Case: Russa H. Mehta Trust, Bombay Vs. Commissioner Of Income-Tax, Bombay City I

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 S. 14 (2)(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 territory 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 S. 14 (2) (c). But paragraph 4 of the Taxation Concessions Order 1949, is not susceptible of any such interpretation. Paragraph 4 of the Order, and Ss. 3,4,4-A, 4-B and S. 14 (2) (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 entities 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 14 (2) (c) 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 S. 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 S. 14 (2) (c) but has since the application of the Income-tax Act become so liable.6. The claim that paragraph 4 applies to income of residents of former British India which was exempt from taxation under Section 14 (2) (c) is belied by the plain words of the Order. Paragraph 4 does not substantively grant any exemption, it merely designates income to which the provisions of the Order granting exemption will apply. It applies to income which would, if Act 67 of 1949 had not 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 S. 14 (2) (c). The use of the expression “had he been a resident" implies that the benefit is not to ensure to persons who were before the merger entitled to the exemption under S. 14 (2) (c).7. 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-s. (2) of S. 14 of the Indian Income-tax 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.8. It is true that by this interpretation of paragraph 4, British Indian residents are denied the benefit of the exemption under S. 14 (2) (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 S. 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 S. 14 (2) (c). There is nothing in the Concessions Order which suggests that it was intended to ensure continuance of the exemption under S. 14 (2) (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 S. 14 (2) (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 C. J., was right in observing in Mrs. Kusumben D. Mahadevias case. I. T. Ref. No. 28 of 1955, dated 20-2-1956 (Bom - unrep.) that:"A person resident in a Merged State, whose income accrued to him there, could out 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 concession to a resident in a merged State this paragraph was enacted, and the particular language which we find in this paragraph was used."9. In the view we have taken on the first question, it is unnecessary to record an answer on the second question.10

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]6. The claim that paragraph 4 applies to income of residents of former British India which was exempt from taxation under Section 14 (2) (c) is belied by the plain words of the Order. Paragraph 4 does not substantively grant any exemption, it merely designates income to which the provisions of the Order granting exemption will apply. It applies to income which would, if Act 67 of 1949 had not 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 S. 14 (2) (c). The use of the expressionhe been a resident" implies that the benefit is not to ensure to persons who were before the merger entitled to the exemption under S. 14 (2) (c).7. 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-s. (2) of S. 14 of the Indian Income-tax 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.8. It is true that by this interpretation of paragraph 4, British Indian residents are denied the benefit of the exemption under S. 14 (2) (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 S. 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 S. 14 (2) (c). There is nothing in the Concessions Order which suggests that it was intended to ensure continuance of the exemption under S. 14 (2) (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 S. 14 (2) (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 C. J., was right in observing in Mrs. Kusumben D. Mahadevias case. I. T. Ref. No. 28 of 1955, dated 20-2-1956 (Bom - unrep.)person resident in a Merged State, whose income accrued to him there, could out 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 concession to a resident in a merged State this paragraph was enacted, and the particular language which we find in this paragraph was used."