The court held the view that it was preferable to defer economic policy decisions to the judgment of the legislature. The Serum Institute of India (SII) had filed a lawsuit challenging the amendments made to the 2015 Finance Act, which introduced sub-clause (xviii) to Section 2(24), defining taxable “income.” However, the recent decision by the Bombay High Court dismissed this lawsuit.
On December 4, a division bench consisting of Justices KR Shriram and Neela Gokhale upheld the legality of the amendment while expressing the opinion that courts should refrain from becoming involved in disputes related to economic policy.
The court emphasized the importance of deferring economic policy decisions to the legislature’s judgment, especially given the complexities of a dynamic economic landscape. It clarified that the court would only intervene in matters of economic legislation if it was absolutely impossible to adopt the position expressed in the law, and the petitioner’s case did not fall under this exception. The amended clause, effective from 2016, included any payments made by the Central or State governments, such as subsidies, grants, incentives, exemptions, concessions, reimbursements, etc., in the taxable income of the assessee.
The court rejected SII’s argument because it found no evidence to suggest that this amendment was unreasonable. It stated, “We are unable to determine, much less presume, that the legislature’s actions in inserting the contested subclause were unreasonable. There is no room for doubt. In our opinion, the petitioner has failed to demonstrate a clear violation of constitutional principles, and there is no reason to question its constitutionality.”
The Serum Institute had previously sought benefits under the State of Maharashtra’s “Package Scheme of Incentives of 2013,” which included benefits such as reduced stamp duty, exemption from electricity duty, and VAT/CST/SGST subsidy. The vaccine producer contested the change to the Finance Act, arguing that subclause (xviii) of Section (24) had an unintentional retrospective application after the Finance Act was amended to include such incentives as taxable income. SII pointed out that this clause was absent when the Maharashtra government unveiled its 2013 plan.
Additionally, SII argued that the Constitution prohibited the Central government from indirectly taxing the State’s revenue through the taxation of incentives. SII further emphasized that the modified Finance Act considered any government incentives, regardless of whether they were revenue or capital receipts, as income. It pointed out that capital receipts were not previously subject to taxation, and various courts, including the Supreme Court, had ruled that capital subsidies were not subject to income tax, making the taxation of capital receipts unconstitutional.
In response, the central government asserted that only Parliament had the authority to enact legislation on subjects listed in List 1 of the Seventh Schedule of the Constitution, including income tax laws. It urged the court to recognize that, in matters related to social and economic policy, it should defer to legislative judgment and refrain from interference unless the exercise of parliamentary judgment was manifestly arbitrary.
The court concluded that the primary authority for designing budgetary and economic policies rested with the legislative and executive branches, and it found merit in the Central government’s arguments. It stated, “The judiciary’s role is limited to ensuring adherence to the Constitution, without delving into the merits of the policy. Overturning fiscal statutes could destabilize the economy and undermine parliamentary authority. Courts must carefully weigh the imperative of upholding constitutional requirements against the real-world consequences of interfering in legislative decisions concerning fiscal matters.” The court then rejected SII’s appeal, emphasizing that courts have the authority to strike down but not to reconstruct.
