TMI Blog1948 (11) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 Maharaja died in or about 1925 and a Council of Regency was appointed, presumably as the present Maharaja was a minor at the time. Till his death Mr. F. E. Dinshaw continued to act as the agent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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 circumstances of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (III of 1926), and (6) Whether the Durbar is entitled under the provisions of the Income-tax Act read with the Government Trading Taxation Act (III of 1926) to a refund under Section 48(1) or a set-off under Section 18(5) of the Income-tax Act of income-tax alleged to be deemed under Section 49B thereof to have been paid by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 for income-tax purposes, irrespective of the other definition of a company in the Income-tax Act. Therefore, if the income of a company would be liable to be taxed on the ground that the income was deemed to have accrued to the company under the Income-tax Act, the income of the Durbar, in the like case, would be similarly liable to tax, if it arose out of the trading or business operations of the Durbar. The further contention that Section 2(1)(a) of the Trading Act only made the machinery se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 facts. The respondent's reply is twofold. It was first argued that the impugned provisions were not extra-territorial in their operation. It was next argued that even if they should be found to operate to a certain extent extra-territorially, that would be no ground to hold them invalid, by the municipal Courts. I shall deal with these contentions separately. Section 42(1) of the Indian Income-tax Act mentions income arising under specified circumstances under four heads. It brings within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 circumstances over which the power extends exist and examining the mode in which the power has been exercised. No doubt there must be some relevance to the circumstances in the exercise of the power. But it is of no importance upon the question of validity that the liability imposed is, or may be, altogether disproportionate to the territorial connection. " In Governor-General in Council v. Raleigh Investment Co. Ltd. ([1944] F. C. R. 229, at p. 253 ; 12 I. T. R. 265 at p. 278), Sir Patrick Spens, C. J., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction. 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 is in the affirmative because the source, i.e., the source from which the income accrues to the lender is known to be going into British India in cash or in kind and this incident is an integral part of the money-lending transaction. As mentioned above, the extent of the connection, if it is real, is not relevant to be discussed in considering the validity of the legislation. That is a matter of policy to be considered by the Legislature. Although in stating his opinion the Commissioner has relied on the last sub-head of income mentioned in Section 42(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 the relevant power [Sections 99(1) and 100 of the Government of India Act, 1935] is a power to make laws for the whole or part of British India or any federated State with respect to " taxes on income other than agricultural income . . . . . . " Only sub-section (2) of Section 99 need be particularly referred to. That sub-section provides that " without prejudice to the generality of the powers conferred by the preceding subsection no Federal law shall, on the ground that it would have an extra-territorial operation, be deemed to be invalid in so far as it appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. 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 right to receive this arose under the first agreement and was a part of the loan transaction. By reason of the second agreement the rate of commission was only reduced. There appears no foundation of fact for the alleged dereliction of duty on the part of Mr. Dinshaw in giving the loan, nor is there any fact to support the contention that this was compensation paid for such alleged dereliction on the part of Mr. Dinshaw. In my opinion the conclusion of the Income-tax authorities and the High Court is correct and the contention of the appellant is rejected. As reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect 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 75,212 shares of the Shapurji Bharucha Mills, Ltd. In the three years 1931-34 a total deduction of Rs. 28 lakhs in the assessment of those years was permitted by the Income-tax authorities on this ground. The assessee appears to have conceded that the items mentioned in questions four and five stood on the same footing and therefore there was evidence before the Commissioner on which he could come to the conclusion that the shares and debentures mentioned in these questions retained the character of business assets. The Commissioner further relied on the fact that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 particular case before us. On the other hand, we are called upon to apply the existing law to the facts of the case. It is to be noted that no specific section of the Indian Income-tax Act is mentioned in the question, but we are simply required to state whether the assessee is liable, under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act, to taxation, in the circumstances of the case. Our first duty then is to ascertain the facts of the case, and, for this purpose, we have to look at the admitted facts and the findings arrived at by the final Income-tax authority. The admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 " the loan was part of operations connected with the money-lending business" The question we have to decide is whether, having regard to the facts set out above, the assessee is (to quote the words used in the question framed by the Commissioner) assessable under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (III of 1926). That the Government Trading Taxation Act applies to the assessee cannot be controverted and has not been controverted. That being so, the assessee is liable to taxation under the Income-tax Act in the same manner and to the same extent as in the like case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 against any extra-territorial legislation. " It seems to me that the learned Chief Justice has, in the treatment of the case, rightly laid stress on the crucial point in the case, viz., that what brings the assessee within the ambit of the operation of the Indian Income-tax Act is the fact that the income in question was connected with his money-lending business in British India, and the loan from which the income arose was not an isolated transaction but formed part of the operations connected with the money-lending business of the Durbar. It is true that the Commissioner of Income-tax, in making his reference, had expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary 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, and there was nothing further to be said in the appeal. In my opinion, the case is covered by that part of the section, and that is sufficient to dispose of the appeal. It seems to me that the fact of money being lent and brought into British India, apart from being an important clause in Section 42 as it now stands, may be a very important circumstance in a particular case. It is certainly in this case a very important link in the chain of facts which may be relied upon for making the assessee liable to taxation. In the first place, all the shares in the Provident Investment Co. Ltd. are owned either by the Gwalior Durbar or its nominees. This fact by itself might be held to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits 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 and Chagla, J. But, when put in the form stated above, it appears to me to be quite an intelligible and serious contention, and I must confess that so far as this contention is concerned, I share the opinion expressed by Sastri, J., with regard to the illusory character of the so called nexus or territorial connection if the case is to be brought under the provision in question. The nexus or connection may appear to be a substantial one in a particular case in view of the facts of that case, but, in many cases, it may be brought down to a vanishing Page No: 0084 point. The question we have to answer is whether the words used in the new clause (which is intended to be of general application), standing by themselves ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Provident Investment Company Limited is assessable under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act (No. III of 1926). " It is somewhat unfortunate that a question of law said to arise in the case should have been formulated in this unspecific form which allows of any point relating to the assessment of the sum in question being argued, the scope of the argument being limited only by the ingenuity of counsel. And the position is by no means improved when the statement of the case submitted by the referring authority also leaves the matter equally vague and indefinite. It was accordingly not to be wondered at that a considerable portion of the debate at the bar was taken up with an avoidable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clearly untenable as the loan was admittedly advanced in Gwalior and the interest was paid and received in Gwalior. The fact that the Durbar was carrying on moneylending business in British India cannot make the interest received in Gwalior in respect of a money-lending operation effected in Gwalior income arising or accruing in British India. The Commissioner of Income-tax in his statement of the case no doubt found that the loan in Gwalior was part of the Durbar's business operations. But that was for the purpose of bringing the case within the Government Trading Taxation Act (No. III of 1926) which brings within the net of British Indian taxation only " income arising in connection " with the business carried on by a Dominion Government. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is no finding that the Durbar derived the income in question through any business connection within the meaning of Section 42 (1), though it would appear from the judgment of the learned Chief Justice in the High Court some reference was made to that aspect of the matter. Learned counsel for the appellant contested the liability to assessment of this sum (Rs. 2,59,726) on two grounds. In the first place it was urged that, on a proper construction of Section 2 of the Government Trading Taxation Act, 1926, read with the Indian Income-tax Act, 1922, any income that does not actually " arise " in British India to the Government concerned could not be subjected to income-tax. Section 2 runs thus : " 2. (1) Where a trade or business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed 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 used in Section 2 of that Act was general, Sections 3 and 4 of the Indian Income-tax Act, 1922, imported a territorial limitation on the income liable to be taxed in such cases. Nor can I accede to the argument that the phrase " all income arising in connection therewith " control and qualify the words " to the same extent as in the like case a company would be liable ", so as to exclude the operation of those provisions of the Indian Income-tax Act, 1922, which render certain categories of income which do not actually arise but are to be deemed to arise in British India. It was urged that when the Government Trading Taxation Act, 1926, was passed, all that could have been contemplated was that only income arising in British India in connection with the trading operations of a Dominion Government s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 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 charge, by means of a statutory fiction, income derived abroad in the case of a non-resident assessee was challenged as being ultra vires the Indian Legislature on the ground of its extra-territorial operation. The provision clearly assumes that the money is lent abroad and the relevant interest accrues or arises or is received outside British India ; and also that the person receiving it is not resident in British India ; for, otherwise, the interest would be taxable under the general provisions of the Act, and this special provision in Section 42 (1) would be unnecessary. The expression " all income, profits or gains accruing or arising through or from any money lent at interest " might suggest that such money should form the source from which the interest is to arise-a construction which might obvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 of a subordinate legislature to pass a taxing law having extra-territorial operation. The question arose whether a company incorporated in England and having its central management and control in that country was liable to pay Indian income-tax on its foreign income also because it earned the major part of its profits in British India in a business carried on through its partner. The provisions of Section 4 (1) (b) (ii) read with Section 4A(c) of the Indian Income-tax Act, 1922, as amended in 1939, which have the effect of bringing into charge the foreign income of a company incorporated and having its management and control in a foreign country, provided the major portion of its income arises in British India, was impugned as being ultra vires the Indian Legislature. Indicating the correct approach in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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, [Section 4A (c)] was a territorial connection "at least as solid as the connection given by the place of central control" and was therefore sufficient to justify the company being treated as liable to British Indian taxtation even in respect of its foreign profits. In view of this important pronouncement it seems no longer useful, in judging the validity of Indian Income-tax law having element of extra-territoriality, to enquire what are the limitations according to international law based on the comity of nations on the power of a subordinate legislature or whether the Indian Legislature has full power under its constitution to make laws having extraterritorial operation. The question reduces itself simply to this : Is the territorial connection relied on in the impugned provision as justifying its ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the degree of such connection being a matter affecting the policy and not the validity of the law. It appears to have been recognised even in those cases that the connection must be real and relevant. It is, however, unnecessary to enter upon a detailed discussion of those cases as the decision referred to above clearly indicates the principles which should guide us in the determination of questions such the one now before us. I am therefore of opinion that, judged by the test indicated by their Lordships, the impugned provision is ultra vires the Indian Legislature, and the Durbar is in consequence not chargeable to tax in respect of the sum of Rs. 2,59,726. I would accordingly allow the appeal in regard to this sum and answer question No. 1 in the negative. In other respects I concur in the judgment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1922, as these stood in 1926, read as follows :- "4. (1) Save as hereinafter provided, this Act shall apply to all income, profits or gins, as described or comprised in Section 6, from whatever source derived, accruing or arising, or received in British India, or deemed under the provisions of this Act to accrue, or arise, or to be received in British India." "42. (1) In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection or property in British India, shall be deemed to been income accruing or arising within British India, and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed to be, for all the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. 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 its ambit Governments of Indian States and other Dominions carrying on business or trade. The effect of the section is not to add to the categories of persons liable to tax under Section 4 of the Income-tax Act, but to include with one of those categories trading states and Dominion Governments carrying on trade. If this is the correct reading of the section, then the contention of the learned counsel for the Durbar that income deemed to arise in British India is outside the charging section cannot be sustained, because of the unambiguous language employed in clause (a) of Section 2 of Act III of 1926. The Government of a State or a Dominion, when trading, has the status of a company, and can be taxed in like manner and to the like extent. A company can be taxed for income which is deemed to arise in British India. So can a foreign Government carrying on trade within India or elsewhere. The decision of their Lordships of the Privy Council in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislature 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 conclusion that it is not. The enabling statute has to be fairly construed. The relevant power (Section 99(1) and 100 of the Government of India Act, 1935) is power to make laws for the whole or part of British India or any Federated State with respect to 'taxes on income other than agricultural income.' The power to tax agricultural income is given to the Provincial Legislatures and the exception throws no light on the construction of the phrase 'taxes on income.' None of the other provisions of the Act affords any guidance as to the income person who may be subjected to tax. Only sub-section (2) of section 99 need be particularly referred to. That sub-section provides that 'without prejudice to the generality of the powers conferred by the preceding sub-section, no Federal law shall, on the ground that it would have an extra-territorial operation, be deemed to be invalid in so far as it applies to ' certain persons and things. In their Lordships' view, this sub-section does no more than assume that there may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and examining the mode in which the power has been exercised. No doubt there must be some relevance to the circumstances in the exercise of the power. But it is of no importance upon the question of validity that the liability imposed is, or may be, altogether disproportionate to the territorial connection. If some connection exists, the legislature is not compelled to measure the taxation by the degree of benefit received in particular cases by the taxation. This affects the policy and not the validity of the legislation. " The validity of the argument of Sir Jamshedji Kanga that the impugned part of Section 42 makes liable to tax in British India foreign money paid in a foreign country to a foreigner towards payment of interest on a debt which was borrowed in foreign territory and is therefore ultra vires of the powers of the Indian Legislature may now be examined. The section read as a whole brings within the ambit of the charging section all income accruing or arising, whether directly or indirectly, in the following cases; (a) when arising through or from any business connection in British India (b) when arising through or from any property in British India, (c), when aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lender has lost all control over, and his ownership in, the money lent outside British India, no real connection could be held to exist between the lender and the country where the money is brought, particularly, when the interest on that money is payable in a foreign country. Here there is not necessarily any such nexus as to justify legislation taxing such interest. As above stated. The assumption underlying the legislation is that when money is lent at interest and is brought into British India, it is done under an arrangement and with the object of earning profits in British India. It may be otherwise in certain cases. It is possible that the borrower, after raising the loan, may change his mind, and, after bringing the money in India, may not use it for earning a profit. Such cases are conceivable, but all legislation has to be construed in a reasonable manner and considered as dealing with a normal man and a normal situation. Normally a person who raises money at interest outside British India (when he intends to bring) and brings it in British India, it may be presumed that he does so with the object of earning profit and paying interest out of that profit. Some exceptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their Lordships of the Privy Council in Patiala State Bank v. Commissioner of Income-tax, Bombay(1). That decision however only decided that the provisions of the section of the Government Trading Taxation Act (III of 1926) were attracted to income earned British India, even though the trading operations were conducted outside British India. That decision does not meet the whole of the argument of Sir Jamshedji Kanga in this Case. The learned Advocate-General attempted to support the answer given by the High Court on question No. 1 on two other grounds. He urged that the loan of fifty lakhs advanced to the Provident Investment Company was connected with the money-lending operations of the Durbar, and that it directly fell within the purview of Act III of 1926. The Assistant Commissioner of Income-tax, in deciding the appeal, did record a finding to that effect. But the learned Commissioner, in his statement of the case to the High Court, did not advert to that finding and agreed that the question as framed by the appellant, be referred to High Court. In my view, no question of law could arise or could gave been referred to the High Court on the finding of fact that the loan wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia rate for the time being but with a minimum of 6 1/2 per cent. per annum. In addition to the interest, it was provided that Messers. Tata Sons Ltd., who were the agents of the Tata Iron and Steel Co., Ltd., should give to Mr. Dinshaw a share of six annas in the rupee on the commission and other remuneration which, as agents, they were entitled to recover from the company. It was specifically provided that such share should continue throughout the unexpired period of the agency, whether any monies were due to the lender by the company or not. Mr. Dinshaw used the Durbar money for making this loan and, out of the six-annas share of the commission received by him, passed a fourannas share to the Durbar and kept two-annas share to himself. When the loan came to the notice of the Council of Regency, they objected to it on the ground that it was against the provisions in the will of the late Maharaja. Luckily, the Tata Iron and Steel Co., Ltd., itself wanted to pay off the loan at that time, and Mr. Dinshaw agreed to the termination of the loan, provided, as consideration therefor, the Tata Sons Ltd., agreed to give four-annas share in the commission as managing agents of the Tata I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agent of the Durbar for its financial operations on its inception and that relationship was not in any way altered or changed when the subsequent agreement was made. The result therefore is that the earning of the commission by the Durbar was not in any way dissociated from or independent of its money-lending operations. The agent, who paid this commission to the Durbar, was employed by it for those operations, and any commission earned subsequent to the termination of the agreement still remained the income earned out of those operations and cannot be said to be income earned from any other source. In these circumstances, I am of the opinion that the High Court returned a correct answer to question No. 2 It was urged before this Court that when the loan was repaid, the relationship of borrower and lender between the Tatas and Mr. Dinshaw as an agent for an undisclosed principal ceased, and what the agent got later from the Tatas by way of commission was income earned independently of his connection with the Durbar as its agent for financial or money-lending operations in India. It was suggested that this commission may have been earned by the agent on account of his own misco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trading Taxation Act (III of 1926). The third, fourth and fifth questions were treated on the same footing by the Commissioner of Income-tax and by the High Court. I however consider that question No. 3 can more appositely be dealt with independently of questions 4 and 5. Question 3 is in these terms : "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 the 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 Income-tax Act read with the Government Trading Taxation Act (III of 1926)." The facts on which this question has been framed are these : "During the course of the Durbar's moneylending transactions in Bombay and elsewhere, some of the mortgagors made default in payment of the principal and interest and the Durbar filed suits to enforce the mortgag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these properties are still part of the assets of the Durbar employed in money-lending operations or that their income has ever been used to any such operations. Chagla, J., in dealing with this question, made the following observations :- "Ordinarily to my mind these properties would continue to remain in the money-lending business as assets of that business standing to the credit of that business. It was for the assessee to show and to establish that he did not something whereby he withdraw these properties from the money-lending business and constituted them an independent investment. There is nothing whatever on the record to establish that position." With great respect to the learned Judge it has to be observed that no such presumption can be raised under any of the provisions of law against the assessee. It may be that in determining the question of fact, under certain circumstances, an inference would be drawn under the provisions of Section 114 of the Indian Evidence Act one way or the other. But no onus can be said to rest on the assessee to prove that he did some unequivocal act by which he withdrew these properties from his moneylending business and constituted them an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repayment of loans made by him to them, agricultural lands in Burma. The money which had been lent to those constituent had originally been borrowed by the assessee for the purpose of his money-lending business. The assessee admittedly carried on only one business for the year of assessment. He received the said lands in repayment of the loans made by him not of his own volition but of necessity, there being no other method of getting payment, and therefore those lands came into his possession directly in the course of his money-lending business and represented the capital originally borrowed. The assessee did not retain and cultivate those lands of his own inclination, but, owing to the fall in the price of agricultural lands, he was in possession and preserved his capital in the only way open to him pending a return of agricultural economic conditions which would make it possible for him to realise, if not all, at least some of the capital originally lent to the borrowers, the previous owners of the said lands. On these facts, it was held that he was entitled to a deductions of the interest paid by him on so much of the capital borrowed by him for business purposes as was represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of reorganization was made under which the Durbar gave up a considerable portion of their claim and took shares for the balance thereof. The Durbar gave up nearly 75 lakhs in the case of Sir Shapurji Bharucha Mills Ltd., and took 75,212 shares of the face value of Rs. 100 in satisfaction of the debt of Rs. 75,21,200. Similarly, owning to the failure of the Central Provinces Portland Cement Co., Ltd., the Durbar accepted preference shares on the new company named the C.P. Cement Company, in satisfaction of the amount due on the security of the debentures held in the C.P. Portland Cement Co., Ltd. Both the transactions, Mr. Dinshaw contends, amount to an investment of money in shares of the companies. The shares, in his opinion, should be treated as part of the investments of the Durbar, and when money lent was converted into shares in joint stock companies, it ceased to be part of the money-lending business. It is contended that the income from the original loan was income earned from business, but when shares were taken in satisfaction of the loan, the loan ceased to exist, and the shares became an investment of the Durbar on the same footing as any other investment. Hence, inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled under the provisions of the Income-tax Act, read with the Government Trading Taxation Act (III of 1926), to a refund under Section 48(1) or a set-off under Section 18 (5) of the Income-tax Act of income-tax alleged to be deemed under Section 49B thereof to have been paid by it as a shareholder in respect of the dividends received by it during the previous year." The facts as stated in the reference are : "The Durbar invested large sums in shares in various public companies besides the shares in the two companies referred to in questions Nos. 4 and 5. The dividends received during the year from these companies were Rs. 11,52,359. As these were treated to be income from investments not coming within the scope of the Government Trading Taxation Act, the Income-tax Officer did not include these in the assessment. The Durbar however claimed that it was entitled to a set-off or refund of income-tax deemed under the provisions of Section 49B to have been paid by it." Section 49B as it stood in the year 1939 provides :- "Where a shareholder has received a dividend from a company which has paid income-tax imposed in British India or elsewhere, he shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d because the section as it stood before its amendment did not say that "a person specified in Section 3 of the Act" alone was entitled to the benefit of refund. That section simply made reference to a shareholder who had received a dividend from a company. Such a shareholder was deemed in respect of dividends to have paid the incometax himself. The error committed in the High Court decision however does not affect the merits of the decision in any manner because, as already stated, Section 49B is not decisive of the point. No refund is permissible under the law unless the claim is brought under Section 48 of the Act. That section, as it stood in the year 1939, entitled certain persons mentioned therein to the benefit of refund. The question therefore for decision is whether the Gwalior Durbar as a "State" comes within the category of persons mentioned in Section 48, i.e., whether the Durbar is an individual, a company or local authority or a firm or other association of persons. The learned Judges of the High Court held that the Gwalior Durbar being a State is outside the description of persons mentioned in the above section. This answer, in my opinion, is a correct one, and nothi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duals, but the Government of a State, even though represented by the ruler for the time being, cannot appositely be described as an individual. It is certainly a corporation sole, but corporations have been separately mentioned in the section itself. Firms, companies, associations of persons, undivided families, are categories apart from one another stated in the section, and it could not be the intention of the legislature to bring within the purview of the word "individual", corporations or corporations sole. Such an interpretation of the word "individual" would conflict with the language employed in the Government Trading Taxation Act. Therein the trading State was given the status of a company for income-tax purposes and the status of an individual for other taxes. There would have been no necessity to confer a new status on a person who already fell within one class of persons mentioned in the Income-tax Act. In common parlance, the Government of a country can hardly be described as an individual. In my opinion, therefore, the learned Judges of the High Court rightly held that the Gwalior Durbar, in its status as the Government of a State, did not fall within the ambit of Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given in the negative and in favour of the assessee, and that in respect to all the other points the judgment appealed against should stand confirmed. As regards questions Nos. 2 to 6, the facts have been dealt with at great length by my Lord the Chief Justice in his judgment and as I substantially concur in the reasons given by him, there is nothing material which I can profitably add. I desire, however, to say a few words expressing my own views on the points raised in connection with question No. 1 which is by far the most important question in this case and upon which the views of all my learned brothers have not been altogether uniform. The circumstances giving rise to question No. 1 are very short. The Gwalior Durbar had admittedly been doing money-lending business in British India on a fairly extensive scale. Sometime in 1927, a company known as Provident Investment Co., Ltd., was incorporated in British India with its headquarters in Bombay and almost all the shares of this company were held by the Gwalior Durbar or its nominees. In 1933, the Durbar advanced. At Gwalior, a loan of Rs. 50 lakhs to the said company on the security of its first mortgage debentures of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s refer only to the machinery employed for purposes of assessment or to the rates at which a company could be taxed. In respect to matters coming under the Government Trading Taxation Act, a Dominion Government occupies the same position as a company and it is liable to be taxed in the same manner as a company is liable under the Income-tax Act. In the case before us, the business in respect to the profits of which the Gwalior Durbar has been assessed to income-tax is money-lending business, and it was undoubtedly in connection with this business that a sum of Rs. 50 lakhs was advanced to the Provident Investment Co., Ltd. It is true that the money was advanced at Gwalior and the interest payable on it was also received at that place but nevertheless it would come within the purview of the clause added to Sections 42(1) of the Income-tax Act by the amendment of 1939 which makes a company liable to be taxed for income accruing or arising "from any money lent at interest and brought into British India in cash or in kind." Sir Jamshedji concedes that if this clause applies, his client would have no case on this point, and the position that he takes up is this, that even if the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order and good Government of Canada or as being one of the specified subjects enumerated in Section 91 of the British North America Act, their Lordships see no reason to restrict the permitted scope of such legislation by any further consideration than is applicable to the legislation of a fully Sovereign State." The position undoubtedly has been made clear with regard to Dominion Parliaments by Section 3 of the Statute of Westminster, 1931, which provides that "the parliament of a Dominion has full power to make laws having extra-territorial operation." In the very recent case of British Columbia Electric Railway Company Ltd. v. The King, ([1947] AC 527 ; 15 ITR Supp. 1) decided by the Judicial Committee of the Privy Council, a question was raised as to whether Section 9(B), sub-section 2(a), which was added to the Income War Tax Act, 1927, and which imposed an income-tax of 5 per cent. upon all non-residents in respect of all dividends received from Canadian debtors, irrespective of the currency in which the payment was made, was ultra vires the Canadian Legislature by reason of extra-territoriality. The question was answered in the negative and Viscount Simon who delivered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orial operation in sub-section (1)." It cannot be argued, therefore, that a statute passed by the Indian Legislature must be held to be invalid because there are extra-territorial element in it. Sir Jamshedji argues that even assuming that Section 99 does not in terms forbid extra-territorial legislation, the provision of the Income-tax Act, which is challenged here, is not a legislative provision which really relates to a subject-matter enumerated in Schedule 7 to the Government of India Act. Tax on income other than agricultural income is undoubtedly a subject upon which the Federal Legislature is competent to legislate, but what is said is, that the new clause in section 42(1) of the Income-tax Act goes against the very conception of incometax as it is recognised in the legislative practice in England. It is argued that the cardinal idea implicit in an income-tax is that there must be a territorial connection or nexus between the State imposing the tax and the person to be taxed, and this nexus being totally absent in the present case, the impugned legislative provision is ultra vires the Indian Legislature. The argument is seemingly attractive and it is necessary that it shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent in British India, his total income shall include all income, profits and gains which accrue or arise to him without British India. The second part of Section 4A (c) provides that for purposes of the Act, a company is resident in India in any year if its income arising British India in that year exceeds its income arising without British India in that year. The validity of both these sets of provisions was called into question on grounds of extraterritoriality in two leading cases, both of which came up before this Court in appeal and ultimately went up to the Judicial Committee and in both these cases the validity of the impugned provisions was upheld. In the case of Governor-General in Council v. Raliegh Investment Co., Ltd., ([1944] FCR 229 ; 12 ITR 265) the respondent company which was incorporated and had its office in England was assessed to tax and super-tax on the dividends it received from the shares it held in nine sterling companies which also were incorporated in England but carried on business in India. The respondent paid the tax under protest and then brought a suit in the Original Side of the Calcutta High Court for a declaration that the provisions in Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... With regard to the other set of provisions referred to above, the question of their invalidity by reason of extra-territorial operation came up for consideration both by this Court as well as by the Privy Council in the case of Wallace Brothers Ltd. v. Commissioner of Income-tax, Bombay. ([1945] 7 FCR 65 ; 13 ITR 39, 75 IA 86. [1948] 10 FCR 1 ; 16 ITR 240) In this case a company incorporated in the United kingdom and having its management and control in that country owned a share in a firm which carried on business in Bombay. Under the terms of the partnership, the company had extensive powers of management and control over the business of the firm. In a particular year, the income of the company arising in British India was over Rs. 17 lakhs, whereas its income without British India amounted to about Rs. 7 lakhs only. The company was treated as a resident of British India under the second part of Section 4A(c) of the Income-tax Act and assessed to tax on its total income including the sum of Rs. 7 lakhs which accrued to it out of British India. The question raised on behalf of the company was that the provisions of the Income-tax Act under which they were assessed were ultr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s derived would be sufficient to establish a territorial connection. I will now examine the impugned clause in Section 42(1) of the Income-tax Act and see whether it really ignores the territorial nexus which is essential in income-tax legislation. As has been said already, even before the amendment of 1939, all income, profits or gains arising directly or indirectly through or from any business connection in British India or through or from any property in British India could be taxed. If a foreign company carries on money-lending business in British India and earns profits by way of interest, there is no doubt that it can be validly taxed for the same, and Sir Jamshedji does not say that this clause in Section 42(1) of the Income-tax Act is in any way void or inoperative. When the legislature made the amendment in 1939, it apparently wanted to prevent circumvention of the existing provision by persons who in substance earned interest on money lent in British India but camouflaged the transaction by advancing loan outside India, the money lent or its equivalent in kind being subsequently brought into British India. I agree with the learned Advocate-General that the words "mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act to deduct the amount paid in tax from the interest payable to the absentee debenture-holders. The intention of the legislature was undoubtedly to tax the debentureholders who actually received the interest, but as it was doubtful whether the Act could be enforced against them, they being nonresidents, the primary liability was imposed upon the company. It was held by the High Court that the legislation was not invalid by reason of extra-territoriality and Dixon, J., in the course of his judgment observed as follows : "To derive income from a country involves the person deriving it in a territorial connection with the country sufficient to support the validity of an exercise of the power in respect of the person as distinguished from the income." In Broken Hill South Ltd. v. Commissioner of Taxation, New South Wales((1937) 50 Com. LR 337), it was held that a foreign company in receiving interest on debentures secured by mortgage of property situated in New South Wales could be taxed by the New South Wales State for the income received as interest. In this case it appears that the foreign company was also carrying on business in New South Wales but that fact was not at all consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be answered against the assessee without embarking on any discussion as to the validity of the later clause which makes taxable all income or profits arising out of money lent and brought into British India. The Commissioner of Income-tax, however, expressed his opinion on the basis of this later clause and as the point was raised and elaborately argued both in the High Court as well as before us, it is proper, I think, that we should record our definite opinion upon it. BY THE COURT. On question No. 3 submitted by the Commissioner of Income-tax, Bombay, we hold that 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 a decrees against mortgagors who had failed to pay the amounts advanced to them in the course of the money-lending business of the Durbar for the assessment year 1939-40 is not income arising in connection with the said business within the meaning of Section 2 of the Government Trading Taxation Act, and that the income arising from such property is not liable to assessment under the provisions of the Indian Incometax Act read with the Government Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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