R.K. GARG ETC. ETC. v. UNION OF INDIA & ORS. ETC (2)

Citation: [1982] 1 S.C.R. 947

Court: Supreme Court of India

Bench: Y.V. CHANDRACHUD, P.N. BHAGWATI, A.C. GUPTA, S. MURTAZA FAZAL ALI, AMARENDRA NATH SEN

Case summary

These writ petitions raise a common question of law relating to the constitutional validity of the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 (hereinafter referred to as the Ordinance) and the Special Bearer Bonds (Immunities and Exemptions) Act 1981...

Judgment text

R. K. GARG ETC. ETC. v. UNION OF INDIA & ORS. ETC. 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. ] Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 and Special Bearer Bonds (ImmunUies and Exemptions) Act, 1981-Constitution validity of-Whether infringes Art. 14-Act whether puts a premium on dishonesty. Constitution ofIndia, 1950. Art. 14-Validity ofclassification-How to be determined. Art. 32-Judicial review·-Discharge of-Principles to be followed. Art. 123-0rdinance making power ofPresident-Whether can extend to tax laws. Interpretation ofstatutes-Legislation on economic matters-Effect of crudities, inequities and possibililies ofabuse-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 It was repealed and replaced by the Special Bearer Bonds (Immunities and Exemptions) Act, 1981.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 provisions of the Ordinance and the Act were similar except section 4(2) of the Act which was worded slightly differently from the corresponding provision of the Ordinance. The Act provided for certain immunities to holders of Special Bearer Bonds, 1981, and for certain exemptions from direct taxes in relation to such Bonds and for matters connected 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 certain immunities and exemptions to render it possible for persons in posses5ion 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) prohibited the commencement of any inquiry or investi~at·on a~ainst a person the 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 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 to (a) claim any set-off under the Income-tax Act or to reopen any assessment or reassessment made under that Act on the ground that he has subscribed to or has otherwise acquired the said Bonds; (b) that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Act has been converted into such bonds, and (c) that any asset held by him represents the consideration received for the transfer of such Bonds.

In their writ petitions to this Court assailing the constitutional validity of the Ordinance and the Act it was contended on behalf of the petitioners that : (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 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 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 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 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 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 benefits 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 unwarranted by the Constitution. ..... Dismissing the petitions, HELD: • [Per majority Chandrachud, C. J. , Bhagwati, Fa:al Ali & Amarendra Na1h Sen, JJ. ] [Gupta, J, dissenting] None of the provisions of the Special Bearer Bonds (Immunities and Exemption) Act, 1981 is violative of Article 14 and its constitutional validity must ·~ be upheld. [989 Bl J(i).

There is no subs1ance in the contention that the President has no 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 in the existing law and emergent legislation may be necessary to enable the executive to cope with the situation. Article 123, therefore, confers powers on the President to promulgate a law by issuing an Ordinance to enable the executive to deal with the emergent situation which might well include a situation created by a law being declared void by a Court of law.

The legislative power conferred on the President under the Article is not a paraUel power of legislation. This power is the clearest indication that the President is invested with this legislative 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 Ordinance but can nlso pass a vote of no confidence in the executive. There is in the theory of Constitutional Law complete control of the legislature over the executive, because if the executive misbehaves or forfeits the confidence of the legislature, it can be thrown out by the legislature. [954 E-G, 965 G-966 B] 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. 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 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 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 it1 the Court may take into consideration matters • of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation. Another rule of equal importance is that 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] 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 propositions and do not relate to abstract units and are not to be measured by abstract symmetry" that exact wisdom and nice adoption of remedy are not 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 comphcated experimental economic legislation but on that account alone it cannot be struck down as invalid. [970 C D] Secretary of Agriculture v. Central Reig Refining Company, 94 Lawyers' Edition 381, referred to. • 2(iii).

The court must adjudge the constitutionality of legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provision. If any crudities, inequities or possibilitks of abuse con1c 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 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 specific ends. What is necessary in order to pass the test of permissible classification 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 legislature.

3(ii). The validity of a classification has to be judged with reference to the object of the legislation and if that is done, there can be no doubt that the classification made by the Act is rational and intelligible and the operation of the provisions of the Act is rightly confined to persons in possession of black money. 4(i). The Preamble of the Act makes it clear that the Act is intended to canalise for productive purposes black money which has become a serious threat to the national economy. It is an undisputed fact that there is considerable amount of black 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 competing with the official economy.

This parallel economy has over the years grown in size and dimension and even on a conservative estimate, the amount of black money in circulation 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 OR1 S [1982] 1 s. C. l. 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 taxevaders 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 ' K. Parasaran, Sol. General in WPs. 863 & 994/8 l. K. S. Gurumoorthi & Miss A. Subhashini for the Respondents. 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 (Immunities and Exemptions) Act 1981 (hereinafter referred to as the Act).

The principal ground on which the constitutional validity of the Ordinance and the Act is challenged is that they are violative of the equality clause contained in Article 14 of the Constitution. There is also one other ground on which the Ordinance is assailed as constitutionally invalid and it is that the President had no power under Article 123 of the Constitution to issue the Ordinance and the Ordinance is therefore ultra vires and void. We shall first deal with ... the latter ground since it can be disposed of briefly, but before we do so, it would be convenient to refer to the relevant provisions of ' ' the Act. It is not necessary to make any specific reference to the provisions of the Ordinance since the provisions of the Act are substan. tially a reproduction of the provisions of the Ordinance.

On 12th January 1981, both Houses of Parliament not being in session, the President issued the Ordinance in exercise of the power conferred upon him under Article 123 of the Constitution. The Ordinance was later replaced by the Act which received the assent of the President OP. 77! 1\ Mar91J 1981, b11t wl! i9h w~s l>rought into force with retrospective effect from 12th January 1981 being the date of promulgation of the Ordinance. The Act is a brief piece of legislation with only a few sections but the ascertainment of their true meaning and legal effect has given rise to considerable controversy between the parties and hence it is necessary to examine the provisions of the Act in some detail. The long title of the Act 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 following words : -- Whereas for effective economic and social planning it is necessary to canalise for productive purposes black money which has become a serious threat to the national economy; And whereas with a view to such canalisation the Central Government has decided to issue at par certain bearer bonds to be known as the Special Bearer Bonds, 1991, of the face value of ten thousand rupees and redemption value, after ten years, of twelve thousand rupees; And whereas it is expedient .

to provide for certain immunities and exemptions to render it possible for persons in possession of black money to invest the same in the said Bonds; Sections 3 and 4 are extremely material since on their true interpretation depends to a large extent the determination of the question relating to the constitutional validity of the Act and they may be reproduced as follows : r 3. (I) Notwithstanding anything contained in any other law ' for the time being in force :- (a) no person who has subscribed to or has otherwise acquired Special Bearer Bonds shall be required to disclose, for any purpose whatsoever, the nature and source of acquisition of such Bonds; (b) no inquiry or investigation &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 Special Bearer Bonds; 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 in any proceedings relating to any offence or the imposition of any penalty nuder any such law. (2) Nothing in sub-section (1) shall apply in relation to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Prevention of Corruption Act, 1947 or any offence which is punishable under any other law and which is similar to an offence punishable under either of those Chapters or under that Act or for the purpose of enforcement of any civil liability. Explanation : For the purposes of this sub-section "civil liability" does not include liability by way of tax under any law for the time being in force. 4.

Without prejudice to the generality of the provisions of section 3, the subscription to, or acquisition of, Special Bearer Bonds by any person shall not be taken into account for the purpose of any proceedings under the Income-tax Act, 1961 (hereinafter referred to as the Income-tax Act), the Wealth-tax Act 1957 (hereinafter referred to as the Wealth-tax Act), or the Gift-tax Act, 1958 (hereinafter referred to as the Gift-tax Act) and, in particular, no person who has subscribed to, or has otherwise acquired, the said Bonds shall be entitled- (a) to claim any set-off or relief in any assessment, reassessment appeal, reference or other proceeding under the Income-tax Act or 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) to claim, in relation to any period before the date of maturity of the said Bonds, that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Act has been converted into the said Bonds: or (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 otherwise 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 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 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 done or taken under the corresponding provisions of the Act.

Having set out the provision of the Act-and be it noted again that the provisions of the Ordinance were substantially in the same terms as the provisions of the Act-we may now proceed to consider the challenge against the constitutional validity of the Ordinance on the ground that the President had no power to issue the Ordinance under Article 123 of the Constitution. There were two limbs of the 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 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 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 J10 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 academic, since the Act has been brought into force with effect from the date of promulgation of the Ordinance and sub-section (2) of . ' section 9 provides that anything done or any action taken under the Ordinance shall be deemed to have been done or taken under the corresponding provisions of the Act and the validity of anything done or any action taken under the Ordinance is therefore required to be judged not with reference to the Ordinance 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 promulgation of the Ordinance and under which the thing or action was deemed to have been done or taken.

It is in these circumstances wholly unnecessary to consider the constitutio,1al validity of the Ordinance, because even if the Ordinance be unconstitutional, the validity of anything done or any action taken under the Ordinance, could still be justified with reference to the provisions of the Act. This would seem to be clear on first principle as a matter of pure construction and no authority is needed in support of it, but if any were needed, it may be found in the decision of this Court in Gujarat Pottery Works v. B. P. Sood, Controller of Mining Leases for India and Ors.

(') There the question was whether the Mining Leases (Modification of Terms) Rules, 1956 (hereinafter referred to as the 1956 Rules) made under Mines and Minerals (Regulation and Development) Act, 1948 (referred to shortly as 1948 Act) were void as being inconsistent with the provisions of the 1948 Act and if they were void, they could be said to be continued by reason of section 29 of the Mines and Minerals (Regulation and Development) Act, 1957 (hereinafter called the 1957 Act). This Court sitting in a Constitution Bench held that the 1956 Rules were not inconsistent with the provisions of the 1948 Act and were therefore valid, but proceeded to observe that even if the 1956 rules were void as being inconsistent with the provisions of the 1949 Act, they must by reason of section 29 of the 1957 Act be deemed to have been made under that Act and (I) R 962 SUPllBM~ COURT REPORTS (1982] I s. c. 11..

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 articulated the reason for taking this view in the following words : "Even if the rules were not consistent with the provisions of the 1948 Act and were therefore void, we do not agree that they could not have continued after the enforcement of the 1957 Act.

Section 29 reads : 'All rules made or purporting to have been made ~ (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 force on the date on which such rules were made and shall continue in force unless and until they are superseded by any rules made under this Act. ' The effect of this section is that the rules which were made or purported to have been made under the 1948 Act in respect of matters for which rules could be made under the 1957 Act would be deemed to have been made 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 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. 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 (XXVII of 1949) shall not affect the previous operation thereof, and subject thereto, anything done or any action taken in the exercise of any power conferred by or under that • 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 significant.

It does not merely provide that the orders passed under the ordinance shall be deemed to be order •• passed under the Act, but it provides that the orders passed under the Ordinance shall be deemed to be orders under this Act as if this Act were in force on the day on which certain things were done or action taken. -- Therefore the object of this section is, as it were, to antedate this Act so as to bring it into force on the day on which a particular order was passed which is being challenged. 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 subsequently passed by Parliament. ' The rules have not been challenged to be ultra vires the 1957 Act in the instant case.

" The same process of reasoning which appealed to this Court in upholding the validity of the 1956 Rules must apply equally in the present case and the validity of anything done or any action taken under the Ordinance must be judged with reference to the provisions of the Act anJ not of the Ordinance. It would therefore be academic for us to consider whether the Ordinance was within the ordinance-making power of the President under Article 123 and ordinarily we would have resisted the temptation of pronouncing on this issue because it is a self-restraining rule of prudence adopted by this Court that "the court will not formulate a rule of constitutional law broader than is required by the precise facts to which it is to be applied. " But since considerable argument was advanced before us in regard to this issue we do not think it would be right on our part to refuse to express our view upon it.

The Ordinance was issued by the President under Article 123 which is the solitary Article in chapter III headed "Legislative Powers of the President. '' This Article provides iner-alia as follows : 123 (I) If at any time, except when both Houses of Parliament are in session, the President is satisfied that circumstances exist which render it necessary for him to take immediate action, he may promulgate such Ordinances as the circumstances appear to him to require. (2) An Ordinance promulgated under this article shall have the same force and effect as an Act of Parliament, hut every such Ordinance :- . ' (a) shall be laid before both Houses of Parliament and shall cease to operate at the expiration of six weeks from the reassembly of Parliament, or, if before the expiration of that period resolutions disapproving it are passed by both Houses, upon the passing of the second of those resolutions : and (b) may be withdrawn at any time by the President.

(3) If and so far as an Ordinance under this article makes any provision which Parliament would not under this Constitution be competent to enact, it shall be void. It will be noticed that under this Article legislature power is con- - ~ ferred on the President exerciseable when both Houses of Parliament are not in session. It is possible that when neither House of Parliament is in session, a situation may be arise which needs to be dealt with immediately and for which there is no adequate provision in the existing law and emergent legislation may be necessary to enable the executive to cope with the situation. What is to be done and how is the problem to be solved in such a case ? Both Houses of Parliament being in recess, no legislation can be immediately undertaken and if the legislation is postponed until the House of Parliament meet damage may be [caused to public weal.

Article 123 therefore confers powers on the President to promulgate a law by issuing an Ordinance to enable the executive to deal with the emergent situation which might well include a situation created by a law being declared void by a Court of law. "Grave public inconvenience would be caused", points out Mr. Seervai in his famous book on Constitutional Law, if on a statute like the Sales-tax Act being declared void, "no machinery existed whereby a valid law could R. K. GARG v. UNION (Bhagwati, J. ) 965 be promulgated to take the place of the law declared void... The President is thus given legislative power to issue an Ordinance and since under our constitutional scheme as authoritatively expounded by this Court in Sharnsher and Anr. v. State of Punjab,(') the President cannot act except in accordance with the aid and advice of his Council of Ministers, it is really the executive which is invested with this legislative power.

Now at first blush it might appear rather unusual and that was the main thrust of the criticism of Mr. R. K. Garg on this point-that the power to make laws should have . ' been entrusted by the founding fathers of the Constitution to the executive, because according to the traditional outfit of a democratic political structure, the legislative power must belong exclusively to the elected representatives of the people and vesting it in the executive, though responsible to the legislature, would be undemocratic, as it might enable the executive to abuse this power by securing tbe passage of an ordinary bill without risking a debate in the legislature. But if we closely analyse this provision and consider it in all its aspects, it does not appear to be so startling, though we may point out even if it were, the Court would have to accept it as the expression of the collective will of the founding fathers. It may be noted, and this was pointed out forcibly by Dr.

Ambedkar while replying to the criticism against the introduction of Article 123 in the Constituent Assembly-that the legislative power confer· red on the President under this Article is not a parallel power of 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 expiration 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 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 (1) [1975] 1 SCR 814. 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 cannot only pass a resolution disapproving the Ordinance but can also pass a vote of no confidence in the executive.

There is in the theory of constitutional law complete control of the legislature over the executive, because if the executive misbehaves or forfeits the ' ' confidence ofthe legislature, it can be thrown out by the legislature. ,. _ Of course this safeguard against misuse or abuse of power by the executive would dwindle in efficacy and value according as if the legislative control over the executive diminishes and the executive begins to dominate the legislature. But nonetheless it is a safeguard which protects the vesting of the legislative power in the President from the charge of being an undemocratic provision. We might profitably quote here the words of one of us (Chandrachud, J, as he then was) in the State of Rajasthan v. Union of India(') where, repelling the contention of the petitioner that the interpretation which the Union of India was inviting the Court to .

t place on Article 356 would impair the future of democracy by enabling the Central Government to supersede a duly elected State Government and to dissolve its legislature without prior approval of Parliament, the learned Judge said-- " ......... there may be situations in which it is imperative to act expeditiously and recourse to the parliamentary process may, by reason of the delay involved, impair rather than strengthen the functioning of democracy. The constitution has therefore provided safety-valves to meet extraordinary situations. They have an imperious garb and a repressive content but they are designed to save, not destroy democracy. The fault, if any, is not in the meeting ol' the ! ' Constitution but in the working of it. " These words provide a complete answer to the criticism of Mr. R. K. Garg. Now once it is accepted that the President has legislative power under Article 123 to promulgate an ordinance and this legis- (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 make laws, it is difficult to see how any limitation can be read into this legislative power of the President so as to make it ineffective to alter or amend tax laws. If Parliament can by enacting legislation alter or amend tax laws, equally can the President do so by issuing an Ordinance under Article 123. There have been, in fact, numerous instances where the President has issued an Ordinance replacing with retrospective effect a tax law declared void by the High Court or this Court. Even offences have been created by Ordinance issued by the President under Article 123 and such offences committed during the life of the Ordinance have been held to be punishable • despite the expiry of the Ordinance. Vide : State of Punjab v.

1 Mohar Singh ( ) lt may also be noted that Clause (2) of Article 123 provides in terms clear and explicit that an Ordinance promulgated under that Article shall have the same force and effect as an Act of Parliament. That there is no qualitative difference between an ordinance issued by the President and an Act passed by Parliament is also emphasized by clause (2) of ! \rticle 367 which provides that any reference in the Constitution to Acts or laws made by Parliament shall be construed as including a reference to an Ordinance made by the President. We do not therefore think there is any substance • in the contention of the petitioner that the President has no power under Article 123 to issue an Ordinance amending or altering the tax laws and that the Ordinance was therefore outside the legislative power of the President under that Article.

• That takes us to the principal question 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 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 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 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. (2) [1979) 2 S. C. R, 476, Court, it is binding upon us.

That decision sets out several propositions delineating the true scope and ambit of Article 14 but not all of them are relevant for our purpose and hence we shall refer only to those which have a direct bearing on the issue before us. They clearly recognise that classification can be made for the purpose of legislation but lay down that : 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 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 distinguishes those that are grouped together from others and (2) that differentia must have a rational relation to the object sought to be achieved by the Act. 2.

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

What is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be "arbitrary, artificial or evasive" but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the legislature. The question to which we must therefore address ourselves 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 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 function 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 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 conceived 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 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 court. should feel more inclined to give judicial deference to legislature 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 : "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 I . 1 n . 1e eg1s ature a ter all has the affirmative responsihility. The courts (I) 354 us 457. 970 SUPREME cotJRt REPORTS [1982! I s. c. il 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 and stability. " The court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent. that ..

laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry" that exact wisdom and nice adaption of remedy are not always possible and that "judgment is largely a prophecy based on meagre and 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 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 1 Refining Company, ( ) be converted into tribunals for relief from such crudities and inequities.

There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great 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 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. (1) 94 Lawyers' Edition 381. R. K. GARG v. UNION (Bhagwati, J. ) 971 With these prefatory observations, we may now proceed to 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 considerable amount of black money in circulation which is unaccounted or concealed and therefore outside the disclosed trading channels. It ' ' is largely the product of black market transactions and evasion of tax. 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. " 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 menance of black money bas now reached such staggering proportions that it is causing havoc to the economy of the country and poses a serious challenge to the fulfilment of our objectives of distributive 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 : (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 for personal purposes; (4) Corrupt business practices such as payments 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 immoral and unethic~l . and does not carry any social stigma. These 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 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 economic 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 inflationary 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 Government by making their implementation ineffective, particularly in the field of credit and investment. Moreover, since black money has 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 ' 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 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 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 l965 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 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 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 Incometax Act 1961 were made more severe and rigorous. Then came the Voluntary Disclosure of Income and Wealth Ordinance 1975 which was followed by an Act in the same terms. This legislation introduced 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 disclosed pursuant to this scheme. But it is an indisputable fact + 9? 4 SUPREME COiJRt REPORTS (1982] l S. C. il.. 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-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 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 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 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 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. 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 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 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 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 subscription to or acquisition of Special Bearer Bonds and totally ignoring it as if it were non-existent, any inquiry or investigation into 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 prosecution 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 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 altogether, such income can be detected, it would be subject to tax. The 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 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 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 granting 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 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 thwarted 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 considerable 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 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, unexplained 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 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 undisclosed income. All these methods and many others "ould still remain available to the tax authorities for detecting undisclosed income 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 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 inquiry and investigation for determining the true taxable income. The only inhibition on the Revenue would be that it would not be 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 this limited immunity is cut down by the provision enacted in subsection (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 Act 1947 or any other similar law. If therefore an inquiry or investigation 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 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 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. 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 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 the immunity granted in respect of subscription to or acquisition of + Special Be~rer Boncls.

This section in its openinll part ~ffirms in 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 assessment 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 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 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 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 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 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 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 possibility of serious abuse to which the issue ofSpecial Bearer Bonds A 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 maturity of such Bonds, that any asset held by him or any sum credited [l in his books of account or otherwise held by him respresents the consideration received by him for the transfer of such Bonds.

This provision precludes a person from explaining away 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 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- 0 deration received by him for transfer of the Special Bearer Bonds, 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 explanation in regard to the nature and source of acquisition of such asset 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 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 disclosed or 'white' money, because he will not be able to account for the consideration received by him, the true explanation being sta· 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 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% 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 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 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 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 Special Bearer Bonds with a view to earning security against discovery of unaccounted money in his hands would ordinarily barter • away that security by again receiving black money for the Special Bearer Bonds.

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

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 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 consideration for sale of spedal bearer bonds. We do not think there is any scope for such abuse; the apprehension expressed by the petitioners is more imaginary than real. It may be noted that in order to sustain his explanation, tile assessee would have to prove to 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 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 reconvert it into black by selling special bearer bonds for black money ? The entire postulate of the argument of the petitioners 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 purchase and if he is unable to do so, the amount of the expenditure would, by reason of section 69C of the Income-tax Act, 1961, be deemed to be his concealed income liable to tax. Even if 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 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. 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 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 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 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 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 between 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 0 and pay wealth tax upon it without earning any interest? It is therefore extremely unlikely that Special Bearer Bonds would remain uncashed after the date of manurity and it would be equally improbable that anyone should want to purchase Special Bearer Bonds after the date of maturity