1950 (1) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 42(1) of the Income-tax Act, 1922, as amended in 1939, to residents.
2. Interpretation of Section 42(1) and its legislative history.
3. Relevance of Section 14(2)(c) in relation to Section 42(1).
4. Analysis of the Bombay High Court decision in Commissioner of Income-tax, Bombay v. Western India Life Insurance Company Ltd.

Detailed Analysis:

1. Applicability of Section 42(1) to Residents:
The primary issue is whether Section 42(1) of the Income-tax Act, 1922, as amended in 1939, applies to residents. The assessee argued that Section 42(1) should not apply to residents of British India, while the revenue authority maintained the contrary. The court concluded that Section 42(1) applies to residents as well as non-residents. The court noted that the language of Section 42(1) is broad and does not specifically exclude residents, thereby implying its applicability to both residents and non-residents.

2. Interpretation of Section 42(1) and Its Legislative History:
The court examined the legislative history and amendments of Section 42(1). Before the 1939 amendment, Section 42(1) explicitly applied only to non-residents. However, the amended Section 42(1) omits any reference to the residency status of the person to whom the income accrues or arises. The court emphasized that the omission of residency reference in the first part of Section 42(1) signifies its applicability to both residents and non-residents. The court contrasted this with Section 42(2), which specifically mentions non-residents, further supporting the broader applicability of Section 42(1).

3. Relevance of Section 14(2)(c) in Relation to Section 42(1):
The assessee contended that under Section 14(2)(c), income accruing in an Indian State to a resident of British India, which is not received or brought into British India, is exempt from tax. However, the court explained that Section 42(1) overrides this exemption if there is a business connection between British India and the income source in the Indian State. The court noted that Section 42(1) deems such income to have accrued in British India, thereby subjecting it to tax and negating the exemption under Section 14(2)(c).

4. Analysis of the Bombay High Court Decision:
The court reviewed the decision in Commissioner of Income-tax, Bombay v. Western India Life Insurance Company Ltd., which held that Section 42(1) applied only to non-residents. The court disagreed with this interpretation, stating that the marginal note "Non-residents" was not a legitimate aid for statutory construction and had been changed in 1947 to "Income deemed to accrue or arise within British India." The court also found fault with the reasoning that the first part of Section 42(1) should be in the definition clauses, noting that Section 42(1) is a charging section and integral to Section 4(1) of the Act. The court concluded that the categories of income in Section 42(1) could apply to residents in specific circumstances, such as the case at hand involving a business connection between Madras and Mysore.

Conclusion:
The court held that Section 42(1) of the Income-tax Act, 1922, as amended in 1939, applies to residents as well as non-residents. The question referred to the court was answered in the affirmative and against the assessee.