Territorial nexus sustains income-tax legislation, while bona fide revenue disputes remain barred from original jurisdiction

Section 226 barred original jurisdiction over a bona fide dispute concerning revenue, even though the assessee challenged the legality of the tax levy. The impugned income-tax provisions were upheld as intra vires because the dividend income had a real and sufficient territorial nexus with British India, the profits from which the dividends were declared having been earned there. The Court further held that a subordinate legislature may enact provisions with some extra-territorial effect where the legislation has sufficient connection with the subject-matter entrusted to it.

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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 the impugned provisions of the Indian Income-tax Act were ultra vires for want of territorial competence.

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 concerns revenue in its ordinary sense. The validity of the taxing provision could not be made a condition precedent to the jurisdictional inquiry, for that would render the exclusionary clause ineffective. A bona fide dispute regarding assessment to income-tax and super-tax remained a matter concerning revenue even though the assessee challenged the legality of the levy.

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

Issue (ii): Whether the impugned provisions of the Indian Income-tax Act were ultra vires for want of territorial competence.

Analysis: The challenged provisions were upheld on the footing that the dividends paid by the sterling companies had a real and sufficient territorial connection with British India, because the profits out of which those dividends were declared were earned in British India. The source of the dividend income was therefore not foreign in the relevant legal sense. In addition, the Court held that the Constitution Act did not impose a general prohibition on every form of extra-territorial operation by a subordinate legislature; the question was whether the legislation had a sufficient connection with the subject-matter entrusted to the legislature. On that test, the provisions fell within legislative power.

Conclusion: The impugned provisions were valid and intra vires.

Final Conclusion: The appeal succeeded, the decree of the High Court was set aside, and the suit was dismissed with costs.

Ratio Decidendi: A taxing provision enacted by a subordinate legislature is valid if the law has a real territorial nexus with the subject taxed, and a bona fide dispute over a revenue levy is barred from original jurisdiction notwithstanding a challenge to the validity of the levy itself.

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