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Issues Involved:
1. Maintainability of the suit. 2. Validity of the impugned provisions of the Indian Income-tax Act. 3. Extra-territorial operation of the Indian Income-tax Act. Issue-wise Detailed Analysis: 1. Maintainability of the Suit: The primary objection to the maintainability of the suit was based on Section 226 of the Constitution Act, which states, "Until otherwise provided by Act of the appropriate legislature, no High Court shall have any original jurisdiction in any matter concerning the revenue, or concerning any act ordered or done in the collection thereof according to the usage and practice of the country or the law for the time being in force." The Government contended that the suit fell within the description "matter concerning the revenue." The High Court, by a majority, held that the suit did not concern revenue but an illegal exaction, as the impugned legislation was invalid. However, the Federal Court disagreed, stating that the decision of the High Court was anomalous and that the provision under Section 226 should be applied to all cases concerning revenue, irrespective of the legality of the revenue claim. The Federal Court concluded that the suit was not maintainable under Section 226. 2. Validity of the Impugned Provisions of the Indian Income-tax Act: The impugned provisions included the words "or, are deemed to accrue or arise" in Section 4(1)(c) of the Indian Income-tax Act and Explanation 3 to Section 4(1). The High Court declared these provisions void, stating they were beyond the law-making powers of the Indian Legislature. The Federal Court, however, held that these provisions were not extra-territorial in their operation. The Court emphasized that the source of the dividends paid to the plaintiff-company by the sterling companies was British-Indian. The Court referred to various precedents and principles, including decisions from the High Court of Australia, to support its conclusion that the impugned provisions were within the legislative powers of the Indian Legislature. 3. Extra-territorial Operation of the Indian Income-tax Act: The Federal Court discussed the distinction between sovereign and non-sovereign legislatures concerning extra-territorial legislation. It concluded that even if the impugned provisions had extra-territorial operation, this would not render them invalid. The Court referred to Section 99 of the Government of India Act, 1935, which empowers the Federal Legislature to make laws "for the whole or any part of British India." The Court interpreted this provision to mean that the Indian Legislature had the authority to enact laws with extra-territorial effects, provided there was a real connection to British India. The Court cited various legal principles and precedents to support this interpretation, ultimately concluding that the extra-territorial operation of the impugned provisions was within the legislative powers of the Indian Legislature. Conclusion: The Federal Court allowed the appeal, setting aside the High Court's decree and substituting it with a decree dismissing the action with costs in the High Court. The respondent was ordered to pay the costs of the appellant. The judgment emphasized the legislative competence of the Indian Legislature to enact the impugned provisions and upheld their validity.
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