TMI Blog1955 (11) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... n periods of this activity, other individuals and departments or governments of the Provinces of Indian States had been associated with the business on a profit-sharing basis, but after 1944 the venture was exclusively carried on by the Province which in 1926 became the sole owner of the factory. After the partition the ownership of the factory and the business came to vest in the Punjab Province of Pakistan. The factory had some agents who worked outside the Province, but they were accountable to the head office of the factory which all along was situate within provincial limits. On 21st February, 1947, an Income-tax Officer served on the managing agents of the factory a notice under section 34 of the Incometax Act requiring them to furnish a return of the income of the factory for the assessment year 1942-43, and by his order dated the 29th March, 1947, he assessed the income of the Province of the Punjab from this source outside the Province at ₹ 3,06,327. This assessment was followed by others for the years 1943-44, 1944-45, 1945-46, 1946-47, 1947-48 and 1951-52, the aggregate tax demand for the whole of this period being ₹ 25,22,556-9-0. The pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Issues on merits. 5. Is the plaintiff Province not liable to income-tax at all under the provisions of the Income-tax Act? 6. Is the plaintiff not liable to tax in respect of goods sold outside British India before partition and outside Pakistan after partition? 7. Is the plaintiff Province not liable to income-tax in respect of the goods sold by the Punjab Province before the 14th August, 1947? 8. Whether the goods sold by the plaintiff Province through the commission agents are not liable to income-tax? 9. Whether a part of the profits paid to the Forest Department by the plaintiff Province as price of the goods supplied by that Department are not liable to income-tax? 10. Whether the plaintiff Province is not entitled to the grant of any declaratory decree? The suit was fixed for hearing the evidence yesterday but with the consent of the parties we decided to hear arguments on the legal issues and deferred the hearing of evidence until we thought evidence to be necessary for the determination of the suit. We have accordingly heard Mr. Faiyaz Ali, Advocate- General of Pakistan, for the defendant Federa tion, and Mr. Changez, Advocat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side and any one or more of the Provinces on the other or if two or more Provinces are arrayed against one another, because it is in the highest degree undesirable that the Federation and Provinces should be fighting out their battles in ordinary Courts like common litigants. Mr. Faiyaz Ali admitted that the dispute prima facie fell within the terms of section 204, but relying on the words with which the section opens subject to the provisions of this Act he contended that these words must be taken to mean subject to the provisions of this Act or any other Act passed by a legislature in exercise of the powers conferred on it by this Act or any law recognised by this Act as being in force after the passing of the Act. The learned Advocate-General had to resort to this construction in a desperate effort to support the argument that because the Incometax Act provides a complete machinery for the adjudication of disputes relating to income-tax, being an exhaustive code not only governing rights and liabilities arising out of assessments to such tax but also the procedure for obtaining the determination of disputes relating to such rights and liabilities, section 204 must be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said: As regards the assessability of the profits which accrued or arose out of the Punjab, there is little doubt according to interpretation which is put on provision of section 155(1) of the Government of India Act. The next question is the assignment of status. The proceedings have been started on the assumption that the Punjab Government is an' association of persons' which is one of the taxable entities set out in section 3 of the Income-tax Act. The Punjab Government is not an individual which in its plain dictionary meaning means a' particular person indivisible'. It is not a firm, nor Hindu undivided family, nor a company even by legal fiction set out in the Government Trading Taxation Act of 1926 which excludes British India from its operation. It is neither a local body. The only status that we can assign to it is an' association of persons' which is a wide term to cover a case of the kind. Accordingly the Punjab Government is held assessable in that status. Before us also Mr. Faiyaz Ali relied upon section 155 of the Government of India Act and contended that that section has the effect of creating a liability to income-tax if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny property used or occupied for the purposes of such trade or business or any income accruing or arising in connection therewith. Thus, while in India the liability of a State to income-tax has to be created by Parliament by law, section 155 of the Government of India Act declares that if any such liability is created by an Act of the Federal Legislature, then that liability shall not be affected by the main provision in sub-section (1) of that section that the Government of a Province shall not be liable to Federal taxation in respect of income accruing, arising or received in Pakistan. The section is a counterpart to the preceding section which exempts the property vested in His Majesty for the purposes of the Government of the Federation from all taxes imposed by, or by any authority, within a Province, unless a Federal law provides otherwise. It appears to us, therefore, that if there be no specific legislation making the Government of a Province liable to income-tax in respect of its trade activities, section 155 of the Constitution Act is not at all in point. To attract the operation of that section either the Income-tax Act should impose on the Province a liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctory, though several Provincial Governments had been engaging themselves in activities which where in the nature of trade or business. In this very Province the business of generating electrical energy is being carried on by the Provincial Government for over ten years, but no Income-tax Officer ever thought of assessing the profits from that business. There is another aspect of the matter which is being completely ignored both by the learned Advocate-General of Pakistan and the Government of Pakistan which insists upon its right to tax the Provincial Government. If, as held by the Income-tax Officer, and contended for by Mr. Faiyaz Ali, the Government of a Province is an association of persons within the meaning of section 3 of the Income-tax Act, the Government of Parkistan also, precisely for the reasons advanced before us, must be held to be an association of persons because in this respect no distinction is possible between the Government of Pakistan and the Government of a Province. Under the existing constitutional position both are different branches of the Crown, carrying on their statutory duties within their respective spheres as defined by the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the Government of a Province is an association of persons. In seeking to discover the sense in which this expression is used in the Income-tax Act it becomes necessary to refer to the provisions of section 3 as a whole as well as to the words of the section as it provisions of section 3 as a whole as well as to the words of the section as it stood before it was amended by Act VII of 1939. In the Act of 1922, as amended by Act II of 1924, the section after the words Hindu undivided family contained the words company, firm and other association of individuals. The present shape to the section was given by the Indian Income-tax (Amendment) Act, 1939, VII of 1939, with the result that instead of other association of individuals we now have the expression other association of persons. Now, since the words individual and persons are both used in the same section it is obvious that there must be some important distinction between the two. On the present words of the section, an association need not be composed of individuals though its members must be persons, i.e., individuals or legal persons or both, the word person as held in Income Tax Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be amended in 1939 and the expression association of individuals to be substituted by association of persons. While every individual must be a person, the converse is not true because an artificial or a legal person, whether it is a corporation aggregate or a corporation sole, is not an individual. An association, therefore, is liable to tax under section 3 as it stands at present even if its members are not individuals. Such members must, however, be persons, whether individuals or legal persons or both. Nor are the cases cited by Mr. Faiyaz Ali, in which the Crown or a State was held to be a person, in point, because here the question is not whether the Provincial Government is a person which it may well be but whether it is an association of persons. As already pointed out, an association of persons must consist of determinate members and the expression is wholly inapplicable to the persons who are running the Government of a Province in Pakistan. Under the Constitution Act the executive authority of a Province has to be exercised by the Governor, either directly or through officers subordinate to him, though he must have a Council of Ministers to aid and adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act or section 9 of the Code of Civil Procedure no suit of the present kind lies. The necessary conditions of section 204 of the Government of India Act being satisfied the suit is plainly competent. There is a real distinction between those cases where a suit was held to be incompetent as, for instance, Raleigh Investment Company Limited v. Governor-General in Council([1943] 11 I.T.R. 393. ), Commissioner of Income-tax, West Punjab v. Tribune Trusta([1948] 16 I.T.R. 215.) and Pindi Kashmir Transport Limited v. Commissioner of Income-tax, Lahore( P.L.R. [1955] Lah. 1.), where the question was whether an assessment had been made according to law, the Income-tax Officer having jurisdiction on the subject matter and over the assessee, and the present case where the question raised is that the Income-tax Officer had no jurisdiction at all to proceed against the Provincial Government. Here there is a complete absence of jurisdiction and if the Income-tax Officer had no authority to tax the Provincial Government, his proceedings are void, and the assessment order is not an answer to the suit on the ground that under the Income-tax Act that order is final. The present proceedi ..... 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