1960 (8) TMI 4 - SC - Income Tax

Whether section 14(2)(c) of the Indian Income-tax Act, as it stood on April 1, 1950, granted an exemption, and that this exemption was not affected by the amendment of the said provision in 1953 even though the amendment was retrospective from April 1, 1950, unless the Finance Act, 1950, which applied the Income-tax Act to this area was also amended? Held that - The fiction in the amendment made the exemption to disappear as if it had never been granted, and unless there was a saving, the amendment must operate to obliterate the exemption. In fact, the whole purpose and intent of the amendment was to reach this result from the assessment year 1950-51 onwards, and there could be no saving. The argument assumes the premise that the Income-tax Act was incorporated in the Indian Finance Act, 1950, but there is neither precedent nor warrant for the assumption that when one Act applies another Act to some territory, the latter Act must be taken to be incorporated in the former Act. It may be otherwise, if there were words to show that the earlier Act is to be deemed to be re-enacted by the new Act. The Indian Finance Act, 1950, was concerned with the application of the Indian Income-tax Act to this area, which it did by amending the definition of taxable territories in the Indian Income-tax Act, and by applying that Act to the territory. Thereafter, the Indian Parliament could amend the Income-tax Act retrospectively, and the amendment would apply also to the new taxable territory. In our opinion, both the arguments are not valid. Appeal dismissed.

Summary

Issues:
1. Interpretation of section 14(2)(c) of the Indian Income-tax Act, 1922.
2. Applicability of exemption under section 14(2)(c) before and after an amendment in 1953.
3. Effect of the Indian Finance Act of 1950 on the taxation of income accrued prior to April 1, 1950.
4. Validity of the arguments regarding the exemption withdrawal and incorporation of the Income-tax Act by reference in the Indian Finance Act of 1950.

Analysis:
The Supreme Court heard an appeal concerning the interpretation of section 14(2)(c) of the Indian Income-tax Act, 1922, in a case involving a private limited company incorporated in the former Kotah State. The company claimed exemption under section 14(2)(c) for the assessment year 1950-51, which was disputed by the income-tax authorities. The Court examined the historical context, noting that prior to the integration of the Kotah State into Rajasthan, there was no income-tax law in force in the region. The Indian Finance Act of 1950 extended the Income-tax Act to Rajasthan, making it a taxable territory from April 1, 1950.

A key contention in the case was whether the exemption under section 14(2)(c) remained valid after an amendment in 1953. The Court considered arguments regarding the effect of the amendment, which substituted "Part B State" with "the State of Jammu and Kashmir," thereby impacting the exemption provision. The appellant argued that the amendment did not affect the original exemption granted before 1950. However, the Court disagreed, emphasizing that the amendment effectively removed the exemption for income accruing within Part B States, except Jammu and Kashmir, from April 1, 1950.

Furthermore, the Court addressed the appellant's argument that subsequent amendments to the Income-tax Act did not affect the original Act as incorporated by reference in the Indian Finance Act of 1950. The appellant contended that the exemption should apply to income accrued before April 1, 1950, as the amendment was prospective. The Court rejected this argument, clarifying that the Indian Finance Act merely applied the Income-tax Act to the region without incorporating it, allowing Parliament to enact new laws for the area.

Ultimately, the Court dismissed the appeal, ruling that the exemption withdrawal was valid from the assessment year 1950-51 onwards. The judgment highlighted that the amendment's intent was to eliminate the exemption retroactively, emphasizing that there was no saving clause to preserve the exemption. The Court concluded that the arguments presented lacked validity, upholding the decision of the High Court and dismissing the appeal with costs.