TaxTMI 
TaxTMI 
1948 (11) TMI 7
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.... :- " 2. (1) Where a trade or business of any kind is carried on by or on behalf of the Government of any part of His Majesty's Dominions, exclusive of British India, that Government shall, in respect of the trade or business and of all operations connected therewith, all property occupied in British India and all goods owned in British India for the purposes thereof, and all income arising in connection therewith, be liable- (a) to taxation under the Indian Income-tax Act, 1922, in the same manner and to the same extent as in the like case a company would be liable ; (b) to all other taxation for the time being in force in British India in the same manner as in the like case any other person would be liable. (2) For the purposes of the levy and collection of income-tax under the Indian Income-tax Act, 1922, in accordance with the provisions of sub-section (1), any Government to which that sub-section applies shall be deemed to be a company within the meaning of that Act, and the provisions of that Act shall apply accordingly. " The Ma....
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....II of 1926). (3) Whether the income derived from the property situated in Bombay and other places in British India purchased by the Durbar at execution sales in enforcement of mortgage decrees against mortgagors who had failed to pay the amounts advanced to them in course of the money-lending business of the Durbar, is income arising in connection with the said business within the meaning of Section 2 of the Government Trading Taxation Act and whether the income arising from such property is liable to assessment under the provisions of the Indian Incometax Act read with the Government Trading Taxation Act (III of 1926). (4) Whether the dividend of Rs. 1,88,030 received by the Durbar from the Sir Shapurji Bharucha Mills Ltd. is taxable in the circumstances of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (III of 1926). (5) Whether the dividend of Rs. 83,447 received by the Durbar from the C. P. Cement Co. Ltd. is taxable in the circums....
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....which alone was the basis for taxing the Durbar. I am unable to accept these contentions. I see no justification for reading the words " in British India " after the words " all income arising . . . . . . " in Section 2(1) of the Government Trading Taxation Act. A similar contention, to read the same words after " trade or business " in the same section, was rejected by the Judicial Committee in Patiala State Bank v. Commissioner of Income-tax, Bombay (1). Sections 2(1) (a) and (b) of the Trading Act clearly show that once the income was shown to have arisen in respect of the trade or business and any operation connected therewith, the same was to be treated as if it was the income of a company and liable to be taxed in the same manner and to the same extent as a company in like circumstances would be liable to be taxed under the Indian Income-tax Act. As held in the Patiala Bank case ([1943] 11 I. T. R. 617), it was not necessary that the trading or business should be in British India. It is sufficient if the State is trading or doing business. To the limited extent mentioned in Section 2 of the Government Trading Taxation Act, such trading States are to be considered a company fo....
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....d ultra vires the Indian Legislature. It is found that the Gwalior Durbar has been carrying on a large trading and money-lending business in British India and has in fact very substantial income accruing therefrom in British India. If the Durbar having such activities gives a loan at interest outside British India, on the mortgage of debentures which cover property in British India, and the amount of such loan is brought into British India, the question is whether the interest on the loan should be considered income deemed to have accrued to the Durbar in British India. The Appellate Assistant Commissioner has found that this loan was a part of the operations of the Durbar connected with its money-lending business. That finding is relevant to be considered in deciding the question before us. I do not propose to discuss in abstract the question which may arise in respect of a complete foreigner having an isolated transaction of loan in a foreign country and receiving interest on the loan in a foreign country and in respect of property which is not situate within India. The question has to be answered on the facts found in the present case and my opinion and conclusion are on those f....
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.... Provident Society ((1934) 50 Com. L. R. 581, at p. 600), Dixon, J., said :-" So long as the statute selected some fact or circumstance which provided some relation or connection with New South Wales and adopted this as the ground of its interference, the validity of an enactment would not be open to challenge. " In the Broken Hill South case ((1937) 56 Com. L. R. 337), Latham, C. J., said that the case was perhaps an extreme one but at page 361 he accepted in any event the observation of Rich, J., in his dissenting judgment in the above case to the following effect :-" I do not deny that once any connection with New South Wales appears, the Legislature of that State may make that connection the occasion or subject of the imposition of a liability. " But he added :-" The connection with New South Wales must be a real one and the liability sought to be imposed must be pertinent to that connection. " Dixon, J., in the same case at page 375 observed :- " If a connection exists, it is for the Legislature to decide how far it should go in the exercise of its powers. As in other matters of jurisdiction or authority, Courts must be exact in distinguishing between ascertaining that the ....
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....he Commissioner of Income-tax has found that as the money lent was brought by the company into British India, the income therefrom is deemed to accrue or arise in British India by virtue of Section 42(1) of the Indian Income-tax Act. Evidently he has relied on the fourth sub-head of Section 42 for his conclusion. The exact words used in the section are " arising from any money lent at interest and brought into British India in cash or in kind. " (The italics are mine). In my opinion it is proper to read this as one head and as indicating one composite transaction. The interest must be the result of the loan of money and the money must be brought into British India in cash or in kind. Reading it in that way, the incident of bringing the money into British India in cash or in kind to the knowledge of the lender and borrower is an integral part of the transaction. After the money is brought into India, how it is used by the borrower, to my mind, is an irrelevant question. The short question to be decided is whether income arising out of a transaction with these incidents establishes some real territorial connection between the person and British India or not. In my opinion the answer ....
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....at the legislation in question is ultra vires. As mentioned above, the aspect of it affecting persons who are beyond the jurisdiction of the municipal Courts cannot be considered sufficient for the Court to hold it ultra vires. The municipal Courts are bound to enforce the law. Whether after obtaining the opinion or decree the same is enforceable against the other side or not, is not a matter for the Court's consideration. The Court has only to see that the legislation is within the ambit of the powers of the Legislature. In this connection Spens, C. J., in his judgment in Raleigh's case ([1944] F. C. R. 229 ; 12 I. T. R. 265) pointed out that Section 99 of the Government of India Act, 1935, was deliberately couched in language different from that employed in Section 65 of the earlier Act of 1915 and that sub-section (1) of Section 99 did not in terms exclude extra-territorial legislation nor did sub-section (2) specify exhaustively the subjects upon which such legislation was permissible. In Wallace Bros. Co. Ltd. v. Commissioner of Income-tax, Bombay City and Bombay Suburban District ([1948] F. C. R. 1 ; 16 I. T. R. 240), their Lordships of the Judicial Committee observed that th....
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....on of the original one. Under the first of those agreements Mr. Dinshaw was to be paid in his name a two annas commission, while under the second agreement F. E. Dinshaw Ltd. was to be paid another two annas commission. The first two annas was the reduced share of the Gwalior Durbar in the agency commission. In the accounting year, the appellant received from the executors of Mr. Dinshaw on account of this two annas share of commission a sum of Rs. 3,57,112. It is admitted that the sum was paid to the appellant as the agent of the Gwalior Durbar in British India. On behalf of the appellant, different grounds on which the sum was paid to the appellant were urged at different times. Before us the only ground urged was that this sum was paid by the executors of Mr. Dinshaw to the appellant, not as income arising out of the trade or business of the Durbar but as compensation for breach of duty on the part of Mr. Dinshaw to lend money to the Tata Iron and Steel Co. Ltd. Reading the three agreements of 1924 and 1927 together it is clear that the effect of the second set of two agreements was to reduce the original commission of Gwalior Durbar from four annas to two annas, and the righ....
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....hat is not done, the income of these properties does not come under the Government Trading Taxation Act and the Durbar is not liable. Under the circumstances of this case, I am unable to accept the view of the High Court that the burden of proof is on the Durbar to establish that the properties had been taken out of the money-lending business. In the absence of a finding by the Commissioner that these properties form part of the trading assets of the Durbar the assessment cannot be upheld, and the answer of the Court should be that the Durbar is not liable in respect of the income of these properties for the year of assessment. This answer is obviously limited to the evidence adduced in this year and does not lead to any conclusion in respect of future years. The conclusion is based on the absence of a finding of fact, rather than on the existence of definite evidence one way or the other. As regards questions four and five, the Commissioner has come to the conclusion that the shares and debentures continued to be the trading assets of the Durbar. In this connection he relied particularly on the claim made on behalf of the Durbar for business losses when the Durbar took up 75,21....
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....ctions 3 and 4 of the Income-tax Act and there would be no justification to exclude the State generally from liability to tax. I agree with the line of reasoning adopted by the High Court for its conclusion on this question, and the answer to the question must therefore be against the Durbar. The result is that except for the variation in answer to question (3), the appeal fails and is dismissed, the appellant to pay three-fourths of the costs of the appeal of the respondent. FAZL ALI, J.- I have nothing to add to what my Lord the Chief Justice has said on questions (2) to (6), but I wish to express as briefly as I can my own views on question (1). That question has been framed in these words :- " Whether in the circumstances of this case the interest of Rs. 2,59,726 received by the Durbar on the loan advanced to the Provident Investment Co. Ltd. is assessable under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (III of 1926). " On the question so framed, we are not called upon to express an opinion on any abstract point of law dissociated from the facts of the partic....
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....t, who delivered the leading judgment in the present case when it was before that High Court, after reciting the facts of the case, has referred to the crucial finding in these words : " In addition to these facts, there is the further finding of fact, that this loan of Rs. 50 lakhs formed part of the operations connected with the money-lending business of the Durbar. So that it comes to this, that the income belonged to or was connected with the Gwalior Durbar's money-lending business in British India, but accrued or arose to it outside British India. " It may be stated here that it has been admitted throughout the proceedings that the Gwalior Durbar has been carrying on money-lending business in British India through its agent, Mr. Wadia. That fact was stated in ground (5) of the memorandum of appeal to the Assistant Commissioner, and it is also stated in the order of the Assistant Commissioner. The point which was raised before the Appellate Assistant Commissioner was that the loan in question was a stray casual transaction and did not constitute or was not part of any money-lending business. This contention however was negatived, and the Assistant Commissioner found that " t....
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.... connected with the Gwalior Durbar's money-lending business in British India. " Then, dealing with the question of ultra vires, which was raised on behalf of the appellant in the High Court, he further stated : " But in my opinion this is not so far, as long as there is a residential or business connection with British India, no question of the law being extra-territorial can arise. There is a territorial connection in this case through the nexus of the Gwalior Durbar's moneylending business carried on in British India. " Again, after referring to certain observations of Dixon, J., in an Australian case, he added :-" That is to say, if a person is deriving income from a business carried on in a country, he has a sufficient territorial connection with that country to prevent a law imposing tax upon him being regarded as extra-territorial. " He then referred to the contention put forward on behalf of the Income-tax department in these words :-" Mr. Setalvad contends that inasmuch as the whole basis of the liability to tax under the impugned sub-section is based on the bulk of the assessee's income arising in British India, the sub-section would not fall within an express prohibition ....
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....ich deals with income accruing directly or indirectly through a business connection in British India, seems to me to rest on foundations which are well laid in the proceedings prior to the appeal to the High Court. As I have already stated, it clearly arose before the Appellate Assistant Commissioner, and also commended itself to the learned Chief Justice, if my reading of his judgment is correct. It is in my opinion not a new point, and there is no question of springing a surprise upon the appellant, because the appellant, being aware of this aspect of the case, tried to contend before the Appellate Assistant Commissioner that the loan with which we are concerned was a solitary transaction, having no connection with his money-lending business. Sir Jamshedji Kanga, who appeared for the assessee, stated in the course of his arguments, that if the decision of the case is rested on the first part of Section 42, i.e., if the interest to be taxed is held to be income, profit or gain accruing directly or indirectly through or from any business connection of the assessee in British India, then the question of ultra vires would not arise in regard to the Government Trading Taxation Act, an....
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....red to in Section 2(1) shall be liable, under the provisions of the Indian Income-tax Act, to taxation, in the same manner and to the same extent as in the like case a company would be liable. Therefore, a foreign Government is placed on the same footing as a company. A company may be liable to taxation in respect of income arising in British India as well as income which is deemed to arise in British India. Therefore, the effect of Section 2(1)(a) is to make a foreign Government liable also in respect of income which is deemed to arise in British India. The other argument, which seems to be a more serious one, is that the new words introduced in Section 42 in the year 1939, which stretch the section to cover all income, profits or gains from any money lent at interest and brought into British India in cash or in kind, do not establish such a nexus or territorial connection between the taxing State and the assessee as to give jurisdiction to the Indian Government to tax a foreigner or a foreign Government. This argument was advanced in a very complicated and somewhat obscure form before the High Court, as will appear from a perusal of the judgments of the learned Chief Justice a....
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....ifferent channels. If the principle that some kind of tangible or intelligible nexus or territorial connection between the taxing State and the assessee is necessary in order to confer jurisdiction on the State to tax the assessee is of any importance, that principle seems to have not received adequate consideration in framing the new clause. I do not wish to pursue the matter further, because, in my opinion, the earlier part of Section 42 is sufficient to cover this case. In my judgment the High Court has rightly answered the first question in the affirmative. PATANJALI SASTRI, J.- As I agree with my learned brothers with regard to the answers which they propose to make to questions Nos. 2 to 6, I do not think it necessary to encumber this judgment with a restatement of the facts giving rise to this reference, I will accordingly refer to them only so far as it is necessary to make intelligible what I have to say on question No. 1, as to which I have reached a different conclusion. That question is "whether in the circumstances of this case the interest of Rs. 2,59,726 received by the Durbar (i.e., the Government of Gwalior or the appellant herein) on the loan advanced to ....
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....e purposes of its business. One of the terms of the loan was that interest on the money was to be paid to the Durbar in Gwalior. The sum of Rs. 2,59,726 was accordingly received in Gwalior as interest accrued due in the previous year, that is, the year ended 31^st March, 1939. It appears that there were also other loans advanced to the company on which a sum of Rs. 61,300 was paid as interest in the same year, but the number and extent of such loans and the circumstances in which they were advanced have not been stated because, presumably, no objection was taken to the assessment of that sum. The question having been framed, as already stated, in vague terms, the learned Advocate-General of India sought to justify the assessment of the sum in question on various grounds. At one stage it was suggested that, on the finding of the Income-tax authorities that the Durbar was carrying on money-lending business through its agents in British India and that the loan of Rs. 50 lakhs to the company was " a part of their business or an operation connected with that business, " the interest in question accrued or arose in British India and was therefore properly assessed. This suggestion is ....
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.... Indian Income-tax Act. " In such circumstances, the respondent cannot, in my opinion, now seek to sustain the assessment on the ground of the supposed existence of a business connection between the Durbar and the borrowing company, as to which, the facts have not been fully investigated nor any clear and definite finding made by the Income-tax authorities. It is significant that while both the Commissioner of Income-tax in his statement of the case and the Appellate Assistant Commissioner in his order on appeal are at pains to show that the loan advanced to the company was part of operations connected with the money-lending business of the Durbar in order to bring the case within the Government Trading Taxation Act, 1926, neither of them uses the expression " business connection " with which they were perfectly familiar. It is clear to my mind that they did not purport to tax the sum of Rs. 2,59,726 received from the company as having arisen through or from a business connection in British India, though possibly on the facts before them the assessment could have been sustained on that ground. As I read the letter of reference and the Appellate Assistant Commissioner's order, there....
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.... or arise or are received in British India. " Relying on this passage and the words " all income arising in connection therewith " in Section 2 (1) of the Government Trading Taxation Act, 1926, learned counsel for the appellant contended that a Dominion Government carrying on business in and outside British India cannot be made liable for the income, profits and gains which do not actually accrue or arise or are received in British India but are to be " deemed to accrue or arise or to be received " in British India. I do not think the decision of the Privy Council referred to above is an authority for this proposition. The income in dispute in that case admittedly arose in British India and no question arose as to the liability to tax of income which did not actually accrue or arise, but was to be deemed to accrue or arise, in British India by virtue of the provisions of the Indian Income-tax Act, 1922. The only question was whether Section 2 of the Government Trading Taxation Act, 1926, applied to the business of the bank although it was carried on exclusively in the State of Patiala. In the passage quoted above, their Lordships were merely emphasising that although the language u....
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....s it stood when the Government Trading Taxation Act, 1926, was passed, and should not be widened by subsequent amendments to the Incometax Act, more especially as Dominion Governments were not within the scope of Indian legislation, but were brought under the charge to income-tax as a result of agreement among the States concerned. I see no force in this argument. The reference to the Indian Income-tax Act, 1922, in Section 2 of the Government Trading Taxation Act, 1926, must be taken to refer to the Indian Income-tax Act, 1922, as it stands amended at the time when the tax is sought to be imposed, that is to say, in the year ended 31st March, 1940, which is the year of assessment in this case. As the words " through or from any money lent at interest and brought into British India in cash or in kind " were introduced in Section 42 (1) by the Amending Act (No. VII of 1939) which came into force on 1st April, 1939, the " extent " of the appellant's liability to British Indian taxation must be determined with reference to that section as so amended. Lastly, the validity of this newly introduced provision in Section 42 (1) which read with Sections 3 and 4 purports to bring into the....
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.... into British India. The learned Advocate-General of India placed strong reliance on the observations in Governor-General v. Raleigh Investment Co. Ltd. ([1944] 12 ITR 265 ; 6 FCR 229), where, this Court, while dismissing the assessee's suit for recovery of the tax paid under protest as not maintainable, went into the merits of the case and upheld the validity of the provisions of the Indian Incometax Act, 1922, authorising the taxation of dividends paid to a foreign company in a foreign country out of profits earned in British India. Such taxation was held to be justified according to the recognised principles of international law as the " source " of the dividend was in British India. This Court was also of opinion that, on a proper construction of Section 99 of the Government of India Act, 1935, the Indian Legislature had power to enact such provisions. On appeal, however, the Privy Council expressed no opinion on these points but merely confirmed the dismissal of the suit. In the subsequent case of Wallace Brothers & Co. Ltd. v. Commissioner of Income-tax, Bombay City and Bombay Suburban District ([1948] 16 ITR 240 ; 10 FCR 1 PC), their Lordships had to consider the power....
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....come" in item 54 of List I of the Seventh Schedule to that Act in the light of the principle recognised in Croft v. Dunphy ([1933] AC 156, at p. 165) that "Where Parliament has conferred power to legislature on a particular topic it is permissible and important in determining the scope and meaning of the power to have regard to what is ordinarily treated embraced within that topic in the legislative practice of the United Kingdom." Finding that the a general conception as to the scope of income-tax legislation in England had been that a person could be charged to income-tax in respect of his foreign income "a sufficient territorial connection" existed between the person sought to be charged and the country seeking to tax him, their Lordships laid down that the validity of such legislation in India depended on "the sufficiency for the purpose for which it is used of the territorial connections set forth in the impugned portion of the statutory test." Applying the principle to the case before them, which related to a company, their Lordships held that the "statutory test" set forth in the impugned provision, namely, the derivation from British India of the major part of its income, [....
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....-but to parts of one and the same transaction the lender and the borrower both agreeing that the money should be invested in British India though ostensibly lent abroad. It was said that the object underlying the provision was to prevent evasion of tax under colour of lending money and receiving interest outside British India, though in substance the money is lent and the interest accrues in British India. This may well be so, but the words used are far too wide and, in my opinion, stretch the section beyond the legitimate ambit of the powers of legislation in regard to "taxes on income" granted to the Indian Legislature by the British Parliament, as those powers have been authoritatively explained by their Lordships of the Judicial Committee in Wallace Brothers & Co.'s case([1948] FCR. 1; 16 ITR 240). Our attention was drawn to the observation in Raleigh Investment Co.'s case([1941] FCR 229; 12 ITR 265) already referred to, where this court quoted with apparent approval certain passages from judgments of the Australian High Court which would seem to suggest that if there is any territorial connection the State has the power to make a law, however extra-territorial its operation....
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....e same manner and to the same extent in the like case a company would be liable; (b) to all other taxation for the time being in force in British India in the same manner as in the like case any other person would be liable. (2) For the purposes of the levy and collection of income-tax under the Indian Income-tax Act, 1922, in accordance with the provisions of sub-section (1), any Government to which that sub-section applies shall be deemed to be a company within the meaning of that Act, and the provisions of that Act shall apply accordingly." It was not denied that the Durbar as an entity is within the purview of this Act. It was however contended that the scope of the section is limited to income actually arising in British India, and not to income which, under the Indian Income-tax Act, 1922, or by its amendment in 1939, is deemed to arise or accrue in British India. The validity of the amendment in the Income-tax act bringing within the scope of the charging section interest earned out of money lent outside but brought into British India was questioned on the ground of its being extra-territorial in character. Sections 4(1) and 42(1) of the Indian Income-tax Act, 19....
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.... country, and though it has sovereign powers, it can only exercise these powers within the field open to its vision under the provisions of Sections 99 and 100 of the Constitution Act. The material facts relevant to Gwalior Durbar's liability to tax in British India, which raise the constitutional question, may best be left for consideration at a later stage, so that the question of the scope and vires of the section can be examined detached from the facts of the case. By the comity of nations, sovereign rulers of States are not subject to the municipal laws of any particular country, but, by Act III of 1926, His Majesty's Dominions and territories under His Majesty's protection were made subject to payment of income-tax under certain conditions and limitations. The charging section of the Act places trading Dominions and Indian States doing trade on the same footing as companies. The extent of chargeability is the same as that of a company. For levy and collection of tax, they are deemed to be a company. In other words, the effect of the section is to enlarge to a limited extent the scope of the definition of "company" given in the Indian Incometax Act, and to include within it....
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....come, so would the Government of a State liable when carrying on any business or trade. The question of the validity of the impugned part of Section 42 may now be considered. The approach to the decision of question like this has been indicated by their Lordships of the Privy Council in Wallace Brothers and Co., Ltd. v. Commissioner of Income-tax, Bombay City and Bombay Suburban District (1948) FCR 1; 16 ITR 240), in the following term :- "There is no rule of law that the territorial limits of a subordinate legislature define the possible scope of its legislative enactments or mark the field open to its vision. The ambit of the powers possessed by a subordinate legislature depends on the proper construction of the statute conferring those powers. No doubt the enabling statute has to be read against the background that only a defend territory has been committed to the charge of the legislature. Concern by a subordinate legislature with affairs or persons outside its own territory may therefore suggest a query whether the legislature is in truth minding its own business. It does not compel the ....
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....gner with the country seeking to tax him was laid down by Dixon, J., in Wanganui Rangitikei Electric Power Board v. Australian Mutual Provident Society((1934) 50 Com. LR 591) in the following terms :-- "So long as the statute selected some fact or circumstances which provided some relation or connection with New South Wales and adopted this as the ground of its interference, the validity of an enactment would not be open to challenges." Rich, J., in Broken Hill South Case (1937) 56 Com. LR 337) observed : "I do not deny that once any connection with New South Wales appears, the legislature of that state may make that connection the occasion or subject of the imposition of a liability. But the connection with New South Wales must be a real one and the liability sought to be imposed must be pertinent to that connection." Dixon, J., in the case cited above further observed : "If a connection exists, it is for the legislature to decide how far it should go in the exercise of its powers. Courts must be exact in distinguishing between ascertaining that the circumstances over which the power extends exist and exam....
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.... a situation, the loan must be treated having been advanced in British India (the lending outside a mere formality when actually the money had to be brought out here. To all intends and purposes the advance is in British India. When the field in the view of the lender for his money-lending operations is India, then his modus operandi cannot effect the territorial connection of these operations. Once the clause is interpreted in the manner above-mentioned, then it cannot be seriously contended that there is no sufficient the territorial connection to attract the jurisdiction of the Indian Legislature to make a law for taxing interest payable on such a loan, and the argument as to ultra vires loses all force. It cannot be denied that when money is actually lent in India, the Indian Legislature will have jurisdiction to tax interest payable on the loan. The situation is not very different when the money lent is brought into India. It was urged that the lent money may not be used in British India, when it is brought there. It may be lost on the race-course. It may be stolen, or it may be thrown away and may not produce any income. It is said that in these situations, when the len....
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.... Ltd., was incorporated in British India in 1927 with headquarters in Bombay, with 4966 shares of Rs. 1,000 each. It is practically a one man company as all the share are either owned by the Gwalior Durbar or its nominees. In 1933 the Durbar advanced to this company a loan of rupees fifty lakhs on the security of the first mortgage debentures of an equal nominal value. The loan was advanced at Gwalior. The interest was payable there and the debentures also were deposited there. But admittedly the company brought the borrowed money to British India and utilized it for the purposes of its business in British India. The interest on the loan received by the Durbar for the year amounted to Rs. 2,59,726. The interest was receivable and actually received at Gwalior." On the above statement of facts it is difficult to dissociate the loan advanced at Gwalior from the security of debentures on property that exists in British India. The loan was a secured loan, and the giving of security cannot be treated as a different transaction from the advancing of the loan itself. The transaction in substance was a transaction of loan in British India. In the High Court, reliance was placed for th....
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....le to subscribe to his line of thought on this aspect of the case. My learned brother, Patanjali Sastri, gave me the privilege of perusing his judgment which has just been delivered. It took me considerable time to make up my mind before I decided to express a different opinion than his. It is unfortunate that on the first question I have to disagree with him. For the reasons given above, I consider that the High Court returned a correct answer to the first question. The second question referred to the High Court was whether the sum of Rs. 3,57,112 received by the Durbar out of the managing agency commission paid by the Tata Iron and Steel Co., Ltd., to Tata Sons Ltd., is assessable under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (III of 1926). This question arose on the following statement of facts : "The late Mr. F. E. Dinshaw, who was the agent of the Durbar for its money-lending operations, entered into an agreement with Tata Iron and Steel Co., Ltd., to finance the company, at a time when it was badly in need of funds, up to a total of one crore rupees, on certain terms and conditions referred to in the agreement. The interest....
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....are to his principal. Even if he was acting against the directions of the principal in making this loan, he would still be liable under the provisions of Section 216 of the Indian Contract Act to pay to the principal all the profits that he would earn on the loan transactions, whether in the nature of interest or commission. As above stated, the discharge of the loan did not in any way affect the earning of the commission, because under the original agreement under which the loan was advanced this payment was to continue even in the event of the loan being repaid. The subsequent agreement entered into by Mr. Dinshaw with the Tatas after the repayment of the loan was only a modification of the original one, and did not discharge it. The effect of the subsequent agreement was only to reduce the amount of the commission that Dinshaw was entitled to or which he had to pay to the Durbar. This was not in the nature of an agreement arrived at independently of the terms of the original document and completely dissociated from it. It was not in the nature of new transaction or deal of Mr. Dinshaw with the Tatas. Mr. Dinshaw entered into this agreement in the same capacity in which he entere....
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....on to the Durbar was payment in the nature of compensation or damages for breach of duty as agent. This suggestion was rightly described as "fantastic" by Chagla, J., as the agreement on the record did not support it. The facts of the case show that Mr. Dinshaw, in the capacity of an agent, advanced the Durbar's money to Tata Sons Ltd., on certain terms, and one of the terms of the advance was the payment of the commission by them to him, part of which he, in his own turn, agreed to pay to the Durbar. So far as the Durbar was concerned, over and above the interest that it earned on its loan, by reason of Dinshaw's deal with Tatas, it also became entitled to received a part of the agency commission. But it became entitled to it, because of the use of the Durbar's money in the money-lending transaction. Independently of the loan transaction, the Durbar would have been entitled neither to the interest nor to the commission. That begin so, there is no substance in the contention raised on behalf of the Durbar that the income arising or accruing to it by way of the commission above mentioned, is not connected with its money-lending operations. It has been rightly held by the High Court ....
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.... affirmative, but I think that the property, which has been taken over in respect of a bad debt of the banking business, is not property occupied in British India for the purposes of the business, but the income derived from such property is income arising in connection with such business, and in that sense falls to be taxed." These observations may be aopposite in the case of a banking institution which uses all its income in connection with its banking business, but they have no application to the case of a Dominion Government or of the Government of a State whose business is not banking, though one of its activities may be money-lending. It was a question of fact that had to be determined in this case whether the properties after they were purchased, or their income were still a part of the assets used by the Durbar in the money-lending business. If it was found that the income of these properties was still being used in money-lending operations or any operations connected with the money-lending business, the answer to the question would obviously be against the Durbar. But, in the absence of that finding, and in the absence of any statement by the Commissioner to that effect in....
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....roperties were subsequently treated as stock-in-trade of that business except perhaps in the case of banking institutions. In this case it was asserted before the Income-tax authorities, that the properties were purchased in lieu of the debt, between the years 1924-35 and since their acquisition, the money-lending business ceased, that no new loan was advanced after the year 1930 and that the income was not used for money-lending purposes. This assertion of fact was not controverted by the Income-tax authorities. In such a situation, it must be accepted as correct. That being so, no presumption could be raised that these properties or their income were part of the moneylending operations of the Durbar. I have already said that the observations made in Patiala State Bank's case([1941] 9 ITR 95) lend no support to the proposition enunciated by the High Court on this question. Reference was also made to the case of S.A.S.S. Chellappa Chettiar v. Commissioner of Income-tax, Madras([1937] 5 ITR 97; ILR 1937 Mad. 734). In that case, the assessee carried on business as a moneylender in India, Burma and the Federated Malay States. Owning to certain of his constituents in Burma being una....
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....that question 3 should be answered in favour of the Durbar, and the decision of the High Court on this point reversed. Questions 4 and 5 are in these terms :- "(4) Whether the dividend of Rs. 1,88,030 received by the Durbar from Sir Shapurji Bharucha Mills Ltd., is taxable in the circumstance of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (III of 1926)." "(5) Whether the dividend of Rs. 83,447 received by the Durbar from the C.P. Cement Co., Ltd., is taxable in the circumstances of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (III of 1926)." The High Court held that the income derived from the dividends on these shares was income arising in connection with the moneylending business of the Durbar and in that sense, falls to be taxed. The answer given by the High Court is supported by the findings of facts recorded by the Assistant Commissioner of Income-tax. Those are to the following effect : "The Durbar was doing money-lending business in Bombay and as....
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....eceived not as income from investment but as income from business falling under the Government Trading Taxation Act." From the conduct of the Durbar the Assistant Commissioner of Income-tax was entitled to draw the inference that it acquiesced in the finding which was to the effect that these shares and their income were still part of the stock-in-trade used by the Durbar in its money-lending operations. There is therefore material to justify the finding and the High Court in answering the question was bound by it. That being so, the income charged clearly fell within the provisions of the Government Trading Taxation Act (III of 1926). Sir Jamshedji Kanga, the learned counsel for the Durbar, urged that the investment in these shares by the Durbar stood on the same footing as the immovable properties purchased by the and dealt with in question No. 3. But this contention is not tenable because the statement of facts in the two cases is not the same. In the case of immovable properties the statements ends by saying that the Durbar owns them, while in the case of shares it proceeds further and says that the dividends on these shares are still used in Durbar's money-lending operation....
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....stance to the Durbar as regards its claims to refund. It substitutes the shareholder for the company in respect of income-tax paid by it on the dividends distributed. In order to entitle the Durbar to a refund of income-tax paid on such dividends, the case must fall within the ambit of Section 48 of the Act, which provides : "If any individual, Hindu undivided family, company, local authority, firm or other association of persons, or any partner of a firm or member of an association individually satisfies the Income-tax Officer or other authority appointed by the Central Government in this behalf that the amount of tax paid by him or on his behalf or treated as paid on his behalf for any year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of any such excess." The learned Judges of the High Court, while dealing with this question, made reference to Section 49B as amended after the year 1939. The amended section provides that only a person specified in Section 3 and who is a shareholder of a company assessed to incometax in British India or elsewhere is entitled to the benefit of the section. On the language o....
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.... for purposes of the Indian Income-tax Act. In the capacity which it has acquired by force of the statute, it comes within one of the categories of persons mentioned in Section 48 of the Act. But in that capacity alone and within the limitations and conditions mentioned in the section, it is deemed to be a company. If any dividends were received in connection with trading operations carried on by the Durbar, then, undoubtedly it would be entitled to a refund of income-tax on those dividends. The dividends on shares of companies dealt with in questions 4 and 5 would fall in this class, and the Durbar would be entitled to refund in respect of them. But the dividends involved in question No. 6 are wholly independent of the trading operations of the Durbar. These represent the income earned out of investments of the Government of Gwalior in its capacity as a State and are not chargeable to tax under any of the provisions of the Act. In the limited status of a company, it cannot claim this refund, as it bears no relation to its money-lending operations. It was however urged by Sir Jamshedji Kanga that the State of Gwalior is an individual and falls within that word used in Section 48 of....
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....e, of persons whose income is not liable to income-tax, stand on an entirely different footing. All of them fall within the category of persons mentioned in Sections 4 and 48 of the Act. In their case, however, the Act allows certain exemptions. It is by force of the statute that those incomes are exempt from tax. It is not independently of the statute that they are so exempt. This is the distinction between the two cases, and shows the fallacy underlying the contention of the learned counsel. But for the exemptions given in the Act, all such persons would be within the category of persons mentioned in section 4 and would be chargeable to income-tax. As the Gwalior Durbar however falls outside the contemplation of the Act and the categories of persons mentioned in Sections 4 and 48 of the Act, it cannot claim the benefits of refund of income-tax on the dividends. It must therefore be held that the question was correctly answered by the High Court. The result therefore is that this appeal fails except on one point, i.e., Question No. 3. My answer on that question is in favour of the appellant, while on the other questions the answer is the same as given by the High Court. To this....
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....iety of this decision was vigorously challenged by Sir Jamshedji Kanga who appeared on behalf of the appellant, and he contended in the first place that as the sum of Rs. 50 lakhs was advanced by his client to the Provident Investment Co., Ltd., at Gwalior which is outside British India, and as the interest due on the same was also received at Gwalior, it was not income arising in British India and the provisions of the Government Trading Taxation Act could not be applied to a case like this. The contention is that the language of Section 2(1) of the Act confines it to income actually "arising" in British India and does not include an income which might be "deemed to arise" in British India within the extended meaning of that expression given by the Income-tax Act. I do not think that this contention can be accepted as sound. Section 2 of the Government Trading Taxation Act nowhere speaks of income arising in British India. The language of clause (a) of sub-section (1) of Section 2 shows that no matter where the dominion Government carries on its trade or business or earns profits thereof, its liability to assessment to income-tax in respect of such income would be the same as that....
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....ctical difficulties in the way of enforcing the extra-territorial provisions of a taxing statute; but these are questions of policy with which the domestic tribunals are not concerned (vide Mortensen v. Peters([1906] 8 F. (JC.) 93, 101). So far as a subordinate or non-Sovereign Legislature is concerned, its powers must certainly be determine with reference to the authority granted to its by the Parent legislature and if there are territorial limitations specified in the very Act which created it, these limitations cannot be disregarded. But when there are no such limitations, the trend of modern decisions is to regard the subordinate legislatures as being vested with as much plenary powers as the Sovereign Parliament itself. The view expressed in Macleod v. Attorney General for New South Wales ([1891] AC 455) that subordinate legislatures should not be held "to possess extra-territorial jurisdiction unless it is conferred upon them expressly or by necessary implication" is no longer a sound doctrine. With regard to the Dominion Parliament of Canada the law was thus laid down by Lord Macmillan in Croft v. Dunphy ([1933] AC 156) where his Lordship referred to the cases of the Queen v....
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....sible... That the enactment of section 9 (B) is in exercise of taxing power within that jurisdiction does not, we think, admit of any doubt..... There is admitted jurisdiction over an act essential to the subject-matter, i.e., the act of performance of an obligation; and these, taken with the language used, satisfy the taxation criteria. Legislation so enacted will be effective in, and must be enforced by, the Courts of this country." Even though the Statute of Westminster was not applicable to India, it was held by this Court in Governor-General in Council v. Raleigh Investment Co., Ltd., ([1944] FCR 229, at p. 259 ; 12 ITR 265) that the position and powers of the Indian Legislature were substantially the same. The fact that this point was left undecided by the Privy Council does not in my opinion detract in any way from the weight which is to be attached to a clear pronouncement of this Court. This Court further pointed out in the Raliegh's case that Section 99 of the Government of India Act, 1935, was deliberately couched in language different from that employed in Section 65 of the earlier Act 1915; and it was held that sub-section (1) of Section 99 did not in terms exclude ....
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....ion 42(1) of the Income-tax Act, as it stood before the amendment of 1939, applied to income arising through or from any business connection or property in British India. Possibly with the object of bringing within the scope of taxation all income accruing primarily from British Indian sources the amendment was introduced in 1939 and income or profits "arising from any assets or source of income in British India" or "through or from any money lent at interest and brought into British India" was brought within the net of taxation. There were various other substantial changes in the income-tax law made by the amendment Act 1939 and two of them deserve special notice for our present purpose. Section 4(1)(c) of the Income-tax Act, as it stands after the amendment, provides that the total income of a person not resident in British India should include all income, profits and gains from whatever source derived, which accrue or arise or are "deemed to accrue or arise" to him in British India during the previous year. Explanation 3 attached to sub-section (1) of section 4 then lays down that a dividend paid without British India shall be "deemed" to be income accruing or arising British In....
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....e learned Judges relied upon a number of decisions by the High Court of Australia where it was held that the existence of the source of income in the territory of a particular State established sufficient territorial connection to justify the imposition of income-tax by the State. Vide in this connection Nathan v. Federal Commissioner of Taxation ([1918] 25 Com. LR 183) and Murray v. Federal Commissioner of Taxation. ([1929] 29 Com. LR 134) Quite apart from the Australian cases it seems to me that there are clear pronouncements of the highest Courts in England in support of the view that competency to tax is based not on residence alone; it is enough that the income was derived from property in the country which imposed the tax. It was said by Lord Herschell in Colquhoun v. Brooks : ([1889] 14 App. Cas. 493) "The Income Tax Acts... themselves imposed a territorial limit, either that from which the taxable income is derived must be situate in the United Kingdom or the person whose income is to be taxed must be resident there." These words were quoted and applied by Lord Wrenbury in Whitney v. Inl....
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....rtainly not to seek a pattern to which a due exercise of the power must conform. The object is to ascertain the general conception involved in the words used in the enabling Act. The general conception as to the scope of the income-tax, according to their Lordships, is, that given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him, income-tax may properly extend to the person in respect of his foreign income. This territorial connection, however, need not be of the same type as is found in British income-tax legislation, and in case of a company which has only an economic existence, the fact that it draws the major portion of its income from a particular country for a particular year can legitimately make it a resident of that country for that year even though its central management and control are located elsewhere. These cases though they do not directly touch the point which is now for consideration before us can be taken to have laid down definitely : (i) that some sort of territorial connection or nexus between the taxing State and the person whose income is to be taxed is absolutely necessary. The connection ma....
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....interpretation that can be put upon them-there would be absolutely no difficulty in holding that the impugned clause does really proceed on the basis of a territorial nexus actually existing between the taxing State and the person in respect of the income that is sought to be taxed. Looked at from a somewhat different standpoint, it can, I think, be said with perfect propriety, that in cases coming under this clause a nexus is established by reason of the fact that the source of the income is situated in British India. It is true that interest payable to a creditor is quite a different thing from dividends paid to a shareholder. Dividends are paid out of the profits of a company, whereas interest on money lent has to be paid even though the borrower does not make any profits from the money borrowed by him. But the person that is taxed here is not the borrower but the lender, and so far as the latter is concerned, the source of income is the money which he lent and which in its original or converted form is actually in existence in British India. This position, I think, receives support from some of the cases decided by the Australian High Court. In Colonial Gas Association Lt....
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....ncome-tax, can be founded on facts other than those upon which the English legislation on the subject is based. My conclusion, therefore, is that the clause in Section 42(1) of the Income-tax Act, which makes taxable the income or profits arising out of money lent and brought into British India in cash or in kind, is not ultra vires the Indian Legislature and the contention of Sir Jamshedji on this point must fail. It may be pointed out in this connection that question No. 1, as framed by the Income-tax Commissioner of Bombay under Section 66 of the Income-tax Act, is perfectly general in its terms and does not refer to any particular clause of Section 42(1) of the Income-tax Act. On the findings of the Income-tax authorities which were accepted by the High Court of Bombay, the loan of Rs. 50 lakhs advanced by the Gwalior Durbar to the Provident Investment Company was not an isolated transaction but formed part of the money-lending business which was carried on by the Durbar in British India. On this finding, the Durbar would certainly come within the purview of the first clause of Section 42(1) of the Income-tax Act and the interest earned by it would be liable to be assessed a....