Deemed company taxation of a State-owned bank: business income and related receipts remained taxable in British India.

The commentary explains that the Government Trading Taxation Act, 1926 was treated as within the legislative competence of the Government of India and capable of applying to a protected State carrying on business. It describes the Patiala State Bank as being assessed on the footing of a deemed company under the Indian Income-tax Act, 1922, with income accruing or arising in British India remaining taxable despite the State-owned character of the concern. It also notes that investment income, receipts from property taken over in satisfaction of debt, and profits on sale of investments were treated as business-related taxable receipts.

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Issues: (i) whether the Government Trading Taxation Act, 1926 was within the legislative competence of the Government of India and validly applied to a protected State carrying on business; (ii) whether the Patiala State Bank, as a State-owned banking concern, was liable to be assessed to income-tax under that Act and the Indian Income-tax Act, 1922; (iii) whether income from investments, property taken over in satisfaction of a debt, and profits on sale of investments formed taxable income of the bank.

Issue (i): whether the Government Trading Taxation Act, 1926 was within the legislative competence of the Government of India and validly applied to a protected State carrying on business

Analysis: The Act was construed as a measure making a Government of a protected Dominion, when carrying on trade or business, liable to Indian income-tax in the same manner and to the same extent as a company. The territorial power under Section 65 of the Government of India Act, 1919 was held wide enough to sustain legislation dealing with income accruing or arising in British India, even though the taxpayer was a Government outside British India. The Patiala State was treated as a territory under His Majesty's protection and therefore within the class described by the Act.

Conclusion: The Act was held to be intra vires and applicable to the Patiala State Bank.

Issue (ii): whether the Patiala State Bank, as a State-owned banking concern, was liable to be assessed to income-tax under that Act and the Indian Income-tax Act, 1922

Analysis: The statutory scheme deemed the relevant Government to be a company for levy and collection under the Indian Income-tax Act, 1922. The charging provisions made income, profits and gains of a company taxable where they accrued, arose, or were received in British India. On that basis, the bank's income connected with its business was assessable as income of a deemed company. The arguments based on special machinery for assessment did not defeat the substantive liability once the return had in fact been made.

Conclusion: The bank was liable to assessment under the Act.

Issue (iii): whether income from investments, property taken over in satisfaction of a debt, and profits on sale of investments formed taxable income of the bank

Analysis: Interest or income from securities invested out of surplus funds was treated as profits arising from the banking business and taxable in British India. Property taken over against a bad debt was not treated as property occupied in British India for the purposes of the business, but the income arising from that property was still income connected with the business and therefore taxable. Profits realised on the sale of investments were accepted on the facts found as part of the bank's profits.

Conclusion: These receipts were held to be taxable income.

Final Conclusion: The reference was answered against the assessee and the assessments were upheld, with costs awarded to be recovered from the assets of the Patiala State Bank.

Ratio Decidendi: A law enacted within territorial legislative competence may validly treat a protected State carrying on trading operations as a deemed company for income-tax purposes, and income accruing or arising in British India from such operations remains taxable notwithstanding the sovereign character of the owner.

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