1940 (10) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the Government Trading Taxation Act, 1926.
2. Applicability of the Government Trading Taxation Act, 1926 to the Patiala State Bank.
3. Nature of investments by the Patiala State Bank in Government of India Securities.
4. Classification of property taken over by the Patiala State Bank from a debtor.
5. Taxability of profits from the sale of investments by the Patiala State Bank.

Issue-wise Detailed Analysis:

1. Validity of the Government Trading Taxation Act, 1926:
The primary issue was whether the Government Trading Taxation Act, 1926, was ultra vires the Government of India. The Act aimed to determine the liability of certain governments to taxation in British India concerning trading operations. The contention was that the Act did not fall within the legislative powers conferred by Section 65 of the Government of India Act, 1919, which allowed the Indian Legislature to make laws for all persons, courts, places, and things within British India. The court held that the Act was intra vires, as it related to income accruing or arising in British India, thus falling within the territorial scope of Section 65. The Act was deemed valid, and the principal question raised by the Commissioner was answered affirmatively.

2. Applicability of the Government Trading Taxation Act, 1926 to the Patiala State Bank:
The court examined whether the Patiala State Bank, wholly owned by the Patiala State and controlled by the Ruler (Maharaja), was liable to be assessed under the Government Trading Taxation Act, 1926. The Act applied to any government of His Majesty's Dominions carrying on a trade or business. The court found that the Patiala State fell under His Majesty's protection, thus within the Act's scope. The court concluded that the Patiala State Bank was liable to Indian Income-tax as if it were a company, and the answer to this issue was in the affirmative.

3. Nature of investments by the Patiala State Bank in Government of India Securities:
The court considered whether the investment of surplus funds by the Patiala State Bank in Government of India Securities constituted trading or business in British India. The question was inaccurately framed, as Section 2 of the Act did not mention trading or business in British India. The court clarified that the income from these investments was considered profits from the business of the Bank received in British India and was thus taxable.

4. Classification of property taken over by the Patiala State Bank from a debtor:
The court addressed whether property situated in Mussoorie, taken over by the Patiala State Bank from a debtor, constituted property occupied in British India for the purposes of its trade or business. The court held that while the property was not occupied for business purposes, the income derived from it was connected to the business and therefore taxable. The answer to this question was substantially in the affirmative.

5. Taxability of profits from the sale of investments by the Patiala State Bank:
The court examined whether the sum of Rs. 66,720 received by the Patiala State Bank from the sale of investments, which exceeded the cost price and was included in the profit and loss accounts, was assessable to income-tax. The Commissioner had found these profits to be part of the Bank's income. Although they could be considered an accretion to capital, the court upheld the Commissioner's finding that they were profits of the Bank and thus taxable. The question was answered in the affirmative.

Conclusion:
The court concluded that the Government Trading Taxation Act, 1926, was intra vires and applicable to the Patiala State Bank. The investments in Government of India Securities and the income from the Mussoorie property were taxable. The profits from the sale of investments were also assessable to income-tax. The answers to all relevant questions were in the affirmative, and costs were directed to be recovered from the assets of the Patiala State Bank.