Full Judgment Text
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PETITIONER:
RUSSA H. MEHTA TRUST, BOMBAY
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BOMBAY CITY I
DATE OF JUDGMENT:
12/11/1965
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION:
1966 AIR 866 1966 SCR (2) 579
ACT:
Merged States (Taxation Concession) Order, 1949 Paragraph 4-
Assessee resident in former British India--Income accruing
in former Indian State--If entitled to rebate.
HEADNOTE:
By the Taxation Laws (Extension to Merged States and
Amendment) Act of 1949 the Income-tax Act. 1922 was applied
to the territories of the former Indian States which were
merged with the former British Indian Provinces under the
States Merger (Governors’ Provinces) Order. 1949. By such
application, the income received, accrued or arisen or
deemed to be received, accrued or arisen to any person
resident within the territory of the merged State became
chargeable to income-tax. With a view to avoid hardship to
residents of former Indian States, caused by the sudden
application of the high rates of taxation, the Central
Government issued the Merged States (Taxation Concessions)
Order of 1949 under a. 60A of the Income-tax Act. Under
Paragraphs 6 and 6A of Us Order income of residents of the
merged States became charageable to tax under the Indian
Income-tax Act, but the income of any previous year ending
after 31st March 1948 was to continue to get for a limited
Period the-benefit of lower rates of tax operative under the
law in force in the States before merger. This concession
was to apply, under paragraph 4 of the Order, 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 s. 14(2)(c) of
the Income-tax Act if the Taxation Laws Extension Act had
not bee passed, that is, in respect of income arising or
accuring to him :within territory of the merged State.
In the Calendar years 1948 and 1949, the assessee, who was
resident and ordinarily resident within British India in
1948, received certaining as dividend in the State of Baroda
which was one of the merged States. The Income-tax Officer
upheld its claim that the dividend income had accrued or
arisen in the Baroda State and as the income was not brought
into British India, it was exempt from liablility to tax
under s. 14(2)(c) of the Income-tax Act. The Appellate
Tribunal held that the dividend income arose in Baroda
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State, but by reason of the definition of "taxable
territories" in s. 2(14A) of the Income-tax Act, the income
attracted liability to tax and did not qualify for the
rebate equal to the difference between the British Indian
-rate and the Baroda State rate in respect of the dividend
income, under paragraph 6 of the Taxation Concessions Order.
The High Court also, on a reference, held that the assessee
was not entitled to the rebate.
In appeal to this Court, the assessee contended that by the
application of the Taxation Laws Extension Act, all
residents in the taxable territory become liable to pay tax
at the Indian rates, but with a view to maintain the status
quo ante, it was intended by the Taxation Concessions Order,
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 India residents,
arising or accruing
5 80
in the territory of the merged States within the limits
prescribed by s. 14(2) (c).
HELD : 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. [587 C-D]
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 merger of the States was
not liable to tax by virtue of s. 14(2) (c), but has, since
the application of the Income-tax Act, become so liable.
The paragraph applies to income. which would, if the
Taxation Laws Extension Act had not been passed, have been
regarded as accuring 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 s. 14(2)(c). It is true that by this
interpretation of paragraph 4 British Indian residents are
denied the benefit of the exemption -under s. 14(2)(c) in
respect of income arising or accruing in the territories of
the merged State. But the use of the expression "had he
been resident in the taxable territories" implies that the
benefit is not to tenure to persons who were before the
merger entitled to the exemption under s. 14(2)(c). [587 A-
B, D]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 589 to 590
of 1964.
Appeal by special leave from the judgment and order dated
October - 12, 13, 1961 of the Bombay High Court in Income-
tax Reference No. 56 of 1956.
K. N. Rajagopal Sastri, J. B. Dadachanji, for the
appellants.
A. V. Viswanatha Sastri, R. Ganapathy Iyer, R. H. Dhebar
and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Shah, J The appellant is a private trust, and was within the
meaning of S. 4A and 4B of the Income-tax Act, 1922 resident
and ordinarily resident within British India in 1948. The
appellant held 1000 shares in an investment company styled
Home 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
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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-I Ward, Bombay, upheld the
claim of the appellant that its dividend income received
from the Company
581
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 s. 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
s. 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 assessee at Bombay ?"
The High Court held, following its earlier judgment in Mrs.,
Kusumben D. Mahadevia, Bombay v. The Commissioner of Income-
tax, Bombay City, Bombay(1) 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
(1) Income-tax Ref. No. 28 of 1955 decided, on February
20, 1956 (unreported).
p. C.I‘./66-7
5 82
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 s. 14(2) (r.) 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
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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
Sch. 11 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 s. 3 of the Taxation Laws (Extension
to Merged States and Amendment) Act 67 of 1949 with
retrospective effect from April 1, 1949, and by s. 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,
supertax 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 s. 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, assesssment or collection. By the application of
Act 67 of 1949, and the repeal of laws corresponding to
those applied to the merged States by S. 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 appro-
583
priate 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 s. 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 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 subsection (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
an) previous year ending after the 31st day of
March, 1948, which is a previous year-
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(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 commuted under the State law
aid the tax thereon computed at the merged
Slate rate of tax;
584
(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
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said date shall, unless the Income-tax
Officer, having regard to any
special
circumstances, otherwise
585
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 s. 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 cl. (c) of sub-
s. (2) of S. 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
586
in S. 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 S. 14(2) (c) of the Income-tax Act to residents
of the territories of British India before August 15, 1.947
in respect of income arising or accruing to them within the
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teffitory 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 S. 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 ss. 3, 4, 4A,
4B and S. 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 entitles 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 s. 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 merger of the States was not liable to tax by
virtue of S. 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 S.
14(2) (c) is belied by the plain words of the Order. Para-
graph 4 does not substantively grant any exemption : it
merely designates income to which the provisions of the
Order granting
587
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
s. 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 S. 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 cl. (c) of sub-
s. (2) of s. 14 of the Indian Incometax 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 S. 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 s. 14 (2) (c) had become
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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 s. 14 (2) (c) - There is nothing
in the Concessions Order which suggests that it was intended
to ensure continuance of the exemption under s. 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 s. 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(1)
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
territories. In order to give this particular
(1) Income-tex Ref. No. 28 of 1955 decided
on February 20, 1956 (unreported).
588
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.
589