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

1. The appellant is a private trust, and was within the meaning of Ss. 4-A and 4-B of the Income-tax Act, 1922 resident and ordinarily resident within British Indian in 1948. 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 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.2. In the calendar years 1948 and 1949 the appellant received at Billimora Rs. 65,000 and Rs. 2,10,000 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 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 S. 14 2) (c)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 1949.3. The following questions were referred by the Tribunal under S. 66 (1)of the Indian Income-tax Act, 1922, to the High Court of Bombay for itsWhether 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 atHigh Court held, following its earlier judgment in Mrs. Kusumben D. Mahadevia. Bombay v. Commissioner of Income-tax. Bombay, I. T. Ref. No. 28 of 1955, dated 20-2-1956 (Bom.) (unrep.), 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.

Reasoning: 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."