Revenue suit bar and real territorial nexus uphold income-tax provisions for dividends linked to British India profits.

Section 226 of the Government of India Act, 1935 barred the suit because the dispute concerned revenue in its ordinary sense; the validity of the underlying tax did not have to be decided first, and a bona fide challenge to assessment or demand remained within the exclusion. The suit was therefore not maintainable. Section 4(1)(c) and Explanation 3 to Section 4(1) of the Indian Income-tax Act were upheld because dividends paid outside British India were treated as having a real territorial nexus with British India where they were paid out of profits earned there. The impugned provisions were thus intra vires, and the action failed on both maintainability and merits.

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Issues: (i) Whether the suit was barred by Section 226 of the Government of India Act, 1935 as a matter concerning revenue. (ii) Whether Section 4(1)(c) and Explanation 3 to Section 4(1) of the Indian Income-tax Act were ultra vires for alleged extra-territorial operation in taxing dividends paid outside British India.

Issue (i): Whether the suit was barred by Section 226 of the Government of India Act, 1935 as a matter concerning revenue.

Analysis: The bar in Section 226 was treated as absolute where the dispute concerned revenue in its ordinary sense. The validity of the taxing law was held not to be a preliminary question that had to be decided before applying the exclusionary clause. A claim bona fide made under a taxing statute remained a matter concerning revenue, even if the taxpayer challenged the legality of the levy. The Court relied on the broad application of the provision to assessment and demand, not merely to collection.

Conclusion: The suit was barred by Section 226 and was not maintainable.

Issue (ii): Whether Section 4(1)(c) and Explanation 3 to Section 4(1) of the Indian Income-tax Act were ultra vires for alleged extra-territorial operation in taxing dividends paid outside British India.

Analysis: The Court held that dividends declared by companies carrying on business in British India could, in the circumstances of the case, be treated as having a real territorial connection with British India because they were paid out of profits earned there. The source of the dividend income was linked to the profits of the trading companies in British India, so the levy was not truly extra-territorial. In any event, the legislative power under the constitutional scheme was not defeated merely because some territorial element existed outside British India, so long as there was a real nexus with the subject of taxation.

Conclusion: The impugned provisions were valid and intra vires.

Final Conclusion: The respondent's suit failed both on maintainability and on merits, and the decree of the High Court was replaced by a dismissal of the action with costs.

Ratio Decidendi: A taxing provision is within legislative competence if it has a real territorial nexus with the taxable subject, and a revenue suit remains barred by the exclusionary clause even when the validity of the underlying tax is challenged.

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