ivil Appeal No 381 of 1956
Appeal by special leave from the judgment and order dated February 24 1955 of the Bombay High Court in Income Tax Reference No 52X of 1954
N A Palkhivala with him Jamshedji B Kanga section N Andley J B Dadachanji P L Vohra and Rameshwar Nath for the appellant
H N Sanyal Additional Solicitor General of India G N Joshi and R H Dhebar for the respondent
May 12
The Judgment of the Court was delivered by VENKATARAMA AIYAR J
This is an appeal against the judgment of the High Court of Bombay in a reference under section 661 of the Indian Income tax Act 1922 hereinafter referred to as the Act
The appellant is a private limited company incorporated under the Indian Companies Act and is carrying on business as marine engineers and ship repairers
Its registered office is in Bombay and it is resident and ordinarily resident in India
Its entire share capital is beneficially owned by two British companies the P  0
Steam Navigation Co Ltd and the British Indian Steam Navigation Co Ltd whose business 850 consists in plying ships for hire
Under an agreement entered into with the two companies aforesaid which will be referred to hereinafter as the non resident companies the appellant repairs their ships at cost and charges no profits
Now the point for determination is whether on these facts the appellant is chargeable to tax under section 422 of the Act
That sub section runs as follows  Where a person not resident or not ordinarily resident in the taxable territories carries on business with a person resident in the taxable territories and it appears to the Income tax Officer that owing to the close connection between such persons the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either DO profits or less than the ordinary profits which might be expected to arise in that business the profits derived therefrom or which may reasonably be deemed to have been derived therefrom shall be chargeable to income tax in the name of the resident person who shall be deemed to be for all the purposes of this Act the assessee in respect of such income tax
 The Income tax Officer Bombay who dealt with the matter took the view that the appellant company had so arranged its business with the non resident companies that it did not produce any profits to it and that was because it was those companies that really owned its share capital and that therefore the profits which it could ordinarily have made but for their close financial connection were liable to be taxed under section 422 and he computed the same at Rs 680000 for the account year 1943 1944 at Rs 467559 for the account year 1944 1945 and at Rs 468963 for the account year 1945 46
On the basis of the above findings orders of assessment of income tax were made for the account years 1944 1945 and 1945 1946 and of excess profits tax for the account years 1943 1944 1944 1945 and 1945 1946
Against these five orders the appellant preferred appeals to the Appellate Assistant Commissioner who by his 851 order dated July 3 1952 confirmed the same
Then there was a further appeal by the appellant to the Appellate Tribunal and the Bench which heard the same having been divided in its opinion the matters came up for hearing before the President who by his order dated March 19 1954 held that section 422 was inapplicable and he accordingly set aside the orders of assessment of income tax and excess profits tax made on the appellant
On the application of the Department the Tribunal referred the following question for the opinion of the High Court of Bombay  Whether on the facts and in the circumstances of the case any income falls to be included in the appellant s assessment under section 422
 The reference was heard by Chagla C J and Tendolkar J who by their judgment dated February 24 1955 held that on the facts found section 422 was applicable and that the appellant was liable to be assessed to income tax and excess profits tax under that section
The appellant applied under section 66A for leave to appeal against this judgment to this court and that application was dismissed
The appellant thereafter applied for and obtained leave to appeal to this Court under article 136 and hence this appeal
It must be mentioned that on December 31 1948 an order of assessment bad been made in respect of the income tax payable by the appellant for the account year 1943 1944 and therein the profits chargeable under section 422 had not been included
But subsequently the Income tax Officer took action under section 34 of the Act and on May 29 1953 made an order assessing the appellant to tax for that year on the profits deemed to have been made by it under section 422 and against that order an appeal is pending before the Appellate Assistant Commissioner
That order is not the subject matter of the present proceedings which are concerned only with the assessment of income tax for the account years 1944 1945 and 1945 1946 and of excess profits tax for the account years 1943 1944 1944 1945 and 1945 1946
Now the sole point for determination in this appeal is whether on the facts found the appellant is chargeable to tax under section 42 2 of the Act
Mr Palkhivala 852 learned counsel for the appellant contends that it is not and urges two grounds in support of his contention 1 that section 422 imposes a charge only on a business carried on by a nonresident and that therefore no tax could be imposed under that provision on the business of the appellant who is a resident and 2 that it is a condition for the levy of a charge under s42 2 that the non resident must carry on business with the resident and that in the instant case it is not satisfied
The first ground does not appear to have been put forward in the Court below but before us it has been presented with great elaboration and pressed with considerable insistence
The argument in support of it may thus be stated section 42 2 imposes a charge on profits of a business actual or notional when the conditions specified therein are satisfied but the section does not in terms say who the person is whose business is liable to be taxed but that that can only be the non resident is clear from other parts of the section
Thus the tax is imposed under section 42 2 on profits  derived  from business which must mean profits actually made therein
Ex hypothesi the resident has so arranged his business that it produces little or no profits to him
If it has produced some profits then they are taxable in his hands even apart from this provision and if he has made no profits then the word  derived  would be inapplicable to his business
Therefore the profits  derived  and taxable under the section can have reference only to the business of a non resident
Then again the profits are chargeable under this section in the name of the resident
If the profits chargeable under section 422 accrue from a business of the resident he would be the person who would even apart from the section be liable for the tax and in that situation the expression  in the name of the resident  would be inappropriate
It would make sense if in fact the profits accrued in a business carried on by a person other than the resident and the legislature sought to tax them in his hands
The true intention behind the legislation it is said is that the profits of the non resident should be taxed but that the tax should fall on the resident by reason of his 853 close connection with the nonresident
Support for this contention is sought in the provision in section 42 2 that the resident shall be deemed to be the assessee for all purposes of the Act
The word  deemed  imports it is argued a legal fiction and if it was the business of the resident that was intended to be taxed then he is in fact the assessee and it would be  inconsistent with that position that he should be treated as an assessee by a legal fiction
It is also urged that sub sections
1 and 3 of section 42 deal with the profits of a nonresident and prescribe the conditions under which and the manner in which the tax could be imposed and collected and section 42 2 must in this setting be construed as referring to the business of the nonresident
There would have been considerable force in this argument had there been any ambiguity or undertainty in the wording of section 42 2 as to whether it is the business of the resident that is sought to be taxed or that of the nonresident
But that is not so
The language of the enactment imposing the charge is too plain to admit of any doubt
Now section 42 2 is it may be noted in two parts
The first part commencing with the opening words  Where a person not resident  and ending with the words  which may reasonably be deemed to have been derived therefrom  prescribes the conditions on which the charge arises
It does not of itself impose the charge
That is done by the second part which provides that the profits derived therefrom or which may reasonably be deemed to have been derived therefrom shall be chargeable to income tax
 The word  therefrom  is very important for the purpose of the present discussion
In the context it can refer only to the business of the resident and it is this business therefore that is the subject of the charge under section 42 2 It was suggested for the appellant that the word therefrom  has reference to the arrangement between the nonresident and the resident but apart from the fact that such a construction would on the grammar of it be untenable it is impossible to conceive how an arrangement relating to the conduct of business can as such be the 854 subject matter of income tax apart from the business in which profits or gains are made
The language of the section is clear beyond all reasonable doubt as to what it is that is sought to be taxed under this section
That is only the business of the resident and not that of the nonresident
In this view it is only necessary to consider whether there is anything in the wording of the other parts of section 42 2 relied on for the appellant which precludes us from giving effect to the plain import of the word  therefrom 
It is on the expression profits derived in the charging part of the enactment that the appellant leans heavily in support of his position that it is the business of the non resident that is really intended to be taxed
But then those words do not stand alone
They are associated with the words  or which may reasonably be deemed to have been derived  and this association has its origin in the preceding clause produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business 
This clause contemplates two classes of cases one where the business of the resident produces no profits and the other where it produces less than the normal profits
The charge is imposed on both these classes of cases and the word  derived  has reference to the latter while the words  profits which may reasonably be deemed to have been derived  relate to the former
That both these clauses relate to the business of the resident is clear from the words  to the resident  occurring therein
The word  derived  in section 42 2 must therefore be interpreted as referring to the business of the resident
The respondent sought further support for this conclusion in the words  which may reasonably be deemed to have been derived in section 422 and contended that those words could apply only to a business which does not yield profits and that will fit in in the context only with the business of the resident and not of the non resident
The answer of the appellant to this contention is that the words in question should be construed as meaning not notional profits but such proportion of the actual profits of the nonresident as 855 could reasonably be apportioned to the business in India
Reliance was placed in support of this contention on Rr 33 and 34 of the Indian Income tax Rules 1922
Rule 33 provides for the determination of the profits of a non resident in cases falling within section 421 and one of the modes prescribed for such determination is to fix an amount which bears the  same proportion to the total profits of the non resident as the Indian receipts bear to the total receipts in the business
Rule 34 then provides that the profits derived from any business carried on in the manner referred to in section 42 2 may be determined for the purposes of assessment to income tax according to the preceding rule 
Now the argument of Mr Palkhivala is that the interpretation put on section 42 2 by the rule making authorities as manifest in R 34 is that the business chargeable under section 42 2 is that of the non resident and that the words  which may reasonably be deemed to have been derived therefrom  had reference to the apportionment of the Indian out of the total profits
We see no force in this contention
There is nothing in R 34 to justify the assumption that the rule making authorities considered either that section 42 2 applied to the business of a non resident or that the words  which may reasonably be deemed to have been derived therefrom  meant apportionment of the Indian out of the world profits of the non resi
And even if those
be the assumptions on which the Rule is based that can have no effect on the true interpretation of section 42 2
And whatever doubts one migt have had as to the meaning to be given to the words  derived therefrom or which may reasonably be deemed to have been
derived therefrom  if they had to be construed in isolation in the contextof the section and read in conjunction with the words  to the resident  and  therefrom  there cannot be any doubt that they have reference to the business of the resident and not that of the non resident
The word  or  in the clause would appear to be rather inappropriate as it is susceptible of the interpretation that when some profits are made but they log 856 are less than the normal profits tax could only be imposed either on the one or on the other and that accordingly a tax on the actual profits earned would bar the imposition of tax on profits which might have been received
Obviouslythat could not have been intended and the word  or  would have to be read in the context as meaning  and 
Vide Maxwell s Interpretation of Statutes Tenth Edn
238 239
But that however does not affect the present question which is whether the word  derived  indubitably points to the business of the nonresident as the one taxable under section 42 2 and for the reasons already given the answer must be in the negative
The appellant also relied on the clauses in section 42 2 that the profits shall be chargeable to tax in the name of the resident  and that he shall be deemed to be the assessee for all purposes of the Act  as indicating that it is not the business of the resident that is really sought to be taxed
But these clauses are explainable with reference to the fact that the profits taxed are not actual profits but what are deemed to be profits
It was argued that if it was the intention of the legislature that what was not profits should be deemed to be profits that should have been independently provided for before the tax is imposed and that in the absence of such a provision the word  deemed  must be construed as referring not to notional profits being treated as actual profits but to a person who is not in fact an assessee being treated as an assessee
We see no substance in this argument
There is no reason why an enactment should not both declare notional profits as taxable profits and at the same time impose a charge on the resident in respect of those profits and that quite clearly is what section 42 2 has done
It may be that its language is not felicitous
But there can however be no mistaking its sense that it is the resident that is to be dealt with as assessee in respect of profits which he had not in fact made
Nor do we see much force in the argument that section 42 sub sections
1 and 3 relate to income of the nonresident and that section 422 which is wedged in between them should therefore be interpreted as having 857 reference to the profits of the non resident
If the language of section 422 is clear that it is the resident who is chargeable to tax it is of no consequence that under section 42 sub sections
1 and 3 it is the non resident that is taxed
It should be remembered that section 42 occurs in Ch
V headed  Liability in Special Cases  and section 422 is a liability which is out of the ordinary run and it is not inappropriate to deal with it in section 42 because while section 421 seeks to bring within the ambit of taxation the profits of a non resident which accrue in India section 422 seeks to tax the resident in respect of profits which he would have normally made but for his business association with a non resident
On the other hand on the construction contended for by the appellant section 422 would become practically useless because a non resident whose profits could be taxed under section 422 could also be taxed under section 421 as also the resident if he were the agent
None of the considerations put forward by the appellant is of sufficient weight to displace the conclusion to be drawn from the words  to the resident  and  therefrom  in section 422 and we must hold that the business which is the subject matter of taxation under that provision is that of the resident and not of a non resident
This contention must accordingly be found against the appellant
We shall next consider the second ground urged in support of the appeal that it is a condition for the levy of a charge under section 422 that a non resident should carry on business with the resident and that on the facts found that condition is not satisfied and that therefore the tax is unauthorised
It is argued that the business of the non resident companies is to ply ships for hire and that the appellant has no concern with that that the business of the appellant is to repair ships and that the non resident companies have no connection with that business and that all that the non resident companies do is to get their ships repaired by the appellant and that does not amount to carrying on any business with the appellant
A person who regularly purchases his goods from a particular dealer does not it is said carry on business with 858 that dealer and on the same analogy in getting their ships repaired by the appellant the non resident companies cannot be said to carry on business with them in the real sense of that word
We are unable to agree with this contention
The word business is as has often been said one of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense
Discussing the connotation of the word trade Scott L J observed in Smith Barry V Cordy 1  The history of judicial decisions has been similar showing a strong tendency not to restrict the scope of Schedule D a tendency which was we think in sympathy with the general social and economic outlook of the country
There is hardly any activity for gaining a livelihood and not covered by the other Schedules which does not seem to us to be swept into the fiscal net by the Schedule D The word business  connotes it was observed by this Court in Narain Swadeshi Weaving Mills vs The Commissioner of Excess Profits Tax 2 some real substantial and systematic or organised course of activity or conduct with a set purpose
 Now it may be conceded that when a person purchases his requirements from a particular dealer he cannot without more be said to carry on business with him
But here there is much more
The non resident companies send their ships for repair to the appellant not as they might to any other repairer but under a special agreement that repairs should be done at cost
And further unlike customers who purchase goods for their own consumption or use the non resident companies get their ships repaired for use in what is admittedly their business
These are clearly trading activities organised and continuous in their character and it will be difficult to escape the conclusion that they constitute business
We are not even concerned in this appeal with the larger question whether the activities of the nonresident companies in connection with the repair of the ships amount to carrying on of business
What we have to decide is whether having regard to the 1  259
2  961 859 course of dealings between the non resident companies and the appellant it can be said of the former that they carry on business with the latter within the meaning of section 422
Now it should be observed that section 42 speaks not of the nonresidents carrying on business in the abstract but of their carrying on business with the resident and in the context it must include all activities between them having relationship to their business
That is the view taken by the learned Judges in the Court below and we are in agreement with it
In this connection reference may be made to section 421 under which a charge is imposed on income profits or gains accruing to a non resident through any business connection in the taxable territories
In Commissioner of Income tax vs Curimbhoy Ebrahim  Sons 1 it was observed by the Privy Council that business connection in section 421 is different from business as defined in section 42 of the Act
 The phrase business connection  observed Sir George Rankin  is different from though not unrelated to the word business  of which there is a definition in the Act 
And in Anglo French Textile Co Ltd vs Commissioner of Income tax Madras 2 this Court has observed that  when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realises his profits such relationship does constitute a business connection
Vide also the observations in Bangalore Woollen Cotton and Silk Mills Co Ltd vs Commissioner of Income tax Madras 3 
The words where a person not resident in the taxable territories carries on business with a person resident in section 422 must be similarly interpreted and a non resident should be held to carry on business with a resident if the dealings between them form concerted and organised activities of a business character
We are accordingly of opinion that on the facts found the non resident Companies must be held to have carried on business with the appellant as provided in section 422
1 2  3 1950 18  433 434
860 It was argued that the result of this arrangement was only to reduce the repairing charges and enable the non resident Companies to thereby make a saving that that was not profit or gains of a business liable to be taxed under the Act and the decisions in Tennant vs Smith 1 and In re Major John were cited in sup
port of this position
But as already held by us the subject matter of the tax under section 422 is the business of the resident and not that of the non resident and what we have to decide is not whether the nonresident Companies made profits in their dealings with the appellant but whether what they did was business and for that purpose it is immaterial that the business was carried on by them in such manner that no profits could accrue to them therefrom
Vide the observations of Coleridge C J at p 113 in Commissioners of Inland Revenue vs Incorporated Council of Law Reporting 3 
The fact therefore that the nonresident Companies could derive no profits from the dealings with the appellant would not detract from their character as business with the appellant
This contention must therefore be rejected
It was finally contended that the profits chargeable under section 422 must be separately assessed and not added on to the other profits or income of the appellant
This contention is based on the assumption that section 422 imposes on the appellant a vicarious liability the charge being in reality on the profits of the nonresident
On our finding that the charge is on the business of the appellant and not of the non resident Companies this contention does not survive
In the result the appeal fails and is dismissed with costs
Appeal dismissed


Summary:
The Hotel Receipts Tax Act 1980 came into force on 9121980
The Act imposed a special tax of 15 on the gross receipts of certain hotels where the room charges for residential accommodation provided to any person during the previous year were Rs75 or more per day per individual
The levy commenced from the assessment year 1981 82 but was discontinued from 2721982
Charges received from persons within the purview of certain Vienna Conventions were exempt from the tax
The constitutional validity of the said Act was chal lenged in these writ petitions on grounds of lack of legis lative competence and of violation of Articles 14 and 191g
It was contended on behalf of the petitioners that the reliance on Entry 82 List I in support of the tax was wholly misconceived and the tax in pith and substance was an impost under Entry 62 List II reserved to the States
It was also contended that the Act is patently violative of Article 14 since the basis of classification has no nexus with the object of the tax in that other hotels which have much higher gross receipts are left out
It was contended by the petitioners that the law imposed unreasonable burden on their freedom of business and constituted a violation of Article 191g of the Constitution
881 On behalf of the Respondent it was contended that the said tax fails under Entry 82 List I and the word income  should not be read in a narrow and pedantic sense but must be given its widest amplitude
The challenge to the Act on the ground that it was violative of Articles 14 and 191g was also resisted by the Respondent
Dismissing the writ petitions HELD 11
The word income  is of elastic import
In interpreting expressions in the legislative lists a very wide meaning should be given to the entries
In understand ing the scope and amplitude of the expression income  in Entry 82 List 1 any meaning which fails to accord with the plenitude of the concept of income  in all its width and comprehensiveness should be avoided
The cardinal rule of interpretation is that the entries in the legislative lists are not 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
The widest possible construc tion according to the ordinary meaning of the words in the entry must be put upon them
Reference to legislative practice maybe admissible in reconciling two conflicting provisions in rival legislative lists
In construing the words in a constitutional document confering legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude
The expression income  in Entry 82 List I cannot be subjected by implication to any restriction by the way in which that term might have been deployed in a fiscal statute
A particular statute enacted under the Entry might as a matter of fiscal policy seek to tax some species of income alone
The definitions would therefore be limited by the consideration of fiscal policy of a particular stat ute
But the expression income  in the legislative entry has always been understood in a wide and comprehensive connotation to embrace within it every kind of receipt or gain either of a capital nature or of a revenue nature
The taxable receipts  as defined in the statute cannot be held to fail outside such a wider connotation  of income  in the wider constitutional meaning and sense of the term as understood in Entry 82 List I Navinchandra Mafatlal vs CIT Bombay City 1955 1 SCR 829 and Bhagwandas Jain vs Union of India AIR 1981 SC 907 relied on
Navnitlal vs KK Sen   Governor Gener al in Council vs Province of Madras and Kamakshya 882 Narain Singh vs CIT  referred to
It is now well settled that a very wide latitude is available to the legislature in the matter of classification of objects for purposes of taxation
It must needs to be so having regard to the complexities involved in the formu lation of a taxation policy
Taxation is not now a mere source of raising money to defray expenses of Government
It is a recognised fiscal tool to achieve fiscal and social objectives
The differentia of classification presupposes and proceeds on the premise that it distinguishes and keeps apart as a distinct class hotels with higher economic status reflected in one of the indicia of such economic superiority
The presumption of constitutionality has not been dislodged by the petitioners by demonstrating how even hotels not brought into the class have also equal or higher chargeable receipts and how the assumption of econom ic superiority of hotels to which the Act is applied is erroneous or irrelevant
As regards reasonableness of classification and restriction on the petitioners  freedom of trade and busi ness similar contentions were raised in a connected case
As has been held in that case and for the reasons given therein the challenge to constitutionality of the provi sions of the Act based on Articles 14 and 191g is rejected
Federation of Hotel  Restaurant Association of India etc
vs Union of India  followed