Tax reference scope and non-retrospective amendment principles govern whether compensation receipt can be taxed under the proviso.

In a section 66 reference under the Indian Income-tax Act, 1922, the High Court may entertain a contention that falls within the scope of the question referred, even if the precise objection was not separately urged before the Tribunal; a new and unrelated issue cannot be introduced. Applying that principle, the challenge to inclusion of the compensation amount was within the reference. The proviso introduced by the Income-tax (Amendment) Act, 1946 was also held not to operate retrospectively, because it came into force on 4 May 1946 without retrospective language. The compensation receipt therefore could not be taxed under that proviso for the relevant assessment year.

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Issues: (i) whether, in a reference under section 66 of the Indian Income-tax Act, 1922, the High Court could entertain a contention on the applicability of the proviso to section 10(2)(vii) although that precise aspect had not been urged before the Tribunal; and (ii) whether the proviso introduced by the Income-tax (Amendment) Act, 1946 applied retrospectively so as to render the compensation receipt taxable for the assessment year 1946-47.

Issue (i): whether, in a reference under section 66 of the Indian Income-tax Act, 1922, the High Court could entertain a contention on the applicability of the proviso to section 10(2)(vii) although that precise aspect had not been urged before the Tribunal.

Analysis: The reference jurisdiction under section 66 is special and advisory. A question of law arises out of the Tribunal's order when it was raised before the Tribunal and dealt with by it, or when it was raised but not expressly dealt with and must be deemed to have been dealt with, or when the Tribunal itself dealt with it. A contention may be advanced before the High Court if it falls within the framework of the specific question referred and does not enlarge the reference into a new and unasked issue. On the facts, the question whether the compensation amount was properly included in the total income was wide enough to include the objection that the taxing provision itself was inapplicable.

Conclusion: The contention was within the scope of the reference and could be entertained by the High Court, in favour of the assessee.

Issue (ii): whether the proviso introduced by the Income-tax (Amendment) Act, 1946 applied retrospectively so as to render the compensation receipt taxable for the assessment year 1946-47.

Analysis: The proviso was brought into force on 4 May 1946 and, in terms, did not operate retrospectively. The receipt sought to be taxed could not be subjected to the proviso by treating the amendment as effective from 1 April 1946 when no such retrospective language was enacted. The compensation was otherwise a capital receipt and became taxable only if the proviso applied.

Conclusion: The proviso did not apply retrospectively and the amount was not taxable under it, in favour of the assessee.

Final Conclusion: The appeal failed because the High Court was right in entertaining the contention within the reference and in holding that the amending proviso could not be applied to tax the compensation receipt for the relevant assessment year.

Ratio Decidendi: In a tax reference under section 66 of the Indian Income-tax Act, 1922, the High Court may entertain a contention that falls within the question referred, but a new and unrelated question cannot be raised for the first time; a taxing amendment will not be applied retrospectively unless the statute clearly so provides.

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