tax Act, 1961. The Voluntary Disclosure Scheme of 1951 was made to facilitate the disclosure of suppressed income by affording certain immunities from penal provisions, Nearly a decade and a half later a second scheme of voluntary disclosure was introduced by section 68 of the Finance Act, 1965, popularly known as the sixty forty scheme which was a little more successful.

Closely following on the heels of this scheme came another under section 24 of the Finance (No. 2) Act 1965-'Block Scheme' according to which tax was payable at rates applicable to the block of concealed income disclosed and not at a flat rate as under the sixty-forty scheme. Then came the Taxation Laws (Amendment and Miscellaneous Provisions) ordinance 1965 followed by an Act which provided for exemption from 952 tax in certain cases of undisclosed income invested in National Defence Gold Bonds 1980. Later on, the Voluntary Disclosure of Income and Wealth ordinance 1975 which was followed by an Act introduced a scheme of voluntary disclosure of income and wealth and provided certain immunities and exemptions. All these legal and administrative measures were introduced by the Government and did not have any appreciable effect with regard to the problem of black money which continued unabated 4 (iv). All efforts to detect black money and to uncover it having failed and the problem of black money being an obstinate economic issue which was defying solution, the impugned legislation providing for issue of Special Bearer Bonds was enacted with a view to mopping up black money and bringing it out in the open, so that, instead of remaining concealed such money may become available for augmenting the resources of the State and being utilised for productive purposes so as to promote effective social and economic planning. This was the object for which the Act was enacted and it is with reference to this object that it is to be determined whether any impermissible differentiation is made in the Act.

4 (v). The whole object of the impugned Act is to induce those having black money to convert it into white money by making it available to the State for productive purposes, without granting in return any immunity in respect of such black money if it could be detected through the ordinary processes of taxation laws without taking into account the fact of purchase of Special Bearer Bonds.

4 (vi). The acquisition or possession of Special Bearer Bonds would not therefore afford any protection to a public servant against a charge of corruption or to a person committing any offence against property. Equally this immunity would not be available where what is sought to be enforced is a civil liability other than liability by way of tax. The immunity granted in respect of subscription to or acquisition of Special Bearer Bonds is a severely restricted immunity and this is the bare minimum immunity necessary in order to induce holders of black money to bring it out in the open and invest it in Special Bearer Bonds

5. Section 4(c) is calculated to act as a strong deterrent against negotiability of Special Bearer Bonds for disclosed or 'white' money. The immunily granted under the provisions of the Act, limited as it is, extends only to the person who is for the time being the holder of Special Bearer Bonds and the person who has transferred the Special Bearer Bonds for black money has no immunity at all and all the provisions of tax laws are available against him for determining his true income or wealth and therefore no one who has purchased Special Bearer Bonds with a view to earning security against discovery of unaccounted money in his hands would ordinarily barter away that security by again receiving black money for the Special Bearer Bonds.

Even if special bearer bonds are transferred against receipt of black money it will not have the effect of legalising more black money into white because the black money of the seller which had become white on his subscribing to or acquiring special bearer bonds would again be converted into black money and the black money paid by the 953 purchaser by way of consideration would become white by reason of being converted into special bearer bonds.

6. No assessee would ever admit that he incurred expenditure out of black money received as consideration for sale of special bearer bonds because it would be impossible for him to establish receipt of black money from the purchaser and if he is unable to do so, the amount of the expenditure, would by reason of section 69C of the Income- tax Act, 1961 be deemed to be his concealed income liable to tax. Even if it is assumed that in some rare and exceptional cases the assessee may be able to establish that he sold special bearer bonds against receipt of black money the purchaser would straight away run into difficulties because the evidence furnished by the assessee would in such a case clearly establish that the purchaser had black money and he paid it to the assessee by way of consideration and he would in that event be rendered liable to tax and penalty in respect of such black money. C

7. Howsoever special bearer bonds may be transferred and for whatever consideration only a limited amount of black money namely The amount originally subscribed for the special bearer bonds or at the most the amount representing the face value of the special bearer bonds would be legalised into white money and the supposedly free negotiability of special bearer bonds would not have the effect of legalising more black money into while or encouraging further generation of black money.

8. When experience shows that the legislation as framed has proved inadequate to achieve its purpose of mitigating an evil or there are cracks and loopholes in it which are being taken advantage of by the resourcefulness and ingenuity of those minded to benefit themselves at the cost of the State or the others, the legislature can and most certainly would intervene and change The law. But the law cannot be condemned as invalid on the ground That after a period of ten years it may lend itself to some possible abuse.

9. It is obvious that the Act makes a classification between holders of black money and the rest and provides for issue of special bearer bonds with a view to inducing persons belonging to the former class to invest their unaccounted money in purchase of special bearer bonds, so that such money which is today Lying idle outside the regular economy of the country is canalised into productive purposes. The object of the Act being to unearth black money for being utilised for productive purposes with a view to effective social and economic planning, there has necessarily to be a classification between persons possessing black money and others and such classification cannot be regarded as arbitrary or irrational.

10. The validity of a classification has to be judged with reference to The object of the legislation and if that is done, there can be no doubt that the classification made by the Act is rational and intelligible and the operation of the provisions of the Act is rightly confined to persons in possession of black money.

11. The legislature had obviously only two alternatives: either to allow the black money to remain idle and unproductive or to induce those in possession 954 of it to bring it out in the open for being utilised for productive purposes. The first alternative would have left no choice to the government but to resort to deficit financing or lo impose a heavy dose of taxation. The former would have resulted in inflationary pressures affecting the vulnerable sections of the society while the latter would have increased the burden on the honest tax payer and perhaps led to greater tax evasion. The legislature therefore decided to adopt the second alternative of coaxing persons in possession of black money to disclose it and make it available to the government for augmenting its resources for productive purposes and with that end in view enacted the Act providing for issue of special bearer bonds.

12. It would be outside the province of the court to consider if any particular immunity or exemption is necessary or not for the purpose of inducing disclosure of black money. That would depend upon diverse Fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the Court would be least fitted to pronounce. The Court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The Court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not. There are so many imponderables that would enter into the determination that it would be wise for the court not to hazard an opinion where even economists may differ.

13. The court must while examining the constitutional validity of a legislation "be resilient, not rigid, forward looking, not static, liberal, not verbal" and the court must always bear in mind the constitutional proposition "that courts do not substitute their social and economic beliefs for the judgment of legislative bodies".

14. The court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary.

[ Per A.C. Gupta, J. dissenting ]

1. The Special Bearer Bonds (Immunities and Exemptions) ordinance, 1981 and the Special Bearer Bonds (Immunities and Exemptions) Act, 1981 are invalid on the ground that they infringe Article 14 of the Constitution. [1002 A] 2 The Act puts a premium on dishonesty without even a justification of necessity-that the situation in the country left no option. [1000 H-1001 A]

3. The basis on which the holders of Special Bearer Bonds have been classified to give certain advantage to one class and deny them to the other, has no rational nexus with the object of the Act. [996 A] 4 (i). Article 14 forbids class legislation but permits classification-Permissible classification, it is well established, must satisfy two conditions viz. (i) li that The classification must be founded on an intelligible differential which distinguishes those that are grouped together from others and: (2) that the 955 differential must have a rational relation to the object sought to be achieved by A the Act. [993 G-994 A] 4 (ii). The differential that is the basis of classification and the object of the Act are distinct things, it is not enough that the differential should have a nexus with the object, but it should also be intelligible.

The presence of some characteristics in one class which are not found in another is the difference between the two classes, but a further requirement is that this differential must be intelligible. If the basis of classification is on the face of it arbitrary in the sense that it is palpably unreasonable it is not possible to call the differential intelligible. [997 B-C] The State of West Bengal v. Anwar Ali Sarkar, [1952] SCR 284; E. P. Royappa v. State of Tamil Nadu and another, [1974] 2 SCR 348 and Maneka Gandhi v. Union of India, [1978] 2 SCR 621, referred to.

5. The preamble of the Act takes note of the fact that black money has become a serious threat to national economy and says that to make economic and social planning effective it is necessary to canalise this black money for productive purposes. The Act however does not define black money. [990 F]

6. The immunities provided by the impugned Act are clearly for the benefit of those who have acquired the Bonds with black money. Clauses (a), (b) and (c) of section 3(1) provide for these immunities "notwithstanding anything contained in any other law for the time being in force".

None of These immunities is required by a person who has paid 'white' money, that is, money that has been accounted for to acquire the Bonds. To a person who has disclosed the source of acquisition of the Bonds, These immunities are of no use. Section 4 makes it clear that the immunities conferred by the Act are of use only to those who have acquired the Bonds with unaccounted money. [994 B-D]

7. The impugned Act denies to those who have acquired the bonds not with black money any relief under the Income- tax Act or the Wealth-tax Act or any benefit in any other way claimed on the ground that they are holders of Special Bearer Bonds, and the relief and the benefit denied to them have been made available to those who have acquired the Bonds with black money by ignoring the source of acquisition in their case. [995 C-D]

8. The Act distinguishes between two classes of holders of Special Bearer Bonds; tax evaders and honest tax-payers.

The object is to canalise black money for productive purposes to make economic and social planning effective. If the exemptions and immunities conferred by the Act are sufficiently attractive to induce tax-evader to acquire Special Bearer Bonds, they will remain as attractive even if all these benefits were granted to those who will pay white money for the Bonds. Denial of these benefits to those who have acquired the Bonds with money which has been accounted for does not in any way further the object of canalisation of black money for productive purposes. The discrimination in favour of black money therefore seems to be obvious. [995 E-F]

9. Terms like 'reasonable', 'just' or 'fair' derive their significance from the existing social conditions.

Expressions like a 'reasonable and fair price' or 'fair 956 and equitable restitution' means nothing, except in conjunction with the social conditions of the time. That action is called 'reasonable' which an informed, intelligent, just minded civilised Man could rationally favour. [998 F-G] Quaker City Cab Co. v. Commonwealth of Pennsylvania 72 Law. Ed. 927, referred to.

10. What is arbitrary and offends Article 14 cannot be called intelligible. It is clear from the provisions of the Act that the advantage which the tax evaders derive from the immunities provided by the Act are not available to those who have acquired the Bonds with 'white money' The Act promises anonymity and security for tax-evaders. No question can be asked as to the nature and source of acquisition or possession of the Bonds. The Bonds can be transferred freely and passing of the Bonds from hand to hand is likely to operate as parallel currency and be used for any kind of transaction. [999 F-G]

11. The Act discloses a scheme which enables tax- evaders to convert black money into white after 10 years and in the meantime use the Bonds as parallel currency initiating a chain of black money investments. There is no provision in the Act requiring that on maturity of the Bonds their holders would have to disclose their identity, which means that if after 10 years black money which had taken the shape of Special Bearer Bonds goes underground again and retain its colour, there is nothing to prevent it. There is nothing in the scheme to halt generation of black money which threatens the national economy. Some people by successful evasion manoeuvres are able to throw the burden of taxation off their own shoulders which means a greater burden on the honest tax payers and this leads to economic imbalance. [1000 B-D]

12. Any law that rewards law breakers and tax dodgers is bound to invite criticism. No law can be struck down only on the ground that it is unethical. However, there cannot be and there never has been a complete separation of law and morality. Historical and ideological differences concern the extent to which the norms of the social order are absorbed into the legal order. The principle of reasonableness is an essential element of equality. The concept of reasonableness does not exclude notions of morality and ethics. It cannot be disputed that in the circumstances of a given case considerations of morality and ethics may have a bearing on the reasonableness of the law in question. [1001 B-D]

ORlGlNAL JURISDICTION: Writ Petition Nos. 355, 360, 863, 994 & 3624 of 1981.

(Under article 32 of the Constitution of India) Petitioner in person in WP. No. 350/81 R.K Garg, A.R. Gupta, Brij Bhushan, Miss Renu Gupta and S.K Jain for the Petitioner in W.P. 360/81.

957 Soli J. Sorabjee, Harish Salve, S.K Dholakia & Mrs.

Ranjana Anand for the Petitioners in W.P. 863/81.

Soli J. Sorabjee, Harish Salve, P.H. Parekh, R.

Karanjawala. K.K. Lahiri & R. Swamy for the Petitioner in W.P. 994/81.

R.S. Sodhi for the Petitioner in WP 3624/81.

L.N. Sinha, Attorney General in WPs. 355 & 360/81.

K Parasaran, Sol. General in WPs. 863 & 994/81.

K. S. Gurumoorthi & Miss A. Subhashini for the Respondents.

U.N. Banerjee for the intervener-Mr. K.B. Kastia V.J. Francis for the intervener-All India L.I.C., Employees Federation.

The following Judgments were delivered BHAGWATI, J. These writ petitions raise a common question of law relating to the constitutional validity of the Special Bearer Bonds (Immunities and Exemptions) ordinance, 1981 (hereinafter referred to as the ordinance) and the Special Bearer Bonds (Immunities and Exemptions) Act 1981 (hereinafter referred to as the Act). The principal ground on which the constitutional validity of the ordinance and the Act is challenged is that they are violative of the equality clause contained in Article 14 of the Constitution.

There is also one other ground on which the ordinance is assailed as constitutionally invalid and it is that the President had no power under Article 123 of the Constitution to issue the ordinance and the ordinance is therefore ultra vires and void. We shall first deal with the latter ground since it can be disposed of briefly, but before we do so, it would be convenient to refer to the relevant provisions of the Act. It is not necessary to make any specific reference to the provisions of the ordinance since the provisions of the Act are substantially a reproduction of the provisions of the ordinance.

On 12th January 1981, both Houses of Parliament not being in session, the President issued the ordinance in exercise of the power conferred upon him under Article 123 of the Constitution. The ordinance was later replaced by the Act which received the assent of the President on 27th March 1981, but which was brought 958 into force with retrospective effect from 12th January 1981 being the date of promulgation of the ordinance. The Act is a brief piece of legislation with only a few sections but the ascertainment of their true meaning and legal effect has given rise to considerable controversy between the parties and hence it is necessary to examine the provisions of the Act in some detail. The long title of the Act describes it as an Act "to provide for certain immunities to holders of Special Bearer Bonds 1991 and for certain exemptions from direct taxes in relation to such Bonds and for matters connected therewith" and the provisions enacted in the Act are proceeded by a Preamble which indicates the object and purpose of the Act in the following words:

Whereas for effective economic and social planning it is necessary to canalise for productive purposes black money which has become a serious threat to the national economy;

And whereas with a view to such canalisation the Central Government has decided to issue at par certain bearer bonds to be known as the Special Bearer Bonds, 1991, of the face value of ten thousand rupees and redemption value, after ten years, of twelve thousand rupees;

And whereas it is expedient to provide for certain immunities and exemptions to render it possible for persons in possession of black money to invest the same in the said Bonds;

Sections 3 and 4 are extremely material since on their true interpretation depends to a large extent the determination of the question relating to the constitutional validity of the Act and they may be reproduced as follows:

3. (1) Notwithstanding anything contained in any other law for the time being in force:- (a) no person who has subscribed to or has otherwise acquired Special Bearer Bonds shall be required to disclose, for any purpose whatsoever, the nature and source of acquisition of such Bonds;

(b) no inquiry or investigation shall be commenced against any person under any such law on the ground that 959 such person has subscribed to or has otherwise acquired Special Bearer Bonds; and (c) the fact that a person has subscribed to or has other wise acquired Special Bearer Bonds shall not be taken into account and shall be inadmissible as evidence in any proceedings relating to any offence or the imposition of any penalty under any such law.

(2) Nothing in sub-section (1) shall apply in relation to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Prevention of Corruption Act, 1947 or any offence which is punishable under any other law and which is similar to an offence punishable under either of those Chapters or under that Act or for the purpose of enforcement of any civil liability.

Explanation : For the purposes of this sub-section "civil liability" does not include liability by way of tax under any law for the time being in force.

4. Without prejudice to the generality of the provisions of section 3, the subscription to, or acquisition of, Special Bearer Bonds by any person shall not be taken into account for the purpose of any proceedings under the Income-tax Act, 1961 (hereinafter referred to as the Income- tax Act), the Wealth-tax Act 1957 (hereinafter referred to as the Wealth-tax Act), or the Gift-tax Act, 1958 (hereinafter referred to as the Gift-tax Act) and, in particular, no person who has subscribed to, or has otherwise acquired, the said Bonds shall be entitled- (a) to claim any set-off or relief in any assessment, reassessment appeal, reference or other proceeding under the Income-tax Act or t reopen any assessment or reassessment made under that Act on the ground that he has subscribed to or has otherwise acquired the said Bonds;

(b) to claim, in relation to any period before the date of maturity of the said Bonds, that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Act has been converted into the said Bonds: or 960 (c) to claim, in relation to any period before the date of maturity of the said Bonds, that any asset held by him or any sum credited in his books of account or other wise held by him represents the consideration received by him for the transfer of the said Bonds.

We shall analyse the provisions of these two sections when we deal with the arguments advanced on behalf of the parties and that will largely decide the fate of the challenge against the constitutional validity of the Act, but in the meanwhile we may proceed to summarise the remaining provisions of the Act. Section S amends the Income-tax Act 1961 by providing that the definition of "capital asset" in section 2 clause (14) shall not include that Special Bearer Bonds issued under the Act so that any profit arising on sale of the Special Bearer Bonds would not be liable to capital gains tax and it also excludes from the computation of the total income of the assessee, premium on redemption of the Special Bearer Bonds by introducing a new sub-clause in section 10 clause (15). Section 5 sub-section (I) of the Wealth Tax Act 1957 is also amended by section 6 so as to exclude the Special Bearer Bonds from the net wealth of the assessee liable to wealth tax. Section 7, by amending section S sub-section (I) of the Gift-tax Act 1958 exempts gifts of Special Bearer Bonds from the incidence of gift tax. Section 8 confers powers on the Central Government to make order removing any difficulty which may arise in giving effect to the provisions of the Act and section 9 sub- section (1) repeals the ordinance, but since the Act is brought into force with effect from the date of promulgation of the ordinance, sub-section (2) of section 9 provides that notwithstanding the repeal of the ordinance, anything done or any action taken under the ordinance shall be deemed to have been done or taken under the corresponding provisions of the Act.

Having set out the provision of the Act-and be it noted again that the provisions of the ordinance were substantially in the same terms as the provisions of the Act-we may now proceed to consider the challenge against the constitutional validity of the ordinance on the ground that the President had no power to issue the ordinance under Article 123 of the Constitution. There were two limbs of the argument under this head of challenge; one was that since the ordinance had the effect of amending the tax laws, it was outside the competence of the President under Article 123 and the other was that the subject matter of the ordinance was in the nature 961 of a Money Bill which could be introduced only in the House of the A People and passed according to the procedure provided in Articles 109 and 110 and the President had therefore no power under Article 123 to issue the Ordinance by-passing the special procedure provided in Art. 109 and 1 10 for the passing of a Money Bill. There is, as we shall presently point out, no force in either of these two contentions, but we may point out straightaway that both these contentions are 1 academic, since the Act has been brought into force with effect from the date of promulgation of the Ordinance and sub-section (2) of section 9 provides that anything done or any action taken under the Ordinance shall be deemed to have been done or taken under the corresponding provisions of the Act and the validity of anything done or any action taken under the Ordinance is therefore required to be judged not with reference to the Ordinance under which it was done or taken, but with reference to the Act which was, by reason of its retrospective enactment, in force right from the date of promulgation of the Ordinance and under which the thing or action was deemed to have been done or taken. It is in these circumstances wholly unnecessary to consider the constitutional validity of the Ordinance, because even if the Ordinance be unconstitutional, the validity of anything done or any action taken under the Ordinance, could still be justified with reference to the provisions of the Act. This would seem to be clear on first principle as a matter of pure construction and no authority is needed in support of it, but if any were needed, it may be found in the decision of this Court in Gujarat Pottery Works v. B.P. Sood, Controller of Mining Leases for India and Ors. There the question was whether the Mining Leases (Modification of Terms) Rules, 1956 (hereinafter referred to as the 1956 Rules) made under Mines and Minerals (Regulation and Development) Act, 1948 (referred to shortly as 1948 Act) were void as being inconsistent with the provisions of the 1948 Act and if they were void, they could be said to be continued by reason of section 29 of the Mines and Minerals (Regulation and Development) Act, 1957 (hereinafter called the 1957 Act). This Court sitting in a Constitution Bench held that the 1956 Rules were not inconsistent with the provisions of the 1948 Act and were therefore valid, but proceeded to observe that even if the 1956 rules were void as being inconsistent with the provisions of the 1949 Act, they must by reason of section 29 of the 1957 Act be deemed to have been made under that Act and 962 their validity and continuity must therefore be determined with reference to the provisions of the 1957 Act and not the provisions of the 1948 Act and since there was no inconsistency between the 1956 Rules and the provisions of the ]957 Act, the 1956 Rules could not be faulted as being outside the power of the Central Government. Raghubar Dayal, J. speaking on behalf of the Court articulated the reason for taking this view in the following words:

"Even if the rules were not consistent with the provisions of the 1948 Act and were therefore void, we do not agree that they could not have continued after the enforcement of the 1957 Act. Section 29 reads:

'All rules made or purporting to have been made under the Mines and Minerals (Regulation and Development) Act, 1948, shall, in so far as they relate to matters for which provision is made in this Act and are not inconsistent therewith, be deemed to have been made under this Act as if this Act had been in force on the date on which such rules were made and shall continue in force unless and until they are superseded by any rules made under this Act.' The effect of this section is that the rules which were made or purported to have been made under the 1948 Act in respect of matters for which rules could be made under the 1957 Act would be deemed to have been made under the 1957 Act as if that Act had been in force on the date on which such rules were made and would continue in force. The Act of 1957 in a way is deemed to have been in force when the modification rules were framed in 1956. The 1956 rules would be deemed to be framed under the 1957 Act and therefore their validity and continuity depends on the provisions of the 1957 Act and not of the 1948 Act." In this connection we may refer to the case reported as Abdul Majid v. P.R. Nayak, A.I.R. 1951 Bom In that case section 58 of Act XXXI of 1950 repealed Ordinance No.

XXVII of 1949 and provided as follows:

'The repeal by this Act by the Administration of Evacuee Property Ordinance 1949 (XXVII of 1949) shall not affect the previous operation thereof, and subject thereto, anything done or any action taken in the exercise of any power conferred by or under that 963 Ordinance shall be deemed to have been done or taken in the exercise of the powers conferred by or under this Act, as if this Act were in force on the day on which such thing was done or action was taken.' Section 58 was construed thus:

'The language used in s. 58 is both striking and significant. It does not merely provide that the orders passed under the Ordinance shall be deemed to be order passed under the Act, but it provides that the orders passed under the Ordinance shall be deemed to be orders under this Act as if this Act were in force on the day on which certain things were done or action taken.

Therefore the object of this section is, as it were, to antedate this Act so as to bring it into force on the day on which a particular order was passed which is being challenged. In other words, the validity of an order is to be judged not with reference to the Ordinance under which it was passed, but with reference to the Act subsequently passed by Parliament.' The rules have not been challenged to be ultra vires the 1957 Act in the instant case." The same process of reasoning which appealed to this Court in upholding the validity of the 1956 Rules must apply equally in the present case and the validity of anything done or any action taken under the Ordinance must be judged with reference to the provisions of the Act and not of the Ordinance. It would therefore be academic for us to consider whether the Ordinance was within the Ordinance-making power of the President under Article 123 and ordinarily we would have resisted the temptation of pronouncing on this issue because it is a self-restraining rule of prudence adopted by this Court that "the court will not formulate a rule of constitutional law broader than is required by the precise facts to which it is to be applied." But since considerable argument was advanced before us in regard to this issue we do not think it would be right on our part to refuse to express our view upon it.

The Ordinance was issued by the President under Article 123 which is the solitary Article in chapter III headed "Legislative Powers of the President." This Article provides inter-alia as follows:

964 123 (1) If at any time, except when both Houses of Parliament are in session, the President is satisfied that circumstances exist which render it necessary for him to take immediate action, he may promulgate such Ordinances as the circumstances appear to him to require.

(2) An Ordinance promulgated under this article shall have the same force and effect as an Act of Parliament, but every such Ordinance:- (a) shall be laid before both Houses of Parliament and shall cease to operate at the expiration of six weeks from the reassembly of Parliament, or, if before the expiration of that period resolutions disapproving it are passed by both Houses, upon the passing of the second of those resolutions: and (b) may be withdrawn at any time by the President.

(3) If and so far as an Ordinance under this article makes any provision which Parliament would not under this Constitution be competent to enact, it shall be void.

It will be noticed that under this Article legislature power is conferred on the President exercisable when both Houses of Parliament are not in session. It is possible that when neither House of Parliament is in session, a situation may be arise which needs to be dealt with immediately and for which there is no adequate provision in the existing law and emergent legislation may be necessary to enable the executive to cope with the situation. What is to be done and how is the problem to be solved in such a case ? Both Houses of Parliament being in recess, no legislation can be immediately undertaken and if the legislation is postponed until the House of Parliament meet damage may be caused to public weal. Article 123 therefore confers powers on the President to promulgate a law by issuing an Ordinance to enable the executive to deal with the emergent situation which might well include a situation created by a law being declared void by a Court of law. "Grave public inconvenience would be caused", points out Mr. Seervai in his famous book on Constitutional Law, if on a statute like the Sales-tax Act being declared void, "no machinery existed whereby a valid law could 965 be promulgated to take the place of the law declared void '.

The President is thus given legislative power to issue an Ordinance and since under our constitutional scheme as authoritatively expounded by this Court in Shamsher and Anr. v. State of Punjab, the President cannot act except in accordance with the aid and advice of his Council of Ministers, it is really the executive which is invested with this legislative power. Now at first blush it might appear rather unusual and that was the main thrust of the criticism of Mr. R.K Garg on this point that the power to make laws should have been entrusted by the founding fathers of the Constitution to the executive, because according to the traditional outfit of a democratic political structure, the legislative power must belong exclusively to the ejected representatives of the people aud vesting it in the executive, though responsible to the legislature, would be undemocratic, as it might enable the executive to abuse this power by securing the passage of an ordinary bill without risking a debate in the legislature But if we closely analyse this provision and consider it in all its aspects, it does not appear to be so starting, though we may point out even if it were, the Court would have to accept it as the expression of the collective will of the founding fathers. It may be noted, and this was pointed out forcibly by Dr. Ambedkar while replying to the criticism against the introduction of Article 123 in the Constituent Assembly-that the legislative power conferred on the President under this Article is not a parallel power of legislation. It is a power exercisable only when both Houses of Parliament are not in session and it has been conferred ex-necessitate in order to enable the executive to meet an emergent situation.

Moreover, the law made by the President by issuing an Ordinance is of strictly limited duration. It ceases to operate at the expiration of six weeks from the reassembly of Parliament or if before the expiration of this period, resolutions disapproving it are passed by both Houses, upon the passing of the second of those resolutions. This also affords the clearest indication that the President is invested with this legislative power only in order to enable the executive to tide over an emergent situation which may arise whilst the Houses of Parliament are not in session.

Further more, this power to promulgate an Ordinance conferred on the President is co-extensive with the power of Parliament to make laws and the President cannot issue an Ordinance which Parliament cannot enact into a law. It will therefore be seen that legislative power has been conferred on 966 the executive by the constitution makers for a necessary purpose and it is hedged in by limitations and conditions.

The conferment of such power may appear to be undemocratic but it is not so, because the executive is clearly answerable to the legislature and if the President, on the aid and advice of the executive, promulgates an Ordinance in misuse or abuse of this power, the legislature cannot only pass a resolution disapproving the Ordinance but can also pass a vote of no confidence in the executive. There is in the theory of constitutional law complete control of the legislature over the executive, because if the executive misbehaves or forfeits the confidence of the legislature, it can be thrown out by the legislature. Of course this safeguard against misuse or abuse of power by the executive would dwindle in efficacy and value according as if the legislative control over the executive diminishes and the executive begins to dominate the legislature. But nonetheless it is a safeguard which protects the vesting of the legislative power in the President from the charge of being an undemocratic provision. We might profitably quote here the words of one of us (Chandrachud, J, as he then was) in the State of Rajasthan v. Union of India where, repelling the contention of the petitioner that the interpretation which the Union of India was inviting the Court to place on Article 356 would impair the future of democracy by enabling the Central Government to supersede a duly elected State Government and to dissolve its legislature without prior approval of Parliament, the learned Judge said- ".... there may be situations in which it is imperative to act expeditiously and recourse to the parliamentary process may, by reason of the delay involved, impair rather than strengthen the functioning of democracy. The constitution has therefore provided safety-valves to meet extraordinary situations. They have an imperious garb and a repressive content but they are designed to save, not destroy democracy. The fault, if any, is not in the meeting of the Constitution but in the working of it." These words provide a complete answer to the criticism of Mr. R.K. Garg.

Now once it is accepted that the President has legislative power under Article 123 to promulgate an Ordinance and this legislative power is co-extensive with the power of the Parliament to make laws, it is difficult to see how any limitation can be read into this legislative power of the President so as to make it ineffective to alter or amend tax laws. If Parliament can by enacting legislation alter or amend tax laws, equally can the President do so by issuing an Ordinance under Article 123. There have been, in fact, numerous instances where the President has issued an Ordinance replacing with retrospective effect a tax law declared void by the High Court or this Court. Even offences have been created by Ordinance issued by the President under Article 123 and such offences committed during the life of the Ordinance have been held to be punishable despite the expiry of the Ordinance. Vide: State of Punjab v. Mohar Singh. lt may also be noted that Clause (2) of Article 123 provides in terms clear and explicit that an Ordinance promulgated under that Article shall have the same force and effect as an Act of Parliament. That there is no qualitative difference between an Ordinance issued by the President and an Act passed by Parliament is also emphasized by clause (2) of Article 367 which provides that any reference in the Constitution to Acts or laws made by Parliament shall be construed as including a reference to an Ordinance made by the President. We do not therefore think there is any substance in the contention of the petitioner that the President has no power under Article 123 to issue an Ordinance amending or altering the tax laws and that the Ordinance was therefore outside the legislative power of the President under that Article.

That takes us to the principal question arising in the writ petitions namely, whether the provisions of the Act are violative of Article 14 of the Constitution. The true scope and ambit of Article 14 has been the subject matter of discussion in numerous decisions of this Court and the propositions applicable to cases arising under that Article have been repeated so many times during the last thirty years that they now sound platitudinous. The latest and most complete exposition of the propositions relating to the applicability of Article 14 as emerging from "the avalanche of cases which have flooded this Court" since the commencement of the Constitution is to be found in the Judgment of one of us (Chandrachud, J. as he then was) in Re: Special Courts Bill. It not only contains a lucid statement of the propositions arising under Article 14, but being a decision given by a Bench of seven Judges of this 968 Court, it is binding upon us. That decision sets out several propositions delineating the true scope and ambit of Article 14 but not all of them are relevant for our purpose and hence we shall refer only to those which have a direct bearing on the issue before us.

They clearly recognise that classification can be made for the purpose of legislation but lay down that:

1. The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and (2) that differentia must have a rational relation to the object sought to be achieved by the Act.

2. The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. In short, while Article 14 forbids class discrimination by conferring privileges or imposing liabilities upon persons arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned.

It is clear that Article 14 does not forbid reasonable classification of persons, objects and transactions by the legislature for the purpose of attaining specific ends. What is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be "arbitrary, artificial or evasive" but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the legislature. The question to which we must therefore address ourselves is whether the classification made by the Act in the present case 969 satisfies the aforesaid test or it is arbitrary and irrational and hence A violative of the equal protection clause in Article 14.

Now while considering the constitutional validity of a statute said to be violative of Article 14, it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in discharge of its constitutional function of judicial review.

The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation.

Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrine or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgement in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond where Frankfurter, J. said in his inimitable style:

"In the utilities, tax and economic regulation cases, there are good reasons for judicial self- restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts 970 have only the power to destroy, not to reconstruct.

When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events-self- limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry" that exact wisdom and nice adaption of remedy are not always possible and that "judgment is largely a prophecy based on meagre and uninterpreted experience".

Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Company, be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, beca