COMMISSIONER OF INCOME-TAX Vs. AHWADIA

JUDGEMENT

(1.) This is a reference under Section 66(1) of the Indian Income-tax Act, 1922, and when it was called on in this Court, Mr. Setalvad, on behalf of the Commissioner, drew our attention to the fact that although a reference was asked for by the assessee, "the Gwalior Darbar," that is to say, the State of Gwalior, as long ago as October 5, 1940, no reference was in fact made for six years. Mr. Setalvad pleaded in excuse for this gross delay the other work of the authorities concerned. I feel that no such excuse can be any exoneration for such a grievous lapse, which amounts to a denial of justice to the taxpayer who under the law is compelled to pay the full tax demanded pending a decision on the reference by this Court. It is most unfair, and it is to be hoped that the authorities will so conduct their affairs in the future that delays of this sort will not be heard of again.

(2.) The questions submitted to us, which are six in number, concern the assessment made on the Gwalior Darbar, through its agent Mr. A.H. Wadia, for the assessment year 1939-40 in respect of the account year April 1, 1938, to March 31, 1939, and touch and concern, except for question No. 6, the Gwalior Darbar's moneylending transactions in British India, and arise by virtue of the Government Trading Taxation Act III of 1926. Section 2 of that Act provides:- 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. And then Sub-section (3) is a definition section as to the scope of the expression "His Majesty's Dominions." There is no doubt that the State of Gwalior is an entity within the purview of that section. As formulated the questions which have been, referred to us are as follows:- (1) Whether in the circumstances of this case the interest of Rs. 2,59,726 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 of 1926 ? (2) Whether the sum of Rs. 3,57,112 received by the Durbar out of the managing agency commission paid by the Tata Iron & Steel Co. Ltd., to Tata Sons Ltd. is assessable under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act III of 1926 ? (3) Whether the income derived from the property situated in Bombay and other places in British India purchased by the Durbar at execution sales in enforcement of mortgage decrees against mortgagors who had failed to pay the amounts advanced to them in the course of the money-lending business of the Durbar, is income arising in connection with the said business within the meaning of Section 2 of the Government Trading Taxation Act and whether the income arising from such property is liable to assessment under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act III of 1926 ? (4) Whether the dividend of Rs. 1,88,080 received by the Durbar from the Sir Shapurji Broacha Mills Ltd. is taxable in the circumstances of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act III of 1926 ? (5) Whether the dividend of Rs. 83,447 received by the Durbar from the C.P. Cement Co. Ltd. is taxable in the circumstances of this case under the provisions of the Indian Income-tax Act read with the Government Trading Taxation Act III 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 of 1926 to a refund under Section 48(1) or a set-off under Section 18(5) of the Income-tax Act of income-tax alleged to be deemed under Section 49B thereof to have been paid by it as a shareholder in respect of the dividend received by it during the previous year ?

(3.) With regard to question No. 1. Sir Jamshedji Kanga on behalf of the assessee submits that Section 2 of the 1926 Act only deals with income which actually arises in British India, and not with income which under the Indian Income-tax Act, 1922, as amended by the 1939 Income tax Act, is deemed to arise in British India or with income which under the amendments to Section 42 of the Act accrues or arises, whether directly or indirectly, through or from any money lent at interest and brought into British India in cash or in kind, which shall be deemed to be income accruing or arising within British India, and he submits, that if it were not so, the 1926 Act would be ultra vires the Indian Legislature. The 1926 Act was enacted by virtue of the powers contained in Section 65 of the Government of India Act, 1919, but the words I have quoted from Section 42 of the Indian Income-tax Act were not introduced until the 1939 amendments to that Act, that is to say, after Section 99 of the Government of India Act, 1935, had come into force. The sum of Rs. 2,59,726 involved in this question arose as follows:- A company styled the Provident Investment Co. Ltd. was incorporated in British India in 1927 with headquarters in Bombay, with 4906 shares of Rs. 1,000 each. It is practically a one man company as all the shares are either owned by the Gwalior Durbar or its nominees. In 1983 the Durbar advanced to this company a loan of Rs. 50 lakhs on the security of its first mortgage debentures of an equal nominal value. The loan was advanced at Gwalior. The interest was payable there and the debentures also were deposited there. But admittedly the company brought the borrowed money to British India and utilised it for the purposes of its business in British India. The interest on the loan received by the Durbar for the year amounted to Rs. 2,59,726 referred to in Item (A) above. The interest was receivable and actually received at Gwalior.