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Issues: (i) Whether the tax on capital gains introduced by the Indian Income-tax (Amendment) Act, 1947 was a tax on income within Entry 54 of List I of the Seventh Schedule to the Government of India Act, 1935. (ii) Whether, if the enactment exceeded the power conferred by Entry 55, the invalid portion was severable so that the measure could still stand at least in relation to individuals and companies.
Issue (i): Whether the tax on capital gains introduced by the Indian Income-tax (Amendment) Act, 1947 was a tax on income within Entry 54 of List I of the Seventh Schedule to the Government of India Act, 1935.
Analysis: The capital gains provision charged tax on profits arising from sale, exchange or transfer of a capital asset and computed the gain after allowing deductions, including cost. One view treated this as a tax on capital accretion rather than income, while the other treated realised capital gains as income in the widest sense. The competing approaches turned on the scope of the words "taxes on income" in the legislative list and whether those words should be confined by English legislative practice or read broadly enough to include realised gains on the disposal of capital assets.
Conclusion: The tax on capital gains fell within Entry 54 as a tax on income, and the enactment was intra vires.
Issue (ii): Whether, if the enactment exceeded the power conferred by Entry 55, the invalid portion was severable so that the measure could still stand at least in relation to individuals and companies.
Analysis: Even assuming that the tax extended beyond the classes mentioned in Entry 55, the Court applied the severability principle and asked whether the valid part could independently survive without the ultra vires part. The legislation could operate on individuals and companies even if it could not validly extend to other assessees, and the valid portion was not inextricably bound up with the invalid portion.
Conclusion: The impugned provision was, at the least, severable and valid as applied to individuals and companies.
Final Conclusion: The constitutional challenge to the capital gains charge failed, and the legislative competence of the taxing provision was upheld.
Ratio Decidendi: A realised capital gain on the sale, exchange or transfer of a capital asset can fall within "taxes on income" when the legislative entry is construed broadly, and a taxing enactment remains valid to the extent that the constitutionally authorised portion is severable from any invalid excess.
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