Appeal No 194 of 1952
Appeal from the Judgment and Order dated the 7th day of September 1951 of the High Court of Judicature at Bombay in Income tax Reference No 46 of 1950
SMitra R J Kolah and 1
N Shroff with him for the appellant
MC Setalvad Attorney General for India G N Joshi with him for the respondent
November 1
The Judgment of the Court was delivered by DAS J
831 DAS J
This appeal is directed against the judgment pronounced on the 7th September 1951 by the High Court of Judicature at Bombay on a reference made at the instance of the appellant under section 661 of the Indian Income tax Act 1922
By an assessment order dated the 31st March 1948 the appellant was assessed by the Income tax Officer Bombay for the assessment year 1947 1948 on a total income of Rs 1966782 including a sum of Rs 938011 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 share in certain immovable properties situate in Bombay which were sold by the assessee and his coowners during the relevant accounting year which was the calendar year ending on the 31st December 1946 to a private limited company known as Mafatlal Gagalbhai  Company Ltd The profits on the sale of the said properties amounted to Rs 1876023 and the appellants half share therein came to the sum of Rs 938011 which was included in the assessment under section 12 B
In April 1948 the appellant appealed from the said order to the Appellate Assistant Commissioner contending that section 12 B of the Act authorising the levy of tax on capital gains was ultra vires the Central Legislature
The Appellate Assistant Commissioner by his order dated the 5th April 1949 dismissed the appeal
A further appeal to the Income tax Appellate Tribunal was dismissed by its order dated the 30th June 1950
Being aggrieved by the order of the Appellate Tribunal the appellant applied to it under section 661 of the Act for raising certain questions of law
The Appellate Tribunal agreeing that certain questions of law did arise out of its order drew up a statement of the case which was agreed to by the parties and referred to the High Court the following questions 1 Whether the imposition of a tax under the head  capital gains  by the Central Legislature was ultra vires 832 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 its judgment in Income tax Reference No 18 of 1950 Sir J N Duggan and Lady Jeena J Duggan vs The Commissioner of Income tax Bombay City answered the first question in the negative and expressed the opinion that it was not necessary to answer the second question
In that reference the two learned Judges gave the same answer to the first question but on different grounds as elaborated in their respective judgments
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 Legislature
Section 12 B was inserted in the Act by the Indian Income tax and Excess Profits Tax Amendment Act 1947 XXII of 1947 which was a Central Act
Under section 100 of the Government of India Act 1935 the Central Legislature was empowered to make laws with respect to matters enumerated 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  54
Taxes on income other than agricultural income
Taxes on the capital value of the assetsexclusive 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 for the 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 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 necessary to discuss whether the legislation was covered by entry 55 in List I of the Seventh Schedule
In our opinion the view taken by Tendolkar J with respect to entry 54 is correct and well founded
In the course of a lucid argument advanced with his usual ability and skill Mr Kolah submitted that entry 54 which deals with taxes on income does not embrace within its scope tax on capital gains
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 English jurists between income and capital that the English legislative practice had always recognised this difference and that as the word had come to acquire a certain meaning and a certain connotation by reason of such legislative practice in England the British 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
Our attention has not however been drawn to any enactment other than fiscal statutes like the Finance Act and the Income tax Act where the word income has been used and therefore it is not possible to say that the critical word had acquired any particular 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 interpretations of the word  income  as appearing in the fiscal statutes mentioned above
A perusal of the those cases however will reveal at once that those decisions were concerned with ascertaining the meaning of that word in the context of the Income tax 834 legislation
Thus the observation of their Lordships of the Privy Council in Commissioner of Income tax vs Shaw Wallace  Co1 laid down the connotation of the word income as used in this Act
 The passage in the judgment of Rowlatt J in Ryall vs Hoare and Ryall vs Honeywill2 quoted by the learned Chief Justice in his judgment and strongly relied on by Mr Kolah refers to profits or gains as used in these Acts
 In Californian Copper Syndicate Limited and Reduced vs Harris3 Lord Justice Clerk refers to the enhanced price realised on sale of certain things over the cost price thereof as not being profits in the sense of Schedule D of the Income Tax Act of 1842 These guarded observations quite clearly indicate that they relate to the term income or Profit as used in the Income tax Act
There is no warrant for saying that these observations out down the natural meaning of the ordinary English word income in any way
The truth of the matter is that while Income tax legislation adopts an inclusive definition of the word income the scheme of such legislation is to bring to charge only such income as falls under certain specified heads eg 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 to be received as mentioned in the statute
The Courts have striven to ascertain the meaning of the word income in the context of this scheme
There is no reason to suppose that the interpretation placed by the Courts on the word in question was intended to be exhaustive of the connotation of the 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 crystallized by reason of the judicial interpretation of that word appearing in the Income tax Act then logically no enlargement of the scope of the Income tax Act by amendment or otherwise will be permissible in future
A conclusion so extravagant and astounding can scarcely be contemplated or 1 1932 LR 59 IA 206 at page 212
2 at page 525
3 at page 165 835 countenanced
We are satisfied that the cases relied 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 acquired a particularly restricted
meaning
The case of Wallace Brothers  Co Ltd vs Commissioner of Income tax1 was not concerned with ascertaining the meaning of the word income at all
The problem there was whether the foreign income of an English company which was a partner in a firm carrying on business in Bombay and whose Indian income was greater than its foreign income could be treated as a resident within the meaning of section 4 A
It was in that context said in that case 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 vs Dunphy1 referred to by Lord Uthwatt in delivering the judgment of the Privy Council in Wallace Brothers case supra
In Kamakshya Narain Singh vs Commissioner of Income tax Lord Wright observed   Income it is true is a word difficult and perhaps impossible to define in any precise general formula
It 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 vs Shaw Wallace  Co supra where an attempt was made to indicate the connotation of the word income as used in this Act
 It is therefore clear that none of the authorities relied on by Mr Kolah establish what may be called a legislative practice indicating the connotation of the 1 1948 LR 75 IA 86  16 ITR 240
2 3 1943 LR 70 IA 180 836 term income apart from the Income tax statute
In our view it will be wrong to interpret the word income in entry 54 in the light of any supposed English legislative practice as contended for by Mr Kolah
It 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
In should be remembered that the question before us relates to the correct interpretation of a word appearing in a Constitution Act which as has been said must not be construed in any narrow and pedantic sense
Gwyer CJ in In re The Central Provinces and Berar Act No XIV of 19381 observed at pages 36 37 that the rules which apply to the interpretation of other statutes apply equally to the interpretation of a constitutional enactment subject to this reservation that their application is of necessity conditioned by the subject matter of the enactment itself It should be remembered that the problem before us is to construe a word appearing in entry 54 which is a head of legislative power
As pointed out by Gwyer CJ in The United Provinces vs Atiqa Begum2 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 which can fairly and reasonably be said to be comprehended in it
Itisthereforeclear anditisacknowledged by Chief Justice Chagla that in construing an entry in a List conferring legislative powers the widest possible construction according to their ordinary meaning must be put upon the words used therein
Reference to legislative practice may be admissible for cutting down the meaning of a word in order to reconcile two conflicting provisions in two legislative 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 vs F N Balsara3
The cardinal rule of interpretation however is that words should be read in their ordinary natural and grammatical meaning subject to this rider that in I 2 3  837 construing words in a constitutional enactment conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude
What then is the ordinary
natural and grammati  cal meaning of the word income  According to the dictionary it means a thing that comes in
See Oxford Dictionary Vol
11 page 162 Stroud Vol 11 pages 14 16
In the United States of America and in Australia both of which also are English speaking countries the word income is understood in a wide sense so as to include a capital gain
Reference may be made to Eisner vs Macomber1 Merchants  Loan  Trust Co vs Smietanka2 and United States vs Stewart3 and Resch vs Federal Commissioner of Taxation 4
In each of these cases very wide meaning was ascribed to the word income as its natural meaning
The relevant observations of learned Judges deciding those cases which have been quoted in the judgment of Tendolkar J quite clearly indicate that such wide meaning was put upon the word income not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word income Its natural meaning embraces any profit or gain which is actually received
This is in consonance with the observations of Lord Wright to which reference has already been made
Mr Kolah concedes that the word income is understood in the United States and Australia in the wide sense contended for by the learned Attorney General but he maintains that the law in England is different and therefore entry 54 which occurs in a Parliamentary statute should be construed according to the law of England
We are again brought back to the same argument as to the word having acquired a restricted meaning by reason of what has been called the legislative practice 1   2   1 3   4  107 838 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 meaning to the ordinary English word income
 As already observed the word should be given it widest connotation in view of the fact that it occurs in a legislative head conferring legislative power
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 26 C and introducing a new head of income in section 6 and inserting the new section 12 B is intra vires the powers of the Central Legislature acting under entry 54 in List I of the Seventh Schedule of the Government 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 dismissed with costs
Appeal dismissed


Summary:
Section 12 B of the Indian Income tax Act 1922 inserted by Act XXII of 1947 which imposed tax on Capital gains  is not ultra vires the Government of India Act 1935
The term Capital 106 830 gains  comes well within the meaning of the word income  used in item No 54 of List I of the Seventh Schedule to the Government of India Act 1935
It is incorrect to say that 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 between income and capital
What is relied on here as a legislative practice is nothing but the judicial interpretation given to the word income  as used in the income tax and fiscal statutes
Such interpretation does not necessarily cut down the ordinary natural meaning of the word income  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 meaning
But the words in a constitutional enactment conferring legislative powers should however be construed most liberally and in their widest amplitude Commissioner of Income tax vs Shaw Wallace  Co LR 59 IA 206 Ryall vs Hoare and Ryall vs Honeywill  Californian Copper Syndicate Limited and Reduced vs Harris  Wallace Brothers  Co Ltd vs Commissioner of Income tax LR 75 IA    Croft vs Dunphy  Kamakshya Narain Singh vs Commissioner of Income tax LR 70 IA 180  In re The Central Provinces and Berar Act No XIV of  United Provinces vs Atiqa Begum  State of Bombay and Another vs F N Balsara   Eisner vs Macomber    Merchant s Loan  Trust Co vs Smietanka   United States vs Stewart  and Resch vs Federal Commissioner of Taxation   referred to