NAVINCHANDRA MAFATLAL versus THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY

S.C.R.

SUPREME COURT REPORTS

829

1954

could have been reached. But in the absence of such a finding, we are unable to see any ground on which the order of the Tribunal could be upset in a reference under section 66 ( 1). Vvhen once it is found that there was no proper determination of the profits as required under Rule 2(a)-and that was indeed conceded-and there was no justification for it such as the High Court thought there was, the only order that could properly be made was to remand the case for further enquiry and fresh disposal in accordance with law. That was the order which was passed by the Tribunal, and that, in our opinion, was right.

General Family Pension Fund v. The Commissionr of Income-tax, West Bengal

Vmkatarama 4vyar J.

and

result of this will

This appeal will accordingly be allowed,

the second question referred by the Tribunal answered in the negative. The that the Income-tax Officer will proceed to enquire into the the years in profits of the appellant Company for question in accordance with the requirements of Rule 2. Under the circumstances, we direct that the parties do bear their respective costs both here and in the High Court.

be

Appeal allowed.

NAVINCHANDRA MAFATLAL

1954

November 1.

THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY. [MEHR CHAND MAHAJAN C.J., s. R. DAS, GHULAM HASAN, BHAGWATI and VENKATARAMA AYYAR JJ.]

..

Indian Income-tax Act

India Act, 1935 (26 Geo. 5 CH. 2) Seventh Schedule, List I, 54-Tax on capital gains, if ultra vires-Capital gains, -Legislative practice-Interpretation of words-Words used Constitution Act.

(XI of 1922) s. 12-B-Government of Item income in

if

Section 12-B of the Indian Income-tax Act, 1922 (inserted by Act XXII of 1947) which imposed is not ultra vires the Government of India Act, 1935. The term 'Capital

tax on 'Capital gains'

z954

Navinchandra Mafatlal v. The Commissioner of Income-tax, Bombay City.

830

SUPREME COURT REPORTS

[1955]

gains co1nes well \Vithin the 1neaning of the word 'income' used in item No. 54 of List I of the Seventh Schedule to the Govern1nent of India .. A.ct, 1935.

that

It is

to say

incorrect

income cannot

signify 'Capital gains' and it is equally an incorrect approach to hold that there is a legislative practice which recognises a clear line of demarcation \Vhat is relied on here as a legisla bet\veen income and capital. tive practice is nothing but the judicial interpretation given to the 'incon1e' as used in the income-tax and fiscal statutes. Such \Vord interpretation does not necessarily cut do\vn the ordinary natural meaning of the word 'inco1ne' as used in item No. 54 of List I of the Seventh Schedule to the Government of India Act, 1935.

•

Cardinal rule of interpretation is that the words should be read in their ordinary natural and grammatical 1neaning.. But the words in a constitutional enact1ne11t conferring legislative powers should however their widest an1plitude.

be construed most

liberally

an<l

in

Commissioner of Income-tax v. Shatv Wallace & Co. (L.R. 59 I.A. 206); Ryal/ v. Hoare and Ryal/ v. Honeywill (1923) 8 T.C. 521; Californian Copper Syndicate (Li1nited and Reduced) v. Ha"is (1904) 5 T.C. 159; Wallace Brothers & Co. Ltd." v. Commissioner of Income-tax [L.R. 75 I.A. 86: (1948) F.C.R. 1: 16 I.T.R. 240]; Croft v. Dunphy L.R. 1933 A.C. 156; Kamakshya Narain Singh v. Commissioner of Income-tax [L.R. 70 I.A. 180: (1943) 11 I.T.R. 513] ; In re The Central Provinces and Bei·ar Act No. XIV of 1938 ( 1939) F.C.R. 18; United Provinces v. Atiqa Begum (1940) F.C.R. 110; State of Bombay and Another v. F. N. Balsara (1951) S.C.R. (252). U.S. 189: 64 L. Ed. 521); 682; Eisner v. Macomber Merchant's Loan & Trust Co. v. Smietanka (2'.\5 U.S. 509: 65 L. Ed. 751) ; United States v. Stewart (311 U.S. 60: 85 L. Ed. 40) and Resch v. Federal Commissioner of Ta_xation (66 C.L:.R. 198), referred to.

CIVIL

APPELLATE

JURISDICTION : Civil Appeal

No. 194 of 1952.

Appeal from

the Judgment and Order, dated· the 7th day- of Septe_mber, 1951, of .the High Court of Judicature at Bombay in Income-tax Referenq.: No. 46 or 1950.

S. Mitra (R. f. Kolah and I. N. Shroff, with him)

for the appellant.

M. C. Setalvad, ·Attorney-General for India (G. ,\[,

foshi, with him) for the respondent.

1954. November 1. The Judgment of the Court

was delivered by DAs J.

• • ...

. ..

1954

N avitU;handra Mafatlal v. The CommissiMwr of !n&Dme-tox, BMnbay Ci!Y.

DatJ.

S.C.R.

SUPREME COURT REPORTS

831

by

the

1948,

at die the

DAs J.-This appeal is directed

against the judg ment pronounced on the 7th September, 1951, by the High Court of Judicature at Bombay on a reference made instance of the appellant under section 66(1) of Income-tax Act, 1922. By an Indian the assessment· order dated the 31st March, appellant was assessed Income-tax Officer, Bombay, for the assessment year 1947-1948 on a total income of Rs. 19,66,782 including a sum of Rs. 9,38,011 representing capital gains assessed in the hands of the appellant under section 12-B of the Act. The said amount of capital gains was earned by the appellant in the following circumstances. The assessee had a half in share m Bombay which were sold by the assessee and his co owners during the relevant accounting year which was the calendar year ending on the 31st December, 1946, to a private company known as Mafatlal Gagalbhai & Company Ltd. The profits on the sale of the said properties amounted and the appellant's half share sum of Rs. 9,38,0ll which was included m the assessment under section 12-B.

immovable properties

to Rs. 18,76,023

therein came

limited

certain

situate

the

to

In April, 1948, the appellant appealed from the said order to the Appellate Assistant Commissioner contend ing that section 12-B of the Act authorising the levy capital gams was ultra vires the Central of tax on Legislature. The Appellate Assistant Commissioner by his order dated the 5th April, 1949, dismissed the appeal. A L.irther appeal to the Income-tax Appellate Tribunal was dismissed by 30th June 1950.

its order dated the

Being aggrieved by the · order of the Appellate Tri bunal the app~llant applied to it under section 66(1) law. The of the Act for raising certain questions of AJ?pellate Tribunal agreeing that certain questions of law did arise om of its order drew up a statement of the case which was agreed to by the parties and rtferred to the High Court the following questions :-

the

( 1) Whether

imposition of a tax under the l1ead "capital gains" by the Central Legislature was ultra vires ? 15-88 S. C. India/59

L.

'

1954

N avinchandra Mqfailal v. The Commissiontr of ln&orne-tax, &mbayCi!J'.

Das].

832

SUPREME COURT REPORTS

[1955]

(2) Whether the imposition was in any way invalid on the ground that it was done by amending the Indian Income-tax Act ?

After hearing the reference the High Court following Income-tax Reference No. 18 of 1950, its judgment in Sir /. N. Duggan and Lady Jeena /. Duggan v. The Income-tax, Bombay City, answered Commissioner of the first the opinion that it was not necessary to answer the second question. Judges first question but on gave the same answer different grounds respective judgments.

question in the negative and expressed

to the as elaborated

the two learned

reference

In that

their

in

The principal question that was discussed before the High Court, as before us, was whether section 12-B which authorised the imposition of a tax on capital gains was invalid being ultra vires the Central Legis lature. Section 12-B was inserted in the Act by the Indian Income-tax and Excess Profits Tax (Amend ment) Act, 1947 (XXII of 1947) which was a Central India Act. Under section 100 of the Government of Act, 1935, the Central Legislature was empowered to make laws with in List I in the Seventh Schedule to that Act. The only entries in List I on which reliance could be placed to uphold the impugned Act were entries 54 and 55 which were as follows :

respect to matters enumerated

"54. Taxes on

income

other

than agricultural

income.

55. Taxes on the capital value of

the assets, exclu sive of agricultural land, of individuals and companies, and taxes on the capital of companies."

Chagla C. J. held that the enactment of Act XXII of 1947 which inserted section 12-B was well within the scope of the legislative powers of the Central Legislature as it fell within entry 55 and was valid either as a whole or, in any case, to the extent that it applied to individuals and companies. Although it was unnecessary learned Chief Justice to decide whether the Act could be supported as a valid piece of legislation falling within the scope of entry 54 yet in deference to the arguments advanced before the Court

for the

.• '

I

S.C.R..

SUPREME COURT REPORTS

833

the learned Chief Justice expressed the view that it could not be so supported. Tendolkar J., on the other hand, held that Act XXII of 1947 was wholly intra vires the Central Legislature as it fell within entry 54 and in this view of the matter he did not consider it to discuss whether the legislation was covered necessary by entry 55 in List I of the Seventh Schedule. In our by Tendolkar J. with respect opinion the view taken to entry 54 is corn~ct and well-founded.

1954

Navinchandra Mefatlal v. The Commissioner of lncome-tQJ<, Bombay City.

Das].

scope

submitted

legislative practice had always

In the course of a lucid argument advanced with his usual ability and skill Mr. Kolah that entry 54 which deals with "taxes on income" does not tax on capital gains. embrace within its "Income'', according to him, does not signify capital gains either according to its natural import or common usage or according to judicial interpretation of relevant 'legislation both in England and in India. He submitted that the learned Chief Justice was entirely right in the view that there was a clear line of demarcation that had always been observed by English lawyers and between income an<l capital, that the English jurists English recognised this that as the word ha<l come to acquire a difference and certain meaning and a certain connotation by reason legislative practice in England, the British of such Parliament which enacted the Government of India Act, 1935, must be regarded as having understood and used that word "income" in entry 54 in that sense. not, however, been drawn to any Our attention has enactment other the Finance than fiscal statutes Act and the Income-tax Act where the word "income" has been used and, to say acquired any particular had that the critical word meaning by reason of any legislative practice. Reference has been made to several cases where the word "income" has been construed by the Court. What is, therefore, described as legislative practice is nothing but judicial appear interpretations of ing in the fiscal statutes mentioned above. A perusal cases, however, will reveal at once that .of the those those decisions were concerned with the meaning of that word in the context of the Income-tax

therefore, it is not possible

the word "income"

ascertaining

like

as

•

1954

NavinchanJra Mqfat/al v. The Commissiontr ofl~tax, Bombt!J Ci!J.

Das].

834

SUPREME COURT REPORTS

[1955]

in

that

tn;itter

the sense

these Acts."

legislation. Thus the observation of their Lordships of the Privy Council in Commissioner of Income-tax v. Shat11 Wallace & Co. ('), laid down the connotation of the word "income" as used "in this Act." The passage in the judgment of Rowlatt J. in Ryal! v. Hoare and Ryal! v. Honeyt11ill (2), quoted by the learned Chief Justice in relied on by Mr. Kolah, his judgment and strongly refers to profits or gains "as used In Californian Copper Syndicate (Limited and Reduced) v. to the enhanced Harris ('), Lord Justice Clerk refers the cost price realised on sale of certain things over price thereof as not being profits "in of Schedule D of the Income Tax Act of 1842." These guarded observations quite clearly indicate they relate to the term "income" or "profit" as used in the Income-tax Act. There is no warrant for saying that these observations cut down the natural meaning of the ordinary English word "income" in any way. The truth of the legislation adopts an inclusive definition of the word "income" the scheme of such legislation is to bring to charge only such specified heads falls under certain (e.g., the 5 Schedules of the English Act of 1918 and our section 6 read with the following sections) and as arises or accrues or is received or is deemed to arise or accrue or received as mentioned in the statute. The ascertain the meaning of the Courts have striven to word "income" in the context of this scheme. There placed is no reason to suppose that the by the Courts on the word in question was intended to be exhaustive of the connotation of rhe word "income" outside the particular statute. If we hold, as we are asked to do, that the meaning of the word "income" has become rigidly crystallised by reason of the judicial interpretation of that word appearing in the Income tax Act then logically no enlargement of the scope of Income-tax Act, by amendment or otherwise, will the so extravagant be permissible in future. A conclusion contemplated or can and astounding

interpretation

scarcely be

Income-tax

that while

income as

to be

is

(1) (1932) L. R. 59 I. A. 206 at page 2r2. (2) (1923) 8 T. C. 521 at page 525. (3) (1904) 5 T. C. 159 at page 165.

1954

N avin&handra Mtifatlal v. The CommissioMr of Income-taJt, Bom6a,y City.

DasJ.

t

)

S.C.R.

SUPREME COURT REPORTS

835

particular! y

acquired a

than its foreign income could

that the cases relied countenanced. We are satisfied on by Mr. Kolah and referred to in the judgment of the learned Chief Justice do not, as we read them, establish the broad proposition that the ordinary English word "income" has restricted meaning. The case of Wallace Brothers & Co. Ltd. v. Commissioner of lncome-tax(1), was not concerned with ascertaining the meaning of the word "incomt" at all. The problem there was whether the foreign income of an English company which was a partner in a firm and whose Indian carrying on business in Bombay income was greater be treated as a resident within the meaning of section 4-A. It was in that context that in determining the scope and meaning of the legislative power regard was to be had to what was ordinarily treated as embraced within that topic in the legislative practice of the United Kingdom. The problem there was not to ascertain the meaning of the word "income" so much as to ascertain the extent of the application of the Act to the foreign income. That case, clearly, does not establish that the word "income" had acquired any special or narrow meaning. The same remarks apply to the case of Croft v. Dunphy{"), referred to by Lord Uthwatt in delivering the judgment of the Privy Council in Wallace Brothers case (supra). In Kamakshya Narain Singh v. Commissioner of lncome-tax(3), Lord Wright observed :-

said in

that

case

"Income, it is true, is a word difficult and perhaps It

impossible to define in any precise general formula. is a word of the broadest connotation."

After making the above observation his Lordship referred to the observations of Sir George Lowndes in Commissioner of Income-tax, Bengal v. Shaw Wallace & Co. (supra), where an attempt was made to indicate the connotation of the word "income" used "in this Act." It is, therefore, clear that none of the authorities relied on by Mr. Kol.ah establish what may be called a connotation of the legislative practice

indicating

the

as

(1) (1948) L. R. 75 I. A. 86; (2) L. R. [1933] A. C. 156. {3) (1943) L. R. 70 I. A. 180; [1943] u I. T. R. 513.

[1948] F. C.R. 1; 16 I. T. R. 240.

836

S1)PREME COURT REPORTS

[19551

1954

.N cwinchandra Mqfatla( v. Tht Commissionct of lncome--tax, Bombay Cit)'.

Das J.

In term "income'', apart from the Income-tax statute. our view, it will be wrong to interpret the word "income" any supposed English in entry 54 in the light of It legislative practice as contended for by Mr. Kolah. is interesting to note that in the English Income Tax Act of 1945 (8 and 9 Geo. VI, C. 32, sections 37 and 38) capital gains have been included as taxable income.

_._

subject to

the correct

that the rules which apply

It should be remembered that

the question before us relates to interpretation of a wore\ appearing in a Constitution Act which, as has been said, must not be construed in any narrow and pedantic sense. Gwyer C.J. in In re The Central Provinces and Berar Act No. XIV of 1938('), observed at pages to the interpretation 36-37 to the interpretation of of other statutes apply equally this reservation a constitutional enactment that their application is of necessity conditioned by the It should be subject-matter of the enactment itsclft is to construe remembered that the problem before us is a head of appearing in entry 54 which a word pointed out by Gwyer C.J. in legislative power. As The United Provinces v. Atiqa Begum(2) at page 134 none of the items in the Lists is to be read in a narrow or restricted sense and that each general word should be held to extend to all ancillary or subsidiary matters reasonably be said to be compre which can fairly and hended in it. It is, therefore, clear-and it is acknowledged by Chief Justice Chagla-that in construing an entry the widest in a List conferring their ordinary possible construction meaning mnst be put upon the words used therein. Reference to legislative practice may be admissible for in order to the meaning of a word cutting down legislative reconcile Lists as was done in The C. P. and Berar Act case (supra), or to enlarge their ordinary meaning as in The State of Bombay and Another v. F. N. Balsara (3). The cardinal rule of that read in their ordinary, natural and words should be grammatical meaning that in (') ['939] F. C.R. ,s. \2) ['940] F. C.R. no.

legislative powers according

to this rider (3) ['95'] S. C.R. 682.

two conflicting provisions in

interpretation, however,

subject

two

is

to

1954

Navincnandm Mafatlal v. The Commissioner of /nfX1tn4-tait, Bomb'!)' Ci1'.

Das].

S.C.R.

SUPREME COURT REPORTS

837

con construing words in a constitutional ferring liberal construction should be put upon the words so that the same may have effect in their widest amplitude.

legislative power

enactment

the most

natural meaning.

What, then, is the ordinary, natural and grammati to cal meaning of the word "income"? According the dictionary it means "a thing that comes in". (See Oxford Dictionary, Vol. V, page 162; Stroud, Vol. II, pages 14-16). In the United States of America and in Australia both of which speaking also are English countries the word "income" is understood in a wide sense so as to include a capital gain. Reference may be made to Eisner v. Macomber( 1 ), Merchants' Loan & Trust Co. v. Smietunka (2), and United States v. Stewart{3), and Resch v. Federal Commissio11er of Taxation (4). Jn to each of these cases very wide meaning was ascribed the word "income" as The its Judges deciding those relevant observations of learned in the judgment of cases which have been quoted Tendolkar J. quite such wide meaning was put upon the word "income" not because of any particular in the United States or in the Commonwealth of Australia but because such was the normal concept and connota Its English word "income." tion of the ordinary natural meaning ef9.braces any profit or gain which is actually the observations of Lord Wright to which reference has already been made. Mr. Kolah concedes that the word "income" is understood in and Australia in the wide sense for· by the learned Attorney"General but he maintains that the law in England is different and, therefore, entry 54 statute should be which occurs in a Parliamentary law of England. We are to construed according to the again brought back to word having acquired a restricted meaning by reason legislative practice of what has

the the same argument as

received. This is in consonance with

the United States

contended

legislative

indicate

practice

clearly

called

either

been

that

the

(1) \1920) 252 U. S. 189; 64 L. Ed. 521. (2) (1925) 255 U.S. 509; 65 L. Ed. 751. (3) (1940) 311 U.S. 60; 85 L. Fd. 40. (4) (1942) 66 C. L. R. 1g8.

i

...,

-

....

,.

•

).. •

·----- --- : . "SUPREME COURT REPORTS

838

[1955)

]tl avinchandt'a Mafatla_l v.

in England ~an argument which· we have already ·discarded. The argument founded on an assumed legislative practice being thus out of the way, there can be no difficulty in applying its natural and grammatical Th• Commission~ meaning to the ordinary English word "income." As ofl•come-taz. · already observed, the word should be given it widest Bombay c.1y. connotation in ·view of the fact that it occurs in a Iegislativ"e head conferring legislative power.

n.,;.

'

, I

I954.

October I8.·

For reasons stated above we are of opinion that Act XXII of 1947 which amended the Indian Income-tax . Act by enlarging the definition of the term income in section 2(6-0) and introducing a new head of income in section 6 and inserting the new section 12-B is int·ra vires the powers of the Central Legislature acting under entry 54 in List I of the Seventh Schedule of the Govern~ merit of India Act, 1935. In this view of the matter it is unnecessary for. us to consider or express any opinion as to the meaning, scope and ambit of entry 55 in that List. ·The appeal is accordingly dismis8ed with costs.

Appeal dismissed. ·

THE CHAMBER OF COMMERCE, HAPUR, AND THREE OTHERS v. THE STATE OF UTTAR PRADESH AND T\VO OTHERS. [MEHR CHAND MAHAJAN C.J., s. R. DAS, GHULA~I HASAN, BHAGWATI and JAGANNADHADAS JJ.] Uttar Pradesh Food-grains (Futures and Options Prohibition) Order, 1951-Uttar Pradesh Food-grains (Futures and Options Prohibition) Order, 1945-Restrictfons on dealings in pulses other thangram,....:.1,. both orders-Order o/'1951 partlu declared ultra vires by Supreme Court-Not so s. 9 thereof which repealrd Order of -1945-Whether Order of 1945 still fo force-Proper procedure for ' clarification of the matter • .

Uttar Pradesh Food-grains (Futures and Options Prohibition) Order, 1951, made it illegal and a punishable offence for any · person to enter into any fntures in pulses other than gram, or to pa.y or receive or to agree to pay or receive a.ny margin rel.a.ting to such futures. Bys. 9 of that Order the Order of 1945·conlaining . similar provisions was repealed. An application qnd~r Art. S2 of