John Beaumont, Kt., C.J.
1. This is a reference made by the Income-tax Appellate Tribunal raising four questions, but in substance only one question calls for serious consideration, and that is whether the provisions of Section 4A(c) of the Indian Income-tax Act, 1922, a sub-section introduced by the amending Act of 1939, are ultra vires in whole or in part. That sub-section provides that a company is resident in British India in any year (a) if the control and management of its affairs is situated wholly in British India in that year, or (b) if its income arising in British India in that year exceeds its income arising without British India in that year. It is not suggested that paragraph (a) is invalid. The provision that the residence of a company depends on where the control and management of its affairs is situated is in accordance with English law. But it is suggested that paragraph (b) is ultra vires in that it involves the taxation of a non-resident in respect of income derived outside British India.
2. The facts found by the Tribunal are that the assessee, Wallace Bros & Co., Ltd., is a company incorporated in the United Kingdom, that the control and management of its affairs is situated wholly in that country, and that the company has no director in India, but is a sleeping partner in the firm of Messrs. Wallace & Co., which carries on, and has a place of, business in Bombay, What exactly is meant by the expression 'sleeping partner,' I am not sure. Seeing that the English company is entitled under the articles of partnership to a 14/32 share in the profits of the Bombay firm and that it can dismiss any other partner on six months' notice, I apprehend that, although it may leave the management of the affairs of the firm in India to the partners resident in India, its views on matters of general policy are likely to meet with considerable respect from those partners. However, I do not think it matters what the exact relationship of the partners inter se may be; it is sufficient to find that the assessee-company is a partner in the firm of Wallace & Co., which carries on business in Bombay. The share of the assessee-company in the profits of Wallace & Co. for the accounting year was something over eight lacs, and it had other income derived from British India, bringing the total to over seventeen lacs, and its income accruing or arising outside British India in the material year was about seven and a half lacs. I should have said that the year of assessment is the year 1939-40, so that the accounting year is 1938-39, and these figures relate to the accounting year. It is therefore clear that in respect of the accounting year the income of the assessee-company arising in British India exceeded its income arising without British India.
3. In order to understand the effect of Section 4A of the Indian Income-tax Act, it is necessary to look at some of the other provisions. Section 3 is the charging section, which provides that where any Act of the Central Legislature enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, the Act in respect of the total income of the previous year. Then Section 4(1) provides, so far as material, that the total income of any previous year of any person includes all income, profits and gains from whatever source derived which (a) are received or are deemed to be received in British India in such year by or on behalf of such person or (b), 'if such person is resident in British India during such year, (i) accrue or arise to him in British India during such year or (ii) accrue or arise to him without British India during such year,' or (c) 'if such person is not resident in British India during such year, accrue or arise or are deemed to accrue or arise to him in British India during such year.' So that a person resident in British India has to pay tax on income which accrues or arises to him without British India during the year in addition to the income accruing or arising within British India. Then Section 4A defines what is meant by 'residence in British India.' It says :
For the purposes of this Act-(a) any individual is resident in British India in any year if he-(i) is in British India in that year for a period amounting in all to one hundred and eighty-two days or more;
4. Then there are other circumstances enumerated which constitute residence of an individual. Then comes Sub-section (c) which is the material one, and which I have already read, and so far as relevant for the present purpose it provides that a company is resident in British India in any year if its income arising in British India in that year exceeds its income arising without British India in that year. That sub-section plainly justifies the present assessment, if it is valid, but the contention of the assessee is that it is ultra vires.
5. Now, the Indian Legislature is not, as we know, a Sovereign Legislature. Its powers are conferred by the Government of India Act, 1935, but within the ambit of the very wide legislative powers conferred by that Act the Indian Legislature is a Sovereign Legislature. The question whether or not this sub-section is ultra vires must necessarily turn on the construction of the Government of India Act, the contention of the assessee being that it is incompetent for the Government of India to provide that the income of a non-resident which accrued outside British India shall be subjected to Indian income-tax, because that would be extra-territorial legislation of a character not sanctioned by the Act.
6. Before I discuss the terms of the Government of India Act, I will notice one or two arguments advanced by Sir Jamahedji Kanga, arguments of a more or less general character designed, I think, to induce in us a state of mind sympathetic towards the construction he desires us to adopt when we approach the Act. He points out, in the first place, that the English system of income-tax taxation is to tax a resident in England upon the whole of his income derived from any source and from any place, and to tax income derived from any property in England wherever the owner of the property may be resident, and from that English practice he affirms a fundamental principle underlying all income-tax legislation that you can only tax a person resident, or property situated, within the taxing country. But the English Legislature is a Sovereign Legislature, and there is nothing whatever to prevent it from extending its practice by imposing income-tax on foreign income of a non-resident in cases where there are assets within the country which enable such taxation to be effective. It is, in my opinion, impossible to maintain that, because the English Legislature has not chosen to tax income of that nature, therefore no other system of legislation can tax such income. Nor am I impressed with the argument, which found some favour with the learned Chief Justice of Calcutta in a case to which I will refer presently, that one ought in construing the Government of India' Act to approach the matter with a presumption that the English Parliament did not intend to confer upon the Indian Legislature a power which it possessed itself, but had never thought it desirable to exercise. Conditions in England and India are quite dissimilar. There is no evidence on the point, but it may well be, and I have no doubt in my mind that it is, a fact, that in British India a much larger proportion of businesses send a part of their profits out of the country than is the case in England, and I see no reason, therefore, why the Indian Legislature should not be empowered to impose taxation on a class of income which the English Legislature has left alone. It was said that this English practice constituted a sort of legislative practice, which tended to show that it cannot have been intended that income of this sort should be subjected to taxation. I do not think in this case any question of legislative practice arises, because we are not called upon to consider the construction of any particular words of the Government of India Act, so that we cannot be asked to construe them in the light of former legislative practice.
7. Then it was argued that the only moral justification for imposing income-tax, if one may use such an expression in relation to such a subject, was that a man is taxed in return for the protection afforded him by the laws of the taxing country. But that argument does not help here, because it is the basis of Sub-section (c) of Section 4A (which I will refer to as 'the impugned sub-section') that the bulk of the assessee's income is derived from British India, and, therefore, is earned under the protection of British Indian laws.
8. Then it was argued by Sir Jamshedji that there was something unfair and improper in taxing the foreign income of a non-resident. In opening he did not go so far as to say that such a provision would be contrary to natural justice, but he could not resist saying so in reply. But, with all respect, there does not seem to me anything inherently unfair in providing that a man who earns income in British India, but does not reside here, should be taxed rather more heavily than a man who does reside here, and who, therefore, spends his income in this country, and engages in social services which a normal resident, in greater or less degree according to his taste, does engage in. However, all these arguments, as I have said, were only designed to induce us to approach the construction of the Government of India Act in a spirit sympathetic to the assessee's case.
9. Now, coming to the Government of India Act, Section 99(1), read with Section 316, provides that, subject to the provisions of the Act, the Indian Legislature may make laws for the whole or any part of British India, and a Provincial Legislature may make laws for the Province. In that sub-section there is no reference whatever to extra-territorial legislation, though the object of legislation must be British India. But Sub-section (2) provides that without prejudice to the generality of the powers conferred by the preceding sub-section, no Indian law shall, on the ground that it would have extra-territorial operation, be deemed to be invalid in so far as it applies to five matters of legislation which are therein enumerated. That sub-section seems to show tot the Legislature realised that the general power in Section 99(1) to make laws for the whole or any part of British India might involve a question as to whether a law with extra-territorial effect would come within the power. The Legislature thought of five matters, on which a doubt might arise, and expressly dealt with them; but it realised that there might be others and, hence the opening words of Sub-section (2), 'Without prejudice to the generality of the powers conferred by the preceding sub-section.' Then Section 100 and the Seventh Schedule enumerates in three lists the matters on which the Indian Legislatures may make laws, the first list being matters on which the Central Legislature can legislate, the second list being those on which the Provincial Legislature may legislate, and the third list being matters on which the Central and the Provincial Legislatures may both legislate. It is to be noticed in passing that several of the items in the first list involve some sort of extra-territorial operation, for instance, items 22 to 25. Item 54 in List I deals with income-tax, and includes 'Taxes on income other than agricultural income.' Taxes on agricultural income are included in the Provincial list. So that two things seem to me clear from those sections and the Seventh Schedule, first, that the mere fact that an Act of the Central Legislature has some extra-territorial operation is not enough to invalidate it, and, secondly, that the power to impose income-tax is vested in the Indian Legislature.
10. Sir Jamshedji Kanga contends that the impugned sub-section is of purely extra-territorial effect. That is clearly going too far, since the basis of the sub-section is that the bulk of income has been earned in British India. On the other hand, Mr. Setalvad, for the Commissioner of Income-tax, maintains that, properly considered, the sub-section has no extra-territorial effect, and he has referred us to certain authorities of the Federal Court of Australia in which the meaning of the expression 'extra-territorial legislation' has been considered, I do not think it necessary to go into that question in any detail, because there is no expression in the Government of India Act which we are called upon to interpret which mentions extra-territorial legislation. There is clearly no provision in the Act which says that any extra-territorial legislation shall be outside the powers of the Indian Legislature. I will only refer to one passage in Colonial Gas Association Ltd. v. Federal Commissioner of Taxation (1934) 51 C. L.R. 172 from the judgment of Mr. Justice Dixon, in which he says (p. 187) :
To derive income from a country involves the person deriving it in a territorial connection with the country sufficient to support the validity of an exercise of the power in respect of the person as distinguished from the income.
That is to say, if a person is deriving income from a business carried on in a country, he has a sufficient territorial connection with that country to prevent a law imposing tax upon him being regarded as extra-territorial. Mr. Setalvad contends that inasmuch as the whole basis of the liability to tax under the impugned sub-section is based on the bulk of the assessee's income arising in British India, the sub-section would not fall within an express prohibition against any extra-territorial legislation. It is, no doubt, true that there is some extra-territorial effect in the impugned sub-section. It does enable the foreign income of a non-resident to be taxed. But other sections have some extra-territorial effect, for instance, Section 4A(a)(i), which directs that an individual shall be regarded as resident in British India if he has been there for a period amounting to one hundred and eighty-two days; so that, although he has been in India only for half a year, he is to be taxed for the whole year; in that sense there is some extra-territorial effect in that provision. So I think there is in Section 42, which enables a non-resident to be taxed in respect of income derived from a business connection in British India. That extra-territorial effect is not so great as in the case of the impugned sub-section, because the income taxed under Section 42 must bo derived from British India; but still it does enable a non-resident to be taxed. If one is going to say that the Government of India Act precludes all legislation which has any extra-territorial effect, it would be difficult to justify, not only the impugned sub-section, but Section 4A(a)(i) and Section 42. But, as I have said, there is nothing in the Government of India Act which lays it down that any legislation having any extra-territorial effect is invalid, and short of such a prohibition, I cannot see any principle on which the impugned sub-section can be held to be ultra vires. Whether it is impolitic as being calculated to drive capital out of the country, it is not for us to consider. As the Tribunal has pointed out, in the ultimate analysis the effect of the sub-section is to increase the amount of the assessment on the taxpayer. In clothing a company with an artificial residence for the purpose of income-tax, the Income-tax Act is merely employing machinery for levying additional tax in relation to income arising within British India. The same result could be achieved by providing that in the case of an assessee who is shown to possess income arising outside British India the amount of his assessment should be increased proportionately to the amount of his income accruing outside British India.
11. Referring to some of the cases cited there is, I think, no doubt from the English cases in the House of Lords, particularly Egyptian Delia Land and Investment Co. v. Todd [1929] A.C. 1 and Swedish Central Ry. Co. v. Thompson [1925] A.C. 495 that, in the case of a company, residence is always artificial, and should be the subject of express legislative enactment, and furthermore that a company may have two places of residence. There can, therefore, be no objection to the impugned sub-section merely because it enacts a definition of an artificial character in respect of the residence of companies. It seems to me clear from the power of the Central Legislature to impose income-tax that that Legislature must have power to determine who is to pay the tax, and for that purpose to lay down rules as to who is to be regarded as resident in, and what income is to be deemed to arise in, British India. I can see no real basis for the assessee's argument.
We were referred to a very recent decision of the Calcutta High Court in Raleigh Investment Co. Ltd. v. Governor-General in Council : [1943]11ITR393(Cal) , in which the Court held that Explanation 3 to Section 4 of the Indian Income-tax Act was ultra vires, no doubt partly on the ground that it was of an extra-territorial character. I do not find myself in agreement with all the views expressed by the learned Judges in that case, but the actual decision has no operation on the matter before us. There may be much more to be said for the invalidity of Explanation 3 than for the invalidity of the sub-section with which we have to deal.
12. In my opinion, the contention that Section 4A(c) is invalid is not well founded, and that really disposes in substance of all the questions.
13. The first question is :
Whether in the circumstances found by the Tribunal in its order under Section 33 the assessee company was taxable to income-tax and super-tax for the assessment year 1939-40 in respect or the income (Rs. 7,48,437 less Rs. 4,500) which accrued or arose to it without British India in the previous year ?
The answer is in the affirmative.
14. The second question is :
Are the provisions of Section 4A(c) and 4(1)(b)(ii) of the Income-tax Act ultra vires the Indian Legislature ?
The answer is in the negative. The answer to this question depends on that to the first one.
15. The third question is :
Is Sub-clause (b) of Clause (c) of Section 4A of the Amended Act applicable to the assessment of the assessee-company for the year 1939-40 ?
I gather that the argument before the Tribunal was that retrospective effect could not be given to the impugned sub-section, but, as the Tribunal points out, there is no question of giving retrospective effect. No doubt, the amended Act came into operation after the close of the previous, year, but under that Act income of the previous year has to be ascertained in accordance with the provisions of the amended Act in order to determine the assessment for the current year. Sir Jamshedji Kanga raised a further point that the sub-section did not apply, because there was no finding that the assessee was to be treated as resident in British India in the year of assessment, the finding only relating to the previous year. But, in my opinion, it is only the previous year which is relevant. So that the third question must be answered in the affirmative.
16. The fourth question is :
Whether on the facts found by the Tribunal the Additional Income tax Officer, Companies Circle, Bombay, had jurisdiction under Section 64(7) or Section 64(2) to make the assessment ?
17. Under Section 64(1) the assessment has to be made by the Income-tax Officer of the area in which the assessee's place of business is situate. Here the assessee has been found to be a partner in the firm of Wallace & Co., and the assessment was made by the Income-tax Officer for the area in which Wallace & Co. carry on business. Therefore, it seems to me plain that the answer to question 4 is that the Officer had jurisdiction under Section 64(1). The question whether jurisdiction also arose under Section 64(2) does not arise.
18. Sir Jamshedji Kanga was anxious to raise certain other questions, which the Tribunal had been asked, and had refused to raise, but we can only deal with questions before us, As far as we can judge, they adequately raise all the questions which can properly be raised, and we see no reason whatever for amending or adding to such questions.
19. The assessee must pay the Commissioner's costs.
Rajadhyaksha, J.
20. I agree and have nothing to add.