The judgment of the court was delivered by
SHAH J.--The appellant is a private trust, and was within
the meaning of sections 4A and 4B of the Income-tax Act, 1922, resident and
ordinarily resident within British India in 1948. The appellant held 1,000
shares in an investment company styled Homi Mehta and Sons Ltd. (hereinafter
called " the company ") which carried on the business of investing in
shares in companies registered in British India and in the former Indian States.
Dividends from the British Indian companies were received by the company at its
registered office at Bombay, and dividends from the Indian States companies were
received by the company at its registered office at Billimora in the State of
Baroda.
In the calendar years 1948 and 1949 the appellant received
at Billimora Rs. 65,000 and Rs. 2,10,000 respectively as dividend in respect of
shares held by it in the company. The 2nd Income-tax Officer, A-1 Ward, Bombay,
upheld the claim of the appellant that its dividend income received from the
company at Billimora had accrued or arisen in the Baroda State, and as the
income was not brought into British India, it was exempt from liability to tax
by virtue of section 14(2)(c) of the Income-tax Act. The Commissioner of
Income-tax, Bombay, held that the income accrued or arose to the appellant in
Bombay where the dividend was declared, and was on that account liable to be
assessed under the Income-tax Act, 1922. The Commissioner accordingly directed
the Income-tax Officer to pass orders imposing tax on the dividend income
received by the appellant from the company. On appeal, the Income-tax Appellate
Tribunal held that the dividend income accrued or arose at Billimora and not at
Bombay, but by reason of the definition of " taxable territories ",
the income which accrued at Baroda attracted liability to tax under the
Income-tax Act and did not qualify for rebate under paragraph 6 of the Merged
States (Taxation Concessions) Order, 1949.
The following questions were referred by the Tribunal
under section 66(1) of the Indian Income-tax Act, 1922, to the High Court of
Bombay for its opinion :
"(1) Whether, on the above facts and circumstances of
the case, the assessee is entitled to rebate equal to the difference between the
British Indian rate and Baroda State rate in respect of the dividend income ?
(2) Whether, on the facts and circumstances of the case,
the dividend income accrued or arose to the assesee at Bombay ?"
The High Court held, following its earlier judgment in
Mrs. Kusumben D. Mahadevia v. Commissioner of Income-tax that the Merged States
(Taxation Concessions) Order, 1949, did not apply to the income of a resident
assessee and therefore the first question must be answered in the negative. The
High Court declined to answer the second question. With special leave granted by
this court, the appellant has appealed to this court.
Income received by the company from its transactions in
the Indian States was retained at its office in Billimora and dividend declared
out of that income was paid to the appellant at the registered office in the
State of Baroda. This dividend it is common ground was not brought into British
India. To appreciate the claim that the income qualifies for rebate under
paragraph 6 of the Merged States (Taxation Concessions) Order, 1949, the
relevant statutory developments in tax laws to effectuate the merger of the
former Indian States since August 15, 1947, may be briefly set out. Under
section 14(2)(c) of the Income-tax Act, added by Act 23 of 1941 and amended by
Act 22 of 1947, it was enacted that :
" The tax shall not be payable by an assessee in
respect of any income profits or gains accruing or arising to him within an
Indian State unless such income, profits or gains are received or deemed to be
received in or are brought into British India in the previous year by or on
behalf of the assessee, or are assessable under section 12B or section 42.
"
By paragraph 3 of the States' Merger (Governors'
Provinces) Order, 1949, it was provided that the States specified in Schedule II
shall, as from August 1, 1949, be administered in all respects as if they formed
part of the provinces specified in the schedule, and by paragraph 4 all the laws
in force in the merged States or in any part thereof immediately before August
1, 1949, were to continue in force until repealed, modified or amended by a
competent legislature or other competent authority. The State of Baroda was one
of the States specified in the schedule and it was to be administered as if it
formed part of the Province of Bombay. The Indian Income-tax Act was applied to
the merged States by section 3 of the Taxation Laws (Extension to Merged States
and Amendment) Act, 1949 (67 of 1949), with retrospective effect from April 1,
1949, and by section 7 corresponding laws relating to income-tax in the merged
States were repealed. It was provided that if immediately before the 26th day of
August, 1949, there was in force in any of the merged States any law relating to
income-tax, super-tax or business profits tax, that law shall cease to have
effect except for the purposes of the levy, assessment and collection of
income-tax and super-tax in respect of any period not included in the previous
year for the purposes of assessment under the Indian Income-tax Act, 1922, as
extended to that State by section 3, or, as the case may be, the levy,
assessment and collection of business profits tax for any chargeable accounting
period ending on or before the 31st day of March, 1948, and for any purposes
connected with such levy, assessment or collection. By the application of Act 67
of 1949, and the repeal of laws corresponding to those applied to the merged
States by section 3, residents in former British India and in the merged States
were sought to be treated equally. But the result was a sudden imposition of
high rates of taxation under the Indian Income-tax Act read with the appropriate
Finance Acts upon the residents of the merged States. With a view to cushion the
impact, the Central Government in exercise of the powers conferred by section
60A of the Indian Income-tax Act granted certain exemptions from and reductions
in the rates of tax and made certain other modifications in the tax structure in
its application to the merged States. By paragraph 3(i) of the Merged States
(Taxation Concessions) Order, 1949, the expression " Act " was defined
as meaning the Taxation Laws (Extension to Merged States and Amendment) Act,
1949 (67 of 1949). Paragraphs 4, 5, 6 and 6A of the Order as amended or added by
the notification dated March 11, 1949, provided :
" 4. The provisions of paragraphs 5, 6, 9, 10 and 11
of this Order shall apply to only so much of the income, profits and gains
included in the total income of an assessee as would, had he been resident in
British India, have been exempt under clause (c) of sub-section (2) of section
14 of the Indian Income-tax Act, 1922, if the Act had not been passed.
5. (1) The income, profits and gains of any previous year
ending after the 31st day of March, 1948, which is a previous year--
(i) for the merged State assessment year 1948-49, or
(ii) for the merged State assessment year 1949-50,
shall be assessed under the Indian Income-tax Act, 1922,
if, and only if, such income, profits and gains have not, before the 1st day of
August, 1949, been assessed under the State law.
(2) Where the income, profits and gains referred to in
sub-paragraph (1) have not been assessed under the State law, they shall be
assessed under the Indian Income-tax Act, 1922, and the tax payable thereon
shall be determined as hereunder--
(i) the tax on the amount of such income, profits and
gains included in the total income shall be computed at the Indian rate of tax ;
(ii) the amount of such income, profits and gains shall be
computed under the State law and the tax thereon computed at the merged State
rate of tax ;
(iii) the amount, if any, by which the tax computed under
clause (i) exceeds the tax computed under clause (ii) shall be allowed as rebate
from the first mentioned tax, and the amount of the first mentioned tax as so
reduced shall be the tax payable.
(3) For the purposes of this paragraph--
(a) the merged State assessment year 1948-49 means the
assessment year which commences on any date between the 1st April, 1948, and the
31st December, 1948, both dates inclusive ; and
(b) the merged State assessment year 1949-50 means the
assessment year which commences on any date between the 2nd January, 1949, and
the 31st July, 1949, both dates inclusive.
6. (1) The income, profits and gains of any previous year
ending after the 31st day of March, 1948, which does not fall within paragraph 5
of this Order or of any previous year commencing after the previous year
referred to in the said paragraph shall be assessed under the Indian Income-tax
Act, 1922, but the tax payable on so much of the income as pertains to the
period ending before the 1st day of August, 1949, shall be determined as
hereunder--
(i) the tax on so much of such income included in the
total income shall be computed, (a) at the Indian rate of tax, and (b) at the
rates of tax in force in the merged State immediately before the 1st day of
August, 1949 ;
(ii) the amount by which the tax computed under sub-clause
(a) of clause (i) exceeds the tax computed under sub-clause (b) of clause (i)
shall be allowed as rebate from the first mentioned tax, and the amount of the
first mentioned tax as so reduced shall be the tax payable.
(2) Where any previous year falls partly before and partly
on or after the 1st day of August, 1949, the income, profits and gains
pertaining to the period falling before the said date shall, unless the
Income-tax Officer, having regard to any special circumstances, otherwise
directs with the approval of the Inspecting Assistant Commissioner of
Income-tax, be in the proportion which the period before the said date bears to
the whole previous year.
6A. The income, profits and gains of any previous year,
referred to in paragraph 5 or 6 of this Order, which accrue or arise without the
taxable territories to a person who is resident but who would not be resident in
the taxable territories if the Act had not been passed, shall be charged to tax
in the same manner and to the same extent as specified in the said paragraph 5
or 6, as the case may be. "
By the application of the Income-tax Act, 1922, to the
territories of the merged States, income received, accrued or arisen or deemed
to be received, accrued or arisen to any person resident within the territory of
the merged States became chargeable to tax under that Act. With a view to avoid
hardship caused by the sudden application of high rates of taxation, the Central
Government exercised its powers under section 60A of the Indian Income-tax Act
and modified the tax levy so as to give certain exemptions and benefits to
residents in the areas of the former Indian States. By paragraph 6 of the Merged
States (Taxation Concessions) Order, 1949, in respect of the income of any
previous year ending with March 31, 1948, which accrued or arose to persons who
were residents in the territories of the merged States, benefit of the same rate
of income-tax to which it was subject in the merged State was granted by
providing that the difference between tax computed at the Indian rate and the
State rate shall be allowed as rebate. In respect of income of residents in the
merged States arising outside the taxable territories, a similar rebate was to
be given (paragraph 6A). The result was that income of residents of the merged
States became chargeable to tax under the Indian Income-tax Act, but it was to
continue to get for a limited period benefit of the lower rates of tax operative
under the law in force in the States before merger. This concession or benefit
was to apply by the express provisions contained in paragraph 4 only to so much
of the income, profits and gains included in the total income of an assessee as
would, had he been resident in the taxable territories, have been exempt under
clause (c) of sub-section (2) of section 14 of the Indian Income-tax Act, 1922,
if the Act had not been passed.
Counsel for the appellants claims that paragraph 4 applies
to income of all assessees resident within British India as defined in section
2(3A) at the relevant time, and not merely to residents in the territories of
the merged States. It is contended that by paragraph 4 it was intended not only
to give the benefit of the State rate of taxation to residents of the former
Indian States which were merged with the provinces under the States Merger
(Governors' Provinces) Order, 1949, but also to preserve the benefit which was
conferred by section 14(2)(c) of the Income-tax Act to residents of the
territories of British India before August 15, 1947, in respect of income
arising or accruing to them within the territory of the merged States. It is
said that by the application of Act 67 of 1949 all residents in the taxable
territory became liable to pay tax at Indian rates, but with a view to maintain
the status quo ante, it was intended by the Taxation Concessions Order, 1949, to
restore the State rates of taxation to residents in the former Indian States,
and also to continue the exemption in respect of the income of the former
British Indian residents arising or accruing in the territory of the merged
States within the limits prescribed by section 14(2)(c). But paragraph 4 of the
Taxation Concessions Order, 1949, is not susceptible of any such interpretation.
Paragraph 4 of the Order, and sections 3, 4, 4A, 4B and section 14(2)(c) of the
Income-tax Act must be read together. The Indian States specified in the
schedule to the States Merger Order, on their merger with the provinces of
British India, ceased to be separate entities and became part of British India,
and by the application of Act 67 of 1949 the Indian Income-tax Act was applied
to the territories comprised within British India. Section 14(2)(c) undoubtedly
remained in force even after the merger of the Indian States effected by the
States Merger Order, but its operation was restricted. After the merger of the
States, income arising or accruing within the territory of such merged State,
could not be deemed to be income arising or accruing within an Indian State, for
the State had ceased to exist, and the income was for the purpose of section 4
of the Income-tax Act income arising or accruing to a person resident within the
taxable territories. There is nothing in paragraph 4 of the Concessions Order
which seeks to grant exemption from liability to tax in respect of income which
prior to the merger of the States was not liable to tax by virtue of section
14(2)(c), but has since the application of the Income-tax Act become so liable.
The claim that paragraph 4 applies to income of residents
of former British India which was exempt from taxation under section 14(2)(c) is
belied by the plain words of the Order. Paragraph 4 does not substantively grant
any exemption ; it merely designates income to which the provisions of the Order
granting exemption will apply. It applies to income which would, if Act 67 of
1949 had not been passed, have been regarded as accruing or arising in an Indian
State, and the assessee would, in respect of that income, had he been a resident
of the taxable territory before merger, have been exempt under section 14(2)(c).
The use of the expression " had he been a resident " implies that the
benefit is not to enure to persons who were before the merger entitled to the
exemption under section 14(2)(c).
The order provides that paragraphs 5, 6, 9, 10 and 11
apply to a slice of income and not to the entire income of an assessee, and by
the express terms, it is that slice of the income, as would, had the assessee
been resident in the taxable territories, have been exempt under clause (c) of
sub-section (2) of section 14 of the Indian Income-tax Act, if the Taxation Laws
Act, 1949, had not been passed. In terms the concession is not given to
residents of the territories of British India, and the context does not warrant
an implication to the contrary.
It is true that by this interpretation of paragraph 4,
British Indian residents are denied the benefit of the exemption under section
14(2)(c) in respect of income arising or accruing in the territories of the
former merged States. But that denial is the result of merger of the States into
British India. The operation of section 14(2)(c) had become restricted by the
modification of the definition of British India. Since that amendment, income
accruing or arising after the merger in Indian States outside British India
alone would be exempt under section 14(2)(c). There is nothing in the
Concessions Order which suggests that it was intended to ensure continuance of
the exemption under section 14(2)(c) to residents of British India as it was
before merger, as if the merger had not taken place. The use of the expression
" had he been resident in the taxable territories " introduces a
fiction; it grants the benefit of section 14(2)(c), though on the express terms
it is not available, to a person who was not before the merger covered thereby,
and in respect of income which would have been, if the Merger Act had not been
passed, exempt from taxation in his hands, if he had been resident in British
India. In our view, Chagla C.J. was right in observing in Mrs. Kusumben D.
Mahadevia's case that :
" A person resident in a merged State, whose income
accrued to him there, could not possibly claim exemption under section 14(2)(c).
Such an exemption could only be claimed by a person resident in the taxable
territorries. In order to give this particular concession to a resident in a
merged State this paragraph was enacted, and the particular language which we
find in this paragraph was used. "
In the view we have taken on the first question, it is
unnecessary to record an answer on the second question.
The appeals therefore fail and are dismissed with costs.
Appeals dismissed
