Appeals Nos 589 to 590 of 1964
Appeal by special leave from the judgment and order dated October 12 13 1961 of the Bombay High Court in Income tax Reference No 56 of 1956
K N Rajagopal Sastri J B Dadachanji for the appellants
A V Viswanatha Sastri R Ganapathy Iyer R H Dhebar and R N Sachthey for the respondent
The appellant held 1000 shares in an investment company styled Home Mehta and Sons Ltd hereinafter called the Company  which carried on the business of investing in shares in companies registered in British India and in the former Indian States
Dividends from the British Indian companies were received by the Company at its registered office at Bombay and dividends from the Indian States  companies were received by the Company at its registered office at Billimora in the State of Baroda
In the calendar years 1948 and 1949 the appellant received at Billimora Rs 65000 and Rs 210000 respectively as dividend in respect of shares held by it in the Company
The 2nd Income tax Officer A I Ward Bombay upheld the claim of the appellant that its dividend income received from the Company 581 at Billimora had accrued or arisen in the Baroda State and as the income was not brought into British India it was exempt from liability to tax by virtue of section 142c of the Income tax Act
The Commissioner of Income tax Bombay held that the income accrued or arose to the appellant in Bombay where the dividend was declared and was on that account liable to be assessed under the Income tax Act 1922
The Commissioner accordingly directed the Income tax Officer to pass orders imposing tax on the dividend income received by the appellant from the Company
On appeal the Income tax Appellate Tribunal held that the dividend income accrued or arose at Billimora and not at Bombay but by reason of the definition of taxable territories the income which accrued at Baroda attracted liability to tax under the Income tax Act and did not qualify for rebate under paragraph 6 of the Merged States Taxation Concessions Order 1949
The following questions were referred by the Tribunal under section 661 of the Indian Income tax Act 1922 to the High Court of Bombay for its opinion 1 Whether on the above facts and circumstances of the case the assessee is entitled to rebate equal to the difference between the British Indian rate and Baroda State rate in respect of the dividend income  2 Whether on the facts and circumstances of the case the dividend income accrued or arose to the assessee at Bombay  The High Court held following its earlier judgment in Mrs Kusumben D Mahadevia Bombay vs The Commissioner of Income tax Bombay City Bombay1 that the Merged States Taxation Concessions order 1949 did not apply to the income of a resident assessee and therefore the first question must be answered in the negative
The High Court declined to answer the second question
With special leave granted by this Court the appellant has appealed to this Court
Income received by the Company from its transactions in the Indian States was retained at its office in Billimora and dividend  declared out of that income was paid to the appellant at the registered office in the State of Baroda
This dividend it is common ground was not brought into British India
To appreciate the claim that the income qualifies for rebate under paragraph 6 of the Merged States Taxation Concessions Order 1949 the 1 Income tax Ref
No 28 of 1955 decided on February 20 1956 unreported
p CI66 7 5 82 relevant statutory developments in tax laws to effectuate the merger of the former Indian States since August 15 1947 may be briefly set out
Under section 142 r of the Income tax Act added by Act 23 of 1941 and amended by Act 22 of 1947 it was enacted that  The tax shall not be payable by an assessee 
in respect of any income profits or gains accruing or arising to him within an Indian State unless such income profits or gains are received or deemed to be received in or are brought into British India in the previous year by or on behalf of the assessee or are assessable under section 12B or Section 42
 By paragraph 3 of the States  Merger Governors  Provinces Order 1949 it was provided that the States specified in Sch
11 shall as from August 1 1949 be administered in all respects as if they formed part of the Provinces specified in the Schedule and by paragraph 4 all the laws in force in the merged States or in any part thereof immediately before August 1 1949 were to continue in force until repealed modified or amended by a competent Legislature or other competent authority
The State of Baroda was one of the States specified in the Schedule and it was to be administered as if it formed part of the Province of Bombay
The Indian Income tax Act was applied to the merged States by section 3 of the Taxation Laws Extension to Merged States and Amendment Act 67 of 1949 with retrospective effect from April 1 1949 and by section 7 corresponding laws relating to income tax in the merged States were repealed
It was provided that if immediately before the 26th day of August 1949 there was in force in any of the merged States any law relating to income tax supertax or business profits tax that law shall cease to have effect except for the purposes of the levy assessment and collection of income tax and super tax in respect of any period not included in the previous year for the purposes of assessment under the Indian Income tax Act 1922 as extended to that State by section 3 or as the case may be the levy assessment and collection of business profits tax for any chargeable accounting period ending on or before the 31st day of March 1948 and for any purposes connected with such levy assesssment or collection
By the application of Act 67 of 1949 and the repeal of laws corresponding to those applied to the merged States by section 3 residents in former British India and in the merged States were sought to be treated equally
But the result was a sudden imposition of high rates of taxation under the Indian Income tax Act read with the appro 583 priate Finance Acts upon the residents of the merged States
With a view to cushion the impact the Central Government in exercise of the powers conferred by section 60A of the Indian Income tax Act granted certain exemptions from and reductions in the rates of tax and made certain other modifications in the tax structure in its application to the merged States
By paragraph 3 i of the Merged States Taxation Concessions Order 1949 the expression Act was defined as meaning the Taxation Laws Extension to Merged States and Amendment Act 67 of 1949
Paragraphs 4 5 6 and 6A of the Order as amended or added by the notification dated March 11 1949 provided  4 The provisions of paragraphs 5 6 9 10 and 11 of this Order shall apply to only so much of the income profits and gains included in the total income of an assessee as would had he been resident in British India have been exempt under clause c of subsection 2 of section 14 of the Indian Income tax Act 1922 if the Act had not been passed 5 1 The income profits and gains of an previous year ending after the 31st day of March 1948 which is a previous year i for the merged State assessment year 1948 49 or ii for the merged State assessment year 1949 50shall be assessed under the Indian Income tax Act 1922 if and only if such income profits and gains have not before the 1st day of August 1949 been assessed under the State law
2 Where the income profits and gains referred to in sub paragraph 1 have not been assessed under the State law they shall be assessed under the Indian Income tax Act 1922 and the tax payable thereon shall be determined as hereunder i the tax on the amount of such income profits and gains included in the total income shall be computed at the Indian rate of tax ii the amount of such income profits and gains shall be commuted under the State law aid the tax thereon computed at the merged Slate rate of tax 584 iii the amount if any by which the tax computed under clause i exceeds the tax computed under clause ii shall be allowed as rebate from the first mentioned tax and the amount of the first mentioned tax as so reduced shall be the tax payable
3 For the purposes of this paragraph a the merged State assessment year 1948 49 means the assessment year which commences on any date between the 1st April 1948 and the 31st December 1948 both dates inclusive and b the merged State assessment year 1949 50 means the assessment year which commences on any date between the 2nd January 1949 and the 31st July 1949 both dates inclusive
 6 1 The income profits and gains of any previous year ending after the 31st day of March 1948 which does not fall within paragraph 5 of this Order or of any previous year commencing after the previous year referred to in the said paragraph shall be assessed under the Indian Income tax Act 1922 but the tax payable on so much of the income as pertains to the period ending before the 1st day of August 1949 shall be determined as hereunder i the tax on so much of such income included in the total income shall be computed a at the Indian rate of tax and b at the rates of tax in force in the merged State immediately before the 1st day of August 1949 ii the amount by which the tax computed under sub clause a of clause i exceeds the tax computed under sub clause b of clause i shall be allowed as rebate from the first mentioned tax and the amount of the first mentioned tax as so reduced shall be the tax payable
2 Where any previous year falls partly before and partly on or after the 1st day of August 1949 the income profits and gains pertaining to the period falling before the said date shall unless the Income tax Officer having regard to any special circumstances otherwise 585 directs with the approval of the Inspecting Assistant Commissioner of Income tax be in the proportion which the period before the said date bears to the whole previous year
 6A The income profits and gains of any previous year referred to in paragraph 5 or 6 of this Order which accrue or arise without the taxable territories to a person who is resident but who would not be resident in the taxable territories if the Act had not been passed shall be charged to tax in the same manner and to the same extent as specified in the said paragraph 5 or 6 as the case may be By the application of the Income tax Act 1922 to the territories of the merged States income received accrued or arisen or deemed to be received accrued or arisen to any person resident within the territory of the merged States became chargeable to tax under that Act
With a view to avoid hardship caused by the sudden application of high rates of taxation the Central Government exercised its powers under section 60A of the Indian Income tax Act and modified the tax levy so as to give certain exemptions and benefits to residents in the areas of the former Indian States
By paragraph 6 of the Merged States Taxation Concessions Order 1949 in respect of the income of any previous year ending with March 31 1948 which accrued or arose to persons who were residents in the territories of the merged States benefit of the same rate of income tax to which it was subject in the merged State was granted by providing that the difference between tax computed at the Indian rate and the State rate shall be allowed as rebate
In respect of income of residents in the merged States arising outside the taxable territories a similar rebate was to be given paragraph 6A
The result was that income of residents of the merged States became chargeable to tax under the Indian Income tax Act but it was to continue to get for a limited period benefit of the lower rates of tax operative under the law in force in the States before merger
This concession or benefit was to apply by the express provisions contained in paragraph 4 only to so much of the income profits and gains included in the total income of an assessee as would had he been resident in the taxable territories have been exempt under cl
c of sub section 2 of section 14 of the Indian Income tax Act 1922 if the Act had not been passed
Counsel for the appellants claims that paragraph 4 applies to income of all assessees resident within British India as defined 586 in section 23A at the relevant time and not merely to residents in the territories of the merged States
It is contended that by paragraph 4 it was intended not only to give the benefit of the State rate of taxation to residents of the former Indian States which were merged with the Provinces under the States Merger Governors  Provinces Order 1949 but also to preserve the benefit which was conferred by section 142 c of the Income tax Act to residents of the territories of British India before August 15 1947 in respect of income arising or accruing to them within the teffitory of the merged States
It is said that by the application of Act 67 of 1949 all residents in the taxable territory became liable to pay tax at Indian rates but with a view to maintain the status quo ante it was intended by the Taxation Concessions Order 1949 to restore the State rates of taxation to residents in the former Indian States and also to continue the exemption in respect of the income of the former British Indian residents arising or accruing in the territory of the merged States within the limits prescribed by section 142 c
But paragraph 4 of the Taxation Concessions Order 1949 is not susceptible of any such interpretation
Paragraph 4 of the Order and sections 3 4 4A 4B and section 142 c of the Income tax Act must be read together
The Indian States specified in the Schedule to the States Merger Order on their merger with the Provinces of British India ceased to be separate entitles and became part of British India and by the application of Act 67 of 1949 the Indian Income tax Act was applied to the territories comprised within British India
Section 142c undoubtedly remained in force even after the merger of the Indian States effected by the States Merger Order but its operation was restricted
After the merger of the States income arising or accruing within the territory of such merged State could not be deemed to be income arising or accruing within an Indian State for the State had ceased to exist and the income was for the purpose of section 4 of the Income tax Act income arising or accruing to a person resident within the taxable territories
There is nothing in paragraph 4 of the Concessions Order which seeks to grant exemption from liability to tax in respect of income which prior to merger of the States was not liable to tax by virtue of section 14 2 c but has since the application of the Income tax Act become so liable
The claim that paragraph 4 applies to income of residents of former British India which was exempt from taxation under section 142 c is belied by the plain words of the Order
Para graph 4 does not substantively grant any exemption  it merely designates income to which the provisions of the Order granting 587 exemption will apply
It applies to income which would if Act 67 of 1949 had not been passed have been regarded as accruing or arising in an Indian State and the assessee would in respect of that income had he been a resident of the taxable territory before merger have been exempt under section 142 c
The use of the expression had he been a resident  implies that the benefit is not to enure to persons who were before the merger entitled to the exemption under section 142 c
The Order provides that paragraphs 5 6 9 10 and 11 apply to a slice of income and not to the entire income of an assessee and by the express terms it is that slice of the income as would had the assessee been resident in the taxable territories have been exempt under cl
c of sub section 2 of section 14 of the Indian Incometax Act if the Taxation Laws Act 1949 had not been passed
In terms the concession is not given to residents of the territories of British India and the context does not warrant an implication to the contrary
It is true that by this interpretation of paragraph 4 British Indian residents are denied the benefit of the exemption under section 142 c in respect of income arising or accruing in the territories of the former merged States
But that denial is the result of merger of the States into British India
The operation of section 14 2 c had become restricted by the modification of the definition of British India
Since that amendment income accruing or arising after the merger in Indian States outside British India alone would be exempt under section 14 2 c There is nothing in the Concessions Order which suggests that it was intended to ensure continuance of the exemption under section 142 c to residents of British India as it was before merger as if the merger had not taken place
The use of the expression had he been resident in the taxable territories introduces a fiction  it grants the benefit of section 142 c though on the express terms it is not available to a person who was not before the merger covered thereby and in respect of income which would have been if the Merger Act had not been passed exempt from taxation in his hands if he had been resident in British India
In our view Chagla CJ was right in observing in Mrs Kusumben D Mahadevia s case1 that  A person resident in a Merged State whose income accrued to him there could not possibly claim exemption under Section 14 2 c
Such an exemption could only be claimed by a person resident in the taxable territories
In order to give this particular 1 Income tex Ref
No 28 of 1955 decided on February 20 1956 unreported
588 concession to a resident in a merged State this paragraph was enacted and the particular language which we find in this paragraph was used
 In the view we have taken on the first question it is unnecessary to record an answer on the second question
The appeals therefore fail and are dismissed with costs
Appeals dismissed


Summary:
By the Taxation Laws Extension to Merged States and Amendment Act of 1949 the Income tax Act
1922 was applied to the territories of the former Indian States which were merged with the former British Indian Provinces under the States Merger Governors  Provinces Order
By such application the income received accrued or arisen or deemed to be received accrued or arisen to any person resident within the territory of the merged State became chargeable to income tax
With a view to avoid hardship to residents of former Indian States caused by the sudden application of the high rates of taxation the Central Government issued the Merged States Taxation Concessions Order of 1949 under a 60A of the Income tax Act
Under Paragraphs 6 and 6A of Us Order income of residents of the merged States became charageable to tax under the Indian Income tax Act but the income of any previous year ending after 31st March 1948 was to continue to get for a limited Period the benefit of lower rates of tax operative under the law in force in the States before merger
This concession was to apply under paragraph 4 of the Order only to so much of the income profits and gains included in the total income of an assessee as would had he been resident in the taxable territories have been exempt under section 142c of the Income tax Act if the Taxation Laws Extension Act had not bee passed that is in respect of income arising or accuring to him within territory of the merged State
In the Calendar years 1948 and 1949 the assessee who was resident and ordinarily resident within British India in 1948 received certaining as dividend in the State of Baroda which was one of the merged States
The Income tax Officer upheld its claim that the dividend income had accrued or arisen in the Baroda State and as the income was not brought into British India it was exempt from liablility to tax under section 142c of the Income tax Act
The Appellate Tribunal held that the dividend income arose in Baroda State but by reason of the definition of taxable territories in section 214A of the Income tax Act the income attracted liability to tax and did not qualify for the rebate equal to the difference between the British Indian rate and the Baroda State rate in respect of the dividend income under paragraph 6 of the Taxation Concessions Order
The High Court also on a reference held that the assessee was not entitled to the rebate
In appeal to this Court the assessee contended that by the application of the Taxation Laws Extension Act all residents in the taxable territory become liable to pay tax at the Indian rates but with a view to maintain the status quo ante it was intended by the Taxation Concessions Order to restore the State rates of taxation to residents in the former Indian States and also to continue the exemption in respect of the income of the former British India residents arising or accruing 5 80 in the territory of the merged States within the limits prescribed by section 142 c
HELD  in terms the concession is not given to residents of the territories of British India and the context does not warrant an implication to the contrary
587 C D There is nothing in paragraph 4 of the Concessions Order which seeks to grant exemption from liability to tax in respect of income which prior to merger of the States was not liable to tax by virtue of section 142 c but has since the application of the Income tax Act become so liable
The paragraph applies to income
which would if the Taxation Laws Extension Act had not been passed have been regarded as accuring or arising in an Indian State and the assessee would in respect of that income had he been a resident of the taxable territory before merger have been exempt under section 142c
It is true that by this interpretation of paragraph 4 British Indian residents are denied the benefit of the exemption under section 142c in respect of income arising or accruing in the territories of the merged State
But the use of the expression had he been resident in the taxable territories implies that the benefit is not to tenure to persons who were before the merger entitled to the exemption under section 142c
587 A B D