COMMISSIONER OF Income Tax, BIHAR and ORISSA vs ABDUL RAUF (AND OTHER CASES).

MANOHAR LALL, J. - These five references are made by the Income Tax Appellate Tribunal u/s 66(1) of the Indian Income Tax Act at the instance of the Commissioner of Income Tax, Bihar and Orissa, for the opinion of this Court on the same two questions which arise in all these cases :-

(1) Whether a levy of Income Tax could be made on the assessee respondent for the year 1939-40 in the absence of a notification u/s 92(1) of the Government of India Act by the Governor expending the Finance Act of 1939 to the excluded area ?

(2) Whether Section 3 of the Indian Income Tax Act by mere implication extends the Finance Act of 1939 without a Notification u/s 92(1) of the Government of India Act ?

The second question is necessarily involved in the first question and need not have been separately framed.

It will be convenient to state the facts only in one case as the facts in all the cases are exactly similar.

In Miscellaneous Judicial Case No. 97 the assessment was made for the year 1939-40 for the accounting period which ended in 1938 on Messrs. Chatturam and Darsanram, a joint Hindu family residing in the previous year at Jhumritilaiya in the district of Hazaribagh, which is situated in the Chotanagpur Division, an excluded area in the Province of Bihar. In some of the other cases it is admitted that the assessees reside either in an excluded area or in a partially excluded areaor in a partially excluded area.

Schedule 6 of the Government of India Act, 1935, gives a list of excluded areas and partially excluded areas. Section 91 of the Government of India Act, hereinafter to be described as the Act, defines excluded areas and partially excluded areas. Section 92 of the Act provides by the first clause that no act of the Federal legislature or of the Provincial legislature shall apply to an excluded area or a partially excluded area unless the Governor by public notification so directs. By the second clause the Governor is empowered to make regulations for the peace and good government of any area in a province which is for the time being an excluded area or a partially excluded area, and any regulation so made may repeal or amend any act of the Federal legislature or of the Provincial legislature, or any existing Indian law, which is for the time being applicable to the area in question. By Section 316 of the Act it is enacted that the powers conferred by the provisions of this Act for the time being on the Federal legislature shall be exercisable by the Indian legislature.

On the 26th May, 1940, the Governor of Bihar issued the following notification : "In exercise of the powers conferred by Sub-section (1) of Section 92 of the Government of India Act, 1935, the Governor of Bihar is pleased to direct that each of the Acts specified in the Schedule shall be deemed to have been applied to the Santal Parganas and the Chotanagpur Division with effect, retrospectively, from the date on which each of the said Acts came into force in other parts of the Province of Bihar" and the Schedule is given which includes the Indian Finance Act, 1940, (Act XVI 1940).

The assessment in this case was made on the 13th March, 1940 and as I have stated above related to the assessment year 1939-40, and must be governed by a Finance Act for the period. But unfortunately notification or regulation extending the application of the Indian Finance Act of 1939 to the excluded areas or to the partially excluded areas in Bihar was ever promulgated by the Governor of Bihar.

Upon these facts it is contended on behalf of the assessee that the imposition of tax upon him was wholly without any authority or jurisdiction. The Appellate Tribunal has accepted this contention and has negatived the contention of the Commissioner who contended that by reason of Section 3 of the Indian Income Tax Act, which was admittedly in force in the excludedor partially excluded areas in question in the assessment year, it must be held that the Indian Finance Act of 1939 which was undoubtedly passed by the Indian legislature ipso facto applied to the assessee in question.

In Bowles v. Attorney General, the question which camp up for decision before Parker, J. (as he then was) arose out of a suit instituted by the plaintiff for a declaration that a notice requiring him to make a return for the purposes of the super-tax before an Act had been passed imposing such tax for the year to which the return related was null and void. I quote from page 689 the observations of the learned Judge : "In order to come to a conclusion whether this contention can be upheld, it is desirable to consider the history of the Income Tax as well as the precise terms of the statutory provisions in question. It appears certain that the Income Tax was originally imposed as, and was intended top be, a temporary tax only, and the Acts regulating its collection have always been so drawn as to expire automatically (except at to arrears) at the end of the period of such imposition. If reimposed at the end of this period the Acts were revived and continued by the Act reimposing the tax, but again only for the period of reimposition. The tax is still, as a matter of form, imposed as a temporary tax only, the period of imposition being for one year, but the hopes once entertained that it would be in fact temporary have long since vanished, and though imposed only from year to year, it is in substance a permanent tax, and the officials responsible for its collection are in fact permanent officials. The financial year in this country runs from the 6th April, but the exigencies of Parliamentary business rarely permit of any Finance Act for the year being passed by that date. The Act imposing the taxes for each financial year is not, in general, passed till the summer months, and sometimes has to be postponed even further." The learned Judge then proceeded to deal with the procedure sanctioned in England by which preliminary assessment proceedings have to go on and then observed at page 692 that the effect of the relevant provisions was "to the Special Commissioners power to demand returns in any financial year commencing the 6th April, even although the super-tax has not been actually imposed for such year - to give them in fact all the powers of demanding the returns necessary for its assessment and collection in case it be so imposed which they had on the last day of the preceding year with regard to super-tax imposed for the year." He, therefore, dismissed the action but he also observed that he must not be understood to have expressed any opinion as to how far the Special Commissioner have power, before the tax for any financial year is actually imposed, to go beyond the preliminary work such as the demand for returns necessary for its assessment and that different considerations would probably arise if they assessee and demand payment of the super-tax before it was actually imposed.

In Bowles v. The Governor & Co. of the Bank of England, the question for decision was whether the Bank was entitled to deduct any sum in respect of Income Tax from the dividends payable to the assessee, who was the holder of the Government stock, before the tax was imposed by the Act of Parliament. Parkar, J., who again was the learned Judge who decided this case, referred to his previous decision which I quoted above and then put to himself the question at page 143 : "Does the section authorise the assessment and collection of the tax before it is actually imposed by the Act of Parliament ?" and gave this answer : "There are, in my opinion, serious difficulties in answering this question in the affirmative. As I have already pointed out, no assessment is possible unless the rate of tax is ascertained. The Attorney-General argued that the rate is fixed by the resolution of the Committee of the House of Commons for Ways and Means, but such resolutions by no means always passed prior to the 6th April, so that even according to this argument there might be a period after the commencement of the financial year during which no assessment could be made. Further, such a resolution, when reported to the House, might not be accepted. The matter might be re-committed and a fresh resolution passed assenting to an Income Tax at a different rate. Again, notwithstanding the resolution, the House might finally impose a tax at rate less than, though not according to its present procedure, at a rate greater then that assented to, or might even reject the tax altogether." He gives his final opinion at page 144 in these words : "The above considerations have led me to the conclusion that the proper interpretation to be placed upon the section in question is to hold that, although it keeps alive the machinery of Income Tax Acts for the purposes of all the preliminary work necessary for the collection of any Income Tax which may be imposed for any financial year, it does not authorise any assessment or collection of a tax not yet imposed by Parliament."

In Commissioner of Income Tax v. Western India Turf Club Ltd., Viscount Cave, L.C., who delivered the judgment of their Lordships also made some pertinent observations which have been quoted in the referring order of the Income Tax Appellate Tribunal. I desire to quote a few lines from page 17 : "The argument which has been used in favour of the appeal seems to involve the fallacy that liability to tax attached to the income in the previous year. That is not so. No liability to tax attached to the income of this company until the passing of the Act of 1925, and it was then to be taxed at the rate appropriate to a company."

This position which is supported by such a high and weighty authority cannot be questioned and has not been questioned by Mr. Gupta, who appears for the Commissioner of Income Tax. But his argument is that by Section 3 of the Indian Income Tax Act since the Finance Act of 1939 was passed for the whole of India it empowered the Income Tax Officer to assess the taxable income of the assessee and relies upon the case of Chinnaswamy Mudaliar v. Commissioner of Income Tax, Civil and Military Station, Bangalore. In that case the question for consideration was whether in the absence of the introduction of the Indian Finance Acts in the Civil and Military Station, Bangalore, the Income Tax Department could levy Income Tax at the particular rate and surcharge as specified in the Finance Acts. The learned Chief Justice, who delivered the judgment of the Bench, made these observations, in a short paragraph : "It is conceded here that the Indian Income Tax Act is in force in the Civil and Military Station, Bangalore, and that is the reason why the first question has not been argued. That having conceded, it seems to me that a contention that there must be a negative answer to the question raised in question No. 2 and the first part of question No. 3 is hardly arguable. I quite agree with the reasons given by the Commissioner of Income Tax Bangalore, for answering this question and the first part of question No. 3 in the affirmative." We have no information as to the provisions which prevailed at that time by which the Government was empowered to apply the Indian Finance Act to the Civil and Military Station of Bangalore, nor has any provisions been pointed out to us in the Government of India Act, as it then existed, which was at all similar to the clear and imperative provisions to be found in Section 92(1) of the Act which emphatically enjoin that no act of the Indian Legislature shall apply to an excluded or partially excluded area unless the Governor of the Province concerned notifies or makes a regulation to that effect.

There is another case, Sobhagmal Nemichand v. Commissioner Income Tax, Bombay, which decides that the Indian Income Tax Act applies to a person resident in Mewas Estates, a scheduled district which is part of British India and that no notification u/s 3 of the Scheduled Districts Act is required for the application of the Income Tax Act. The learned Chief Justice and Blackwell, J., who decided that case observed that it was quite clear from the terms of the Income Tax Act that it does apply to the whole of British India including scheduled districts and, therefore, no notification under the Scheduled Districts Act was necessary. They thought that the point was covered by the decision of the Full Bench of the Madras Court in Krishnachandra v. President, Agency District Board. It will be noticed that the case turned upon the construction of Section 3 of the Scheduled District Act.

In the Full Bench case referred to, it was observed by Ramesam, J., who delivered the judgment of the Bench, that "This argument seems to rest on a misunderstanding of the object and scope of the scheduled Districts Act of 1874. The object of that Act was to remove doubts regarding the applicability of Acts of the Indian legislature prior to that date and they were sought to be removed generally be by the Laws Local Extent Act and secondly, by notification either u/s 3(a) or 3(b) of the Act either declaring certain Acts to be in force or declaring certain Acts not to be in force. But the Scheduled Districts Act does not apply to acts of the Indian legislature passed after that Act which are very clear as to the local extent. The practice since 1874 has been for an Act to say that the Act applies to the whole of British India or it applies to the whole of British India excluding the scheduled districts as the case may be." But here the terms of section 92(1) of the Act are entirely different as I have pointed out several times above.

Reference was also made to the case of Commissioner of Income Tax, Madras v. Valliammai Achi, where the learned Chief Justice observed as follows : "It is said that as the Income Tax Act does not come into operation in any year until the Finance Act has been passed the Income Tax Act must be treated as a statute which is passed every year....... We do not accept this argument. It is true that the Income Tax Act cannot be applied in any year until the Finance Act has been passed, but the Act cannot be treated as being a statute which is passed by the Act cannot be treated as being a statute which is passed annually. It is permanent enactment but it may not be enforced in any particular year until the Finance Act has been passed." I do not see how this case helps the Commissioner. It seems to take the view which I have expressed above.

But it was argued that the Finance Act had been passed and, therefore, the conditions required by Section 3 of the Indian Income Tax Act are satisfied, and that by that Section the department is empowered to assess the income and levy tax at the rate which is now to be found to the Indian Finance Act admittedly passed in and for 1939. But the fallacy in this argument is that no Indian Finance Act has been passed for the excluded areas because of the absence of a notification to that effect. Let it be supposed that the Indian Finance Act itself had enacted that this Act shall not apply to the excluded areas until the Governor of the Province concerned shall notify. Can it be argued in that case that the Indian Finance Act has been passed which the assessing authorities can take into consideration for fixing the rate of the assessee in the excluded area ? In may opinion the answer is clear that unless and until a Finance Act had been passed which applies to the excluded areas in the manner provided by Section 92(1) of the Act the Income Tax authorities had not jurisdiction whatsoever to impose a tax on the assessable income of the assessee.

For these reasons I would answer the first question in the negative. As I have said above question No. 2 does not arise, but the answer to this question also in the negative.

As the assessee has succeeded he is entitled to the costs incurred in this Court. I would assess the hearing fee at Rs. 100 in each case and would direct that the fee of Rs. 100 which was deposited by the assessee as cost of the reference to this court must be refunded to him in each case.

FAZL ALI, C.J. - The point to be decided in these references is a short one and can be very briefly dealt with.

The assessee in all these cases live within the Chotanagpur Division which is a "partially excluded area" as defined in Section 91 of the Government of India Act, 1935. Section 92 of the same Act provides that notwithstanding anything in the Act no Act of the Federal legislature or of the Provincial legislature shall apply to an excluded area or a partially excluded area unless the Governor by public notification so directs, and the Governor in giving such direction with respect to any Act may direct that the Act shall in its application to the area, or to any specified part thereof, have effect subject to such exceptions or modifications as he thinks fit. By Section 316 this provision is applicable to the present Indian legislature as no Federal legislature functions at present.

Now the assessment with which we are concerned in these cases relates to the year 1939-40 and the rates applied to the assessment were those mentioned in the Finance Act of 1939. It is common ground that no action has been taken by the Governor to make the Finance Act 1939 applicable to Chotanagpur by public notification as provided in Section 92 of the Government of India Act. The main question which therefore arises is whether a levy of Income Tax could be made on the assessees concerned for the year 1939-40 in the absence of a proper notification of the Finance Act, 1939, so as to make it applicable to Chotanagpur.

Now the Income tax Act (which is said to be applicable to the assessee) does not state at what rate or rates the assessment is to be made. It is the Finance Act which supplies the rates each year, but the Finance Act of 1939 has not been made applicable to Chotanagpur by means of Notification as provided in Section 92. The assessees contention which has been accepted by the Income Tax Tribunal is that in such a case they cannot be assessed at all. The Commissioner of Income Tax not being satisfied with the decision of the Tribunal has asked the Tribunal to refer these cases to the High Court for its opinion on the question of law involved and we have to decide whether such question has been correctly decided by the Tribunal.

The point in my opinion can be bluntly put thus : Suppose it was provided expressly in the Finance Act that the rates specified in that Act were not applicable to Chotanagpur, could it then be said that notwithstanding this provision the rates were still applicable and the assessee within the area in question could be assessed according to those rates ? Mr. Gupta, who appears on behalf of the Income Tax department, was compelled to say that he was not prepared to go so far as to contend that in the hypothetical case which I have referred the assessees within Chotanagpur Division could be taxed. If that point is to be conceded, then it seems to me that there is nothing else left in the case. It the Finance Act was not properly notified u/s 92 of the Government of India Act to be applicable to Chotanagpur, then that Act is clearly not applicable to that area under the express terms of Section 92. If that Act is not applicable, then can the rates mentioned in that Act be charged within that area ? The only reply which has been offered on behalf of the Income Tax department is that Section 3 of the Income Tax Act is sufficient to enable the department to assess the persons living in Chotanagpur. That section runs as following :-

"Where any Act of the Central Legislature enacts that Income Tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act is respect of the total income of the previous year of every individual, Hindu undivided family etc."

Now it is said that the rates specified in the Finance Act become automatically part of the Income Tax Act by reason of this provision and that inasmuch as the Income Tax Act has been made applicable by a proper notification to Chotanagpur, the assessees before us could be charged with Income Tax according to the rates applicable to their case. It seems that an argument similar to this found favour with the Madras High Court in the case of Chinnaswami Mudaliar v. Commissioner of Income Tax, Civil and Military Station, Bangalore. We have not before us the specific provisions which were relevant to that case and that being so, the decision in that case can hardly be treated as an authority governing the cases before us. In my opinion the moment it is conceded, as it was conceded before us, that the Finance Act was not applicable to the present assessees, it is difficult to hold that the rates assessed in that Act can by applied to them. It is true that the Indian Income Tax Act is applicable to Chotanagpur, but so far as they are concerned the position is the same as it would be if no Finance Act had been passed in 1939. In that case they could not be assessed at all because Section 3 of the Indian Income Tax Act clearly states that a person can be taxed at a certain rate only when an Act of the legislature enacts that that rate shall be charged for any year. If there is no enactment in that respect then there is a gap in the Act and there being no provision as to what rate or rates at which the tax is to be charged no tax can be assessed. I would therefore hold that the following two questions which have been referred to us, namely,

Whether a levy of Income Tax could be made on the assessee respondent for the year 1939-40 in the absence of a Notification u/s 92(1) of the Government of India Act by the Governor extending the Finance Act of 1939 to the excluded area ?

Whether Section 3 of the Indian Income Tax Act by mere implication extends the Finance Act of 1939 without a Notification u/s 92(1) of the Government of India Act ? should be answered in the negative.

The assessees concerned will be entitled to their costs as stated in the judgement of my learned brother Manohar Lall, J.

Reference answered in the negative.