TMI Blog1951 (9) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... i made as a result of 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 ₹ 3,54,168 and ₹ 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slative competence of the Central Legislature, we have to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power the Legislature to impose a capital levy under entry 55 and that was the 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 va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... threw little light on the matter. It may be that what is intended is a tax on the total value of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered from another aspect because, according to Sir Jamshedji, inasmuch as the Legislature has legislated under entry 55, not only with regard to individuals and companies 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt because it was not open to the Legislature to tax other categories of assessees than individuals and companies. But I think it sufficient to apply the first test laid down by the Privy Council 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I agree-that, in construing ' income in entry 54, we must give to that expression the widest connotation. But however wide, the connotation may be, as I shall presently point out, the connotation cannot possibly convert 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. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome or persons who may be subjected to tax. Therefore, the Privy Council was confronted with the same difficulty as we are as to what is the income which Parliament contemplated when it used that expression in entry 54. And the difficulty 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of Income Tax Act. Than he goes on to explain what 'capital accretion' is (p. 525): That rules out, of course, the well-known case of a casual profit made upon an isolated buying and selling of some article; that is a capital accretion, and unless it is merged with other similar 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 onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lifornian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 Tax Cas. 159, which is an earlier decision than the one I have referred to for the purpose of citing the judgment of Rowlatt J., at p. 165 Lord Justice Clerk very lucidly sums up the true position. And oven then, Lord Justice Clerk says that it was a well settled principle, 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 -- o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to a tax payer, without distinguishing whether the profits or gain should be regarded as a receipt on capital or on income or revenue account. Now, I do not agree for a moment that, in construing the expression income in entry 54 of List I, we must be guided by a reasonable understanding as to what income means. We must be more guided by the understanding that 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. Now surely, this is hardly a test that we can apply to the construction of the expression 'income' in entry 54. As I said before, it is not a case of common understanding. What we have to try and determine is what Parliament understood by the expression income when it put that expression in the Constitution Act. The second case is Merchants' Loan T. Co. v. Smietanka. (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 mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the position in Australia or in the United States of America, the position under English law is perfectly clear. And if capital accretion could never have been looked upon as income by an English lawyer, then, in construing a Parliamentary statute, to my mind, it would not be correct to give to the expression income a connotation so wholly foreign to English legislative practice. It is for this reason that I am unable to accept the contention 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for determination is whether it was competent to the Central Legislature to enact such a legislation and to impose a tax on capital gains. 14. Now, the competence of the Central Legislature to enact such legislation can be sought, if at at all, in Entries 54 and 55 in List I of Sch. 7 to the Government of India Act. Of these two entries, Entry 54 is, in one sense, the more comprehensive, because it includes within its scope not only certain classes of assessees but all classes of 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 chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooked a particular topic of legislation and had left it to be dealt with by the Governor-General under Section 104. Further, it was not necessary that the impugned legislation should be refer-able to one specific entry in the List. It was sufficient if legislative competence could be deduced from the relevant List or Lists taken as a whole. These principles, then, being well established, how are they to be worked in practice along with the principle which Sir Jamshedji asks us to accept, namely, that, if by Parliamentary 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeded to observe (p. 99): Income tax legislation in the United Kingdom has --putting the matter broadly -- proceeded on the lines that there is subjected to income tax all income arising within the United Kingdom and (independently of remittance to the United Kingdom) some, but not all, income arising abroad belonging to a person resident in the United Kingdom. The resulting general conception as to the scope of Income Tax is that, given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him, Income Tax may properly extend to 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 conferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was that the Bombay Prohibition Act, 1949, fell within Entry 14 of List 2, Sch. 7, Government of India Act, which is Public health and sanitation. Against this, it was strenuously urged before the Full Bench by Sir Nusserwanji Engineer that, by a long course of legislative practice in England, the words ''public health and sanitation had come to acquire a particular meaning, and prohibition could not conceivably be included as an item within the scope of the entry Public health and sanitation. Now, even a cursory acquaintance with English statute law is sufficient to know that, ever since the Public Health 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which merely lay down that income ' in any particular Act or Acts does not include a capital gain, they are, in my opinion, of negative value because they do not determine that the word income is incapable of including within its scope capital gains. Now, the series of authorities in England, which my Lord the Chief Justice has set out in his judgment, no doubt make it abundantly clear -- and I do not wish to reproduce the authorities-- that anything in the nature of capital gains is outside the concept of income under the fiscal statutes in the United Kingdom. And as pointed out by Rowlatt J. in Ryall V Hoare, and V. Honeywill (1903) 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 decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the substance and provisions of the particular Act must be considered. That a particular label or a general name baa been given to the Act is of little or no importance where there is no ambiguity in the provisions of the Act. The word income is comprehensive enough to include the subject dealt with in the Act, and its vise in this connection is in accordance with common understanding, which is one main due to the meaning of the Legislature... Then Starke J. observed (p. 213):-- Income is as large a word as can be used to denote a person's receipts...: it signifies that which comes in. An 'Act to impose a tax upon incomes' is cot less general in scope, 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 decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der a stock dividend made lawfully and in good faith against profits accumulated by a corporation. Pitney J., in dealing with this matter, observed [p. 523 (206)] ; The fundamental relation of 'capita!' to 'income' has been much discussed by economists the former being likened to the tree or the land, the latter to the fruit or the crop; the former, depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose we require only a clear definition of the term 'income', as used in common speech, in order to determine its meaning in the Amendment; and haying formed also a correct judgment as to the nature of a 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt thing. The observations of Douglas J. also make it abundantly plain that the word income is a term of the widest possible import and is capable of including within its scope all actual receipts although they may have been obtained as a result of selling a capital asset. 21 I am, therefore, of the opinion that the true meaning to be placed on the entry Taxes on income is income in the widest sense, and certainly income which would include capital gains as defined in Section 12B, Indian Income Tax Act, which are gains actually realised as a result of sale, exchange or transfer. That being so, the Legislature clearly had authority under Entry 54 to legislate in respect of such capital gains as they have done by Act 22 of 1947, and is my opinion, the Act is wholly intra vires, 22. In this view, it becomes unnecessary for me to consider whether 'the Act is also valid under Entry 55. But it has been urged that, if the Act is valid under Entry 55, since Entry 55 is applicable only to individuals and companies, we should put a narrower interpretation on Entry 54 and exclude from its scope what is included in Entry 55. Now, if we have to give the wides ..... X X X X Extracts X X X X X X X X Extracts X X X X
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