A.H WADIA v.

INCOME –TAX
COMMISSIONER

( A.I.R 1949 F.C. 18 S.C.)

Submitted by – Somya Verma

Submitted to – Panch Rishi Dev
- Roll no – 24
Sharma
-Section – B
( Asst . Prof.)
- LL.B hons
Constitutional Law of India (Paper - VI
Faculty of Law
Lucknow University
 FACTS :
1) The appellant is the agent of the Gwalior Durbar. The Durbar was participating in various trade and business operations, in and outside the
Gwalior State for many years. The record shows that those activities in any event existed in 1924 when the predecessor of the present
Maharaja was on the throne. That Maharaja had appointed Mr. F.E. Din-shaw as his agent in Bombay for his, trade or business operations.
The record shows that money was advanced as loan and also on the security of immovable properties. The Gwalior Durbar as such has not
been treated as an assessee under the Indian Income-tax Act, but in respect of certain trading and business operations of the Durbar the
Indian Income-tax authorities sought to make the Durbar liable under the Government Trading Taxation Act, III of 1926.

Section 2 of that Act, which alone is material for the present case, runs as follows:
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.
2. The Maharaja died in about 1925 and a Council of Regency was appointed, presumably as the present
Maharaja was a minor at the time. Till his death Mr. F.E. Dinshaw continued to act as the Agent of the
Durbar. Thereafter the present appellant was appointed the agent of the Durbar.

3. In response to notices issued under the Income-tax Act Mr. Dinshaw and thereafter the present
appellant submitted returns to the Income-tax authorities in Bombay from year to year. The disputes
between the parties in the present appeal relate to the assessment of the Durbar for the assessment year
1939-40. Being dissatisfied with the assessment order of the Income-tax Officer the appellant filed an
appeal to the Appellate Assistant Commissioner, Income-tax, Bombay. Being dissatisfied with the order of
the Appellate Assistant Commissioner the appellant asked for a reference to elicit the opinion of the High
Court on certain questions. That application was made in 1940. The Income-tax Commissioner made a
reference to the Court on October 17, 1946. We are unable to find any, much less satisfactory, reasons for
this deplorable delay. As will be noticed hereafter, this delay has contributed largely to the difficulties of
the High Court and of this Court in satisfactorily disposing of the matter. The statement of facts in the
letter of reference is far from satisfactory, is scrappy and leaves this Court to find out relevant facts from
different papers, if it can do so. These defects were noticed by the High Court and adversely criticised in
the judgment of that Court. We endorse the observations of the High Court in this respect .
ISSUES :
ISSUE (1)
1)Whether in the circumstances of this case the interest of Rs. 2,49,726 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?
The material facts, as set out in the reference made by the Commissioner, on the first question are these. A company styled the Provident Investment Co.,
Ltd., was incorporated in British India in 1927 with headquarters in Bombay. It was practically a one-man company as all the shares were either owned by
the Gwalior Durbar or its nominees. In 1933 the Durbar advanced to this company a loan of Rs. 50 lacs 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 were also deposited there. Admittedly the
Provident Investment Co., Ltd., brought the borrowed money into British India and utilised it for the purpose of its business in British India. The interest
on the loan, received by the Durbar for the accounting year, amounted to Rs. 2,59,726. It was receivable and actually received at Gwalior.
On these facts it was contended on behalf of the appellant that the income did not accrue to the Durbar in British India and was therefore not liable to
Indian income-tax. It was first argued that on the terms of Section 2(1) of the Government Trading Taxation Act, III of 1926, only income which arose in
British India in respect of trade or business and operations connected therewith was liable to tax.
ISSUE (2)
(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?
As regards the second question, the relevant facts are these. The Gwalior Durbar did moneylending business on a fairly extensive scale. On June 23, 1924,
Mr. Dinshaw entered into an agreement with the Tata Iron & Steel Co., Ltd., and Tata Sons, Ltd., to advance to the first named party a sum of Rs. one
crore at interest and on. the terms contained in the agreement. This money was of the Gwalior Durbar and Mr. Dinshaw was the agent of the Durbar at the
time. One of the material terms of the agreement was that a six-annas share in the remuneration of Tata Sons Ltd. as agents of the Tata Iron & Steel Co.,
Ltd., was to be paid to Mr. Dinshaw, irrespective of the fact of the loan remaining due or not to the lender from the company under the agreement.
Out of this Mr. Dinshaw retained a two annas share for himself and the Gwalior Durbar was to receive the balance of four annas share. The late
Maharaja died some time in 1925 and it appears that the Regency Council thereafter urged that under the terms of the will of the late Maharaja
this loan was not permissible. About that time the Tata Iron & Steel Co., Ltd., and Messrs. Tata Sons, Ltd., also appeared to be in a position and
desirous of paying back the loan. On the loan being repaid, two fresh agreements were made on July 29, 1927, in substitution of the original
one. Under the first of those agreements Mr. Dinshaw was to be paid in his name a two annas commission, while under the second agreement
F.E. Dinshaw Ltd. was to be paid another two annas commission. The first two annas was the reduced share of the Gwalior Durbar in the agency
commission. In the accounting year, the appellant received from the executors of Mr. Dinshaw on account of this two annas share of
commission a sum of Rs. 3,57,112. It is admitted that the sum was paid to the appellant as the agent of the Gwalior Durbar in British India.

ISSUE – 3
(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 course
of the money-lending business of the Dubar, 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?

As regards question three, the Commissioner of Income-tax in his letter of reference has stated as follows:"During the course of Durbar's
money-lending transactions in Bombay and elsewhere some of the mortgagors made default in payment of the principal and interest and the
Durbar filed suits to enforce the mortgages and obtained decrees for the sale of the properties. The mortgaged properties which are all in British
India were put up for sale in execution of these decrees and were purchased in Court auctions by the Durbar and the Durbar still continues to
own these properties. Item C represents income from these properties.“
ISSUE – 4

(4) Whether the dividend of Rs. 1,88,030 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
1936?
ISSUE(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 49-B
thereof to have been paid by it as a shareholder in respect of the dividend received by it during the previous year?

As regards questions four and five, the Commissioner has come to the conclusion that the shares and debentures continued to be the trading
assets of the Durbar. In this connection he relied particularly on the claim made on behalf of the Durbar for business losses when the Durbar
took up 75,212 shares of the Shapurji Broacha Mills Ltd. In the three years 1931-34 a total deduction of 28 lakhs in the assessment of those
years was permitted by the Income-tax authorities on this ground. The assessee appears to have conceded that the items mentioned in questions
four and five stood on the same footing and therefore there was evidence before the Commissioner on which he could come to the conclusion
that the shares and debentures mentioned in these questions retained the character of business assets. The Commissioner further relied on the
fact that in the previous year the appellant had applied to make a reference to the Court in respect of the income derived from these shares and
debentures, but withdrew his application.
JUDGEMENT :
ISSUE - 1
H. Kania J :
the Indian Legislature is supreme within the ambit of the legislative heads mentioned in the Government of India Act, 1935, I am unable to
consider that the legislation in question is ultra vires. As mentioned above, the aspect of it affecting personsIn my opinion, the contention of the
appellant that the legislation is ultra vires, cannot therefore be entertained by this Court. The answer to the first question is correctly given by the
High Court against the appellant. who are beyond the jurisdiction of the municipal Courts cannot be considered sufficient for the Court to hold it
ultra vires. The municipal Courts are bound to enforce the law. Whether after obtaining the opinion or decree the same is enforceable against the
other side or not, is not a matter for the Court's consideration. The Court has only to see that the legislation is within the ambit of the powers of
the Legislature . In my opinion, the contention of the appellant that the legislation is ultra vires, cannot therefore be entertained by this Court.
The answer to the first question is correctly given by the High Court against the appellant.
Faiz Ali , J :
These facts are to be read with the findings set out in the appellate order of the Assistant Commissioner of Income-tax, which are to the
following effect:
It is admitted that the Durbar carried on banking business and this is so because the Durbar has a lot of surplus money to invest and
earn interest. The loan advanced in this case is part of operations connected with that money-lending business. Hence the income
therefrom is liable to be taxed. If the principle that some kind of tangible or intelligible nexus or territorial connection between the
taxing State and the assessee is necessary in order to confer jurisdiction on the State to tax the assessee is of any importance, that
principle seems to have not received adequate consideration in framing the new clause. I do not wish to pursue the matter further,
because, in my opinion, the earlier part of Section 42 is sufficient to cover this case. In my judgment the High Court has rightly
answered the first question in the affirmative.
Patanjali Shastri , J :
In view of this important pronouncement it seems no longer useful, in judging the validity of an Indian Income-tax law having elements of
extraterritoriality, to enquire what are the limitations, according to international law based on the comity of nations, on the power of a subordinate
Legislature, or whether the Indian Legislature has full power under its constitution to make laws having extra-territorial operation. The question
reduces itself simply to this: Is the territorial connection relied on in the impugned provision as justifying its extra-territorial operation sufficient for
the purpose for which it is used? The only territorial connection set forth in the impugned portion of Section 42(1) is the bringing of the borrowed
money into British India and the purpose for which it is used is the taxation of the interest received abroad by the non-resident lender. To my mind,
there is no relevant and sufficient nexus between bringing the borrowed money into British India and the receipt abroad of the interest sought to be
taxed, for the payment of the interest would not ordinarily be dependent on the earning of profits by the utilisation of the money in British India.I am
therefore of opinion that, judged by the test indicated by their Lordships, the impugned provision is ultra vires the Indian Legislature, and the Durbar
is in consequence not chargeable to tax in respect of the sum of Rs. 2,59,726. I would accordingly allow the appeal in regard to this sum and answer
question No. 1 in the negative. On the other questions I substantially concur in the judgment of my Lord the Chief Justice.
Meher Chandra Mahajan , J :
All the questions in issue concern the liability of the Gwalior Durbar to tax. The Durbar admittedly did money-lending business and thus became
chargeable to tax in India, in view of the provisions of the Government Trading Taxation Act, III of 1926, but subject to the limitations contained
therein.I had the advantage of perusing the judgment just delivered by my brother, Sir Fazl Ali, and though I have considerable hesitation in
disagreeing with anything that he says, I regret I have not been able to subscribe to his line of thought on this aspect of the case. My learned brother,
Patanjali Sastri, gave me the privilege of perusing his judgment which has just been delivered. It took me considerable time to make up my mind
before I decided to express a different opinion than his. It is unfortunate that on the first question I have to disagree with him. For the reasons given
above, I consider that the High Court returned a correct answer to the first question.
Mukhrejea .J :
On the findings of the Income-tax authorities which were accepted by the High Court of Bombay, the loan of Rs. 50 lakhs advanced by the Gwalior
Durbar to the Provident Investment Co. was not an isolated transaction but formed part of the money-lending business which was carried on by the
Durbar in British India. On this finding, the Durbar would certainly come within the purview of the first clause of Section 42(1) of the Income-tax
Act, and the interest earned by it would be liable to be assessed as income arising from business connection in British India.
It is not the contention of Sir Jamshedji that the first clause in Section 42(1) of the Income-tax Act, which relates to income arising out of business
connection in British India, is in any way void or inoperative. Strictly speaking, therefore, the question No. 1, as formulated by the Income-tax
Commissioner, could be answered against the assessee without embarking on any discussion as to the validity of the later clause which makes taxable all
income or profits arising out of money lent and brought into British India. The Commissioner of Income-tax, however, expressed his opinion on the basis of
this later clause, and as the point was raised and elaborately argued both in the High Court as well as before us, it is proper, I think, that we should record
our definite opinion upon it.
ISSUE – 2
H . Kania , J
Reading the three agreements of 1924 and 1927 together it is clear that the effect of the second set of two agreements was to reduce the original commission
of Gwalior Durbar from four annas to two annas, and the right to receive this arose under the first agreement and was a part of the loan transaction. By
reason of the second agreement the rate of commission was only reduced. There appears no foundation of fact for the alleged dereliction of duty on the part
of Mr. Dinshaw in giving the loan, nor is there any fact to support the contention that this was compensation paid for such alleged dereliction on the part of
Mr. Dinshaw. In my opinion the conclusion of the Income-tax authorities and the High Court is correct and the contention of the appellant is rejected.
Faiz Ali , J :
Agreed with the judgement of H . Kania . And added , “I do not wish to pursue the matter further, because, in my opinion, the earlier part of Section 42 is
sufficient to cover this case. In my judgment the High Court has rightly answered the first question in the affirmative .
Patanjali shastri , J :
Agreed with the judgement of H . Kania .As I agree with my learned brothers with regard to the answers which they propose to make to questions Nos. 2 to
6, I do not think it necessary to encumber this judgment with a restatement of the facts giving rise to this reference.
M C Mahajan ,J :
The result therefore is that the earning of the commission by the Durbar was not in any way dissociated from or independent of its money-lending
operations. The agent, who paid this commission to the Durbar, was employed by it for those operations, and any commission earned subsequent to the
termination of the agreement still remained the income earned out of those operations and cannot be said to be income earned from any other source. In
these circumstances, I am of the opinion that the High Court returned a correct answer to issue No. 2.
Mukherjea ,J :
My conclusion, therefore, is that the clause in Section 42(1) of the Income-tax Act, which makes taxable the income or profits arising out of money
lent and brought into British India in cash or in kind, is not ultra vires the Indian Legislature .
ISSUE – 3 :
H . Kania J :
As regards question three, the Commissioner of Income-tax in his letter of reference has stated as follows:"During the course of Durbar's money-
lending transactions in Bombay and elsewhere some of the mortgagors made default in payment of the principal and interest and the Durbar filed
suits to enforce the mortgages and obtained decrees for the sale of the properties. The mortgaged properties which are all in British India were put up
for sale in execution of these decrees and were purchased in Court auctions by the Durbar and the Durbar still continues to own these properties. Item
C represents income from these properties.“
I am unable to accept the view of the High Court that the burden of proof is on the Durbar to establish that the properties had been taken out of the
moneylending business. In the absence of a finding by the Commissioner that these properties form part of the trading assets of the Durbar the
assessment cannot be upheld, and the answer of the Court should be that the Durbar is not liable in respect of the income of these properties for the
year of assessment. This answer is obviously limited to the evidence adduced in this year and does not lead to any conclusion in respect of future
years. The conclusion is based on the absence of a finding of fact, rather than on the existence of definite evidence one way or the other.
Faiz ali ,J :
Agreed with the judgement of j Kania and said ,”I have nothing to add to what my Lord the Chief Justice has said on questions (2) to (6), but I wish
to express as briefly as I can my own views on question (1). “
Patanjali Shastri , J :
Said ,” As I agree with my learned brothers with regard to the answers which they propose to make to questions Nos. 2 to 6, I do not think it
necessary to encumber this judgment with a restatement of the facts giving rise to this reference.”
MC Mahajan ,J :The facts of this case bear no analogy to the facts of the present case. My brother Patanjali Sastri, who in that case represented the
Commissioner of Income-tax, argued therein that the Commissioner did not question the proposition that the lands formed the assets of the business.
In the present case that is a matter that has to be determined as a question of fact and not as a matter of law. On the question of fact, all that the
Commissioner has stated is that the Durbar owns these properties. He has not proceeded further to say that the Durbar is still employing these
properties as assets for its money-lending business. On this statement, in my opinion, the High Court was not justified in answering the question
framed in favour of the Commissioner of Income-tax. Mere purchase of property out of the capital once employed in money-lending does not
necessarily make that property part of the money-lending business of a person, without further proof of the treatment of that property as part of the
business. The result therefore is that question 3 should be answered in favour of the Durbar, and the decision of the High Court on this point reversed.
ISSUE – 4 and 5 :
H Kania , J
If the Durbar was an individual or company under Section 48, it would be also an individual or company under Sections 3-and 4 of the Income-tax
Act, and there would be no justification to exclude the State generally from liability to tax, I agree with the line of reasoning adopted by the High
Court for its conclusion on this question and the answer to the question must therefore be against the Durbar.
The result is that except for the variation in answer to question 3, the appeal fails and is dismissed. The appellant to pay three-fourths of the costs of
the appeal of the respondent.
Faiz Ali J and Patanjali shastri J : Agreed with the opinion of H. Kania , J .
MC Mahajan :
From the conduct of the Durbar, the Assistant Commissioner of Income-tax was entitled to draw the inference that it acquiesced in the finding which
was to the effect that these shares and their income were still part of the stock-in-trade used by the Durbar in its money-lending operations. There is
therefore material to justify the finding, and the High Court, in answering the question, was bound by it . In the case of immovable properties the
statement ends by saying that the Durbar owns them, while in the case of shares it proceeds further and says that the dividends on these shares are still
used in Durbar's money-lending operations.
Mukhrejea J : I agree with my Lord the Chief Justice that this appeal should be allowed in part, only to this extent, that our answer to question No. 3,
formulated by the Income-tax Commissioner of Bombay, should be given in the negative and in favour of the assessee, and that in respect to all the
other points the judgment appealed against should stand confirmed.
Assertion
On issue No. 3 submitted by the Commissioner of Income-tax, Bombay, we hold that 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 for the
assessment year 1939-40 is not income arising in connection with the said business within the meaning of Section 2 of the Government
Trading Taxation Act, and that the income arising from such property is not liable to assessment under the provisions of the Indian
Income-tax Act read with the Government Trading Taxation Act, III of 1926. The answer to this question should therefore be in the
negative, and to that extent the appeal is allowed. On issues Nos. (2), (4), (5) and , it is the opinion of the Court and, on issue No. (1), of
the majority of us, that the appeal fails. The appeal is accordingly dismissed on the said five questions.
The case is remitted to the High Court of Judicature at Bombay for effecting the necessary substitution in its judgment and decree.
The appellant shall pay to the respondent three-fourths of the costs of the appeal to this Court.

 And SC held that ,” In the case of Sovereign Legislature, question of the extra territoriality of any enactment can never be raised in
the municipal courts as a ground for challenging its validity .
 The legislation may offend the rules of International law offend the rules of International law, may not be recognised by foreign
courts or there may be practical difficulties in enforcing them but these are questions of policy with which the domestic tribunals
are not concerned .