Private state agreements cannot override tax law; assessable income stays taxable, and statutory exemption requires compliance with prescribed procedure.

A private agreement with the State does not, by itself, create a statutory exemption from income-tax or operate as a notification under the Income-tax Act, 1922 unless the prescribed statutory mode is followed, including competent governmental action and Gazette publication where required. The text also distinguishes assessability of income from actual recovery of tax: profits may remain assessable even if tax collection is deferred or waived by agreement. It further notes that exemption for dividend-related tax provisions depends on the income falling within the relevant exempt category, and a mistaken sub-section citation does not necessarily defeat recovery if the substantive liability otherwise exists.

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Issues: (i) whether a private agreement with the State could be treated as exempting the company's income from assessment or as a notification under the Income-tax Act, 1922; (ii) whether Section 23A could be applied where the company's profits were assessable but, by agreement, tax was not recovered; (iii) whether the company was liable under Sections 18(3A), 18(3C) and 18(7) in respect of tax not deducted from dividends paid to non-resident shareholders.

Issue (i): whether a private agreement with the State could be treated as exempting the company's income from assessment or as a notification under the Income-tax Act, 1922.

Analysis: The agreement was treated only as an executive arrangement by which the State agreed not to recover tax for a period and thereafter at a specified rate. It was not regarded as a legislative exemption comparable to the exemptions in Section 4(3), nor as a notification issued under Section 60. A notification under Section 60 required action by the competent Government and publication in the Gazette, which was absent.

Conclusion: The agreement did not create a statutory exemption and could not be treated as a notification under Section 60.

Issue (ii): whether Section 23A could be applied where the company's profits were assessable but, by agreement, tax was not recovered.

Analysis: Assessability of income and liability to pay tax were treated as distinct concepts. The company's profits remained assessable income notwithstanding the State's agreement not to collect tax. As no dividend had been distributed, the conditions for Section 23A were satisfied.

Conclusion: Section 23A validly applied and the order made under it was upheld.

Issue (iii): whether the company was liable under Sections 18(3A), 18(3C) and 18(7) in respect of tax not deducted from dividends paid to non-resident shareholders.

Analysis: The court held that exemption attached only where the income fell within Section 4(3). Since the company's income was not exempt income, its character did not change merely because it was later distributed as dividends. The mistaken citation of one sub-section instead of another was treated as a procedural defect that did not vitiate the demand. The company could therefore be treated as an assessee for recovery of the tax not deducted.

Conclusion: The liability under Sections 18(3A), 18(3C) and 18(7) was sustained.

Final Conclusion: The challenged income-tax orders were held to be valid, the references were answered in a manner adverse to the assessee, and the assessee was directed to bear the costs.

Ratio Decidendi: A private agreement by a State cannot override the provisions of a taxing statute or operate as a statutory exemption unless the statute's prescribed mode of exemption is complied with; assessable income remains taxable for statutory purposes even if tax is not recovered by reason of a separate agreement.

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