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Judgment
Mohd. Ahmed Ansari, J.—This group of references, under S. 82(1), Hyderabad income tax Act, No. 8 of 1357F., contains a common question, relating to the constitutionality of S. 14(5) of the Act, and in case the sub-section be found intra vires of the then State Legislature, there are further sets of questions relating to the interpretation of the Act, as well as about the deductions of expenses under Cls. (a) and (b) of S. 14(5). All the three assessees in the references were the holders of Crown grants.
Salar Jung was a Jagirdar and Raja Jagannath Rao, as well as the late Rani Saheba were respective holders of Samasthans known as Jatpole and Gadwal. These tenures have since been abolished, and the basis of the contention by the assessees about the aforesaid sub-section of the Hyderabad income tax Act being ultra vires is S. 18(8) and (9) of the Hyderabad Legislative Assembly A''in. The English translation of these parts of the A''in is as follows:
There shall not be introduced into, or moved in the Assembly, any Bill, or motion, or resolution, or question, or other proceedings relating to or affecting the following matters:
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(8) The relations of His Exalted Highness with the holders of Samasthans and Jagirdars and with such other grantees as derive grants from Sanads.
(9) The powers of His Exalted Highness over the present or future grants, whether they be in the form of land or cash.
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It is conceded that the Hyderabad income tax Act, 8 of 1357F., was passed by the then Legislative Assembly without any earlier permission of the Ruler. It, however, received the assent of His Exalted Highness the Nizam and came into force on Azur 1, 1357F. (1-10-1947). Many of its provisions are similar to the Indian income tax Act, but a few have no parallel in the Indian Act and the impugned sub-section is one of them. Its English translation runs as follows:
(5) In respect of income from land revenue paid to the Jagirdar by the holder of any non-balsa land in lieu of the use or possession thereof and in respect of any income derived by giving over abkari trees for extracting sendhi or toddy and from Bithak, which under proviso (2) and explanation respectively of Cl. (4) of S. 2 is deemed to be non-agricultural income, such income, profits and gain shall be computed after making the following allowances:
(a) all such expenses, not being his private or personal expenses, which the assessee may incur in relation to such land, or the inhabitants thereof towards management, or superintendence, or on works of public welfare;
(b) such necessary expenditure as the assessee may incur under any law;
(c) 5 per cent of the income chargeable to tax towards necessary expenditure.
It will be observed that the sub-section is a head of the other sources of the assessee''s profits that have been made liable to pay income tax, and comprises entirely of the land revenues and excise duties payable to the Crown grantees in areas covered by their grants. Obviously, the peculiarity of the sub-section is due to the special nature of the source, from which the income sought to be taxed, accrued and we would be justified in giving early some of the characteristics of these tenures.
The areas covered by the grants formed parts of the Hyderabad State and all that the term ''non-khalsa land'' indicates is that the lands covered by the grants were not ordinarily administered by the Government. They were managed by the grantees with the consequence that such lands were excluded from the units, created for the purposes of judicial or revenue administration of the State, and expenses of such managements were met by the grantees from their own resources.
Because they were Crown grants, the prerogative of the Ruler over them was absolute, so much so that the devolution of the estate after the death of the holder rested on the uncontrolled discretion of the grantor, who could regrant the estate to any of the heirs of the deceased grantee, or even to a stranger. Again because the areas were within the territorial limits of the then Hyderabad State, the laws passed by the legislating authority of the State were operative in the areas, ...... if they indicate the intentions to be so operative.
A Full Bench of this Court in the case of -- ''Sangappa v. The State'', 32 Dec L.R. 254 (A), held that the Hyderabad Penal Code extended over the entire areas of the Hyderabad State including the jagirs, as they were part of the State. So also the Evidence Act and the CPC of Hyderabad extended over the whole territorial limits of the then Dominion.
Undoubtedly, there were varieties of such tenure. Some were granted for purposes of maintaining forces. Others were liable to pay only fixed annual sums, known as ''peshkush''. But their absolute subordination to the prerogative of the Ruler and to the general enacting power of the Legislature has long been settled.
There would, therefore, be no justification for dealing separately with the references made on the application of the assessee, who was a jagirdar, and those where the assessees were the holders of the Samasthans. The question relating to the constitutionality of the sub-section in each of the references is the same and the answer should also be common. This part of our judgment will, therefore, cover all the three references made on the applications of the three assessees. The question which was decided by the income tax authorities against the assessees and which is now referred to us is as follows:
Whether the Hyderabad income tax Act is ultra vires.
It has been widely framed and involves consideration of the general competency of the then Legislature to pass laws covering the areas of Crown grants. The contention of the assessees is not that the areas of their grants were never parts of the Hyderabad State.
Indeed consistently with their being grantees from the Ruler, they could not claim the areas of their grants not being parts of his Domain. The land comprised in their giants, therefore, formed parts of the then Hyderabad State, and it follows that the legislative body set up to enact laws for such a territory would be generally competent to make laws binding on granted areas also unless there be some express limitation on the authority.
The general competency of the Legislative Assembly that passed the Hyderabad income tax Act being so established, the assessees in order to establish their case of the enactment being ultra vires must establish some limitation.
They rely on S. 18(8) and (9) of the Hyderabad Legislative Assembly A''in and have argued that taxing the revenue and the excise duties arising in areas of the Crown grants, affected the relation of the Nizam with the holders of Samasthans and jagirs. They contended that the subsequent assent of the Ruler to the Act would not cure the initial incapacity of the Assembly to pass the law.
We think that the income tax Appellate Tribunal has rightly rejected the argument. To begin with, once the competency of the then Legislative Assembly to tax the income of all persons resident within the State be conceded and we think it cannot be challenged, the incidental encroachment of such a law on the forbidden field would not be fatal to its validity.
In other words, we fail to understand why the doctrine of pith and substance, which is one of general application, would not be applicable to such a legislation also. The question would then be not whether the constitution of the State is federal; but whether the legislative power has been substantially transgressed.
We have the case of -- ''Gallagher v. Lynn'', 1937 A. C. 863 (B), where the following observation is to be found:
It is well established that you are to look at the ''true nature and character of the legislation'' ...........''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 the matters which are outside the authorized field.
In this case the Government of Ireland Act, 1920, conferred upon the Parliament of Northern Ireland the power to make laws for the peace, order and good government of Northern Ireland, but not in respect of trade with any place out of that part of Ireland except so far as trade may be affected by the exercise of power of taxation, or by regulation made for the sole purpose of preventing contagious diseases.
The Parliament of Northern Ireland passed an Act in 1934 providing certain precautions to protect the health of the inhabitants of Northern Ireland from the dangers of unregulated supply of milk. The effect of the Act was practically to put an end to the milk trade between certain farmers in Irish Free State and the customers in Northern Ireland.
The Act was upheld by the House of Lords on the ground that its pith and substance was to protect the health of the inhabitants of Northern Ireland, though it might incidentally affect trade outside Northern Ireland. On the same reasoning, the pith and substance of the Hyderabad income tax Act was to tax income, profits and gains of residents within the then Dominions of Hyderabad and if it incidentally taxed the gains arising from grants of those, who were Crown grantees, it cannot be said that the Act directly affected the relation between the grantor and the grantees.
The impugned sub-section was, therefore, not beyond the competence of the enacting authority.
The other reason, which has led us to reject the argument of the sub-section being ultra vires, is that the Hyderabad income tax Act was finally sanctioned by the Nizam. At that time he had legally absolute power of enacting laws and limitations incorporated in S. 18(8) and (9) of the A''in were not on the power of the Ruler.
His consent to the provisions for the taxation of the profit and gain arising from jagir tenures would, therefore, make them his act and the absence of jurisdiction in the earlier stages of the measure, assuming the objection to be valid, would not vitiate the sanction, from which the rule derived its force. In - Ameerunnissa Begum and Others Vs. Mahboob Begum and Others, the Supreme Court have observed that at the time when the Nizam was not only the supreme legislative authority, but was also the fountain of justice, a rigid line of demarcation between the one and the other would from the nature of things be not justified.
It, therefore, follows that the unification of powers in one person makes any differentiation between exercise of his several powers impossible.
It is not denied that the Ruler''s prerogatives as the superior holder of all tenures within the State were absolute, and consequently is direct enactment of a taxation measure affecting jagir tenures would be legally valid. The position of his consenting to a similar enactment is legally no worse.
In our opinion the sanction by the person with such uncontrolled enacting powers cures the initial defect, if there be any defect, in passing the measure and it would be validated by such a subsequent ratification. Therefore, our answer to the question whether the Hyderabad income tax Act is ultra vires, is in the negative.
The next common question in the references that have been made on the applications of the assessee is:
Assuming that the Hyderabad income tax Act is intra vires, whether the income of the previous year, that is to say, the income of 1356F. could be validly taxed in 1357F.
We may mention here that prior to the enforcement of the Hyderabad income tax Act there was no income tax in this State. The Act came into operation on Azur 1, 1357F. (1-10-1947) and the argument by the assessee is that the Act not being retrospective their incomes for the previous year, which was 1356F., cannot be taxed.
The income tax authorities have rejected this argument and have dissented from the views of the Rajasthan High Court. This view of the High Court authority has since been overruled by the Supreme Court. In our opinion, the answer to the question depends on the construction of the charging section in the Act. Section 3, Hyderabad income tax Act provides that the tax shall be charged for the year beginning with 1357F. in respect of the total income of the previous year, which means the year 1356F.
It is, therefore, clear that the section like the Indian income tax Act makes the tax payable on the income of the previous year and is not an advance tax on the profits of the year of assessment, which is estimated on the basis of the profits of the previous year. There is thus a difference between the present Indian income tax Act 1922 upon which the Hyderabad Income tax Act was based and the previous income tax Act of 1918.
Under the latter Act the charge was on the income of the assessment year taking the income of the previous year as a measure of the unascertained income of the assessment year. After the termination of the assessment year when actual income was known and ascertained a final assessment and adjustment was made on the actual figures.
This basis of assessing income was changed by the Indian income tax Act 1922 when the tax in the language of Lord Porter delivering the judgments of the Judicial Committee in the -- Indian Iron and Steel Co. Ltd. v. Commr. of Income Tax, Bengal "is assessed and paid the next succeeding year upon the result of the year before". Therefore, our answer to the question referred to earlier in this paragraph is in the affirmative.
We have so far dealt with the common questions in the references on the applications of the three assessees. We now come to those that have been sent to his Court on the applications of the income tax Commissioner. It appears that the income tax Appellate Tribunal has allowed certain deductions claimed by the three assessees on the ground that such expenses were covered by S. 14 (5)(a) and (b), income tax Act.
These questions are three in number, one in each case, and will be dealt with separately. But before doing so, we would emphasise that the deductions permitted by the several clauses of sub-s. (5) of S. 14 appear to have been arisen from the legal obligations of the grantees of managing the areas of their grants, and of paying other charges out of the income of such grants.
Thus Cl. (a) permits deductions of expenses incurred for the management of the lands, or for the general welfare of the inhabitants of such tenures. Had the matter rested there, it would have been plausible to argue that the personal expenditures of the grantees as jagirdars would also be covered; but the clause proceeds further to define the class of permitted expenditures under it as not being private or personal. It, therefore, follows that expenses, even though they be to sustain the status of the grantee as the jagirdar, are not covered by the clause as they were not in respect of managing the land nor for the welfare of the inhabitants.
On this construction the expenses for maintaining the forces, where grants have been made for such a purpose or for sustaining certain honours allowed by the Sanads, or allowances to their dependents would be covered by clause (b) of sub-s. (5) because of its wider scope. This clause though vaguely framed, has also certain conditions.
They relate to the expenditure being necessary and under law; and have been deliberately put in to exclude any expenditure incurred under fear of social stigma or for purposes of sustaining the social status of the grantees as jagirdars. If we were to construe this clause otherwise the further deduction of five per cent of the income chargeable to tax for necessary expenses would be meaningless.
It would depend on facts of each case, whether the expenditures though personal are social or legal. They would be legal if they were authorised by the instrument creating the tenure or were in compliance with the orders of the grantor. The position would be the same if expenditure be under some other law. But in the absence of necessary facts in the reference showing the nature of the tenure or grantor''s order it would follow that the expenditure to sustain the dignity of being a jagirdar would not be saved, because there would be no legal sanction behind the failure to incur them.
Now we come to the three questions. In the reference in which the late Salar Jung was the assessee, it appears that he had claimed deductions under S. 14(a), (b) and (c) to the extent of Rs. 2,65,226-11-10. The Appellate Tribunal has reversed the orders of the income tax authorities and has allowed deductions to the extent of Rs. 1,32,613. The details of the expenses are given in Annexure A, which is at page 21 of the typed copy of the reference. The document is divided into three sections and after the expenses covered by S, (A), with which we are not concerned, are deducted the total of those under Ss. (B) and (C) come to Rs. 2,65,226-11-10.
All the items mentioned in the two Sections are of personal expenditures, such as pays of Chopdars, etc. It was contended before us on behalf of the Department that all the items in the aforesaid two sections arc of a personal nature and, therefore, the Appellate Tribunal had erred in allowing even half of the aforesaid amount on the ground that the jagirdars in Hyderabad State occupied a peculiar position as jagirdars, though personal, if necessary, should be allowed. The question, therefore, framed in this case is as follows :
Whether the sum of Rs. 1,32,613 allowed by the appellate Tribunal as a revenue deduction under S. 14 (5) is in accordance with law.
Obviously, S. 14 (5) (a) excludes such expenses on the ground of their private or personal nature and not having been incurred for the purposes of management or superintendence of jagir lands nor for the public welfare of his jagir.
The next point is whether these expenses may be allowed under cl. (b). There are no statements of facts that the assessee was under an obligation because of his Sanads or orders of the grantor to incur them. There is, therefore, no orders in exercise of prerogative power to render their having been incurred as under any law. Assuming the expenses to be under family customs, we still think they would not be covered by the clause, for the sanction behind their being incurred would still be of fear of social disapproval or stigma and not of duty legally enforceable.
They would, therefore, be not under any law. Consequently, Cl. (b) does not cover these expenditures. Clause (c) is equally inapplicable, because the Appellate Tribunal has not allowed the deductions as being within 5 per cent of the income chargeable to tax. In these circumstances, these amounts though spent for maintaining the dignity of the late Salar Jung as jagirdar, in our opinion, cannot be allowed. Therefore, our answer to this question is in the negative.
The question in the reference made on the application of the Commissioner of income tax in the case where the assessee is the Raja of the Samasthan of Jatpole is as follows :
Whether the sums of Rs. 14,390 and Rs. 38,079 or part thereof should be allowed as a revenue deduction under Sec. 14 (5) (a) or 14 (5) (b) of the Hyderabad income tax Act.
It may be observed that the two deductions are for the two assessments of the Fasli years of 1357 and 1358, and comprise of expenses for stables and elephants, charity, subscriptions and bodyguards.
We think that the Appellate Tribunal has erred in granting these deductions. The jagirdar, however, anxious he be to maintain his dignity, cannot claim deductions of money so spent professedly unless there be orders in exercise of prerogative powers of the grantor authorising such expenditures. For example, ho may be authorised by the Sanad creating his tenure to maintain elephants or bodyguards. These expenditures would then, though personal, be necessary and legal, because of the constitutional position of the grantor when the tenure was created and continued.
But the statement of the case should show the legal basis upon which deductions are allowed. If the assessee was entitled to maintain elephants, stables paraphernalia, etc., under the grants, he should have filed them before the income tax authorities, Evidently this has not been done; at any rate there is no mention of this fact in the statement of the case. In the result, the answer to the question is in the negative.
In the reference on the application of the Commissioner of income tax where the assessee is the late Maharani of Gadwal, the question is :
Whether the sum of Rs. 2,75,000 was admissible deduction in arriving at the assessee''s total income for 1356 F.
It appears that in that year the assessee has paid the aforesaid amount towards the debt which she had incurred in the preceding year in order to manage her estate.
We have mentioned earlier that the grantees of jagirs in this State were to make their own arrangements for the realisation of the revenue and it often happened that the realisations did not suffice to meet the necessary expenses of administration. What was due in one year would be realised in the next, but the expenses of the arrangements for the realisation of the revenue could not be similarly postponed. The sum of Rs. 2,75,000 was claimed to have been paid towards the amounts borrowed for meeting the expenses relating to the management of the estate in the preceding year and the Appellate Tribunal has allowed the claim.
It is argued on behalf of the Department that as the income tax is annual in structure, an assessee is not entitled to deduction in respect of expenditure which was not incurred in the year, the profits of when are being assessed. We would have accepted the argument had it not been for the fact that the revenue amounts for the preceding year that were realised in the assessment year had also been brought in for the purposes of assessment. The tax has thus been assessed on the actual receipts and these payments cannot be said to be without the expenses which the assessee had already incurred. At any rate, the words of cl. (a) of sub-s. (5) are wide enough to cover provision for past debts incurred for management and the assessee has claimed what is generally done in all public finances.
The special nature of the jagir was taken note of when it was decided to tax the income arising from the revenue of these jagirs, all such expenses "not being the jagirdars" private or personal expenses which he may incur in relation to such land or the inhabitants thereof towards the management or superintendence etc., were deductible. The borrowings in this case are admittedly not of a private or personal nature; but had to be resorted to in order to run the administration of the Samasthan due to a fall in the collections of the particular year, in which they were borrowed.
This amount had to be paid back in the same way as any debt incurred for running the administration or business, has to be paid back. If this were not so, the tax would be leviable on gross receipts. It appears to us that when arrears were due in any year by reason of which borrowing had to be resorted to, and which when collected is taxed in the year of account, then the loan incurred for the purposes of the arrears, is a charge on the revenues of the Samasthan and should be paid in the year of account.
We are of the opinion that the quasi-public nature of management by the jagirdars of their tenures justified the expenses allowed to the assessee in this case. Our answer to the question is in the affirmative.
This opinion will cover all the references.