Navinchandra Mafatlal Vs. The
Commissioner of Income-Tax, Bombay City  INSC 107 (1 November 1954)
DAS, SUDHI RANJAN MAHAJAN, MEHAR CHAND (CJ)
HASAN, GHULAM BHAGWATI, NATWARLAL H.
AIYYAR, T.L. VENKATARAMA
CITATION: 1955 AIR 58 1955 SCR (1) 829
CITATOR INFO :
F 1958 SC 560 (10) R 1959 SC 459 (13) R 1959
SC 582 (7) RF 1960 SC 424 (11) R 1960 SC 751 (4) R 1960 SC1073 (10) RF 1961 SC
652 (10) R 1962 SC1563 (10) R 1963 SC1241 (68) RF 1964 SC 572 (8) R 1965 SC1375
(9,22,24,25,27,35,36) RF 1965 SC1387 (12) MV 1966 SC1089 (55) R 1967 SC1373
(40) E 1968 SC1286 (6) R 1971 SC 792 (4) R 1972 SC 425 (30) D 1978 SC 449
(26,41,42) F 1978 SC 771 (58) R 1981 SC 907 (10,13) R 1984 SC 981 (8) RF 1986
SC1272 (79) RF 1990 SC 781 (13) E 1990 SC1637 (16-A,38) E 1990 SC1664 (6)
Indian Income-tax Act (XI of 1922) s.
12-B-Government of India Act, 1935 (26 Geo. 5 CH. 2) Seventh Schedule, List I,
Item 54-Tax on capital gains, if ultra vires--Capital gains, if income
-Legislative practice-Interpretation of words- Words used in Constitution Act.
Section 12-B of the Indian Income-tax Act,
1922 (inserted by Act XXII of 1947) which imposed tax on 'Capital gains' is not
ultra vires the Government of India Act, 1935. The term 'Capital 106 830 gains'
comes well within the meaning of the word 'income' used in item No. 54 of List
I of the Seventh Schedule to the Government of India Act, 1935.
It is incorrect to say that income cannot
signify 'Capital gains' and it is equally an incorrect approach to hold that
there is a legislative practice which recognises a clear line of demarcation
between income and capital. What is relied on here as a legislative practice is
nothing but the judicial interpretation given to the word 'income' as used in the
income-tax and fiscal statutes. Such interpretation does not necessarily cut
down the ordinary natural meaning of the word 'income' as used in item No. 54
of List I of the Seventh Schedule to the Government of India Act, 1935.
Cardinal rule of interpretation is that the
words should be read in their ordinary natural and grammatical meaning. But the
words in a constitutional enactment conferring legislative powers should
however be construed most liberally and in their widest amplitude, Commissioner
of Income-tax v. Shaw Wallace & Co. (L.R. 59 I.A. 206); Ryall v. Hoare and
Ryall v. Honeywill (1923) 8 T.C. 521; Californian Copper Syndicate (Limited and
Reduced) v. Harris (1904) 5 T.C. 159; Wallace Brothers & Co. Ltd. v. Commissioner
of Income-tax [L.R. 75 I.A. 86: (1948) F.C.R. 1 : 16 I.T.R 2401 ; Croft v.
Dunphy L.R. 1933 A.C. 156;
Kamakshya Narain Singh v. Commissioner of
Income-tax [L.R. 70 I.A. 180: (1943) 11 I.T.R. 513] ; In re The Central
Provinces and Berar Act No. -XIV of 1938 (1939) F.C.R. 18;
United Provinces v. Atiqa Begum (1940) F.C.R.
110; State of Bombay and Another v. F. N. Balsara (1951) S.C.R. 682 ;
Eisner v. Macomber (252 U.S. 189 : 64 L. Ed. 521) Merchant's Loan & Trust Co. v. Smietanka (255 U.S. 509: 65 L. Ed. 751) ; United States v. Stewart (311 U.S. 60: 85 L. Ed. 40) and Resch
v. Federal Commissioner of Taxation (66 C.L.R. 198), referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 194 of 1952.
Appeal from the Judgment and Order, dated the
7th day of September, 1951, of the High Court of Judicature at Bombay in Income-tax Reference No. 46 of 1950.
S.Mitra (R. J. Kolah and 1. N. Shroff, with
him) for the appellant.
M.C. Setalvad, Attorney-General for India (G.
N. Joshi, with him) for the respondent.
1954. November 1. The Judgment of the Court
was delivered by DAS J.
831 DAS J.-This appeal is directed against
the judgment pronounced on the 7th September, 1951, by the High Court of
Judicature at Bombay on a reference made at the instance of the appellant under
section 66(1) of the Indian Income-tax Act, 1922. By an, assessment order dated
the 31st March, 1948, the appellant was assessed by the Income-tax Officer,
Bombay, for the assessment year 1947-1948 on a total income of Rs. 19,66,782
including a sum of Rs. 9,38,011 representing capital gains assessed in the
hands of the appellant under section 12-B of the Act. The said amount of
capital gains was earned by the appellant in the following circumstances. The
assessee had a half share in certain immovable properties situate in Bombay
which were sold by the assessee and his coowners during the relevant accounting
year which was the calendar year ending on the 31st December, 1946, to a
private limited company known as Mafatlal Gagalbhai & Company Ltd. The
profits on the sale of the said properties amounted to Rs. 18,76,023 and the
appellants half share therein came to the sum of Rs. 9,38,011 which was
included in the assessment under section 12-B.
In April, 1948, the appellant appealed from
the said order to the Appellate Assistant Commissioner contending that section
12-B of the Act authorising the levy of tax on capital gains was ultra vires
the Central Legislature. The Appellate Assistant Commissioner by his order
dated the 5th April, 1949, dismissed the appeal. A further appeal to the
Income-tax Appellate Tribunal was dismissed by its order dated the 30th June
Being aggrieved by the order of the Appellate
Tribunal the appellant applied to it under section 66(1) of the Act for raising
certain questions of law. The Appellate Tribunal agreeing that certain
questions of law did arise out of its order drew up a statement of the case
which was agreed to by the parties and referred to the High Court the following
questions:- (1) Whether the imposition of a tax under the head " capital
gains " by the Central Legislature was ultra vires 832 (2) Whether the
imposition was in any way invalid on the ground that it was done by amending
the Indian Income-tax Act ? After hearing the reference the High Court
following ,its judgment in Income-tax Reference No. 18 of 1950, Sir J. N. Duggan
and Lady Jeena J. Duggan v. The Commissioner of Income-tax, Bombay City,
answered the first question in the negative and expressed the opinion that it
was not necessary to answer the second question. In that reference the two
learned Judges gave the same answer to the first question but on different
grounds as elaborated in their respective judgments.
The principal question that was discussed
before the High Court, as before us, was whether section 12-B which authorised
the imposition of a tax on capital gains was invalid being ultra vires the
Central Legislature. Section 12-B was inserted in the Act by the Indian
Income-tax and Excess Profits Tax (Amendment) Act, 1947 (XXII of 1947) which
was a Central Act. Under section 100 of the Government of India Act, 1935, the
Central Legislature was, empowered to make laws with respect to matters
enumerated in List I in the Seventh Schedule to that Act. The only entries in
List I on which reliance could be placed to uphold the impugned Act were
entries 54 and 55 which were as follows:
" 54. Taxes on income other than
55. Taxes on the capital value of the assets exclusive
of agricultural land, of individuals and companies, and taxes on the capital of
companies." Chagla C. J. held that the enactment of Act XXII of 1947 which
inserted section 12-B was well within the scope of the legislative powers of
the Central Legislature as it fell within entry 55 and was valid either as a
whole or, in any case, to the extent that it applied to individuals and
companies. Although it was unnecessary for the learned Chief Justice to decide
whether the Act could be supported as a valid piece of legislation falling
within the scope of entry 54 yet in deference to the arguments advanced before
the Court 833 the learned Chief Justice expressed the view that it could not be
so supported. Tendolkar J., on the other hand, held that Act XXII of 1947 was
wholly intra vires the Central Legislature as it fell within entry 54 and in
this view of the matter he did not consider it necessary to discuss whether the
legislation was covered by entry 55 in List I of the Seventh Schedule. In our
opinion the view taken by Tendolkar J. with respect to entry 54 is correct and
In the course of a lucid argument advanced
with his usual ability and skill Mr. Kolah submitted that entry 54 which deals
with "taxes on income" does not embrace within its scope tax on
capital gains. "Income", according to him, does not signify capital
gains either according to its natural import or common usage or according to
judicial interpretation of relevant legislation both in England and in India.
He submitted that the learned Chief Justice was entirely right in the view that
there was a clear line of demarcation that had always been observed by English
lawyers and English jurists between income and capital, that the English
legislative practice had always recognised this difference and that as the word
had come to acquire a certain meaning and a certain -connotation by reason of
such legislative practice in England, the British Parliament which enacted the
Government of India Act, 1935, must be regarded as having understood and used
that word " income " in entry 54 in that sense. Our attention has
not, however, been drawn to any enactment other than fiscal statutes like the
Finance Act and the Income-tax Act where the word "income" has been
used and, therefore, it is not possible to say that the critical word had
acquired any particular meaning by reason of any legislative practice.
Reference has been made to several cases where the word "income" has
been construed by the Court. What is, therefore, described as legislative
practice is nothing but judicial interpretations of the word " income
" as appearing in the fiscal statutes mentioned above. A perusal of the
those cases, however, will reveal at once that those decisions were concerned
with ascertaining the meaning of that word in the context of the Income-tax 834
legislation. Thus the observation of their Lordships of the Privy Council in
Commissioner of Income- tax v. Shaw Wallace & Co.(1), laid down the
connotation of the word "income" as used "in this Act." The
passage in the judgment of Rowlatt J. in Ryall v. Hoare and Ryall v.
Honeywill(2), quoted by the learned Chief Justice in his judgment and strongly
relied on by Mr. Kolah, refers to profits or gains "as used in these
Acts." In Californian Copper Syndicate (Limited and Reduced) v. Harris(3),
Lord Justice Clerk refers to the enhanced price realised on sale of certain
things over the cost price thereof as not being profits "in the sense of
Schedule D of the Income Tax Act of 1842." These guarded observations
quite clearly indicate that they relate to the term "income" or
"Profit" as used in the Income-tax Act.
There is no warrant for saying that these
observations out down the natural meaning of the ordinary English word
"income" in any way. The truth of the matter is that while Income-tax
legislation adopts an inclusive definition of the word "income" the
scheme of such legislation is to bring to charge only such income as falls
under certain specified heads (e.g., the 5 Schedules of the English Act of 1918
and our section 6 read with the following sections) and as arises or accrues or
is received or is deemed to arise or accrue or to be received as mentioned in
the statute. The Courts have striven to ascertain the meaning of the word
"income" in the context of this scheme. There is no reason to suppose
that the interpretation placed by the Courts on the word in question was
intended to be exhaustive of the connotation of the word "income"
outside the particular statute. If we hold, as we are asked to do, that the
meaning of the word "income" has become rigidly crystallized by
reason of the judicial interpretation of that word appearing in the Income-tax
Act then logically no enlargement of the scope of the Income-tax Act, by
amendment or otherwise, will be permissible in future. A conclusion so
extravagant and astounding can scarcely be contemplated or (1) (1932) L.R. 59
I.A. 206 at page 212.
(2) (1923) 8 T.C. 521 at page 525.
(3) (1904) 5 T.C. 159 at page 165.
835 countenanced. We are satisfied that the
cases relied on by Mr. Kolah and referred to in the judgment of the learned
Chief Justice do not, as we read-them, establish the broad proposition that the
ordinary English word "income" has acquired a particularly
restricted. meaning. The case of Wallace Brothers & Co. Ltd. v.
Commissioner of Income-tax(1) was not concerned with ascertaining the meaning
of the word "income" at all. The problem there was whether the
foreign income of an English company which was a partner in a firm carrying on
business in Bombay and whose Indian income was greater than its foreign income
could be treated as a resident within the meaning of section 4-A. It was in
that context said in that case that in determining the scope and meaning of the
legislative power regard was to be had to what was ordinarily treated as
embraced within that topic in the legislative practice of the United Kingdom.
The problem there was not to ascertain the meaning of the word
"income" so much as to ascertain the extent of the application of the
Act to the foreign income. That case, clearly, does not establish that the word
"income" had acquired any special or narrow meaning. The same remarks
apply to the case of Croft v. Dunphy(1), referred to by Lord Uthwatt in
delivering the judgment of the Privy Council in Wallace Brothers case (supra).
In Kamakshya Narain Singh v. Commissioner of Income-tax(,), Lord Wright
observed :- " Income, it is true, is a word difficult and perhaps
impossible to define in any precise general formula. It is a word of the
broadest connotation. " After making the above observation his Lordship
referred to the observations of Sir George Lowndes in Commissioner of
Income-tax, Bengal v. Shaw Wallace & Co. (supra), where an attempt was made
to indicate the connotation of the word "income" as used "in
this Act." It is, therefore, clear that none of the authorities relied on
by Mr. Kolah establish what may be called a legislative practice indicating the
connotation of the (1) (1948) L.R. 75 I.A. 86;  F.C.R. 1 ; 16 I.T.R.
(2) L.R.  A.C. 156.
(3) (1943) L.R. 70 I.A. 180;  11 I.T.R.
836 term "income", apart from the
Income-tax statute. In our view, it will be wrong to interpret the word
"income" in entry 54 in the light of any supposed English legislative
practice as contended for by Mr. Kolah. It ,is interesting to note that in the
English Income Tax Act of 1945 (8 and 9 Geo. VI, C. 32, sections 37 and 38)
capital gains have been included as taxable income.
In should be remembered that the question
before us relates to the correct interpretation of a word appearing in a
Constitution Act which, as has been said, must not be construed in any narrow
and pedantic sense. Gwyer C.J. in In re The Central Provinces and Berar Act No.
XIV of 1938(1), observed at pages 36-37 that the rules which apply to the
interpretation of other statutes apply equally to the interpretation of a
constitutional enactment subject to this reservation that their application is
of necessity conditioned by the subject-matter of the enactment itself It
should be remembered that the problem before us is to construe a word appearing
in entry 54 which is a head of legislative power. As pointed out by Gwyer C.J.
in The United Provinces v. Atiqa Begum(2) at page 134 none of the items in the
Lists is 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.
It is, therefore, clear-and it is acknowledged
by Chief Justice Chagla-that in construing an entry in a List conferring
legislative powers the widest possible construction according to their ordinary
meaning must be put upon the words used therein. Reference to legislative
practice may be admissible for cutting down the meaning of a word in order to
reconcile two conflicting provisions in two legislative Lists as was done in
The C. P. and Berar Act case (supra), or to enlarge their ordinary meaning as
in The State of Bombay and Another v. F. N. Balsara(3). The cardinal rule of
interpretation, however, is that words should be read in their ordinary, natural
and grammatical meaning subject to this rider that in (I)  F.C.R. 18.
(2)  F.C. R. 110.
(3)  S.C. R. 682.
837 construing words in a constitutional
enactment conferring legislative power the most liberal construction should be
put upon the words so that the same may have effect in their widest amplitude.
What, then, is the ordinary. natural and
grammatical meaning of the word "income" ? According to the
dictionary it means "a thing that comes in". (See Oxford Dictionary,
Vol. 11, page 162; Stroud, Vol. 11, pages 14-16). In the United States of
America and in Australia both of which also are English speaking countries the
word "income" is understood in a wide sense so as to include a
Reference may be made to Eisner v.
Macomber(1), Merchants' Loan & Trust Co. v. Smietanka(2), and United States
v. Stewart(3), and Resch v. Federal Commissioner of Taxation( 4). In each of
these cases very wide meaning was ascribed to the word "income" as
its natural meaning. The relevant observations of learned Judges deciding those
cases which have been quoted in the judgment of Tendolkar J. quite clearly
indicate that such wide meaning was put upon the word "income" not
because of any particular legislative practice either in the United States or
in the Commonwealth of Australia but because such was the normal concept and
connotation of the ordinary English word "income." Its natural
meaning embraces any profit or gain which is actually received. This is in
consonance with the observations of Lord Wright to which reference has already
been made. Mr. Kolah concedes that the word "income" is understood in
the United States and Australia in the wide sense contended for by the learned
Attorney-General but he maintains that the law in England is different and,
therefore, entry 54 which occurs in a Parliamentary statute should be construed
according to the law of England. We are again brought back to the same argument
as to the word having acquired a restricted meaning by reason of what has been
called the legislative practice (1) (1920) 252 U.S. 189; 64 L. Ed. 521.
(2) (1925) 255 U.S. 509 ; 65 L. Ed. 75 1 (3)
(1940) 311 U.S. 60 ; 85 L. Ed. 40.
(4) (1942) 66 C.L.R. 198.
107 838 in England an argument which we have
already discarded. The argument founded on an assumed legislative practice
being thus out of the way, there can be no difficulty in applying its natural
and grammatical meaning to the ordinary English word "income." As
already observed, the word should be given it widest connotation in view of the
fact that it occurs in a legislative head conferring legislative power.
For reasons stated above we are of opinion
that Act XXII of 1947 which amended the Indian Income-tax Act by enlarging the
definition of the term income in section 2(6-C) and introducing a new head of
income in section 6 and inserting the new section 12-B is intra vires the
powers of the Central Legislature acting under entry 54 in List I of the
Seventh Schedule of the Government of India Act, 1935. In this view of the matter
it is unnecessary for us to consider or express any opinion as to the meaning,
scope and ambit of entry 55 in that List. The appeal is accordingly dismissed