TMI Blog1979 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (5) of section 132 of the Income-tax Act or in charging income-tax under sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 of the said Act or in computing the ' advance tax ' payable under Chapter XVII-C of the said Act, at the rate or rates in force,- (a) the net agricultural income shall be taken into account, in the manner provided in clause (b) (that is to say, as if the net agricultural income were comprised in the total income after the first five thousand rupees of the total income but without being to tax), only for the purpose of calculating, charging or computing such income-tax or, as the case may be, 'advance tax ' in respect of the total income ; and (b) such income-tax or, as the case may be, ' advance tax' shall be so calculated, charged or computed as follows :- (i) the total income and the net agricultural income shall be aggregated and the amount of income-tax or ' advance tax ' shall be determined in respect of the aggregate income at the rates specified in Sub-Paragraph I or, as the case may be, Sub-Paragraph II of the said Paragraph A ; as if such aggregate income were the total income ; (ii) the net agricultura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1974-75. The provision thus made for aggregation of the two types of income is carried out also into the provisions of the I.T. Act dealing with the payment of advance tax. Section 207 of the I.T. Act provides for liability to pay advance tax, and ss. 208 to 219 regulate the mode and manner of payment of advance tax. Section 2, cl. (6) of the Finance Act, 1973, provides that the rate of advance tax under s. 208 of the I.T. Act is to be computed with reference to the aggregated income. Part IV of the Schedule provides for computation of the net agricultural income. These provisions should highlight the scope of the attack mounted by the petitioners. The petitioners have alleged in these writ petitions that if the two modes of income are to be aggregated and income-tax charged as provided by the Finance Acts of 1973 and 1974 there is a vast difference in the incidence as well as the operation of the tax (see for instance para. 4 of O.P. No. 3265 of 1974). The provisions have been attacked on three grounds : that the provision for aggregation is violative of the scheme of taxation sanctioned by s. 4 of the I.T. Act and the other sections ; that, if the impugned pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the total income, agricultural income cannot enter into the reckoning at all. This was emphasised with reference to the definition of it "net agricultural income " in s. 2(7), sub-s. (e) of the Finance Act, 1973, and of Part IV of Schedule I of the Act, and, in particular, of r.11 thereof. These provisions, it was claimed, were quite inadequate to achieve the purpose of merging the agricultural income with the total income under the I.T. Act, for the purpose of subjecting the latter to tax ; or to enter into the reckoning even for computation of the rate of tax. Reliance was placed on the decision of the Bombay High Court in CIT v. N. M. Raiji [1949] 17 ITR 180. There, the assessee was a partner in the firm of S. B. Billimoria Co. from 1928. The partnership was dissolved by a consent decree of the High Court of Bombay from the 9th October, 1942, and the assessee ceased to be a partner from that date. For the assessment year 1943-44, the assessee showed a personal income of Rs. 6,535. The share of the assessee in the firm from 1st January, 1942, to 9th October, 1942, was determined as Rs. 41,000. By reason of s. 25(4) of the Indian I.T. Act, 1922, the firm of Billimoria Co. w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate, the income of the trust was to be applied at the sole discretion of the trustees for the benefit of the wife, children and grandchildren of Shrenik. The year of account was 1961-62 (assessment year 1962-63). Out of the income of Rs. 6,977 earned for that year, Rs. 3,000 was paid to one of the beneficiaries under the trust, namely, Kalpana. The income from other sources of Kalpana amounted to Rs. 35,973. The ITO thought that it would be very beneficial to the revenue to tax the sum of Rs. 3,000 received by Kalpana under the trust in her hands rather than in the hands of the trust and proceeded to assess on that basis, that is, Rs. 3,000 in the hands of Kalpana and Rs. 3,977 in the hands of the trustees. The trustees were assessed as an " association of persons " under s. 164 of the Act, at the rate applicable to the income of Rs. 6,977. The trustees were aggrieved by this mode of computation of the rate. Their contention was accepted on appeal by the AAC, who found that the rate liable to be charged was the rate applicable to the total income of Rs. 3,977. On appeal by the revenue, the Appellate Tribunal restored the decision of the officer. The matter thereupon came up before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation of rate. Once income goes out from the total income for the purpose of liability to tax, it would also go out for determination of rate unless there is a specific Provision in the statute Providing the Contrary." The words underlined are significant and furnish the clue to the correct approach to the question. The " contrary " provision indicated by the learned judges in the passage cited, is made in the instant case by the provisions of the Finance Act of 1973, which we have quoted, namely, s. 2(6)(a). The decision, therefore, is of no assistance to the assessee. In Khatau Makanji Spinning Weaving Co. Ltd. v. CIT [1956] 30 ITR 841 (Bom), in effect and substance, what happened was that, to the previous year's income which could legitimately be subjected to tax under the Indian I.T. Act, 1922, was added an additional tax on the excess dividend declared in prior years. There was no legislative provision deeming this excess dividends in prior years to be the income of the previous year. This crucial nexus was absent; and that supplies the clue to correctly understand the decision. Chief Justice Chagla who spoke for the court observed : " It must be borne in mind, as has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itation upon the power of Parliament which is inherent in the nature of the tax which can be imposed under section 3. If one understands the rate to mean merely the mode of computation of the tax in relation to the total income of the assessee, then undoubtedly the power of Parliament is unlimited. But if 'rate' is understood to mean the fixing of the tax irrespective of the total income and unconnected with the total income, then in our opinion Parliament is clearly travelling outside the ambit of section 3. It may well be asked, if that is the power of the Legislature, why have any provision in the Income-tax Act with regard to the computation of total income ? The Income-tax Act contains an elaborate machinery for ascertaining the total income of an assessee. Various notional incomes have to be added to the total income, various deductions have to be made, and then the total income has to be arrived at. If Parliament has the power to fix tax at a rate which has no connection with the total income, then the machinery set up under the Income-tax Act becomes entirely infructuous. In our opinion, section 3 prescribes the subject-matter of the tax and the rate of that tax is to be pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iament has done so then no effective charge can be made on the total income of the previous year of the assessee under the provisions of the Finance Act which deals with additional tax on excess dividend. " Having regard to the provisions of the Finance Acts questioned herein we do not think that these provisions outrun the embankments provided by the I.T. Act, 1961. The above decision of the Bombay High Court was carried up in appeal to the Supreme Court-vide CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. [1960] 40 ITR 189. The Supreme Court affirmed the judgment of the High Court. Hidayatullah J. (as he then was), speaking for a three- judge-court, observed : " The learned Chief Justice, with respect, very rightly pointed out that the Income-tax Act puts the tax on income or something which it deems to be income. In other words, the tax deals with income and income only. It further provides that this tax shall be collected at a particular rate on the total income for which provision shall be made in an yearly Central Act. The Finance Act also follows the same scheme, and lays down the rate at which the tax is to be collected. In the Finance Act, the tax is laid on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould accordingly reject the first of the contentions of counsel for the assessee that the impugned provisions of the Finance Acts of 1973 and 1974, outrun the embankments provided by ss. 4, 66 and 110 of the I.T. Act and the scheme of the provisions for the computation of tax. We shall next deal with the argument of legislative competence. Entry 82 of List I of the 7th Schedule to the Constitution reads : " 82. Taxes on income other than agricultural income." And entry 46 of List II provides : " Taxes on agricultural income ". The argument with respect to these entries is that " agricultural income " has been excluded from the field of Parliamentary legislation under List I, and is completely within the domain of State legislation under List II. Therefore, it was said, that agricultural income is totally tabooed for parliamentary legislation, whether for the purposes of computation of income, or for working out the rate of tax. There is an element of attractiveness in the argument that if the field is altogether forbidden, it makes little difference whether you saunter into it for viewing the country-round or for carrying on more predatory or desultory activities. But is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng land cess as royalty under mining leases cannot be held to have been repealed by the Mines and Minerals Regulation and Development Act, 1948, or, in any event, by the Mines and Minerals Regulation and Development Act, 1957-both enactments by Parliament ; so that, after these Acts, the land cess that could be levied under the Madras Act would only be exclusive of royalty. It was ruled that there was no overlapping between the Central Acts and the Madras Act, and that the Madras Act was in no way concerned with mines and minerals. It was further ruled that the land cess under the Madras Act is a " tax on land " under entry 49 of the State List of the Government of India Act, 1935. The court observed: " When a question arises as to the precise head of legislative power under which a taxing statute has been passed, the subject for enquiry is what in truth and substance is the nature of the tax. No doubt, in a sense, but in a very remote sense it has relationship to mining as also to the mineral won from the mine under a contract by which royalty is payable on the quantity of mineral extracted. But that does not stamp it as a tax on either the extraction of the mineral or on the mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p. 870 (HL) in these words : ' It is well established that you are to look at the " true nature and character of the legislation... " Russell v. Queen [1882] 7 App Cas 829 (PC), "...the pith and substance of the legislation ". If on the view of the statute as a whole, you find that the substance of the legislation is within the express powers, then it is not invalidated if incidentally it affects matters which are outside the authorised field. The legislation must not under the guise of dealing with one matter in fact encroach upon the forbidden field. Nor are you to look only at the object of the legislator. An Act may have a perfectly lawful object, e.g., to promote the health of the inhabitants, but may seek to achieve that object by invalid methods, e.g., direct prohibition of any trade with a foreign country. In other words, you may certainly consider the clauses of an Act to see whether they are passed " in respect of " the forbidden subject.' The Punjab Act purports to tax property which prima facie the provincial legislature is allowed to do under item 42 of List II, Government of India Act. But if it appears that the impugned tax, in the guise of dealing with property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment upon " gains and profits " ; but they are not simply synonymous or interchangeable expressions. ' 13. Now once it is realised that the annual value is not necessarily actual income, but is only a standard by which income may be measured, much of the difficulty which appears on the surface is removed. In our opinion, the crucial question to be answered is whether merely because the Income-tax Act has adopted the annual value as the standard for determining the income, it must necessarily follow that, if the same standard is employed as a measure for any other tax, that tax becomes a tax on income ? If the answer to this question is to be given in the affirmative, then certain taxes which cannot possibly be described as income-tax must be held to be so. A case in point is to be found in In re A reference under the Government of Ireland Act, 1920 : In re S. 3, Finance Act (Northern Ireland), 1934 [1936] AC 352 ; [1936] 2 All ER 111 (PC). The question which arose in that case was whether the provisions of s. 3, Finance Act (Northern Ireland), 1934, were beyond the powers of the Parliament of Northern Ireland. Section 3 of the Act of 1934 imposed a tax on the council of every ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tempt to reconcile the two conflicting jurisdictions, and, only if such a reconciliation should prove impossible, the impugned Act should be declared invalid. " The principle of the decision of the Federal Court in Ralla Ram v. Province of East Punjab, AIR 1949 FC 81, was followed by the Supreme Court in Sudhir Chandra Nawn v. WTO [1968] 69 ITR 897. The classic passage from the judgment of Sir Maurice Gwyer C.J. in Subramanian Chettiar v. Muttuswami Goundan, AIR 1941 FC 47, regarding the applicability of the doctrine of pith and substance was cited and followed. In the light of the above principles and decisions we are of the opinion that the impugned provisions in pith and substance are within the legislative competence of Parliament under Entry 82 of List I, and are, therefore, fully valid. We turn last to the argument based on discrimination. We do not think there is any substance in the plea. The charge of tax is still on non-agricultural income. No part of the agricultural income is subjected to tax. For the purposes of determining the rate at which non-agricultural income is to be taxed, the agricultural income is taken into account. Such taking into account and the diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore to be first allowed for before non-agricultural income above the exemption limit of Rs. 5,000 is distributed over the different slabs and taxed at appropriate rates.... 4.9. To clear all doubts on the matter we sought the advice of the Law Commission. In a unanimous report on this subject forwarded to us by the Ministry of Law, the Commission has stated that ' the inclusion of agricultural income within the scope of total income for the limited purpose of computing the rate of tax, is only a method of computation of tax, and does not amount to the levying of a tax on the income so included '. It adds that ' the power of the Union to tax non-agricultural income includes the power to take into account agricultural income for the purpose of determining the rate of tax, if it is found to be necessary for the efficient exercise of that power '. " In the result, we reject the contentions raised against the validity of the impugned provisions of the Finance Act of 1973 and of 1974 viz .: s. 2(6), 2(7)(e) and Part IV of the Ist Schedule of the Finance Act, 1973; and s. 2(2), 2(7)(b)(ii) and 2(8)(e) and Part IV of Sch. I to the Finance Act, 1974. We dismiss the writ petitions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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