Supreme Court of India
R.K. GARG ETC. ETC.versusUNION OF INDIA & ORS. ETC.
- Citation
- 1981 INSC 181
- Decided
- 20 October 1981
- Disposal
- Dismissed
- Bench
- Y V CHANDRACHUD
Holding
The Special Bearer Bonds Ordinance and Act are constitutionally valid; the President’s ordinance power under Article 123 includes amending tax laws, and the classification under Article 14 is reasonable and intelligible.
Summary
The Supreme Court examined the constitutionality of the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 and the subsequent Act, which granted anonymity and tax exemptions to holders of special bearer bonds intended to canalise black money. The petitioners argued that the President lacked authority under Article 123 to issue an ordinance amending tax law and that the Act violated Article 14 by giving preferential treatment to tax evaders. The majority held that the President’s ordinance power is co‑extensive with Parliament’s legislative power and may be used in emergent situations, and that the classification of bond holders is based on an intelligible differentia with a rational nexus to the objective of extracting black money for productive use, thus satisfying Article 14. Consequently, the Act and Ordinance were upheld and the writ petitions dismissed. A dissenting judge found the legislation unconstitutional on equality grounds.
Issues considered
- Whether the President has power under Article 123 to promulgate an ordinance that amends tax legislation.
- Whether the Special Bearer Bonds (Immunities and Exemptions) Act, 1981 infringes Article 14 of the Constitution by creating an arbitrary classification.
- Whether the classification of bond holders (black‑money owners vs. honest taxpayers) has a rational relation to the Act’s purpose.
- Whether the Act is unconstitutional for putting a premium on dishonesty or for moral considerations.
Legislation cited
- Constitution of Indias. Article 109, s. Article 110, s. Article 123, s. Article 14, s. Article 32, s. Article 367
- Gift Tax Act, 1958s. Section 5(1)(iiib)
- Income Tax Act, 1961s. Section 10(15), s. Section 2(14), s. Section 69, s. Section 69A, s. Section 69C
- Indian Penal Code, 1860s. Chapter IX, s. Chapter XVII
- Prevention of Corruption Act, 1957
- Special Bearer Bonds (Immunities and Exemptions) Act, 1981s. Section 3, s. Section 4, s. Section 5, s. Section 6, s. Section 7
- Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981
- Wealth Tax Act, 1957s. Section 5(1), s. Section 5(1)(xvib)
Subjects
Article 14Article 123Equality clauseOrdinance powerTax legislationBlack moneySpecial bearer bondsConstitutional validityClassificationJudicial review
Judgment
947 A
R.K. GARG ETC. ETC.
v.
UNION OF INDIA & ORS. ETC. B
October 20, 1981 and November 13, 1981
(Y.V. CHANDRACHUD, C.J., P.N. BHAGWATI, A.C. GUPTA,
s. MuRTAZA FAZAL Au AND AMARENDRA NATH
SEN, JJ.]
c
Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 and
Special Bearer Bonds (ImmunUies and Exemptions) Act, 1981-Constitution vali-
dity 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. D
Art. 32-Judicial review·-Discharge of-Principles to be followed.
Art. 123-0rdinance making power of President-Whether can extend to tax
laws.
Interpretation of statutes-Legislation on economic matters-Effect of crudi- E
ties, inequities and possibililies of abuse-Whether renders legislation invalid.
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 provi- F
sions 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 lherewith. 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 G
certain immunities and exemptions to render it possible for persons in posses 5ion
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 II
n~ture and source of acquisition of the Special Bearer Bonds. Clause (b) prohi-
bited the commencement of any inquiry or investi~at·on a~ainst a person 00 the
948 SUPREME COURT REPORTS (198211 s.c.11
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 Beater 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 (I) 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
B Prevention of Corruption Act, 1957 or other similar law.
Section 4 provided that without prejudice to fhe provisions of section 3
subscription to, or acquisition of Speeial 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
c 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 conver-
ted into such bonds, and (c) that any asset held by him represents the considera-
-
tion received for the transfer of such Bonds.
D
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 :
(J) 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
E Articles 109 and 1101 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
F 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 Jend themselves to was that if special bearer bonds
are sold and the sale proceeds are utilised in meeting expenditure, the asscssee
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 expendilurc is
G 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 se]J 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
H 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 h:is paid the considerl!.tioQ out of his black money, he can claim
l\,K. GAl\G v. UNION 949
the immunity granted under section 3 sub·section (1) and his black money would A
be converted into white, (d) the Act is unconstitutional as it offends against
morality by according to dishon(!st assessees who have evaded payment of tax.
i1nmunities 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 bene-
fits and concessions placing them at an advantage over those who have observed
the Jaw and paid the taxes due from them and this is clearly immoral and un-
warranted by the Constitution. B
..... Dismissing the petitions,
• HELD:
[Per majority Chandrachud, C.J., Bhagwati, Fa:al Ali &
Amarendra Na1h Sen, JJ.]
c
[Gupta, J, dissenting]
None of the provisions of the Special Bearer Bonds (Immunities and Ex-
emption) Act, 1981 is violative of Article 14 and its constitutional validity must
·~ be upheld. [989 Bl
J(i). There is no subs1ance in the contention that the President has no
D
power under Article 123 to issue an Ordinance amending or altering the tax laws
and 1hat the Ordinance was outside the legislative power of the President under
that Article. [967 El
t(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
E
in the existing law and emergent legislation may be necessary to enable the exe-
cutive 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 paraUel power of legislation. This
power is the clearest indication that the President is invested with this legislative F
power only in order to enab1e the executive to tide over an emergent situation
which may arise whilst the Houses of Parliament are net in session. The con~
ferment 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 1esolution disapproving the Ordi-
nance but can nlso pass a vote of no confidence in the executive. There is in G
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]
l(iii). If parliament can by enacting legislation after or amend tax la\\'S,
• equally can the President do so by issuing an Ordinance under Article J23. H
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 SUPREME COURT REPORTS (1982) I s.C.l.
A this Court. Even offences have been created by Ordinance issued by the Presi·
dent 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] J SCR 893, referred to.
2(i). Certain well established principles have been evolved by Courts as
B 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 presun1ption of constitutionality is indeed so strong
that in order to sustain it 1 the Court may take into consideration matters •
c 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 Jaws 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]
D Morey v. Dond, 354 US 457, referred to.
2(ii). The court must always remember that HJegislation 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 pro-
positions 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
E always possible and that "judgment is largely a prophecy based on meagre and
unin1erpreted 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 comph-
cated experimental economic legislation but on that account alone it cannot
be struck down as invalid. [970 C D]
F
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 possi-
bilities of abuse of any of its provision. If any crudities, inequities or possibili-
tks of abuse con1c to light, the legislature can always step in and enact suit-
G able amendatory legislation. That is the essence of pragmatic approach which
must guide and inspire tht: 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 attainine
H specific ends. What is necessary in order to pass the test of permissible classifi-
cation under Article 14 is that the classification n1ust not be arbitrary, artificial
or evasive but must be based on some real and substantial d1stincion bearing
R.K. GARG V. UNION 951
a just and reasonable relation to the object sought to be achieved by the legisla- A
ture.
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 classi-
fication 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. B
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 n1oney 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 com-
c
peting 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 1uns 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 fulfilment
of objectives of distributive justie<) and setting up of an egalitarian society. D
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 gene-
ration 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 E
tends to defeat the economic policies of the Government by making their imple-
mentation 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 ean 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 u!' _of th~ tax depa.rtment from time to time with a view to strengthening the
F
adm1n1strattve machinery for checking tax evasion. The Government also
amended section 37 of t~e. Indian Income Tax Act, 1922 with a view to conferring
power on the tax authonties to carry out searches and seizures and this power
was elaborate~ and made more effectual under the Income Tax Act, 1961. The
Voluntary ~1sclosure Scheme of 1951 was made to facilitate the disclosure of
suppressed income by affording certain immunities from penal provisions, Nearly
a decade a~d a half later a second scheme of voluntary discJosure was introdu- G
ced by sect!on 68 of t~e Finance Act, 1965, popularly known as the sixty .forty
~eme which was a little more successful. Closely following 00 the heels of
~his scheme ca're another under section 24 of the Finance (No. 2) Act 1965-
Block Scheme ac~ording 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
s~heme. :hen came the Taxation Laws (Amendment and Miscellaneous Provi- H
sions) Ordinance 1965 followed by an Act which provided for exemption from
952 SIJPkBMll COURT kllPORTS (1982) I s.c.a.
A 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.
B
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 n1opping 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 produc~
( tive 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
D 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 taxa-
tion 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
E 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 subs-
cription to or acquisition of Special Bearer Bonds is a severely rc:stricted immu-
nity and this is the bare minimum in1munity necessary in order to induce holders
of black money to bring it out in the open and invest it in Special Bearer
F Bonds.
S. Section 4(c) is calculated to act as a strong deterrent against negotiabi-
lity of Special Bearer Bonds for disclosed or 'white' money. The immun.lty
granted under the provisions of the Act, limi1ed as it is, extends only to the
person who is for the time being the holder of Special Bearer Bonds and the
G person who has transfe1red the Special Bearer Bonds for black money has no
immunity at all and all the provisions of tax laws are available against hin1 for
detecmining his true incon1e or wealth and therefore no one who has purchased
Special Bearer Bonds with a view to earning security against discovery of un-
accounted money in his hands would ordinarily barter away that security by again
receiving black money for the Special Bearer Bonds. Even if special bearer
H bonds are transferred against receipt of black n1oney it will not ha~e 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 1uoney paid by the
R.IC. GARO V. UNION 953
purchaser by way of consideration would become white by reason of being con- A
verted 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 pur-
chaser 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 B
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 diffi-
culties 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 origi-
nally subscribed for the special bearer bonds or at the most the amount represen-
ting 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 white or encouraging further ()
generation of black money.
8. When experience shows that the legislation as framed has proved in-
adequate 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 I·:
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 unaccoun-
ted money in purchase of special bearer bonds, so that such money which is F
today lying idle outside the regular economy of the country fo 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 econo-
n1ic planning, there has necessarily to be a classification between persons posses-
sing black money and others and such Classification cannot be regarded as
arbitrary or irrational.
G
JO. The validity of a classification has to be judged wi1h reference to the
object of the legislatWn and if that is done, there can be no doubt that the
classification made by 1hc Act is rational and intelligible and the operation of
the provisions of the Act is rightly confined to persons in possession of black
money.
H
11. The legislature had obvioudy only two alternatives: either to allow the
black money to remain idle and unproductive or to induc~ those in poss~ssion
954 SUPREME COURT REPORTS (1982] 1 s.c.R.
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 to 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 a1ternative of coaxing persons in possession of black money to dis-
B close 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 ouside the province of the court to consider if any particu-
lar immunity or exemption is necessary or not for the purpose of inducing dis-
closure of black money. That would depend upon diverse fiscal and economic
c considerations based on practical necessity and administrative expediency and
would also involve a certain amount of experimentation on which the Court
would ,b~ least fitted to ptonounce. 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 parti-
cular 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
D that it would be wise for the court not to hazard an opinion where even econo- _..
_ __ -
mists may differ.
13. The court must while examining the constitutional validity of a legis-
lation "be resilient, not rigid, forward looking, not static, liberal, not verbal" and •
the court must always bear in mind the constitutional proposition "that courts du
not substitute their social and economic beliefs for the judgment of legislative
bodies".
E
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]
F 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]
G 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-Per-
missible classification, it is well established, must satisfy two conditions viz. (i)
11 that the classification must be founded on an intelligible differentia which
distinguishes those that are grouped together from others and; (2) that the
Ide GARG v. UNION 955
differentia must have a rational relation to the object sought to be achieved by A
the Act. [993 G-994 A]
4 (ii). The differentia that is the basis of classification and the
object of the Act are distinct things, it is not enough that the differentia
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 8
differentia 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
differentia intelligible. [997 B-C]
Th• Stale of West Bengal v. Anwar Ali Sarkar, [1952] SCR 284; E. P.
Royappa v. State o/Tan1il Nadu and another, (1974] 2 SCR 348 and Maneka
Gandhi v. Union of India, [1978] 2 SCR 621, referred to. c
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 pro-
ductive purposes. The Act however does not define black money. [990 F]
_, --<··
6. The imn1unities provided by the impugned Act are clearly for the bene- D
fit of those who have acquired the Bonds with black money. Clauses (a), (b) and
(c) of section 3(1) provfrle for these immunities "notwithstanding anything con-
tained 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 E
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 igno-
ring the source of acquisition in their case. (995 C-D]
• . 8. The Act distinguishes between two classes of holders of
~pec1al Bearer Bonds; tax ev~ders and honest tax-payers. The object is to cana-
lise b~ack money for pro.duct1ve purposes to make economic and social planning
effect1~e. If .the exemptions and immunities conferred by the Act are sufficiently
attractive.to 1nduc~ tax-evader to acquire Special Bearer Bonds, they will remain G
as attractive even 1f qll these benefits were granted to those who will pay white
money f~r 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 fu th h
object of canalisation of black money for productive purposes Th d' r .er_t e
· · fi b · e 1scnm1oa-
t1on 10 avour of lack money therefore seems to be obvious. [995 E-FJ
·~ . 9. T~rms like .'~easonable', 'just' or 'fair' derive their significance from the
ff
ex1~ting social cond1t1ons. Expres'iions like a 'reasonable and ~.· · , 'f .
1, ir price or air
9S6 SUPREME COURT REl>OR1 S [1982] 1 s.C.l.
A and equitable restitution• means nothing, except in onjunction with the social
conditions of the time. That action is called 'res lnab1e' which an informed,
intelligent, just minded civilised 1nan could rationally favour. [998 F-G]
Quaker City Cab Co. v. Commonwealth of Pt 1nsylvania 72 Law. Ed. 927,
referred to.
10. What is arbitrary and offend5 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 h<' asked as to the nature and
source of acquisition or possession of the Bonds. The Bonds can be transferred
c freely, and passing of the Bonds from hand to hand is likely to operate as
-
parallel currency and be used for any kind of transection. [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 paraUel
currency initiating a chain of black money investi:1ents. There is no provision
in the Act requiring that on n1aturity of the Bond ; their holders would have to --»--
0 disc1ose their identity, which means that if after 10 years black money which had
taken the shape of Special Bearer Bonds goes und !rground 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 n1anoeuvres are able to th ow 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]
E
12. Any law that rewards law breakers an ~ 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 be :n 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 reasonbleness is an essential element of equality. The concept of reasonable...
F ness dOes not exclude notions of morality and ethics. It cannot be disputed
that in the circumstances of a given case consid ~rations of morality and ethics
may have a bearing on the reasonableness of the I aw in question. [1001 B-D]
ORIGINAL JURJSDIClJON : Writ Pe:ition Nos. 355, 360, 863,
G 994 & 3624 of 1981.
(Under article 32 of the Constitutio 1 of India)
Petitioner in person in WP. No. 350.'81
H R.K. Garg, A.K. Gupta, Brij Bhus'1an, Miss Renu Gupta and
S.K. Jain for the Petitioner in W .P. 360/81.
R.K. GARG v. UNION (Bhagwati, J.) 957
Soli J. Sorabjee, Harish Salve, S.K. Dholakia & Mrs. Ranjan~ A
Anand for the Petitioners in W.P. 863/81.
So/i 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. B
>'
L.N. Sinha, Attorney General in WPs. 355 & 360/8 l.
K. Parasaran, Sol. General in WPs. 863 & 994/8 l.
K. S. Gurumoorthi & Miss A. Subhashini for the Respondents. c
U.N. Banerjee for the intervener--Mr. K.B. Kastia
VJ. Francis for the intervener-All India L.I.C., Employees
---~
Federation.
.
0
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 (Immuni-
ties and Exemptions) Act 1981 (hereinafter referred to as the Act). E
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 con-
stitutionally invalid and it is that the President had no power under
Article 123 of the Constitution to issue the Ordinance and the F
... 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
substan.tially a reproduction of the provisions of the Ordinance. G
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 H
assent of the President OP. 77!1\ Mar91J 1981, b11t wl!i9h w~s l>rought
958 SUPREME COURT REPORTS [1982) 1 s.c.R.
A 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 con-
troversy between the parties and hence it is necessary to examine
the provisions of the Act in some detail. The long title of the Act
8 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 preceeded by a
.,
Preamble which indicates the object and purpose of the Act in the
c
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;
D 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;
E 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 inter-
F pretation 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 :
r
3. (I) Notwithstanding anything contained in any other law
'
for the time being in force :-
G
(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;
H (b) no inquiry or investigation &hall be commenced against
any person under any such law on the ground that
R.K. GARG v. UNION (Bhagwati, J.) 959
such person has subscribed to or has otherwise acquired
A
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 imposi-
B
tion of any penalty nuder any such law.
(2) Nothing in sub-section (1) shall apply in relation to prosecu-
tion 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 c
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 D
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 E
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-
f
(a) to claim any set-off or relief in any assessment,
reassessment appeal, reference or other proceeding
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 G
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 H
under the Wealth-tax Act has been converted into the
said Bonds: or
960 SUPREME COURT REPORTS [1982] I s.c.R.
A (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 5 amends
the Income-tax Act 1961 by providing that the definition of "capital
c 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 IO clause (15). Section 5
D 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
s~ction 5 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 (I) 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
F 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
G 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 argment 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
H
other was that the subject matter of the Ordinance was in the nature
'
R.K. GARG v. UNION (Bhagwati, J.) 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 J 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 B
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 c
to be judged not with reference to the Ordinance uncter which it was
done or taken, but with reference to the Act which was, by reason of
its restrospective enactment, in force right from the date of pro-
mulgation 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 constitutio,1al validity of the Ordi- D
nance, 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 E
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 F
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 G
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
(I) R
962 SUPllBM~ COURT REPORTS (1982] I s.c.11..
A 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 1957 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
B articulated the reason for taking this view in the following words :
"Even if the rules were not consistent with the provi-
sions of the 1948 Act and were therefore void, we do not
agree that they could not have continued after the enforce-
ment of the 1957 Act. Section 29 reads :
c 'All rules made or purporting to have been made ~
(j'"
under the Mines and Minerals (Regulation and Deve- )
::t:
lopment) 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 th;s Act had been in
D
force on the date on which such rules were made and
shall continue in force unless and until they are super-
seded 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
E in respect of matters for which rules could be made under
the 1957 Act would be deemed to have been made un~er
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
F 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." •
Jn this connection we may refer to the case reported
as Abdul Majid v. P.R. Nayak, A.LR. 1951 Born. 440.
G In that case section 58 of Act XXXT 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 (XX VII of 1949)
shall not affect the previous operation thereof, and
H subject thereto, anything done or any action taken in
the exercise of any power conferred by or under that
•
k.k. iJAR.G v. UNION (Biiagwati, J.) 963
}
Ordinance shall he 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 B
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
c
on which a particular order was passed which is being
_,,_ challenged. Jn 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
D
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 up- E
holding 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 anJ not of the Ordinance. It would therefore be aca-
demic for us to consider whether the Ordinance was within the
ordinance-making power of the President under Article 123 and
F
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
G
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 B
Powers of the President.'' This Article provides iner-alia as
follows :
964 SUPREME COURT REPORTS [198ij I s.c.l.
A 123 (I) If at any time, except when both Houses of Parliament
are in session, the President is satisfied that circum-
stances exist which render it necessary for him to take
immediate action, he may promulgate such Ordinances
as the circumstances appear to him to require.
B (2) An Ordinance promulgated under this article shall
have the same force and effect as an Act of Parliament,
hut every such Ordinance :- .'
(a) shall be laid before both Houses of Parliament
c 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.
E
It will be noticed that under this Article legislature power is con- - ~
ferred on the President exerciseable when both Houses of Parlia-
ment 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
F 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 un-
dertaken and if the legislation is postponed until the House of Par-
liament meet damage may be [caused to public weal. Article 123
G therefore confers powers on the President to promulgate a law by
issuing an Ordinance to enable the executive to deal with the emer-
gent situation which might well include a situation created by a law
being declared void by a Court of law. "Grave public inconveni-
ence would be caused", points out Mr. Seervai in his famous book
H on Constitutional Law, if on a statute like the Sales-tax Act being
declared void, "no machinery existed whereby a valid law could
R.K. GARG v. UNION (Bhagwati, J.) 965
be promulgated to take the place of the law declared void... The
A
President is thus given legislative power to issue an Ordinance and
since under our constitutional scheme as authoritatively expounded
by this Court in Sharnsher and Anr. v. State of Punjab,(') the Presi-
dent 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 elected representatives of the people and vesting it in the execu-
c
tive, though responsible to the legislature, would be undemocratic,
as it might enable the executive to abuse this power by securing
tbe passage of an ordinary bill without risking a debate in
the legislature. But if we closely analyse this provision and consi-
der it in all its aspects, it does not appear to be so startling, though D
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 confer·
red on the President under this Article is not a parallel power of E
legislation. It is a power exercisable only when both Houses of
Parliatnent are not in session and it has beeil 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 ex- F
piration of this period, resolutions disapproving it are passed bv
both Houses, upon the passing of the second of those resolution;.
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 G
promulgate an Ordinance conferred on the President is co·extensive
with the power of Parliament to make laws and the Pre;ident cannot
issue an Ordinance which Parliament cannot enact into a Jaw. It
will therefore be seen that legisl~tive power has been conferred on
H
(1) [1975] 1 SCR 814.
966 SUPREME COURT REPORTS [1982] 1 S.C.R.
A 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 tl1e legislature and if
the President, on the aid and advice of the executive, promulgates
an Ordinance in misuse or abuse of this poNer, the legislature can-
B 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. ,._
c
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
D 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 in-
terpretation which the Union of India was inviting the Court to .t
place on Article 356 would impair the future of democracy by enab-
ling the Central Government to supersede a duly elected State
E Government and to dissolve its legislature without prior approval
of Parliament, the learned Judge said--
" ......... there may be situations in which it is impera-
tive to act expeditiously and recourse to the parliamentary
F process may, by reason of the delay involved, impair rather
than strengthen the functioning of democracy. The consti-
tution has therefore provided safety-valves to meet extra-
ordinary 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 ol' the !'
Constitution but in the working of it."
G
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 legis-
H
(I) [1978] I SCR 1.
R.K. GARG v. UNION (Bhagwati, J.) 967
lative power is co-extensive with the power of the Parliament to A
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, nume-
rous instances where the President has issued an Ordinance replacing
B
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 (1) lt may also be noted that Clause (2) of Article 123
c
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 !\rticle 367 which provides that
D
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 . E
• That takes us to the principal question ansmg 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 bas been the subject matter of discussion in numerous decisions
of this Court and the propositioas applicable to cases arising under
f
that Article have been repeated so many times during the last thirty
years that they now sound platitudenous. 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
G
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
ti) [1955) l S.C.R. 893.
H
(2) [ 1979) 2 S.C.R, 476,
968 SUPREME COURT REPORTS [1982] I S.C.R.
A Court, it is binding upon us. That decision sets out several propo-
sitions 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 pur-
pose of legislation but lay down that :
B
I. The clasification 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
c who are left out but those qualities or characteristics
must have a reasonable relation to the object of the
legislation. Jn order to pass the test, two conditions
must be fulfilled, namely,( I) that the classificatiou must
be founded on an intelligible differentia which distin-
guishes those that are grouped together from others
D 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.
E
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 privi-
leges sought to be conferred or the liabilities proposed
to be imposed, it does not forbid classification for the
F
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 pur-
G pose 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 legis-
H
lature. The question to which we must therefore address ourselves
js whether the classification made by the Act in the present case
k.K. GARG v. UNION (Bhagwafi, J.) 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 brar in mind
certain well established principles which have been evolved by the
courts as rules of guidance in discharge of its constitutional func-
B
tion of judicial review. The first rule is that there is always a pre-
' ' sumption 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
c
experience and its discrimination are based on adequate grounds.
The presumption of constitutionality is indeed so strong that in
'- ---.,I 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 concei-
D
ved existing at the time of legislation.
Another rule of equal importance is that laws relating to
economic activties 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
E
should be allowed some play in the joints, because it has to deal
with complex problems which do not admit of solution through
any doctraire 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
F
court.should feel more inclined to give judicial deference to legisla-
ture JUdgrnent m the field of economic regulation than in other
areas where. ~undamental human rights are involved. Nowhere has
this adrnomt10n been more felicitiously expressed than in M
D d (') h orey v.
on w ere Frankfurter, J. said in his inimitable style :
G
"In the utilities, tax and economic regulation cases
t?ere are good reasons .for judicial self-restraint if not judi'.
c1al defference to leg1slat1ve i'udgment Tl
n . 1e Ieg1s. 1ature
a ter all has the affirmative responsihility. The courts
H
(I) 354 us 457.
970 SUPREME cotJRt REPORTS [1982! I s.c.il
A 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 con·
flict 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
B 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 ..
c
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 uninter- '
preted 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
..._ "'
D 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, (1) be converted into tribunals for relief from
E such crudities and inequities. There may even be possibilities of
abuse, but that too cannot of itself be a ground for invalidating the
legislation, because it is not possible for any legislature to anticipate
as if by some divine prescience, distortions and abuses of its legis-
lation which may be made by those subject to its provisions and to
provide against such distortions and abuses. Indeed, howsoever great
F may be the care bestowed on its framing, it is diftkult to conceive
of a legislation which is not capable of being abuseJ by perverted
human ingenuity. The Court must therefore adjudge the constitu-
tionality of such legislation by the generality of its provisions and
'r
not by its crudities or inequities or by tl~e possibilities of abuse of
any of its provisions. If any crudities, inequities or possibilities of
G 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.
H
(1) 94 Lawyers' Edition 381.
R.K. GARG v. UNION (Bhagwati, J.) 971
With these prefatory observations, we may now proceed to A
examine the constitutional validity of the Act. The Preamble of the
Act which "affords useful light as to what the statute intends to
reach" or in other words "affords a clue the scope of the statute"
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 consider- B
able 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. Indeed, as pointed out by the Direct Taxes Enquiry Commi·
ttee headed by Mr. Wanchoo, retired Chief Justice of India "tax
evasion and black money are closely and inextricably interlinked." c
The abundance of black money has in fact given rise to a parallel
economy operating simulta·1eously 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 io circulation runs into som' tl1ousand crores. The D
menance of black money bas now reached such staggering propor-
tions that it is causing havoc to the economy of the country and
poses a serious challenge to the fulfilment of our objectives of distri-
butive justice and setting up of an egalitarian society. There are
several causes responsible for the generation of black money and
they have been analysed in the Report of the Wanchoo Committee.
Some of the principal causes may be summarised as follows : E
(l) high rates of taxation under the direct tax laws : they breed tax
evasion and generate black money; (2) economy of shortages and
consequent controls and licences leading to corruption for issuing
licences and permits and turning blind eye to the violation of con·
trols; (3) do~ations of black money encouraged by political parties
to meet electwn expense> and for augmenting party funds and also F
for personal purposes; (4) Corrupt business practices such as pay-
ments of. secret commission, bribes, money, pugree etc. which
need keepmg on hand money in black; (5) ineffective administration
~nd enforcement of tax laws by the authori,ies and (6) deterioration
m moral standards so that tax evasion is no longer regarded as im-
moral and unethic~l . and does not carry any social stigma. These G
causes need to be ehmmated if we want to eradicate the evil of black
:_oney.. Hut "'.hether any steps are taken or not for removing these
uses with a view to preventing future generation of black
th ~ t · h money,
e ac remams t at today the re is considerable amount of black
+. money, unaccounted and concealed, in the hands of a i;
. . . . . . . ew persons
H
972 SUPREME COURT REPORTS (1982] 1 s.c.R
A and it is causing incalculable damage to the economy of the
country.
The first casualty cf this 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 econo-
B mic inequality and concentration of wealth in the hands of the
unscrupulous few in the country. In addition, since black money is
in a way 'cheap' money because it has not suffered reduction by way
of taxation, there is a natural tendency among those who possess it
to use it for lavish expenditure and conspicuous consumption. The •
existence of black money is to a large extent responsible for infla-
c tionary pressures, shortages, rise in prices and economically unheal-
thy speculation in commodities. It also leads to leakage of foreign
--
exchange, making our balance of payments rather distorted and
unreal and tends to defeat the economic policies of the Govern-
ment by making their implementation ineffective, particularly in the
field of credit and investment. Moreover, since black money has
D necessarily to be suppressed in order to escape detection, it results
in immobilisation of investible funds which would otherwise
be available to further the economic growth of the nation end in
turn, foster the welfare of the common man. It is therefore no
< xaggeration to say that black money is a cancerous growth in the
country's economy which if not checked in time is certain to lead to
E
chaos and ruination. There can be no doubt that urgent measures
are therefore required to be adopted for preventing further genera-
tion 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.
F
Now this problem of black money corroding the economy of
the country is not a new or recent problem. It has been there almost
since the Second World War and !t has been continuously engaging •
the attention of the Government. The Government has adopted T
various measures in the past with a vie\v to curbing the generation
of black money and bringing it out in the open so that it may become
c available for strengthening the economy. For instance, the Govern-
ment 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 evasio.n. The Govern-
ment also amended section 37 of the Indian Income Tax Act 1922
H with a view to conferring power on the tax authorities to carry out
searches and seizures and this power was elaborated and made more
iUc GARG v. i.JN!ON (Bhagwati, J.)
effectual when the Income Tax Act 1961 came to be enacted. Quite A
apart from these legal and administrative measures taken for the
purpose of curbing evasion of tax, certain steps were also taken to
tackle the black money built up out of past evasions. In 1946, just
at the close of the Second World War, high denomination notes
were demonetised so as to bring within the net of taxation black
money earned during the War. This was followed by the enactment ll
of the Taxation of Income Investigation Commission Act 1947. Then
came the Voluntary Disclosure Scheme of 1951, popularly known as
> ' Tyagi Scheme, to facilitate the disclosure of suppressed income by
affording certain immunities from the penal provisions. This scheme
• was however not successful because it helped to unearth only
Rs. 70-20 crores of black money. Thereafter, nearly a decade and a c
half later, a second scheme of voluntary disclosure was introduced
by section 68 of the Finance Act 1965. This scheme, popularly
known as the sixty-forty scheme, enabled the tax evaders to disclose
suppressed income by paying 60% of the concealed income as tax
and bringing the balance of 40% into their books. This scheme was
a little more successful than the earlier one, but it could .help to net D
only about Rs. 52.l l crores of black money. Closely following on
the heels of this scheme came another scheme under section 24 of
the Finance (No. 2) Act l 965 popularly known as the 'Block
Scheme' according to which tax was payable at rates applicable to
the block of concealed income disclosed and not at a fiat rate as
under the sixty-forty scheme. This scheme recieved a slightly better E
response and the income disclosed under it amounted to about
Rs, 145 crores. Then came the Taxation Laws (Amendment and
Miscellaneous Provisions) Ordinance 1965 followed by an Act in
identical terms, which provided for exemption from tax in certain
cases of undisclosed income invested in National Defence Gold Bonds
1980, We shall have occasion to consider the broad scheme of this F
Act a little later, but for the time being as we may point out that the
scheme as envisaged in this Act was very closely similar to the scheme
under the impugned Act, Subsequent to this Act followed the Report
of the Wanci·oo Committee and as a result of the recommendations
made in this Report certain penal provisions contained in the Income-
tax Act 1961 were made more severe and rigorous. Then came the G
Voluntary Disclosure of Income and Wealth Ordinance 1975 which
was followed by an Act in the same terms. This legislation intro-
duced a scheme of voluntary disclosure of income and wealth and
provided certain immunities and exemptions. The record before us
does not show as to what was the concealed income and wealth H
+ disclosed pursuant to this scheme. But it is an indisputable fact
9?4 SUPREME COiJRt REPORTS (1982] l S.C.il..
A that the adoption of these stringent legal and administrative measures
as also the introduction of these different voluntary disclosure
schemes did not have any appreciable effect and despite all these
efforts made by the Government, the problem of black money
continues unabated and has assumed serious dimemsions. It may
be possible to say and that was the criticism of Mr. R.K. Garg--
B that the enforcement machinery of the tax department is not as
effective as it should be and no serious effort has been made to
..
eliminate the other causes of generation of black money, but what-
ever may be the failures of the political and administrative machinery.
and we are not here concerned to inquire into that question nor are
we competent to express any opinbn upon it-the fact remains.that
c there is considerable amount of black money in the hands of persons
which is causing havoc to the economy of the country and seriously
prejudicing mobilisation of resources for social and economical
-
reconstruction of the nation.
It was to combat this menacing problem of black money and
D to unearth black money lying secreted and outside the ordinary
trade channels that the Act was enacted by Parliament. It was
realised that all efforts to detect black money and to uncover it had
failed and the problem of black money was an obstinate economic
i5sue which was defying solution and the impugned legislation
providing for issue of Special Bearer Bonds was therefore enacted
E with a view to mopping-up black money and bringing it out in the
open, so that, instead of remaining concealed and idle, 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 we have
F to determine whether any impermissible differentiation is made by
the Act so as to involve violation of Article 14.
We may now turn to examine the provisions of the act.
•
Section 3 sub·section (I) provides certain immunities to a person
who subscribed to or otherwise acquired Special Bearer Bonds.
G Clause (a) protects such a person from being required to disclose,
for any purpose whatsoever, the nature and source of acquisition of
the Special Bearer Bonds. Clause (b} prohibits the commencement
of any inquiry or investigation against a person on the ground of
his having subscribed to or otherwise acquired the Special Bearer
II
Bonds. And clause (c) provides that the fact of subscription to or
acquisition of Special Bearer Bonds shall not be taken into account
ll.k. GARG v. UNION (lJhagwati, J.) 915
and shall be inadmissible in evidence in any proceedings relating to A
any offence or the imposition of any penalty. It will be seen that
the immunities granted under section 3, sub-section (!) are very
limited in scope. They do not protect the holder of Special Bearer
Bonds from any inquiry or investigation into concealed income which
could have been made if he had not subscribed to or acquired
Special Bearer Bonds. There is no immunity from taxation given
B
to the black money which may be invested in Special Bearer Bonds.
that money remains subject to tax with all consequential penalties,
if it can be discovered independently of the fact of subscription to
or acquisition of Special Bearer Bonds. The only protection
given by section 3, sub-section I is that the fact of
subscription to or acquisition of Special Bearer Bonds shall be
c
ignored altogether and shall not be relied upon as evidence showing
possession of undisclosed money. This provision relegates the
Revenue to the position as if Special Bearer Bonds had not been
purchased at all. If without taking into account the fact of subscrip-
tion to or acquisition of Special Bearer Bonds and totally ignoring
it as if it were non-existent, any inquiry or investigation into
D
concealed income could be carried out and such income detected
and unearthed, it would be open to the Revenue to do so and it
would be no answer for the assessee to say that this money has
been invested by him in Special Bearer Bonds and it is therefore
exempt from tax or that he is on that account not liable to prosecu-
E
tion and penalty for concealment of such income. This is the main
difference between the impugned Act and the Taxation Laws
(Amendment and Miscellaneous Provisions) Act, 1965. Under the
latter Act, where gold is acquired by a person out of his undisclosed
income, which is the same thing as black money, and such gold is
tendered by him as subscription for the National Defence Gold
F
Bonds, 1980, the income invested in such gold is exempted from
• t;ix, but where Special Bearer Bonds are purchased out of undisclosed
income under the impugned Act, the income invested in the Special
Bearer Bonds is not exempt from tax and if independently of the fact
of purchase of the Special Bearer Bonds and ignoring them altoge-
ther, such income can be detected, it would be subject to tax. The
G
entire machinery of the taxation Laws for inquiry and investigation
into concealed income is thus left untouched and no protection is
granted to a person in respect of his concealed income merely
because he has invested such income in Special Bearer Bonds. It is
therefore incorrect to say that as soon as any person purchases
H
Special Bearer Bonds, he is immunised against the processes of
taxation laws. Here there is no amnesty granted in respect of any
9?6 SUl'kllMll COORt REPORtS tl9siJ l s.c.lt
A part of the concealed income even though it be invested in Special
Bearer Bonds. The whole object of the impugned Act is to induce
those having black money to convert it into 'white money' by mak·
ing it available to the State for productive purposes, without grant-
ing in return any immunity in respect of such black money, if it
could be detected through the ordinary processes of taxation laws
8 without taking into account the fact of purchase of Special Bearer
Bonds. Now it is true and this was one of the arguments advanced
on behalf of the petitioner-that if black money were not invested
in Special Bearer Bonds but were lying in cash, it could be seized by
the tax authorities by carrying out search and seizure in accordance
with the provisions of the tax laws and this opportunity to detect
c and unearth black money would be lost, if such black money were
invested in Special Bearer Bonds, because even if Special Bearer
Bonds were seized, they cannot be relied upon as evidence of
possession of black money. But this argument of the petitioner
that the detection and discovery of black money would thus thwar-
ted by the conversion of black money into Special Bearer Bonds
0 is highly theoretical and does not take into account the prac·
tical realities of the situation. If it had been possible to detect and
discover a substantial part of the black money in circulation by
carrying out searches and seizures, there would have been no need
to enact the impugned Act. It is precisely because, inspite of con-
siderable efforts made by the tax authorities including carrying out
of searches and seizures, the bulk of black money remained secreted
and could not be unearthed, that the impugned Act had to be
enacted. Moreover, actual seizure of black money by carrying out
searches is not the only method available to tax administration for
detecting and discovering black money. There are other methods
also by which concealment of income can be detected and these are
F commonly employed by the tax authorities in making assessment of
income or wealth. Close and searching scrutiny of the books of
account may reveal that accounts are not properly maintained, un-
explained cash credits may provide evidence of concealment and so
too unaccounted for investments or lavish expenditure; information
derived from external sources may indicate that income has been
G concealed by resorting to strategems like suppression of sales or
under-statement of cons;deration; and existence of assets in the
names of near relatives may give a lead showing investment of un-
disclosed income. All these methods and many others "ould still
remain available to the tax authorities for detecting undisclosed in-
H come and bringing it to tax despite investment in Special Bearer
Bonds. The taxable income of the holder of Special Bearer Bonds
k.K. GRRG v. UNION (Bhagwati, J.) 977
would not stand reduced by the amount invested in the purchase of A
Special Bearer Bonds and it would be open to the Revenue to assess
such taxable income in the same manner in which it would do in
any other case, employing the same methods and techniques of in-
quiry and investigation for determining the true taxable income.
The only inhibition on the Revenue would be that it would not be
B
entitled to call upon the assessee to disclose for the purpose of
assessment, the nature and source of acquisition of the Special
Bearer Bonds and in making the assessment, the investment in the
Special Bearer Bonds would have to be left wholly out of account
and the Revenue would not be entitled to rely upon it as
evidence of possession of un-disclosed money. This is the only
limited immunity granted under section 3 sub-section (I) and even
c
this limited immunity is cut down by the provision enacted in sub-
section (2) of section 3. This sub-section says that the immunity
granted under sub-section (!) shall not be available in relation to
prosecution for any offence punishable under Chapter IX or Chapter
XVII of the Indian Penal Code or the Prevention of Corruption
D
Act 1947 or any other similar law. If therefore an inquiry or in-
vestigation is sought to be made against a public servant in respect
of an offence under Chapter IX of the Indian Penal Code or the
Prevention of Corruption Act 1947 alleged to have been committed
by him, the acquisition or possession of Special Bearer Bonds could
be a ground for instituting such inquiry or investigation and it E
could also be an admissible piece of evidence in a prosecution in
respect of such offence. The same would be the position in relation
to an inquiry, investigation or prosecution in respect of an offence
under Chapter XVII of the Indian Penal Code. 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 F
person committing any offence against property. Equally this imm-
unity would not be available where what is sought to be enforced is
a civil liability other than liability by way of tax. It will thus be
seen that 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 G
holders of black money to bring it out in the open and invest it in
Special Bearer Bonds.
It is also necessary to note the further restrictions provided
in section 4 which are clalculated to pre-empt any possible abuse of H
+ the immunity granted in respect of subscription to or acquisition of
Special Be~rer Boncls. This section in its openinll part ~ffirms in
978 SUPREME COURT REPORTS [1982] I s.c.R.
A unmistakable terms that subscription to or acquisition of Special
Bearer Bonds shall not be taken into account i.n any proceeding
under the Income-tax Act 1961 or the Wealth-tax Act 1957 or the
Gift-tax Act 1958. If any investment in Special Bearer Bonds ·has
been made by the assessee, it is to be ignored· in making assess-
ment on him under any of the above-mentioned three tax laws, the
8 assessment is to be made as if no Spe~ial Bearer Bonds had been
purchased at all The process of computation of taxable income
and assessment of tax on it remains unaffected and is not in any
way deflected or thwarted by the investment in Special Bearer
Bonds. The position remains the same as it would have been if
there were no investment in Special Bearer Bonds. We have a1ready
c discussed the full implications of this proposition in the preceding
paragraph while dealing with section 3 and it is not necessary to
say anything more about it. Then, proceeding further, after
enacting this provision in the opening part, section 4 branches off
into three different clauses, Clause (a) provides that no person who
has subscribed to or otherwise acquired Special Bearer Bonds shall
D be entitled to claim any set off or relief in any proceeding under the
Income-tax Act 1961 or to reopen any assessment or reasssssment
made under that Act on the ground that he has subscribed to or
othewise acquired such Bonds. The holder of Special Bearer Bonds
is thus precluded from claiming any advantage by way of set-off or
relief or reopening of assessment on the ground of having invested
E undisclosed money in purchase of Special Bearer Bonds. Clause (b)
enacts another prohibition with a view to preventing abuse of the
immunity granted in respect of Special Bearer Bonds and says that
no person who has subscribed to or otherwise aquired Special Bearer
Bonds shall be entitled to claim, in relation to any period before the
date of maturity of such Bonds, that any asset which is includible
F
in his net wealth for any assessment year under the Wealth-tax Act
bas been converted into such Bonds. The object of this provision
is to preclude an assessee who is sought to be taxed on his net •
wealth under the wealth-tax Act from escaping assessment to tax on
any asset forming part of his net wealth by claiming that he has
G invested it in purchase of Special Bearer Bonds. The investment in
Special Bearer Bonds would not grant immunity from assessment
to wealth tax to any asset which is found by the taxing
authorities, otherwise than by relying on the fact of acquisition of
Special Bearer Bonds, to belong to the assessee and hence forming
H part of his net wealth. The asset would be subjected to wealth tax
despite the investment in Special Bearer !londs Then follows clause (c)
R.K. GARG v. UNION (Bhagwati. J.) 979
which is extremely important and which effectively counters the A
) A
possibility of serious abuse to which the issue of Special Bearer Bonds
might otherwise have IeQt itself. It provides that no person who has
subscribed to or otherwise acquired Special Bearer Bonds shall be
entitled to claim, in relation to any period before the date of matu-
rity of such Bonds, that any asset held by him or any sum credited
[l
in his books of account or otherwise held by him res presents the
consideration received by him for the transfer of such Bonds. This
provision precludes a person from explaining a way the existence of
any asset held by him or any sum credited in his books of account
or otherwise held by him by claiming that it represents the sale
proceeds of Special Bearer Bonds held by him. If at any time
before the date of maturity of the Special Bearer Bonds held by an c
assessee, it is found that any asset is held by him or any sum is
credited in his books of accounts or is otherwise held by him and he
is required to explain the nature and source of acquisition of such
asset or sums of money, he cannot be heard to say by way of
explanation that such asset or sum of money represents the consi-
deration received by him for transfer of the Special Bearer Bonds, 0
even if that be factually correct. This explanation, though true
being statutorily excluded, it would be impossible for the assessee to
offer any other explanation for the acquisition of such asset or sum
of money, because any such explanation which might be given by
him would be untrue and in the absence of any satisfactory explana-
tion in regard to the nature and source of acquisition of such asset E
or sum of money, the Revenue would be entitled to infer that such
asset has heen acquired out of undisciosed income or that such sum
of money represents· concealed income and hence the value of such
asset or such sum of money, as the case may be, should be treated
as undisclosed income liable to be included in the taxable income
of the assessee. Vide sections 69, 69A and 69B of the Income-tax F
• Act, 1961. It is obvious that this provision is calculated to act as
a strong deterent against negotiability of Special Bearer Bonds for
disclosed or 'white' money. No holder of Special Bearer Bonds would
dare to transfer his Bonds to another person against receipt of dis-
closed or 'white' money, because he will not be able to account for
the consideration received by him, the true explanation being sta· G
tutorily unavilable to him, and such consideration would inevitably
be liable to be regarded as his concealed income and would be
subjected to tax and penalties. Moreover, it is difficult to see why
anyone should want to invest disclosed or 'white' money in the
acquisition of Special Bearer Bonds. Ordinarily ·a person would
9SO SUPREME COURT REPORTS [1982) 1 s.C.R.
A go in for Special Bearer Bonds only for the purpose of converting
his undisclosed money into 'white' money and it would be quite
unusual bordering almost on frekishness for anyone to acquire
Special Bearer Bonds with disclosed or 'white money' when he can
get only 2% simple interest on the investment in Special Bearer
Bonds, while outside he can easily get anything between 15%
B to 40% yield by openly dealing with his disclosed or 'white'
money. The transferability of Special Bearer Bonds against
disclosed or 'white' money is thus, from a practical point of view,
completely excluded. The question may still arise whether Special
Bearer Bonds would not pass from hand to hand against undisclosed
c or black money. Would they not be freely negotiable against
payment of undisclosed or black money ? Now it may be conceded
that a purchaser of Special Bearer Bonds would undoubtedly be
-
interested in acquiring such Bonds by making payment of 'black'
money, beacuse he would thereby convert his un-disclosed or 'black
money' into 'white' money. But it is difficult to understand why a
holder of Special Bearer Bonds should ever be interested in selling
D such Bonds against receipt of 'black money'. Obviously he would
have acquired such Bonds for the purpose of converting his 'black
money' into 'white' in order to avoid the risk of being found in
possession of 'black money' and if that be so, it is inexplicable as
to why he should again want to convert his 'white money' into
'black' by selling such Bonds against receipt of 'black money'. The
E immunity 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
F Special Bearer Bonds with a view to earning security against dis-
covery of unaccounted money in his hands would ordinarily barter
away that security by again receiving black money for the Special
•
Bearer Bonds. Furthermore, 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
G 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 purchaser by way of
consideration would become white by reason of being conve.:"d into
Special Bearer Bonds. The petitioners however expressed an appre-
H hension that special bearer bonds would fetch a much higher value
in the black market than that originally subscribed and this would
R.K. GARG v. UNION (Bhagwati, J.) 981
enable a larger amount of black money to be legalised into white A
than what was originally invested in subscription to special bearer
bonds. We do not think this apprehension is well founded. It is
true that once the date for original subscription to special bearer
bonds has expired, the only way in which special bearer bonds could
thereafter be acquired would be by going in the 0pen market and
the number of special bearer bonds in the market being necessarily B
limited, they may fetch a higher value in black money from a person
who is anxious to convert bis black money into white. If the
• demand outreaches the limited supply, the price of special bearer
bonds in the black market may exceed the amount originally
invested in subscription to special bearer bonds. But even so, the
black money paid by the purchaser for acquision of special bearer, c
bonds would not in its entirety be converted into white, it would
change its colour from black to white only to the extent of the
amount originally subscribed for the special bearer bonds or at the
most, if we also take into account interest on such amount, to
the extent of the face value of the special bearer bonds, because
whatever be the amount he might have paid in black money for
D
acquisition of the special bearer bonds, the holder of the special
bearer bonds will get only the amount representing the face value on
maturity of the special bearer bonds. It will thus be seen that how-
soever 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
E
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 white or encouraging further
generation of black money.
F
There was also one other abuse, said the petitioners, to which
• special bearer bonds might lend themselves and it 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 exenditure to be the
G
sale consideration of the special bearer bonds and hence by resorting
to this strategy, white money can be accumulated as capital while
expenditure is met out of black money received by way of consi-
deration for sale of spedal bearer bonds. We do not think there
is any scope for such abuse; the apprehension expressed by the H
petitioners is more imaginary than real. It may be noted that in
order to sustain his explanation, tile assessee would have to prove to
982 SUPREME COURT REPORTS [1982] 1 s.c.&.
A the satisfaction of the tax department that he had special bearer
bonds and that he sold them for a certain amount. Now if he has
received black money by way of consideration, it is difficult to see
how he would ever be able to establish that he sold special beater
bonds for that particular amount of black money. Would he be
so fool-hardy as to admit that he received the consideration in
B black money and even if he does, would he ever be able to prove
it? Who would believe him even if he makes such an admission?
And when he has bought special bearer bonds for the purpose of
converting his black money into white, why should he again re-
convert it into black by selling special bearer bonds for black
money ? The entire postulate of the argument of the petitioners
c is theoretical and has no basis in reality. 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 pur-
chase 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
D deemed to be his concealed income liable to tax. Even if we assume
that in some rare and exceptional case the assessee may be able to
establish that he sold special bearer bonds against receipt of black
money, the purchaser would straightaway 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
E
assessee by way of consideration and he would in that event be
rendered liable to tax and penalty in respect of such black money.
This would show the utter improbability bordering almost on
impossibility, of special bearer bonds being subjected to any such
abuse as is apprehended by the petitioners.
F
It was then urged on behalf of the petitioners that sectirn 4
clause (c) operates only in relation to a period before the date o.f
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
G 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 the
H immunity granted under section 3 sub-section(!) and his black
money would be converted into white. Thus the black money
of the se!ler whi9h bad been 9onverted into white on his subscribing
R.K. GARG v. UNION (Bhagwati, J.) 983
to or otherwise acquiring special bearer bonds would remain white A
and in addition, the black money of the purchaser would also be
converted into white by reason of his purchase of special bearer
bonds. This argument plausible though it may seem. is in our
opinion, fallacious and cannot be sustained. It is a highly debatable
issue whether, under the provisions of the Act, special bearer bonds
are at all in1ended to be transferable after the date of maturity, for B
the postulate of the legislation clearly seems to be that on the date
of maturity, special bearer bonds will be encashed. It is indeed
difficult to believe that anyone holding special bearer bonds would
keep them uncashed without earning any interest from and after
the date of maturity, when they can be immediately encashed and
the amount received can be invested yielding interest ranging bet- c
ween 18 per cent to 40 per cent. Moreover, special bearer bonds
would cease to be exempt from wealth tax from and after the date
of maturity and they would therefore be includible in the net wealth
of the holder for the purpose of wealth tax and if that be so, how
would it benefit the holder to keep them as part of his net wealth
and pay wealth tax upon it without earning any interest? It is 0
therefore extremely unlikely that Special Bearer Bonds would remain
uncashed after the date of manurity and it would be equally impro-
bable that anyone should want to purchase Special Bearer Bonds
after the date of maturity when they do not yield a!ly interest but
are still includible in the net wealth for the purpose of liability to
E
- wealth tax. But let us assume for the purpose of argument that in
a given case special bearer bonds are not encashed on the date of
maturity and they are lawfully transferred after the date of maturity
for a consideration paid by the purchaser. There are two alterna-
tives : the consideration may be paid by the purchaser in white
money or in black money. If the purchaser pays the consideration
in white money, no question of conversion of further black money F
into white arises. It would be a straight open transaction to which
no exception can be taken. But let us consider what consequences
would ensue if he pays in black money. The seller would obviously
r be interested in showing the consideration as his white money and
there may be no difficulty so far a; he i; concerned, because he
would be able to explain the possession of such money by claiming
that he has received it by way of consideration for sale of special
G
bearer bonds. Section 4 clause (c) will not stand in the way of his
I offering that explanation. But so far as the purchaser is concerned,
he will run into serious difficulties. Even if the immunity under
section 3 sub-section (I) were available to him after the date of
H
)llaturity, he will still b~ in trouble, be9~use the disclos4re rnade by
984 SUPREME COURT REPORTS (1982] I S.C.R.
A the seller would be the clearest evidence showing that the purchaser
had black money which he paid by way of consideration to the seller,
and this evidence, being independent of the fact of acquisition of
special bearer bonds by the purchaser, would be admissible and the
purchaser would be liable to tax and penalty on the amount of
black money paid by him as consideration. We fail to see how
B transfer of special bearer bonds after the date of maturity, even if
legally permissible, can be utilised for the purpose of legalising
black money into white. But we may point out that if at any time
after the date of maturity or even before, it is found that there is
some loophole in the provisions of the Act or that special bearer
c bonds are utilised for any dishonest or nefarious purpose or are
being perverted to any improper use, the legislature can always step
in and amend-the Act or pass other appropriate legislation with a
view to preventing such abuse. It must be remembered that every
legislation is an experiment in achieving certain desired ends and
trial and error method is inherent in every such experiment. There-
fore, when experience shows that the legislation as framed has pro-
D
ved 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 01 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
E law cannot be condemned as invalid on the ground that after a
period of ten years it may lend itself to some possible abuse.
We may now proceed to consider the constitutional validity of
the Act in the light of the above discussion as regards the scope and
-
effect of its various provisions. It is obvious that the Act makes a
F classification between holders of black money and the rest and pro-
vides for issue of special bearer bonds with a view to inducing per-
sons 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
G 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. It is of course true-and this must be poin·
H ted out here since it was faintly touched upon in the course of the
arguments-that there is n9 legal bar enacted in the Act against
IU<. GARG v. UNION (Bhagwati, i.) 9$5
investment of white money in subscription to or acquisition of spe- A
cial bearer bonds. But the provisions of the Act properly construed
are such that no one would even think of investing white money in
special bearer bonds and from a practical point of view, they do
operate as a bar against acquisition, whether by original subscrip-
tion or by purchase, of special bearer bonds with white money.
We do not see why anyone should want to invest his white money B
in subscribing to or acquiring special bearer bonds which yield onli
2 per cent simple interest per annum and which are not encashable
for a period of not less than ten years. It is true that special bearer
bonds can be sold before the date of maturity but who would pay
- white money for them and even if in some rare and exceptional case,
a purchaser could be found who would pay the consideration in
white money, no one will dare to sell special bearer bonds for white
c
money, because of the disincentive provided in section 4 cl. (c). The
investment of white money in special bearer bonds is accordingly,
as a practical measure, completely ruled out and the provisions of
the Act are intended to operate only qua persons in possession of
black money. There is a practical and real classification made bet- D
ween persons having black money and persons not having such
money and this de facto classification is clearly based on intelli-
gible differentia having rational relation with the object of the
Act. The petitioners disputed the validity of this proposition and
contended that the classification made by the Act is discriminatory
in that it excludes persons with white money from taking advantage
E
of the provisions of the Act by subscribing to or acquiring special
bearer bonds. But this contention is totally unfounded and we
cannot accept the same. 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
F
is rational and intelligible and the operation of the provisions of
the Act is rightly confined to persons in possession of black
money.
,.,
It was then contended that the Act is unconstitutional as it
offends against morality by according to dishonest assessees who G
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 con-
cessions placing them at an advantage over those who have observed
the law and paid the taxes due from them and this, according to the 8
etitioners, is clearly immoral and unwarranted by the Constitution.
\ve do not think this contention can be sustained. It is necessary
986 SUPREME COURT REi>ORtS il982j I s.C.lt.
A to remember that we are concerned here only with the constitutional
validity of the Act and not with its morality. Of course, when we
say this we do not wish to suggest that morality can in no case have
relevance to the constitutional validity of a legislation. There may
be cases where the provisions of a statute may be so reeking with
immorality that the legislation can be readily condemned as arbitrary
8 or irrational and hence violative of Article 14. But the test in every
such case would be not whether the provisions of the statute offend
against morality but whether they are arbitrary and irrational having
regard to all the facts and circumstances of the case. Immorality
by itself is not a ground of coustitutional challenge and it obviously
cannot be, because morality is essentially a subjective value, except
c in so far as it may be reflected in any provision of the Constitution
or may have crystalised into some well-accepted norm of special
behaviour. Now there can be no doubt that under the provisions
of tbe Act certain immunities and exemptions are granted with a
view to inducing tax evaders to invest their undisclosed money in
special bearer bonds and to that extent they are given benefits and
D concessions which are denied to those who honestly pay their taxes.
Those who are honest and who observe the law are mulcted in
paying the taxes legitimately dne from them while those who have
broken the law and evaded payment of taxes are allowed by the
provisions of the Act to convert their black money into 'white'
without payment of any tax or penalty. The provisions of the
E Act may thus seem to be putting premium on dishonesty and they
may, not, withont some justification, be accnsed of being tinged
with some immorality, but howsoever regrettable or unfortunate it
may be, they had to be enacted by the legislature in order to bring
out black money in the open and canalise it for productive purposes.
Notwithstanding stringentlaws imposing severe penalties and vigo-
F rous steps taken by the tax administration to detect black money and
despite various voluntary disclosure schemes introduced by the
government from time to time, it had not been possible to unearth
black money and the menace of black money had over the years
assumed alarming proportions causing havoc to the economy of the
country and the legislature was therefore constrained to enact the
G
Act with a view to mopping up black money so that instead of
remaining idle, such money could be utilised for productive purposes.
The problem of black money was an obstinate economic problem
which had been defying the Government for quite some time and it
H was in order to resolve this problem that, other efforts having
failed, the legislature decided to enact the Act, even though the
j
R.K. GARG v. UNION (Bhagwati, .!.) 987
effect of its provisions might be to confer certain undeserve l advan- A
tages on tax evaders in possession of black money. The legislature
had obviously only two alternatives; either to allow the black money
to remain idle and unproductive or to induce those in possession 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 to impose a heavy dose of taxation· B
The former would have resulted in inrlationary 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 augmentin3 G
• its resources for productive purposes and with that end in view,
enacted the Act providing for issue of special bearer bonds. It may
be pointed out that the idea of issuing special bearer bonds for the
purpose of unearthing black money was not a brain wave which
originated for the first time in the mind of the legis\atur( in the
year 1981. The suggestion for issue of special bearer bonds was
0
made as far back as 1950 by some of the members of the provisional
Parliamei.t, notably those belonging to the opposition and the
government was repeatedly asked why it was not issuing special
bearer bonds in order to absorb the liquidity and thereby control
the inflationary pressures in the country. Though the majority of
the members of the Wanchoo Committee expressed themselves
E
against the issue of special bearer bonds, Shri Chitale a member of
that Committee wrote a dissenting note in which he suggested that
special bearer bonds should be issued. We may point out that the
majority members of the Wanchoo Committee were against issue of
special bearer bonds for the purpose of mopping up black money,
F
because they apprehended certain abuses to which special bearer
bonds might be supjected, but as we have already pointed out while
discussing t11e true meaning and legal effect of the provisions of the
Act, we do not think that there is any scope for such abuses, for the
legislature has, while enacting the provisions of the Act, taken care
to see that such abuses are reduced to the minimum, if not eliminated G
altogether.
It is true that certain immunities and exemptions are granted
to persons investing their unaccounted mouey in purchase of special
bearer bonds but that is an inducement which has to be offered for H
unearthing black money. Those who have successfully evaded taxa-
tion and concealed their income j or wealth despite the strin~ent ta~
988 SUPREME COURT REPORTS [1982] 1 S.C.k
A laws and the efforts of the tax depatment are likely to disclose their
unaccounted money without some inducement by way of immuni-
ties and exceptions and it must necessarily be left to the legislature
to decide what immunities and exemptions would be sufficient for
the purpose. It would be outside the province of the court to con·
sider if any particular immunity or exemption is necessary or not for
B the purpose of inducing disclosure of black money. That would
depend upon diverse fiscal and economic considerations based on
practical necessity and ad111inistrative 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
c economic issue. The court cannot possibly assess or evaluate
what would be the impact of a particular immunity or ex-
emption and whether it would serve the purpose in view or not.
There are so many imponderables that would enter into the deter·
mination that it would be wise for the court not to hazard an
opinion where even economists may differ. The court must while
D examining the constitutional validity of a legislation of this kind,
"be resilient, not rigid, forward looking, not static, liberal, not
verbal" and the court must always bear in mind the constitutional
proposition enunciated by the Supreme Court of the United States
in Munn v. Tl/inois(') namely, "that courts do not substitute
their social and economic beliefs for the judgment of legisla-
E tive bodies". The court must defer to legislative judgment in
matters relating to social and economic policies and must not inter-
fere, unless the exercise of legislative judgment appears to be palpa-
bly arbitrary. The court should constantly remind itself of what the
Supreme Court of the United States said in Metropolis Thieater Co.
v. City of Chicago,(')"The problems of government are practical ones
F and may justify, if they do not require, rough accommodations, illo-
gical it may be, and unscientific. But even such criticism should not
be hastily expressed. What is best is not always discernible, the
wisdom of any choice may be disputed or condemned. Mere errors
of government are not subject to our judicial review." It is true
that one or the other of the i1n1nunities or exemptions granted under
G
the provisions of the Act may be taken advantage of by resourceful
persons by adopting ingenious methods and devices with a view to
avoiding or saving tax. But that cannot be helped because
fl (I) 94 U.S. 13.
(2) 57 Lawyers' Edition 73Q.
k.k. GARG v. UNION (Gupta, 1.) 989
human ingenuity is so great when it comes to tax avoidance that it
A
would be almost impossible to frame tax legislation which cannot be
abused. Moreover, as already pointed out above, the trial and
error method is inherent in every legislative effort to deal with an
obstinate social or economic issue and if it is found that any immu-
nity or exemption granted under the Act is being utilised for tax
B
evasion or avoidance not intended by the legislature, the Act can
always be amended and the abuse terminated. We are accordingly of
of the view that none of the provisions of the Act is violative of·
Article 14 and its constitutional validity must be upheld.
These were the reasons for which we passed our Order
dated 2nd September, 1981 rejecting the challenge against the cons-
c
tiutional validity of the Ordinance and the Act and dismissing the
writ petitions. Since these writ petitions are in the nature of public
interest litigation, we directed that there shonld be no order as to
costs.
D
GUPTA, J. I was unable to share the view taken by the majo-
rity in disposing of these writ petitions on September 2, 1981 that
"neither the Special Bearer Bonds (Immunites and Exemptions)
Ordinance, 1981 nor the Special Bearer Bonds (Immunities and
Exemptions) Act, 1981 is violative of Art. 14 of the Constitution", E
and I made the following order on the same day :-
"I have come to the conclusion that the Special Bearer
Bonds (Immunities and Exemptions) Ordinance, 1981 and
the Special Bearer Bonds (Immunities and Exemptions)
Act, 1981 violate Art. 14 of the Constitution and are there- F
fore invalid. I would allow the writ petitions with
costs.
I shall give my resons later."
Here briefly are my reasons. G
These five writ petitions question the constitutional validity of
the Special Bearer Bonds (Immunities and Exemptions) Ordinance,
1981 and Special Bearer Bonds (Immunities and Exemptions) Act,
1981. The Ordinance which was promulgated by the President on H
January I 2, 1981 was repealed and replaced by the Act. The
Act received the President's assent on March 27, 1981. Section I
990 SUPREME COURT REPORTS [1982] I s.c.il.
A (3) of the Act says that it shall be deemed to have come into force
on January 12, 1981. The Provisions of the Ordinance and the
Act are similar except that section 4 (c) of the Act is worded slightly
differently from the corresponding provision cf the Ordinance but
the difference is not material and I shall hereinafter refer to the pro-
visions of the Act only.
B
As the long title of the Act shows, it is "An Act to provide
for certain immunities to holders of Special Bearer Bonds, 1991
and for certain exemptions from the direct taxes in relation to such
Bonds and for matters connected therewitl1." The purpose for
which the Act was passed as appearing from the preamble is :-
c
"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:
D 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 redemp-
•
tion value, after ten years, of twelve thousand rupees;
E And whereas it is expedient to provide for certain
immunities and exemptions to render it possible for per-
sons in possession of black money to invest the same in
the said Bonds;"
F
The premb le thus 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 does not
-
atiempt to define black money. The Direct Taxes Enquiry Com-
mittee set up by the Government of India in 1970 with Sbri K.N.
Wanchoo, retired Chief Justice of the Supreme Court of India, as
G Chairman explains what the term black money means in its final
report submitted in December, 1971 :
"It [black money] is, as its name suggests, 'tainted'
money-money which is not clean or which bas a stigma
H attached to it...Black is a colour which is generally asso-
ciated with evil. While it symbolises something which
R.k. GARG v. UNION (Gupta, J.) 991
violates moral, social or legal norms, it also suggests a veil A
of secrecy shrouding it. The term 'black money' conse-
quently has both these implications. It not only stands for
money earned by violating legal provisions-even social
conscience-but also suggests that such money is kept
secret and not accounted for.
B
Today the term 'black money' is generally used to
denote unaccounted money or concealed income and/or
undisclosed wealth, as well as money involved in transac-
• tions wholly or partly suppressed."
c
The Act contains nine sections. The sections that are rele·
vant for the present purpose are set out below.
Immuni- 3. (I) Notwithstanding anything contained in any
ties. other law for the time being in force, - D
(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; E
(b) no inquiry or investigation shall be
commenced against any person under
any such law on the ground that such
person has subscribed to or has other-
wise acquired Special Bearer Bonds; F
and
(c) the fact that a person has subscribed to
or has otherwise acquired Special Bearer
Bonds shall not be taken into account
and shall be inadmissible as evidence
G
in any proceedings relating to any
offence or the imposition of any penalty
under any such law.
H
(2) x x x x
•
992 sui>ItilME couat REPORt$ {1982] 1 s.c.a.
A Acquisition 4. Without prejudice to the generality of the pro·
etc., of vions of section 3, the subscription to, or acquisi ·
Bonds not tion of, Special Bearer Bonds by any person
to be taken shall Dot be taken into account for the purpose
into account of any proseeding under the Income-tax Act,
for certain 1961 (hereinafter referred to as the Income-tax
B proceedings. 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,
c the said Bonds shall be entitled-
-
(a) to claim any set-off or relief in any assess-
ment, re-assessment, appeal, reference or
other proceeding under the Income-tax Act
or to reopen any, assessment or re-assess-
D
ment made under that Act on the ground
that he has subscribed to or has otherwise
acquired the said B,1nds:
(b) to claim, in relation to any period before
the date of maturity of the said Bonds, that
E 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
(c) to claim, in relation to any period before,
F the date or maturity of the said Bonds, that
any asset held by him or any sum credited
in his books of account or otherwise held
by him represents the consideration received
by him for the transfer of the said Bonds.
G Amend- 5. In the Income-tax Act,-
ment of (a) in section 2, in clause (14), after sub clause
Act 43 (iv), the following sub-clause shall be
of 1961. inserted, namely :-
"(v) Special Bearer Bonds, 199 I issued by
H the Central Government,"
ll.K. GARG v. UNION (Gupta, J.) 993
(b) in section 10, in clause (15), after sub-clase A
(ia), the following sub-clause shall be in-
serted, namely :-
(ib) premium on the redemption of Speeial
Bearer Bonds, 1991:".
B
Amend- 6. In section of 5 of the Wealth-tax Act, in ,ub-
ment of section ( 1), after clause (xvia), the following
Act 27 clause shall be inserted, namely :-
of 1957.
- Amend-
(xvib) Special Bearer Bonds, 1991;".
7. In section 5 of the Gift-tax Act, in sub-section
c
ment of (I), after clause (iiia), the following clause shall
Act 18 be inserted, namely :-
of 1958. D
(iiib) "of property in the form of Special
Bearer Bonds, 1991." ."
The mariginal notes against sections 5, 6, and 7 indicate that
these sections are amendments respectively of the Income-tax Act E
of 1961, Wealth-tax Act of 1957 and Gift-tax Act of 1958. Sec-
tion 5 ex cl odes Special Bearer Bonds, 1991 from the capital asset
of an assessee and exempts the premium payable on the redemption
of the Bonds from income-tax. Section 6 exempts the Bonds from
wealth-tax. Section 7 exempts from gift-tax property in the form
of these Bonds. F
The Act has been challenged mainly on the ground that it
infringes Art. 14 of the Constitution. Art. 14 forbids class legisla-
tion but permits classification.· Permissible classification, it is well
established, must satisfy two conditions which Das J. enunciated in
The State of West Bengal v. Anwar Ali Sarkar(1) as follows:- G
"(I) that the classification must be founded on an intelli-
gible differentia which distinguishes those that are
grouped together from others 11nd,
fl
994 SUPREME COURT REPORTS [1982] I S.C .. R
A (2) that the diffcrcntia must have rational relation to the
object sought to be achieved by the Act."
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 (I) provide for these immuni-
B ties "notwithstanding anything contained m any other law for the
time being in force." Clause (a) states that no holder of Special
Bearer Bonds shall be required to disclose for any purpose the nature
and source of acquisition of the Bonds. Clause (b) forbids com-
mencement of any enquiry or investigation under any law against a
c person on the ground that he has subscribed to or otherwise acquired
the Bonds. Under clause (c) the fact that a person has subscribed
to or otherwise acquired Special Bearer Bonds shall be inadmissible
in evidence and cannot be taken into account in any proceeding
relating to any offence or the imposition of any penalty under any
law. None of these immunities is required by a person who has
D paid 'white' money, that is, money that has been accounted for, to
acquire Bonds. To a person who has disclosed the source of acquisi-
tion 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.
Section 4 states that the fact that one has subscribed to or otherwise
E acquired the Bonds shall not be taken into account in any proceeding
under the Income-tax Act, 1961, the Wealth-tax Act, 1957 and the
Gift-tax Act, 1958 and goes on to provide specifically that no one
shall be entitled to :
(a) any manner of relief under the Income-tax Act on
the ground that he has acquired the Bonds; or
(b) claim that any asset belonging to him which formed *'
part of his net wealth in any period before the matu-
rity of the Bonds, has been converted into such Bonds; ~
or
G
(c) claim that any asset held by him or any sum of money
credited in his books of account or otherwise held by
him m the aforesaid period is the consideration recei-
ved by him for the transfer of the Bonds.
H
Mr. Salve appearing for the petitioners in writ petitions Nos. 863
and 994 of 1981 contended that section 4(c) did not constitute an
R.k. GARG v. UNION (Gupta, J.j 995
absolute bar to the assessee seeking to prove that the said sum or
A
asset represents the sale price of Special Bearer Bonds; on behalf
of the Union of India it was asserted that this was an absolute bar.
In view of the conclusion I have reached, I do not propose to decide
the point and I shall proceed on the basis that it is an absolute bar.
It is apparent from clauses (a) to (c) of section 4 that the rights they
B
deny affect only those who have disclosed their source of acquisi-
tion of the Bonds. Those in whose case the source of acquisition
. has not been detected are not affected by the prohibition contained
in section 4. 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
c
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.
D
The Act thus distinguishes between two classes of holders of
Special Bearer Bonds : tax-evaders and honest tax-payers. Has this
classification a rational relation to the object of the Act ? The
object, as already noticed, is to canalise black money for produc-
tive purposes to make economic and social planning effective. If
the exemptions and immunities conferred by the Act are sufficiently E
attractive to induce tax-evaders 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 acqnired 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 discri-
F
mination in favour of black money therefore seems to be obvious.
It was however argued that no one would be inclined to invest
'white' money for Special Bearer Bonds which carry only 2 per cent
annual interest. I do not think this is a consideration which could
justify the discrimination. Apart from that, a return of 2 per cent
simple interest per annum is not a correct measure of the actual G
advantages conferred by the Act. Taking into account the income-tax
and the wealth-tax savings if one did not have to pay any tax on the
amount with which Special Bearer Bonds were acquired-purchasers
of the Bonds with black money did not-and the tax free premium
on the Bonds, the actual return would be many times more than 2 H
per cent simple interest per annum. It must therefore be he Id that
996 SUPREME COURT REPORTS [1982] I s.c.il.
A the basis on which the holders of Special Bearer Bonds have been
classified to give certain advantages to one class and deny them to
the other, has no rationai nexus with the object of the Act.
The matter has another aspect. The classification of holders
of Special Bearer Bonds into tax-payers and tax-evaders does dis·
B close a basis. Would it be an acceptable argument to say that this
basis has a relation to the object of the Act because the black money
invested in Special Bearer Bonds by tax-evaders could be utilised for
productive purposes for ten years and that both the conditions of a
valid classfication were thus satisfied ? I am afraid not. In
c State of West Bengal v. Anwar Ali Sarkar, (supra) Das J. points
out: -
"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
D short while the Article [Art. 14] forbids class legislation in
sense of making improper discrimiation by conferring pri-
vileges 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 liability proposed to be imposed, it does not
forbid classification for the purpose of legislation ... "
In Anwar Ali Sarkar's case the constitutional validity of the West
Bengal Special Courts Act (X of 1950) constituting special
courts and empowering the state government to refer 'cases'
'offences' or 'classes of cases' or 'classes of offences' to such
F courts was in question. The object of the West Bengal Act was
to provide for the speedier trial of certain offences. Das J. observes
further : •
"To achieve this object, offences or cases have to be
classified upon the basis of some differentia which will
G distinguish those offences or cases from others and which
will have a reasonable relation to the recited object of the
Act. The differentia and the object being, as I have said,
different elements, it follows that the object by itself cannot
be the basis of the classification of offences or the cases, for
H in the absence of any special circumstances which may dis-
tinguish one offence or one class of offences or one class
R.K. GARO v. UNION (Gupta, J.) ~97
of cases from another offence, or class of offences or class A
of cases, speedier trial is desirable in the disposal of all
offences or classes of offences or classess of cases.''
If the differentia, that is, the basis of classification, and the
object of the Act are distinct things, it follows that it is not enough B
that the differentia 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 differentia must be
._ intelligible. If the basis of classification is on the face of it arbitrary
- in the sense that it is palpably unreasonable, I do not thin\: it is
possible to call the differentia intelligible. The following passage
from the judgment of Bose J. in Anwar Ali Sarkar's case illustrates
the point :
c
"I can conceive of cases where there is the utmost
good faith/and where the classification is scientific and D
rational and yet which would offend this law. Let us take
an imaginary case in which a State legislature considers
that all accused persons whose skull measurements are
below a certain standard, or who cannot pass a given series
of intelligence tests, shall be tried summarily whatever the
offence on the ground that the less complicated the trial E
the fairer it is to their sub-standard of intelligence. Here
is classification. It is scientific and systematic. The Inten-
tion and motive are good. There is no question of favouri-
tism, and yet I can hardly believe that such a law would
be allowed to stand. But what would be the true basis of
the decision? Surely simply this that the Judges would F
not consider that fair and proper."
• The scope of Art. 14 was furt, er elaborated in some of the later
decisions of this Court. This is what Bhagwati, J. speaking for
himself and Chandrachud and Krishna Iyer JJ. in E.P. Royappa v.
State of Tamil Nadu and another{') says :
G
"We cannot countenance any attempt to truncate its
all-embracing scope and meaning, for to do so would be to
violate its activist magnitude. Equality is a dynamic
H
(I) [1974] 2 SCR 34&.
998 SUPREME COURT REPORTS (1982] l S.C.R.
A concept with many aspects and dismen;ions and it
cannot be "cribed, cabbined and confined" within tradi-
tional and doctrinaire limits. From a positivistic points of
view, equality is antithetic to arbitrariness. In fact equality
and arbitrariness are sworn enemies; one belongs to the rule
of law in a republic while the other, to the whim and
B caprice of an absolute monarch. Where an act is arbi-
tray it is implicit in it that it is unequal both according to
to political logic and constitutional law and is therefore
violative of Art. 14."
c Bhagwati J. reiterates in Maneka Gandhi v. Union of India(')
what he had said in Royappa' s case and adds : -
"The principle of reasonableness, which legally as
well as philosophically, is an essential element of equality
D or non-arbitrariness pervades Article 14 like a brooding
omnipresence ... ''
To pass the test of reasonableness if it was enough that there
should be a differentia which should have some connection with
E the object of the Act, then these observations made in Maneka
Gandhi and Royappa would be so much wasted eloquence. The
decisions of this Court insist that the differentia must be intelligible
and the nexus rational, and the observations quoted above would
seem to be appropriate only if we attach some significance to the
words 'intelligible' and 'rational'. The question however remains:
F when is one justified in describing something as arbitrary or unrea-
sonable ? Terms like 'reasonable', 'just' or 'fair' derive their
significance from the existing social conditions. W. Friedmann in
his "Legal Theory" (5th Ed. page 80) points out that expressions
like "a reasonable and fair price" or a "fair and equitable" restitu-
tion means nothing, except in conjunction with the social conditions
G of the time". Brandeis J. in his opinion in Quaker City Cab Co.
v. Commonwealth of Pennsylvania(') explains when a classification
shall be reasonable : "We call that action reasonable which an
informed, intelligent, just-minded, civilized men could rationally
favour." Bose J. in Anwar Ali Sarkar's case says !llUch the sam~
H
( 1) [1978] 2 S.C.R. 621.
(2) 72 Law Ed. 1927
R.K GARG v. UNION (Gupta, J.) 999
thing in holing that the West Bengal Special Courts Act of 1950 A
offends Art. 14 :
"We find men accused of heinous crimes called upon
to answer for their lives and liberties. We find them
picked out from their fellows, and however much the new B
procedure may give them a few crumbs of advantage, in
the bulk they are deprived of substantial and valuable pri·
vileges of defence which others, similarly charged, are able
to claim. It matters not to me, nor indeed to them and
their families and their friends, whether this be done in
good faith, whether it be done for the convenience of c
government, whether the process can be scientifically classi-
fied and labelled, or whether it is an experiment in speedier
trials made for the good of society at large. It matters not
how lofty and laudable the motives are. The question
with which I charge myself is, can fair-minded, reasonable,
unbiased and resolute men, who are not swayed by emo- D
tion or prejudice, regard this with equanimity and call it
reasonable, just and fair, regard it as that equal treatment
" and protection in the defence of liberties which is expected
of a sovereign democratic republic 'in the conditions which
obtain in India today ?"
E
Keeping in mind these observations on what is reasonable, is
the basis on which the holders of Special Bearer Bonds have been
classified into two groups, honest tax-payers and tax-evaders, intelli-
gible? What is arbitrary and offends Art. 14, cannot be called in·
telligible. It is clear from the provisions of the Act set out earlier
F
that the advantages which the tax-evaders derive from the immuni-
ties provided by the Act are not avilable to those who have acquired
Jt. the Bonds with 'white· money. The Act promises anonymity and
security for tax-evaders. No question can be asked as to the nature
i and source of acquisition or possession of the Bonds, The Bonds
can be transferred freely, and the apprehension expressed by the G
petitioners cannot be said to be baseless that passing from hand to
hand the Bonds are likely to operate as parallel currency and be
used for any kind of transaction. From a reading of the preamble
of the Act it does not seem that the object of the Act was only to
to enable the Central Government to have some use for 10 years H
9f the black money which is said to have "become a serjoqs threat
1000 SUPREME COURT REPORTS [1982} I S.C.R.
A to the national economy". As I read the preamble the purpose of
the Act is to unearth black money and use it for productive purpo·
ses for effective economic and social planning. If that be the object
of the Act, it is difficult to see how its provisions help to achieve the
intended purpose. The Act discloses a scheme which enables tax.
evaders to convert black money into white after IO years and in
the meantime use the Bonds as parallel currency intiating 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 IO years black
money which had taken the shape of Special Bearer Bonds goes
c under·ground again and retain its colour, there is nothing to pre·
vent 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. On
D the effect of giving concessions to such unscrupulous tax·evaders in
preference to the honest tax-payers, Mr. R.K. Garg appearing in
person and Mr. Saive both repeated what the Direct Taxes Enquiry
Committee's final report says : "Resorting to such a measure ...
would only shake the confidence of the honest tax-payers in the
capacity of the Government to deal with the law breakers and would
E invite contempt for its enforcement machinery." The petitioners
submitted further that measures like the Special Bearer Bonds
scheme would tempt more people to evade taxes and instead of serv-
ing a legitimate public interest would grievously damage it.
It has been pointed out that there have been voluntary disclo·
F
sure schemes in the past. That is so, but none of them is quite like the
scheme in question which not only exempts the unaccounted money
in the shape of Special Bearer Bonds from all taxes but provides
also for a tax-free premium on it. According to the petitioners, if
·•
the earlier schemes have been conciliatory, the present scheme
G amounts to capitulation to black money. I asked the Attorney
General if it was his case that all attempts to unearth black money
had failed and the present scheme was the only course open. His
answer was that that was not his case The affidavit filed on behalf
of the Union of India also does not make such a case. Clearly, the
impugned Act puts a premium on dishonesty without even a justi·
R..k. GARG v. UNION (Gupta, J.) 1001
fication of necessity-that the situation in the country left no A
option.
The Act has been criticised as immoral and unnethical. Any
law that rewards law breakers and tax dodgers js bound to invite
such criticism. Should the court concern itself with questions of B
morality and ethics in considering the constitutional validity of an
Act ? Of course no law can be struck down only on the ground
that it is unethical. However as Friedmann in his "Legal Theory"
(page 43) says: "There cannot be-and there never bas been-a com-
- plete 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." It bas been held by this Court
G
in Royappa and M aneka Gandhi that the principle of reasonable·
ness is an essential element of equality. The concept of reasonable-
ness does not exclude notions of morality and ethics. I do not see
how it can be disputed that in the circumstances of a given case
considerations of morality and ethics may have a bearing on the D
reasonableness of the law in question.
Having regard to the provisions of the impugned Act which I
have discussed above and the object of the Act to which I have
referred, is it possible to say that it is reasonable to classify the E
holders of Special Bearer Bonds into honest tax-payers and
tax-evaders for the purpose of conferring benefits on the tax-
evaders and denying them to those who have honestly paid their
taxes, especially when a measure appeasing the tax-evaders to the
extent the scheme in question does is not claimed as unavoidable ?
The inforll)ed, fair-minded, civilized man on whose judgment both F
Brandeis J. and Bose J. rely, would he have found the basis of the
classification intelligible? The questions answer themselves, the
. arbitrary character of the differentiation is so obvious. I do not
think it is possible to take the rhetoric of Royappa and Maneka
Gandhi seriously and find that the Act passes the test of reasona-
bleness. G
What I have said above on the Special Bearer Bonds scheme
should not be read as an expression of opinion on the wisdom of
the government policy-that the scheme is not the best in circum- H
stances. My conclusion is based not on what the policy of the
government is but on what the equality elause in Art. 14 requires.
i002 SuPREME couh REPORTS [1982] i s.c.k.
A Having held that the Special Bearer Bonds (Immunities and
Exemptions) Ordinance, 1981 and the Special Bearer Bonds (Immu-
nities and Exemptions) Act, 1981 are invalid on the ground that
they infringe Art. 14 of the Constitution, I do not find it necessary
to consider whether Special Bearer Bonds (Immunities and Exemp-
tions) Ordinance, 198 l is outside the ordinance making power of
B the President under Art. 123 of the Constitution.
N.V.K. Petitions dismissed.
-
,..
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