Territorial source nexus permits taxation of dividends where company profits arise in British India; challenged provisions upheld.

Section 226 of the Government of India Act bars original High Court jurisdiction in ordinary revenue disputes, therefore a suit for refund challenging tax assessment is not maintainable and is to be dismissed. Separately, Section 4(1)(c) and Explanation 3 of the Income-tax Act validly treat dividends as arising from the source of the company's profits where those profits are earned by business in British India; a territorial connection or source-based nexus suffices for taxation and does not render those provisions ultra vires. Operative effect: the impugned statutory provisions are upheld and the High Court decree against the revenue is set aside.

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Issues: (i) Whether a suit for refund challenging an assessment to income-tax and super-tax is maintainable in the High Court under the bar contained in 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) are intra vires the Indian Legislature and validly impose liability to tax dividends received by a non-resident shareholder where the source of profits is in British India.

Issue (i): Whether Section 226 of the Government of India Act, 1935 bars original jurisdiction of the High Court in a matter concerning revenue, thereby rendering the plaintiff's suit for refund not maintainable.

Analysis: Section 226 operates as an absolute bar where a dispute concerns revenue in its ordinary sense, including demands and assessments. The provision is to be given its natural meaning and applied as a demurrer-style plea; the question whether a claim is bona fide one concerning revenue is for determination under the section. Arguments that the validity of the underlying revenue law must first be decided before applying the bar would nullify the statutory prohibition and are not supported by authority.

Conclusion: The suit is not maintainable in the High Court under Section 226 and that bar applies to the present proceedings in favor of the appellant.

Issue (ii): Whether Section 4(1)(c) and Explanation 3 to Section 4(1) of the Indian Income-tax Act, as amended in 1939, are ultra vires for being extra-territorial or otherwise invalid in taxing dividends received by a non-resident shareholder when the underlying profits are derived from business in British India.

Analysis: The statutory language makes assessability depend on income which accrues or arises in British India and Explanation 3 links dividends to profits subjected to tax in British India. Precedent and principle support treating the source of dividend income as the same as the source of the company's profits where those profits are earned by business carried on in the taxing territory. Comparative authorities recognise that a territorial connection or source-based nexus suffices for valid taxation. The constitutional distribution of legislative power in the Government of India Act, 1935, construed against the background of developments concerning extra-territorial legislative competence, authorizes laws "for the whole or any part of British India" and contemplates non sovereign legislature powers subject to the connection implicit in "laws for British India." Practical difficulties of enforcement or partial extra territorial effect are not alone grounds of invalidity where a real connection exists between the taxed item and British India. Consequently, the impugned provisions operate within the legislative competence conferred by the Constitution Act.

Conclusion: Section 4(1)(c) and Explanation 3 to Section 4(1) of the Indian Income-tax Act are intra vires the Indian Legislature and validly apply to the dividends in question; this conclusion is in favour of the appellant (Revenue) and against the respondent (assessee).

Final Conclusion: The appeal is allowed and the decree of the High Court is to be set aside; the impugned provisions of the Income-tax Act are held valid and within legislative power, and the plaintiff's action is to be dismissed.

Ratio Decidendi: Where dividends are paid out of profits earned by companies carrying on business in the taxing territory, the "source" of the dividend corresponds to the source of the company's profits and a legislature empowered to make laws for British India may validly tax such dividend income when a real territorial connection exists between the income and British India.

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