Bar on High Court original jurisdiction in revenue matters affirmed; extraterritorial dividend taxation upheld as within legislative competence.

Section 226 of the Government of India Act, 1935 operates as an absolute bar on High Court original jurisdiction in disputes concerning revenue, and preliminary pleas under that provision need not await merits determination, resulting in dismissal of the suit on jurisdictional grounds. Separately, amendments taxing dividends to non-resident shareholders were held intra vires: the dividends were sourced from profits of companies carrying on business in British India and Explanation 3 links assessability to profits subjected to tax in British India, so any extraterritorial elements fell within the Federal Legislature's competence, validating the challenged provisions.

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Issues: (i) Whether the suit was maintainable in the High Court in original jurisdiction in view of Section 226 of the Government of India Act, 1935; (ii) Whether Section 4(1)(c) and Explanation 3 to Section 4(1) of the Indian Income-tax Act (1939 amendments) insofar as they seek to tax dividends received by a non-resident shareholder are ultra vires the legislative powers of the Indian Legislature.

Issue (i): Whether Section 226 bars the High Court's original jurisdiction in this suit concerning assessment and revenue.

Analysis: The Court examined the plain wording and purpose of Section 226, the historical authorities on its scope (including Spooner v. Juddow), and prior High Court decisions. The Court rejected the view that the legality of the revenue law must first be determined on the merits before applying Section 226, holding that the provision operates as an absolute bar where the dispute concerns revenue in its ordinary sense. The Court observed that treating preliminary pleas under Section 226 as dependent on merits would render the bar ineffective.

Conclusion: The Court held that Section 226 applies to matters concerning revenue and that the suit, being within that description, was barred - conclusion in favour of the appellant.

Issue (ii): Whether the impugned provisions of Section 4(1)(c) and Explanation 3 to Section 4(1) of the Indian Income-tax Act operate extra-territorially and, if so, whether such operation renders them ultra vires the Indian Legislature.

Analysis: The Court considered the statutory language, the 1939 amendments, and authorities on the concept of the source of income, including leading English and Australian decisions. It held that dividends paid to the plaintiff derived their source from profits earned by companies carrying on business in British India and that the qualifying language in Explanation 3 ties assessability to profits subjected to income-tax in British India. The Court addressed arguments about extra-territorial operation, distinguishing sovereign and subordinate legislatures, and interpreted Sections 99 and related provisions of the Government of India Act, 1935, to permit the Federal Legislature to legislate for matters having a sufficient connection with British India. The Court concluded that any extraterritorial elements present were within legislative competence and that the provisions were not invalid on that ground.

Conclusion: The Court held the impugned provisions to be intra vires the Indian Legislature - conclusion in favour of the appellant.

Final Conclusion: The appeal is allowed; the decree of the High Court declaring the specified words void is set aside and substituted by a decree dismissing the suit, affirming the legislative validity of the challenged provisions and the applicability of Section 226 as a bar in revenue matters.

Ratio Decidendi: A statute which taxes income linked by a real and pertinent connection to activities or profits within British India is within the legislative competence of the Indian Legislature; moreover Section 226 of the Government of India Act, 1935 bars High Court original jurisdiction in matters concerning revenue, and preliminary pleas under that section need not await decision on the merits.

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