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Issues Involved:
1. Cause of Action 2. Bar under Indian Income Tax Act 3. Jurisdiction under Section 226 of the Government of India Act, 1935 4. Ultra Vires Nature of Explanation (3) to Section 4 of the Indian Income Tax Act 5. Relief Entitlement Detailed Analysis: 1. Cause of Action: The plaintiff company, a non-resident entity, was assessed to income tax in British India on dividends received from sterling companies declared and paid outside British India. The company contended that these dividends did not accrue or arise in British India and challenged the legality of Explanation (3) to Section 4 of the Indian Income Tax Act, which deemed such dividends as income accruing in British India. The court held that the income from dividends paid by sterling companies did not arise or accrue in British India, thus giving the plaintiff a valid cause of action to challenge the assessment. 2. Bar under Indian Income Tax Act: The court examined whether the suit was barred by the provisions of the Indian Income Tax Act, particularly Section 67. The court determined that the special tribunals set up by the Income Tax Act did not have the jurisdiction to decide on the ultra vires nature of legislative provisions. The court concluded that Section 67 did not bar the suit as it was not for setting aside or modifying an assessment but for declaring the assessment unauthorized and outside the Act. 3. Jurisdiction under Section 226 of the Government of India Act, 1935: The court deliberated whether Section 226, which bars the High Court's original jurisdiction in matters concerning revenue, applied to this case. It was held that the court must determine whether the money paid was legal revenue or an illegal exaction. If the money was demanded and paid under a valid law, the court had no jurisdiction. However, if the demand was made under an invalid law, the money was an illegal exaction, and the court had jurisdiction. The court found that the impugned legislation was beyond the law-making powers of the Government of India, thus the money paid was not legal revenue, and Section 226 did not bar the court's jurisdiction. 4. Ultra Vires Nature of Explanation (3) to Section 4 of the Indian Income Tax Act: The court analyzed whether Explanation (3) to Section 4, which deemed dividends paid outside British India as income accruing in British India, was ultra vires. The court held that the Indian Legislature did not have the power to legislate extra-territorially in this manner. The provision was found to be beyond the legislative powers conferred by the Government of India Act, 1935, making it invalid. Consequently, the words "or are deemed to accrue or arise" in Section 4(1) and Explanation (3) were of no legal effect. 5. Relief Entitlement: The court granted the plaintiff a declaration that the impugned legislation was invalid and ordered the return of the money paid, amounting to Rs. 4,35,290-5-0, as money had and received, along with interest at 4% per annum from the date of the notice of claim until payment. The court did not grant an injunction to restrain future assessments, assuming the judgment would prevent further illegal assessments. Separate Judgments: - Derbyshire, J., concluded that the impugned legislation was beyond the law-making powers of the Government of India and thus invalid, entitling the plaintiffs to a refund. - Mitter, J., agreed with the invalidity of Explanation (3) to Section 4 and held that the suit was not barred by Section 226 or the provisions of the Income Tax Act. - Lodge, J., dissented on the jurisdiction issue, believing Section 226 barred the High Court from entertaining the suit but agreed on the invalidity of the legislation and the cause of action. Order: The court ordered the return of the money paid by the plaintiff, with interest, and declared the impugned legislation invalid.
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