Foreign dividend taxation on non-residents failed where income neither arose nor was received within British India.

A non-resident shareholder was not chargeable on dividends declared, paid and received in England by sterling companies, because the income did not in fact accrue or arise in British India and the statutory deeming rule could not extend the tax territorially. The civil suit challenging the levy was not barred by the Income-tax Act's remedial machinery or exclusion clause, since those provisions did not cover a challenge to the constitutional validity of the charging provision itself. Section 226 of the Government of India Act, 1935 did not exclude original jurisdiction, because an unlawful exaction is not revenue. Explanation (3) to Section 4(1)(c) was therefore ultra vires and ineffective against foreign dividend income.

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Issues: (i) whether dividends declared and paid in England by sterling companies could be treated as income accruing or arising in British India to a non-resident shareholder; (ii) whether the suit was barred by the remedial machinery and exclusion clause in the Indian Income-tax Act, 1922; (iii) whether Section 226 of the Government of India Act, 1935 barred the High Court's original jurisdiction because the claim concerned revenue; and (iv) whether Explanation (3) to Section 4(1)(c) of the Indian Income-tax Act, 1922 was ultra vires the Indian Legislature.

Issue (i): whether dividends declared and paid in England by sterling companies could be treated as income accruing or arising in British India to a non-resident shareholder.

Analysis: The dividends were declared in England, paid in England, and received in England. The sterling companies were incorporated in England, were centrally managed there, and their share registers were kept there. The Court held that, apart from the statutory deeming provision, the income represented by those dividends arose at the situs of the shares and the source fund, which on the facts was outside British India.

Conclusion: The dividends did not in fact accrue or arise in British India, and the assessee was entitled to challenge the deeming provision.

Issue (ii): whether the suit was barred by the remedial machinery and exclusion clause in the Indian Income-tax Act, 1922.

Analysis: The statutory appeal and reference scheme enabled an assessee to dispute an assessment made under the Act, but it did not provide a forum for challenging the constitutional validity of the charging provision itself. A challenge that the assessment was unauthorised because the statutory provision was ultra vires lay outside the scope of the appellate and reference machinery. The exclusion clause in Section 67 was likewise confined to assessments made under valid law and did not extend to a suit asserting that the levy itself was beyond legislative power.

Conclusion: The suit was not barred by the procedural or exclusion provisions of the Income-tax Act.

Issue (iii): whether Section 226 of the Government of India Act, 1935 barred the High Court's original jurisdiction because the claim concerned revenue.

Analysis: The bar in Section 226 was held to operate only in relation to legal revenue, not to an exaction imposed without authority of law. The Court determined that it had to decide the validity of the impugned levy in order to decide whether the amount demanded was revenue at all. On the majority view, once the impugned provision was found ultra vires, the demand ceased to be revenue within the meaning of Section 226 and the original jurisdiction of the Court was not excluded.

Conclusion: Section 226 did not bar the suit.

Issue (iv): whether Explanation (3) to Section 4(1)(c) of the Indian Income-tax Act, 1922 was ultra vires the Indian Legislature.

Analysis: The impugned Explanation sought to tax a non-resident on dividends declared and paid abroad by foreign companies, even though the income had neither arisen nor been received in British India. The legislative competence conferred by Sections 99 and 100 of the Government of India Act, 1935, read with the Seventh Schedule, did not authorise such extra-territorial taxation in the absence of express or necessarily implied power. The Court held that the provision exceeded the territorial limits of the Indian Legislature.

Conclusion: Explanation (3) to Section 4(1)(c) was ultra vires and of no legal effect insofar as it applied to the non-resident assessee's foreign dividend income.

Final Conclusion: The levy on the sterling-company dividends was held unconstitutional, the suit was maintainable, and the assessee was entitled to declaration and refund with interest.

Ratio Decidendi: A subordinate legislature cannot, unless expressly or by necessary implication authorised, impose a tax on non-resident persons in respect of foreign income that neither arose nor was received within its territorial jurisdiction; an exaction imposed under such ultra vires law is not "revenue" for the purpose of a jurisdictional bar excluding civil suits.

Dissenting Opinion: Lodge, J. agreed that the dividend income was separately assessable and that the statutory remedy did not bar a challenge to ultra vires legislation, but held that Section 226 of the Government of India Act, 1935 barred the High Court's original jurisdiction because the claim concerned revenue. On that view, the plaint should have been returned for presentation to the proper court.

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