TMI Blog1948 (11) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... runs as follows: 2 (1) Where a trade or business of any kind is carried on by or on behalf of the Government of any part of His Majesty's Dominions, exclusive of British India, that Government shall in respect of the trade or business and of all operations connected therewith, all property occupied in British India and all goods owned in British India for the purposes thereof, and all income arising in connection therewith, be liable (a) to taxation under the Indian Income Tax Act, 1922, in the same manner and to the same extent as in the like case a company would be liable; (b) to all other taxation for the time being in force in British India in the same manner as in the like case any other person would be liable. (2) For the purposes of the levy and collection of Income Tax under the Indian Income Tax Act, 1922, in accordance with the provisions of Sub-section (1), any Government to which that sub-section applies shall be deemed to be a company within the meaning of that Act, and the provisions of that Act shall apply accordingly. 2. The Maharaja died in about 1925 and a Council of Regency was appointed, presumably as the present Maharaja was a minor at the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them in course of the money-lending business of the Durbar, is income arising in connection with the said business within the meaning of Section 2. Government Trading Taxation Act, and whether the income arising from such property is liable to assessment under the provisions of the Income Tax Act read with the Government Trading Taxation Act, III [3] of 1926. (4) Whether the dividend of Rs. 1,88,030 received by the Durbar from the Sir Shapurji Bharucha Mills Ltd is tax-ble in the circumstances of this case under the provisions of the Income tax Act read with the Government Trading Taxation Act, III [3] of 1926. (5) Whether the dividend of Rs. 83,447 received by the Durbar from the CP. Cement Co Ltd., is taxable in the circumstances of this case under the provisions of the Income Tax Act read with the Government Trading Taxation Act, III [3] 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 [3] of 1926 to a refund under Section 48(1) or a set off under Section 18 '5), Income Tax Act of income tax alleged to be deemed under Section 49-B thereof to have been paid by it as a share-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly 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 Income Tax Act. As held in the Patiala Bank case A.I.R. (30) 1943 P.C. 181 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, 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. 8. The further contention that Section 2(1)(a) of the Trading Act only made the machinery sections of the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the 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. 11. 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. 12. Section 42(1), Income tax Act, mentions income arising under specified circumstances under four heads. It brings within the ambit of the charging section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eny that once any connection with New South (sic) 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 p 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 assertaining 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 The Governor-General in Council v. Raleigh Investment Co. Ltd. A.I.R. (31) 1944 P.C. 51 Sir Patrick Spans C.J. after citing the above passages with approval observed as follows: If some connection exists the Legislature is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay, 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. 15. Although in stating his opinion the Commissioner has relied on the last sub-head of income mentioned in Section 42(1). It may be noted that in the question submitted for the Court's opinion the reference is not limited to that sub-head only. The question is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly couched in language different from that employed in Section 65 of the earlier Act of 1915 and that sub.s. (1) of Section 99 did not in terms exclude extra-territorial legislation nor did sub.s. (2) specify exhaustively the subjects upon which such legislation was permissible. In Wallace Bros, Co. Ltd. v. The Commissioner of Income-tux, Bombay City and Bombay Suburban District A.I.R. (35) 1948 P.C. 118 their Lordships of the Judicial Committee observed that the relevant power (Sections 99(1) and 100, 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 sub-section no Federal law shall on the ground that it would have an extra territorial operation be invalid 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 be some laws having extra-territorial operation validly made pursuant to Sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 Darbar 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. 19a. As regards question three, the Commissioner of Income tax in his letter of reference has stated as follows: During the course of Durbar's money-lending transactions in Bombay and elsewhere some o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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. 21. 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 Bnarucha Mills Ltd. In the three years, 1931-34, a total deduction of 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 the previous year the appellant had applied to make a reference to the Court in respect of the income derived from these shares and debentures, but withdrew his application. This does not of course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 2,49.726 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 [3] 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 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 Income Tax Act, read with the Government Trading Taxation Act, to taxation, in the circumstances of the case. 25. 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 facts are stated by the Commissioner of Income Tax in his letter of reference in these words: A company styled the Provident Investment Co. Ltd. was incorporated in British India in 1927 with head quarters in Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner, 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. 27. 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 Income Tax Act read with the Government Trading Taxation Act, III [3] of 1926. 28. 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 company would be liable. In the present case, the interest on the loan which is said to represent the income was paid at Gwalior, and therefore the question arises as to whether in spite of this fact, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untry to prevent a law imposing a 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 extraterritorial 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 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. 29. It is true that the Commissioner of Income Tax, in making his reference, had expressed an opinion to the following effect: As the money lent was brought into British India, the income therefrom is deemed to accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the basis of 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 constitute a business connection. See Commissioner of Income Tax, Bombay Presidency and Aden v. Gurrimbhoy Ebrahim and Sons Ltd. A.I.R. (23) 1936 P.C. 1, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 connexion, if the case is to be brought under the provision in question. The nexus or connexion 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 point. The question we have to answer is whether the word used in the new Clause (which is intended to be of general application), standing by themselves are sufficient to constitute such a nexus as is contemplated by the authorities which deal with the subject. My brothers Mahajan and Mukherjea JJ. have suggested that the lending of the money at interest and its being brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed a different conclusion. 33. 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, the appellant herein) on the loan advanced to the Provident Investment Co. Ltd., is assessable under the provisions of the Income Tax Act read with the Government Trading Taxation Act (No. III [3] 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 therefore not a matter for surprise that much of the debate at the bar was taken up with an avoidable controversy as to the precise point or points on which the referring authority intended to seek the opinion of the Court. While on the one hand it is not desirable to state the questions of law in a purely abstract form without relating them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 money-lending 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 [3] 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. Indeed, the learned Advocate-General did not seriously press this extreme suggestion. 36. It was next urged with more plausibility that the sum in question was properly assessed to Indian Income Tax, as on the facts found, it coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossibly 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. 37. 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, Government Trading Taxation Act, 1926, read with the 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 of any kind is carried on by or on behalf of the Government of any part of His Majesty's Dominions, exclusive of British India, that Government shall, in respect of the trade or business and of all operations connected therewith, all property occupied in British India and all goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Income Tax Act, 1922, imported a territorial limitation on the income liable to be taxed in such cases. 39. Nor can I accede to the argument that the phrase all income arising in connection therewith control and qualify the worda 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 Income Tax Act, 1922, which render certain categories of income which do not actually arise but are to 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 should be subject to taxation and not income earned abroad. It is, however, to be observed that the Income Tax Act even in its original form made certain categories of income not strictly arising in British India chargeable to tax by providing that they shall be deemed to have accrued or arisen or to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 obviate the constitutional objection as the source would then be in British India. (See Governor-General in Council v. Raleigh Investment Co., Ltd. A.I.R. (31) 1944 F.C. 51. But such a construction would restrict the application of the provision only to those rare but possible cases where the payment of interest is dependent on the earning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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), 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, were impugned as being ultra vires the Indian Legislature. Indicating the correct approach in such cases, their Lordships made the following pertinent observations: Their Lordships do not approach the matter on the formal lines embodied in these contentions (which were also more or less the lines on which this Court proceeded in Raleigh Investment Co's. case A.I.R. (31) 1944 P.C. 51 as well as in the case then under appeal. There is no rule of law that the territorial limits of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 4A(C)) was a territorial connexion at least as solid as the connexion given by the place of central control and was therefore sufficient to justify the company being treated as liable to British Indian taxation even in respect of its foreign profits. 45. In view of this important pronouncement it seems no longer useful, in judging the validity of an Indian Income Tax law having elements of extra-territoriality, to enquire what are the limitations, according to international law based on the comity of nations, on the power of a sub-ordinate Legislature or whether the Indian Legislature has full power under its constitution to make laws having extra-territorial operation. The question reduces itself simply to this : Is the territorial connexion relied on in the impugned provision as justifying its extra-territorial operation sufficient for the purpose for which it is used ? The only territorial connexion set forth in the impugned portion of Section 42(1) is the bringing of the borrowed money into British India and the purpose for which it is used is the taxation of the interest received abroad by the non-resident lender. To my mind, there is no relevant and sufficient nex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e degree of such connexion 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 connexion 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 as the one now before us. 48. 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 1 in the negative. On the other question I substantially concur in the judgment of my Lord the Chief Justice, Mahajan, J. 49. This is an appeal, on a certificate granted by the High Court of Bombay under Section 205, Constitution Act of 1935, from a judgment of that Court answering in favour of the respondent, the Commissioner of Income Tax, Bombay, certain questions of law referred to the High Court by him. 50. The constitutional q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stood in 1926, read as follows: 4. (1) Save as hereinafter provided, this Act shall apply to all income, profits or gains, 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 connexion or property in British India, shall be deemed to be 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 purposes of this Act, the assessee in respect of such Income Tax. Provided that any arrears of tax may be recovered also in accordance with the provisions of this Act from any assets of the non-resident person which are, or may at any time come, within British India. 54. Income deemed to arise in British India, though not actually arising, was chargeable to a certain extent under the Act. By the amendment of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax Act, but to include within 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 [3] 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 Patiala State Bank v. The Commissioner of Income Tax, Bombay A.I.R. (30) 1943 P.C. 181 has settled the point that Section 2, Government Trading Taxation Act, 1926, is not confined in its operation to trade or business carried on in British India, and that, if any Indian State carries on a banking business, the income, profits and gains of that business which accrue, arise or are received in British India would be liable to taxation u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or persons 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 invalid 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 be some laws having an extra-territorial operation validly made pursuant to Sub-section (1). It is no help one way or another in determining the authorized area of taxes on income.... The resulting general conception as to the scope of Income Tax is that given a sufficient territorial connexion between the persons 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not the validity of the legislation. 59. The validity of the arguments 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 arising through or from any asset or source of income in British India, and (d) when arising from any money lent at interest and brought into British India in cash or in kind. It is the business connection in Clause (1) the sitution of property in British India and the existence of any asset or source of income in British India in Clauses (2) and (3) and the bringing in British India of lent money at interest in the last clause, that is the basis of liability. The territorial connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exceptional cases may not fall within the presumption on the basis of which the impugned clause of Section 42 has been enacted. But that fact would not make the clause ultra vires. In my view, money lent outside British India and brought in India is almost on par with the existence of an asset in British India, or with the clause regarding business connection of a non-resident in British India. Every legislature has power to legislate and enact laws in such a way that its revenue laws are not de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vocate-General attempted to support the answer given by the High Court on question 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 [3] 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 the High Court. In my view, no question of law could arise or could have been referred to the High Court on the finding of fact that the loan was a part of the money-lending operations of the Durbar and the income arose by reason of the Durbar's business connection in British India. The High Court could have declined to answer the question of law referred to it on the ground that, on the finding of fact recorded by the Assistant Commissioner of Income Tax, no question of law arose. It seems to me that the statement of facts on which the question was framed by the Commissioner is not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod 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 anna share of the commission received by him, passed a four anna share to the Durbar and kept two anna 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 anna share in the commission as managing agents of the Tata Iron Steel Co., Ltd. Accordingly, the loan was paid off. Fresh agreements were entered into on 29th July 1927, according to which the share in the commission as managing agents, payable by Tata Sons Ltd., was reduced to four annas in the rupee. The amount payable to the Durbar was correspondingly reduced from four to two annas. The Durbar continued to receive two anna share of the commission from Mr. Dinshaw, and, during the assessment year, the sum received by the Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2. 67. 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 misconduct or misbehaviour in that capacity, but it could not be said to be part of the money-lending operations of the Durbar conducted by him. This argument seems to be devoid of force, in view of the clear terms of the original agreement, under which commission was payable even if the loan was terminated. The period during which the commission was payable was the period of the managing agency which the Tata Sons Ltd. had obtained from Tata Iron Steel Co. Ltd. The commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enforcement of mortgage decrees against mortgagors who had failed to pay the amounts advanced to them in course of the money-lending business of the Durbar, is income arising in connection with the said business within the meaning of Section 2, Government Trading Taxation Act, and whether the income arising from such property is liable to assessment under the provisions of the Income tax Act read with the Government Trading Taxation Act III [3] of 1926. The facts on which this question has been framed are these: During the course of the Durbar's money-lending 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 mortgages and obtained decrees for the sale of the mortgage properties. The mortgaged properties which are all in British India were put up for sale in execution of these decrees and were purchased in court auctions by the Durbar and the Durbar still continues to own these properties. 70. On the facts stated, it is difficult to reach the conclusion arrived at by the High Court to the effect that the case is covered by the observations made by Sir John Beaumont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id something whereby he withdrew 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, 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 money-lending business and constituted them an independent investment. The decision of the Bombay High Court in Himatlal Motilal and Ramanlal Lallubhai v. The Commissioner of Income Tax, Bombay (1932) 6 I.T.C. 159, is authority for the proposition that where in part satisfaction of a mortgage debt, the mortgagee purchases mortgage-property and sells it later on, he cannot claim the loss as an allowable business loss in the loan transaction. It was held that the loss was loss of capital invested in the purchase of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore 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 bor-rowers, the previous owners of the said lands. On these facts, it was held that he was entitled to a deduction of the interest paid by him on so much of the capital borrowed by him for business purposes as was represented by the agricultural lands, under Section 10(2)(iii), Income Tax Act, 1922. 72. The facts of this case bear no analogy to the facts of the present case. My brother Patanjali Sastri, who in that case represented the Commissioner of Income Tax, argued therein that the Commissioner did not question the proposition that the lands formed the assets of the business. In the present case, that is a matter that has to be determined as a question of fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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, income arising from such investment should not be included for purposes of supertax. From the record of this case, I find that this question was raised before the Assistant Commissioner of Income Tax during the assessment for the Income Tax year 36-37, and was decided against the Durbar. This decision was upheld by an order of the Commissioner of Income Tax passed on 16th June 1938. He too definitely held that dividends amounting to Rs. 4,91,104 received in respect of 75,212 shares in the Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 49-B 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 be deemed, in respect of such dividend, himself to have paid the Income Tax (exclusive of super-tax) paid by the company on so much of the dividend as bears to the whole the same proportion as the amount of income on which the company has paid, such Income Tax bears to the whole income of the company. This section in plain terms says that where a. company has paid or distributed to a shareholder any dividends, then such shareholder shall be deemed in respect of such dividends himself to have paid Income Tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 nothing that Sir Jamshedji Kanga said in his arguments justifies the taking of a different view. As I visualize the situation, it is this. The Gwalior Durbar enjoys a double status. It is the Government of a State and the ruler of the State represents it. As a sovereign State, it is outside the Income Tax Act. In that capacity, it is neither an individual nor a company, nor an association of persons. The ruler as an individual is not the State, though he represents it. If he in his individual capacity e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 48, Income Tax Act, and was not entitled to a refund. 75. It was, however, urged that even persons who are not chargeable to Income Tax under Section 4 of the Act, can claim a refund under Section 48. By way of illustration, it was urged that trustees of charitable institutions are not liable to Income Tax on the income of the charity; yet they can claim a refund of Income Tax under Section 48 read with Section 49-B. The analogy of persons whose income is exempt from the Income Tax Act was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by far the most important question in this case and upon which the views of all my learned brothers have not been altogether uniform. 79. The circumstances giving rise to question 1 are very short. The Gwalior Durbar had admittedly been doing money-lending business in British India on a fairly extensive scale. Some time 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 face value of the same amount. The debentures were deposited at Gwalior and interest on the loan was also payable at that place. The interest received by the Durbar from the said loan during the year 1938-39 amounted to Rs. 2,59,726. This interest, as said above, was paid at Gwalior which is outside British India but it was in respect of money lent at interest and brought into British India. The question is whether this sum of money earned by the Gwalior Durbar as interest on money lent could be assessed to Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tedly in connexion 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 never-the less it would come within the purview of the clause added to Section 42(1), 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, 83. 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 operation of this clause is not excluded by the language of Section 2, Government Trading Taxation Act, the clause itself must be hold to be inoperative as being a piece of extraterritorial legislation which is ultra vires the Indian Legislature. 84. Now, as a general principle, it need not be disputed that States can legislate effectively only for their own territories. But occasions do arise when for purposes of taxation, custom, defence or other matters and even for proper enforcement of its own laws, a Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extra-territorial operation. In the very recent case of British Columbia Electric Railway Co. Ltd v. The King A.I.R. (33) 1946 P.C. 180 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 extraterritoriality. The question was answered in the negative and Viscount Simon, who delivered the judgment, quoted with approval the following passages from the judgment of Rand J. of the Supreme Court of Canada: The power of the Dominion to tax is to be interpreted as being as plenary and as ample within the limits prescribed...as the Imperial Parliament in the plenitude of its power possessed or could bestow : Hodge v. The Queen (1883) 9 A.C. 117. But there is obviously a distinction between, the standing of legislative enactments by a Sovereign State within its boundaries and beyond them. In an effective sense a declaration by su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tedly a subject upon which the Federal Legislature is competent to legislate, but what is said is, that the new clause in Section 42(1), Income Tax Act, goes against the very conception of Income Tax 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 connexion 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 should be examined carefully. 88. I am not unmindful of the observations of Lord Macmillan in Croft v. Dunphy A.I.R. (20) 1933 P.C. 16, that when a power is conferred to legislate on a particular topic it is important in determining the scope of the power to have regard to what is ordinarily treated as embraced within that topic in legislative practice and particularly in the legislative practice of the State which has conferred the power. The legislative practice in this country at the time when the Government of India Act was passed would, I think, affor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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. The Raleigh Investment Co. Ltd. A.I.R. (31) 1944 F. C. 51 the respondent company which was incorporated and had its office in England was assessed to tax and supertax 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(1)(c) and Expln. 3 to Section 4(1), Income Tax Act, were ultra vires the Indian Legislature. The Calcutta High Court decreed the suit and pronounced the provisions noted above to be void and inoperative as being an attempt on the part of the British Indian Legislature to tax persons and property which were beyond British India and not subject to its laws. This decision was reversed on appeal by this Court and it was held, not only that the suit was not maintainable by reason of Section 226, Government of India Act, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement 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), 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 ultra vires the Indian Legislature by reason of extra-territoriality. This contention was negatived by the Bombay High Court before which the matter came up by way of reference under Section 66, Income Tax Act, and this decision was affirmed by this Court as well as by the Privy Council. The judgment of the Judicial Committee is important for our present purpose for more reasons than one. With reference to the dictum of Lord Macmillan in Croft v. Dunphy A.I.R. (20) 1933 P.C. 16 referred to above, that when Parliament has conferred a power to legislate on a particular topic it is permissible and important in determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oubt that it can be validly taxed for the same, and Sir Jamshedji does not say that this clause in Section 42(1), 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 money lent at interest and brought into British India either in cash or in kind really contemplate different parts of one and the same transaction. To bring a case within the purview of this clause, it is not enough to show that money was advanced outside British India and then for some reason or other the borrower thought it fit to bring the money or its equivalent into British India. It must be the basic arrangement underlying the transaction that the money shall be brought into British India after it is taken by the borrower outside its territories. In such circumstances, I think the transaction in substance would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection with the country sufficient to support the validity of an exeroisa of the power in respect of the person as distinguished from the income. In Broken Hill South Ltd v. The Commissioner of Taxation, New South Wales (1987) 56 Com. L.R. 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 considered material by the learned Judges, whose judgment proceeded on the footing that the connection with New South Wales which was the basis of the legislation, was to be found in the fact that the money upon which interest was paid was secured upon property in New South Wales The mortgaged property itself might not be profitable but that was not material; if the property mortgaged was situated within the territory of a particular State, that was quits sufficient to establish the nexus. 97. It is well-known that the scheme of the English Income Tax statutes is essentially different from that of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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