TaxTMI 
TaxTMI 
1951 (9) TMI 54
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....f the sale of certain shares and securities. Lady Duggan likewise, in her return of income for the same assessment year, included as 'capital gains' two sums of Rs. 3,54,168 and Rs. 37,632 arising from the sale of shares and securities. The Income Tax Officer included these capital gains in the assessable incomes of the husband and wife under Section 12B, Income Tax Act. The contention raised by the assessees was that Section 12B, Income tax Act, was ultra vires of the Central Legislature. This contention was overruled by the Tribunal, and the assessees have now come before us on a reference made to us under Section 66 (1), Income Tax Act. 4. Certain important amendments were effected in the Income tax Act by Act XXII [22] of 1947. A new definition of "capital asset" was inserted as Section 2(4A), and ''capital asset" was defined as "property of any kind held by all assessee, whether or not Connected with his business, profession or vacation," and the definition then excluded certain properties mentioned in that clause. The definition of "income" was also expanded, and "income" was defined so as to include "any capital gain chargeable according to the provisions ....
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....turn to the Seventh Schedule to the Government of India Act. And this is a Central Act, we have to turn to List I of that schedule. The two relevant entries which fall to be considered are entries 51 and 55. Entry 54 relates to taxes on income other than agricultural income; and entry 65 relates to taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies, and taxes on the capital of companies. It is first necessary to consider whether the impugned legislation falls within the ambit of entry 56. Now, entry 55 empowers the Central Legislature to impose taxes not on assets but only of the capital value of the assets: in other words, on the capitalised value of the assets. It is important to see this entry in juxtaposition with certain entries in List II, Entry 42 in List II empowers the Provincial Legislature to impose taxes on lands and buildings, hearths and windows. Now, lands and buildings would undoubtedly be assets. But whereas the Provincial Legislature is competent to impose a tax on lands and buildings, the Central Legislature is empowered under entry 55 of List I to impose a tax not on lands and buildings as such but on the capit....
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.... sole purpose of including entry 55 in List I of the Seventh Schedule. I see no warrant whatever for construing entry 55 in that restricted and limited sense. It is well settled by now that a large and liberal interpretation must be placed upon all entries in the Seventh Schedule of the Government of India Act, and that the widest import and significance must be given to the language used by Parliament in these various entries. It must not be forgotten that the Legislature created by the Government of India Act was a sovereign Legislature within its own sphere, and that, when a topic was assigned to a particular Legislature in respect of which it could legislate, then all possible powers with regard to that topic must be attributed to that Legislature Apart from authorities, I should have thought) it inarguable that, if the Legislature could impose a tax on all the assets of an individual or a company and to assess that tax on the full value of the assets, the Legislature could not do something much less than that, namely, impose a tax only on some assets and not on the full value but on a value arrived at after certain deductions. The only justification for such an argument is ....
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....assets in the nature of a capital levy. Therefore, here again, the learned Judge merely indicated what the argument was with regard to the construction of entry 55, without deciding the point. Mr. Justice Kania, as he then was, states (p. 56): -- I do not think the impugned tax is of a nature to to encroach upon item 55 in List I. Under that item the tax should be on the total capital assets, and not on individual portions of a person's capital. But, at p. 54 the learned Judge himself poses the question.: The crucial question is this: Is the tax on the lauds and buildings or on income of the lands and building? Therefore, that was the crucial question which the Court was called upon to consider. And having held that it was a tax on lands and buildings covered by entry 42 of List I, no further question really arose for the determination of that Court. In the first place, the observations of the learned Chief Justice and of Broomfield J. are not at all helpful; and, secondly, even if they were helpful, they certainly do not decide the question which we have to decide on this reference. The attention of the learned Judges was not seriously drawn to the q....
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....panies but also with regard to other categories of asses-sees, the Legislature has exceeded its competence, and, therefore, the impugned Act is invalid. If "individuals and companies" comprise all the categories of assessees referred to in the Indian Income Tax Act, then there is no substance in this argument. But on the assumption that 'individuals and companies" referred to in entry 55 do not comprise all the categories of assessees made liable to tax under the Indian Income Tax Act, I proceed to consider the argument. Now, the expression "assessee" in the Indian Income tax Act can be resolved into its component parts; and an assessee may be in one of the different categories to which I have referred and which are-set out in Section 3 of the Act, The Legislature, therefore, has imposed this tax not only on individuals-and companies but also on the other categories of assessees the question that falls for determination is whether, by reason of the Legislature's exceeding its competence, the whole legislation becomes void, or whether the bad part is sever-able and can be severed and the good part can be allowed to stand. Now, we have had several occasions in the past to ....
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....cil without launching upon a hypothetical enquiry as to how the minds of the members of the Legislature would have worked if they were confronted with this difficulty. And, as I said before, there can be no doubt in this case that the valid piece of legislation can independently survive although the part which is declared invalid has been removed or deleted from the Act which the Legislature passed. 7. In my opinion, therefore, Act XXII [22] of 1947 is valid, either as a whole or, in any case, to the extent that it applies to individuals and companies. 8. A very careful and able argument was advanced before us as to whether the legislation does not also fall under entry 54. Strictly, it is unnecessary to consider the question. I should also like to point out that, although the Solicitor-General here has contended that the legislation also falls under entry 54 of List I, no such argument was advanced by the Income Tax Department before the Tribunal. As a matter of fact, the decision of the Tribunal is entirely based upon the consideration of entry 55 of List I, But as the matter is of considerable importance, and as it has been fully and ably argued, I think it right that I sh....
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....ert "income" into "capital." If there is one clear line of demarcation that has always been observed by English lawyers and English jurists, it is the line between income and capital; and English legislative practice has always realised the difference between taxing income and taxing capital. If therefore, the tax in question, namely, the tax on capital gains, is a tax on capital, then by no manner of means, by no stretching of the language of 'income" in entry 54, and by no liberal interpretation of that expression, can the legislation be put in that entry. It must also be borne in mind that the Government of India Act was drafted by Parliamentary draftsmen imbued in English legal traditions and familiar with English legislative practice; and if a particular expression had come to have a certain moaning and a certain connotation, then the draftsmen, when they used that expression, must have used it to convey that meaning and that connotation. "Income" is not a word to which its plain, natural grammatical meaning in English can be given. Such a meaning would be true of a word or an expression which has no legislative background, which has no legislative associations, and whi....
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....y was overcome by the Privy Council by resorting to the legislative practice of the United Kingdom, which they did in the following words (p. 99): Where Parliament has conferred a power to legislate on a particular topic it is permissible and important ill determining the scope and meaning of the power to have regard to what is ordinarily treated as embraced within that topic in the legislative practice of the United Kingdom, They relied for the above proposition on Croft v. Dunphy 1938 A.C. 156. Then their Lordships go on to say (p. 99): The point of the reference is emphatically 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 is the enabling Act. Therefore, the question is : What is the general conception involved in the use of the word "income" in entry 54 in List I? Is a tax on capital gains included in that general conception, or is a tax on capital gains entirely foreign to that conception? If the idea of a tax on capital gains is entirely repugnant to the English legal conception of "income", then, to my mind, it is impossible to hold that, by means o....
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....r transactions in the carrying on of a trade, and the trade is taxed, no tax is eligible in respect of a transaction of that kind. 'Profits or gains' mean something which is in the nature of Interest or fruit, as opposed to principal or tree. Now, I should like to make it clear that the case we are dealing with of Sir Jamshedji Duggan and Lady Duggan is a case of an isolated transaction of a sale of shares and securities. It is not suggested that this transaction constituted business, because, if it did constitute business, then it would have been unnecessary for the Department to bring the amount of profit made by the two assessees within the category of "capital gains". If it was business, then it could have been taxed as profits and gains under the head of 'business' under the ordinary provisions of the Income Tax Act. In "capital gains" we are only dealing with isolated cases where an asset is sold, exchanged or transferred, and the sale, exchange or transfer results in a profit. It has been urged by the Solicitor-General that these observations of Rowlatt J. are confined to construing the meaning of "income" as used in the English Income Tax Acts, and what w....
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.... which he sums up as follows (p. 165) ; ... where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at the enhanced price is not profit in the sense of Sch. D, Income Tax Act of 1842 assessable to Income tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of Investment, but an act done in what is truly the carrying on, or carrying out, of a business. 9. As against this impressive series of authorities which, as I said before, clearly and emphatically draw a line of demarcation between income and capital, and equally emphatically put capital accretion on the other side of the line--on the side of capital -- our attention has been drawn by the Solicitor General to certain Commonwealth and American decisions. Now, as I said before, to my mind those decisions are entirely irrelevant, because the Parliamentary draftsmen who drafted the Government of India Act were more concerned, more conversant, with their own legal system and their own legislative practice tha....
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....hat this word has acquired by legislative practice, Reasonable understanding is a matter of doubt and uncertainty. But as far as legislative practice is concerned with regard to the meaning of "income", there is no doubt whatever as to whether capital accretion is income or not. Then there are three American reports, the earliest of which is Eisner v. Macomber (1919) 252 U.S. 189. That was a case where bonus shares had been issued in respect of the accumulated profits of a company, and the question arose whether the issue of bonus shares constituted income within the meaning of the 16th Amendment to the American Constitution. Now, it should be noted that, under the American Constitution, under Section 2(3) of Article 1, representative and direct taxes which the Congress can levy have to be apportioned among the several Scales. To this provision in the Constitution, Amendment 16 provided that the Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. Therefore, the expression "taxes on income" as used in Amendment 16 was intended to be an exception t....
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....ka. (1921) 256 U.S. 509 and I must admit that it is a case directly in point, because it deals with the question of an executor realising the estate of a testator by selling certain shares and securities on which there was a profit. The question was whether that profit constituted "income" within the meaning of the 16th Amendment, and Clarke J. at page 755 [519] says: In determining the definition of the word 'income' time arrived at, this Court has consistently refused to enter into the refinements of lexicographers or economists, and has approved in the definitions quoted, what it is believed to be the commonly understood meaning of the term which must have been in the minds of the people when they adopted the 16th Amendment to the Constitution. The meaning of the word "income" referred to here is therefore the commonly understood meaning of the United States of America, in the minds of the people of the United States of America, when they adopted the 16th Amendment. But are we really concerned with what Americans thought of a particular expression when they adopted the 16th Amendment to their Constitution? However remote we may be to-day from the British Parl....
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....ion put forward by the Solicitor-General that "taxes on income" can include taxes on capital accretion. 11. But as I have taken the view that the impugned legislation falls within the scope and ambit of entry 65 in List I of the Seventh Schedule, I am of opinion that Act 22 of 1947 is not ultra vires of the Legislature. I will, therefore, answer the question referred to us by the Tribunal in the negative. S.R. Tendolkar, J. 12. Although I have come to the same conclusion as to the competence of the Legislature, with very great respect to my Lord the Chief Justice, I have come to that conclusion on a wholly different process of reasoning. 13. The question for determination is the competence of the Central Legislature to enact Act XXII [22] of 1947. That Act was enacted in order to amend the Indian Income Tax Act, 1922, and the Excess Profits Tax Act, 1940, for the purposes therein apparent. The relevant provisions of the Act for the purposes of determining the competence of the Legislature are to be found in Section 2, which introduces a new definition as Section 2 (4A), Income Tax Act of the expression "capital asset"; in Section 2 (c) (sic) which amends the definition ....
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....f possible assessees, while Entry 55 restricts itself in terms to individuals and companies Now, turning to these entries, I will first consider Entry 54, because it is, to my mind, wider in its scope in so far as its applicability to assessees is concerned. That entry is "taxes on income other than agricultural income." Now, whatever may be the true meaning to be attached to the word "income"--and that is the matter that we have to determine on this reference--under this entry the Central Legislature has undoubtedly the power not only to tax what may be described as "real income," but it also has the power to tax "notional" or "statutory income": and indeed it has already done so without challenge in the case, for example, of income from property under Section 9, Income Tax Act, where the Income Tax may have no actual relationship to the net rent received by the landlord. But what it does tax must of necessity, in my opinion, have some relationship, howsoever remote, to the concept of income. Moreover, the Legislature, whilst enacting legislation for taxing income, would have ample powers to prescribe the conditions under which the tax is payable. So far there can be little disput....
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....mentary usage a term has acquired a legislative meaning, such legislative meaning alone ought to be given to it? What happens in a case in which the legislative meaning may be narrower than the ordinary plain meaning of the words used in the entry? Is the principle of a liberal construction then to be modified and is it to be said that the entry in the legislative list should then have only the narrow meaning that it had by Parliamentary usage in England? I will presently notice the cases that have been relied upon by Sir Jamshedji Kanga in support of his submission ; but it appears to me that the result of those decisions is that, where the language used in any of the legislative entries is plain and unambiguous, the widest possible import must be given to it ; but where the language is either ambiguous or of a limited scope only, in its plain meaning, it is not only permissible but indeed expedient to have regard to Parliamentary practice to resolve the ambiguity or to extend the scope of the plain words. I know of no instance--and none has been cited at the Bar--in which Parliamentary practice has been resorted to for restricting the scope of plain words appearing in any entry i....
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....ncome Tax may properly extend to that person in respect of his foreign income. It is abundantly plain from this that resort was made to Parliamentary practice because the entry itself was silent in regard to the person or income which could be subjected to tax and there was no other guidance in the statute as to the matter for decision before their Lordships. The reference to Parliamentary practice was in no sense to narrow down the meaning of the word "income" is the entry "Taxes on income." 16. Turning next to the case of Croft v. Dunphy, 1933 A.C. 156, in that case the power conferred by the Customs Act of Canada to seize and forfeit any vessel engaged in smuggling within 12 miles from the coast of Canada was challenged. The Canadian Parliament had power to enact customs laws for Canada. The question was whether it could legislate beyond its shores, at any rate beyond three miles from its shores which is the internationally accepted limit of territorial waters. The Privy Council held that it had such power, and in doing so the Privy Council relied upon the legislative practice in England. Lord Macmillan observes (p. 165): When a power is conferred to legisla....
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....lth Act of 1848 right up to the consolidated Public Health Acts of 1936, what the Public Health Acts embraced wore, broadly speaking, such matters of public health and sanitation 83 were usually entrusted to local bodies, prohibition never having been thought of as any one of such items; and if Parliamentary practice had to be invoked to narrow down the meaning of the expression "public health and sanitation," the Prohibition Act of 1949 could never have been held to fall within the scope of entry 14. The Fall Bench did not think it necessary to consider whether it fell within the scope of that entry. But the Supreme Court specifically held, as will be found from State of Bombay v. F.N. Sahara 1951 S.C.J. 478, that the Prohibition Act fell within Entry 14 in List 2 of the Seventh Schedule to the Government of India Act. Of course, it does not appear from the report of the Supreme Court whether the particular argument, that the entry should be read so as to restrict its meaning to the meaning which it acquired by Parliamentary practice, had been pressed before the Supreme Court. It is obvious, nonetheless, that, if Parliamentary practice, with which the Supreme Court must obvious....
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.... 8 Tax. Cas. 521, such an interpretation has been sanctified by the usage of a century. But these authorities themselves, or at least moat of them, state in terms that the concept of "income" that they are discussing is the concept for the purposes of the taxation Acts in the United Kingdom, and not for the purpose of determining whether the word "income" is capable of including within its scope a capital gain or not. We have, to the same effect, similar decisions under the Indian Income Tax Act. Reference may be made to a decision of their Lordships of the Privy Council in Income-tax Commissioner v. Shaw Wallace and Co. 39 Ind. App. 206 Sir George Lowndes observes: " ... Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. His Lordship was particular in emphasizing that he was dealing with "this Act," namely, the Indian Income tax Act; and it is for the purposes of this Act, as it then stood, that "income" connotes a periodical monetary return. This decision stands on the same footing as the decisions of the English Courts and they do not, in my ....
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....it must be liberally construed, and include everything which by reasonable understanding might fairly be regarded as income. Of course, Parliament cannot by any definition or provision that it may adopt contravene the provisions of the Constitution. But I am by no means convinced that the Parliament cannot under cover of an Income Tax tax anything that comes into a taxpayer without regard to the characteristics or attributes of capital and income in the works of economists or in the decisions of the Courts. Dixon, J. observed (p. 325): The distinction between profits of a capital nature and profits in the nature of income in the strict sense is not one which the Act maintains, Nor is it a discrimination which the Legislature is bound to regard. Indeed, in the United States, under the 16th Amendment which speaks of 'income', the term is considered to include all profits whether on account of capital or on account of Income in the strict sense. In United States v. Stewart (1940) 311 U.S. 60 Douglas J. says: "Income" is a generic term amply broad to include capital gains for purposes of income tax', citing Merchants' Loan & Trust Co. v. Smietanka (1921) 255....
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....stock dividend, we shall find it easy to decide the matter at issue. "After examining dictionaries in common use (Bouviet's Law Dict.; Standard Diet.; Webster's Int. Dict.; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act. . . . : 'Income may be defined as the gain derived from capital, from labour, or from both combined', provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle case 1918 247 U.S. 179. "Brief as it is, it indicates the characteristic and distinguishing attribute of income, essential for a correct solution of the present controversy. , . Then the learned Judge held that a stock dividend was not something "derived from capital, and on that ground held that it did not fall within the scope of the 16th Amendment. But the passage I have just quoted makes it abundantly plain that, as used in common speech, "income" has a very wide connotation, at least in the United States of America. I next turn to the case of Merchants' Loan & T. Co. v. Smietanka 1921 255 U.S. 509. Now, in this....