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TMI Blog1944 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... reet, Douglas, in the Isle of Man, and its in office at Egham, Surrey, England. It has no business premises in India, but holds the bulk of the shares in eleven companies which carry on the business of manufacturing and selling tobacco and cigarettes in India. Two of these companies, referred to in the judgments of the High Court as "rupee companies", are incorported in India under the Indian Companies Act and have their registered office and business head-quarters at Calcutta. The nine remaining companies, referred to as the "sterling companies", are companies registered under the English Companies Act. They are controlled in London, where the Boards of Directors sit, the shares registers are situate and dividends are declared. The Boards in London have constituted Boards which are situate in India. The business in India, where all profits are made, is managed by the local Boards. The ultimate control lies with the London Boards. No shares registers are kept in India. The financial policy of the companies is controlled by the London Boards and in all important matters of business the London Boards are consulted. All the general meetings of the companies are held in England. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de British India, it was held by the Bombay High Court in 1931 in Commissioner of Income-tax v. Goldie, that dividends received by him outside British India from companies doing business in British India but registered in the United Kingdom and having their share register there could not be assessed to income-tax in British India, under the Indian Income-tax Act, as it then stood. To meet this situation, certain amendments were inserted in the Act in 1939 and these are the provisions now impugned. It having been enacted by Section 3 that the tax shall be charged in respect of "the total income" of the previous year, Section 4 proceeds to define "the total income". In respect of income not "received or deemed to be received in British India" by or on behalf of the assessee, the Act creates a category of "income accruing or arising or deemed to accrue or arise in British India"; and, drawing a distinction in this connection between persons resident in British India and persons not resident in British India, it provides by clause (c) of sub-section (1) of Section 4 that the total assessable income of a non-resident shall include income which accrues or arise or is deemed to accrue or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il 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." It was contended on behalf of the Government that the present suit fell within the description "matter concerning the revenue" in the above provision. Lodge, J., was of the opinion that this objection should prevail; but the Chief Justice and Mitter, J., held that a matter could be held to concern revenue only when the law under which the revenue was claimed was itself valid; and as they came to the conclusion that the relevant provisions of the law were in this case invalid, they were of the opinion that the suit must be held to relate not to revenue, but to an illegal exaction. The learned Chief Justice said : "In order to decide whether the money has been demanded and paid legally, the Court must first determine whether the impugned legislation is valid or not. The Court inbound to inquire into and decide this matter to ascertain whether it has jurisdiction or not." Dealing wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim may well be described as an "illegal" claim against him. Again, there may be a dispute between a taxpayer and the revenue authorities as to whether the taxpayer has or has not paid what was due from him and if on investigation it should be found that he had paid what was claimed as still due, the claim as against him for further payment might well be described as "illegal." If in such cases the Court should be called upon to decide whether the claim was well founded in law before applying the bar under Section 226, the provision would be practically rendered nugatory. In Spooner v. Juddow, the Judicial Committee held that the section would apply to all cases in which "parties bona fide and not absurdly believed that they are acting in pursuance of statues and according to law." This language will, in our opinion, apply as much to the Indian Legislature acting in the belief that its enactment is authorised by the Constitution Act as to a subordinate authority in India acting in the belief that his or its action is authorized by the Indian law. Section 226 is obviously not limited to steps taken in the collection of revenue. It equally applies to the demand or assessment. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riously contested by the Advocate-General" in that case. The authority of that pronouncement does not in any event carry us further that the considered judgment of the Calcutta High Court in the present case. Mitter, J., refers to the analogy of cases where a Court has power to determine what are called jurisdictional facts, if the jurisdiction of the Court depends on the existence of certain facts. In such cases, the jurisdictional or exclusionary provisions will ordinarily be of a qualified character and indicate what facts must be found before the jurisdiction can attach or be excluded. But as we read Section 226, the bar is absolute, if the dispute concerns revenue, taking the word "revenue" in its ordinary sense. The above conclusion as to the effect of Section 226 of the Constitution Act would by itself suffice to justify the appellant's contention that the suit should be dismissed. As the case has however been fully argued before us on the merits and we have come to the conclusion that the appellant's contention must succeed even on the point as to the legality of the assessment, we proceed to deal with it, as it would be embarrassing to the Government in the administratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whose income is to be taxed. Strong reliance was also placed on certain decisions of the High Court of Australia, where, dealing with provisions similar to the impugned provisions of the Indian Act or provisions of even wider import, the High Court of Australia has held that they were not invalid on the ground of extra-territorial operation. On behalf of the respondent, it was contended that in a case like the present the source of income to the plaintiff-company could not be regarded as situate in British India. It was argued that though the sterling companies might earn their profits by business carried on by them in British India, there was no connection between the plaintiff-company and the earning of these profits and that the plaintiff-company derived its income only in England where the dividends were declared by the sterling companies. In support of this contention, reliance was placed on some of the observations of Tomlin, J., (as he then was) in London and South American Investment Trust v. British Tobacco Co. (Australia) (1918) 25 cOM. l.R. 183. The judgment of the High Court seems to be mainly based upon these observations. The learned Chief Justice states that the eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly entitled to the profits of the business to a certain extent fixed and ascertained in a certain way dependent on the constitution of the corporation. This argument was overruled by all the learned Judges. In Nathan's case, Isaacs, J., delivering the judgment of the Court, observed that the question as to the source of the share-holder's income was a question of fact to be determined on practical grounds. In both the cases, the Court held that though no individual cooperator could lay claim to any portion of the profits made by the company, every corporator had an interest in them. The very observation of Fletcher Moulton, L.J., [in the Gramophone and Typewriter, Ltd. case] quoted above recognises that the share-holder "is entitled to the profits of the business to a certain extent." The languages used by Brett and Cotton, L. JJ., in Gilbertson v. Fergusson shows that dividends are paid out of profits - and in that sense must have the same source - and this is not affected by the remarks made on that case in Barnes v. Hely Hutchinson. It is true that the profits of a company may not materialize into a dividend for the share-holder till a dividend is declared, but that is differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onial tax had not existed, so much more would have been available as profits from the business in the Colonies for division among the share-holders of the company." True, when a divided is declared it becomes a "debt" for which the share- holder can sue the company, but that is not a picture of the whole transaction. The company can declare dividends only when it has earned profits; the real question therefore is where has the money out of which the dividends are declared been earned ? How exactly this question is to be answered when the dividends have passed through more than one company will depend upon the circumstances of each case. No such difficulty arises here. In Colonial Gas Association, Ltd. v. Federal Commissioner of Taxation and Broken Hill South Ltd. v. Commissioner of Taxation (N.S.W.), the Australian High Court went even further than in the earlier cases and held that interest paid to a non-resident foreigner on debentures raised in a foreign country might be said to have its "source" in Australia, if the moneys borrowed had been used by the borrowing company for carrying on business in Australia or had been secured by the mortgage of any property in Australia. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the existence in New South Wales of some item of property comprised in a security to which directly or indirectly the taxpayer might resort if the interest was not paid. As he said on p. 362, the tax was there laid upon income which was not necessarily derived from or was affected by the New South Wales connection. One other point was emphasized by Dixon, J., on p. 375 : "If a connection exists, it is for the legislature to decide how far it should go in the exercise of its powers. As in other matters of jurisdiction or authority, Courts must be exact in distinguishing between ascertaining that the circumstances over which the power extends exist and examining the mode in which the power has been exercised. No doubt there must be some relevance to the circumstances in the exercise of the power. But it is of no importance upon the question of validity that the liability imposed is, or may be, altogether disproportionate to the territorial connection." If some connection exists, the legislature is not compelled to measure the taxation by the degree of benefit received in particular cases by the tax-payer. This affects the policy and not the validity of the legislation. In the Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iously interpreted. (See Ratcliffe and McGrath, "Australian Income-tax Law" at pp. 62, 176, 177, and Shaw and Barker, "The Law of Income-tax", at pp. 12, 240, 284). If its effect is only to lay down that Courts in one country will not feel bound by the revenue laws of another country or that a foreign legislature cannot affect the rights inter se of the parties to an English contract [cf. observation of Lord Macmillan in Inland Revenue Commissioners v. National Mortgage and Agency Co. of New Zealand], the case will have little bearing upon the present question. If the observations of the learned Judge are however to be relied on as bearing on the question whether an Australian Court could hold against the validity of an Australian law assessing to income-tax the dividend paid to an English shareholder by an English company deriving its revenue from the shares it held in other companies which carried on business in Australia, the decision must be read in the light of certain facts on which the learned Judge himself has laid stress. The plaintiff in that case held shares in two companies, namely, the defendant company and the Australian Pastoral Company. The plaintiff was a trust inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 and repeated by him in the course of his judgment, that the defendant-company did not actually carry on business in Australia, but was a purely holding company. As we understand the judgment, it was because there was no evidence to show whether the same was the case even as regards the Australian Pastoral Company that the learned Judge said (on p. 118) : "In the absence of evidence, I will assume that it (plaintiff-company) was taxable in respect of its dividends received from the Australian Pastoral Company, Ltd." Where the company in which the non-resident share- holder holds shares is not carrying on business in the taxing country, it may br possible to say that the connection between the non-resident shareholder of the first company and the profits arising out of the trade carried on by another company in which the first company held shares is too remote to justify the position of income-tax on that shareholder or on dividends received by him from the first company, by the State in which the trading company carried on business. On the facts of that case, the importance attached by the learned Judge to the situs of the plaintiff's shares ins understandable. In the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly indicates that the legislative power of the subordinate legislature is subject to specified territorial limitations or if, on the other hand, the language authorizes expressly or by necessary implication extra-territorial legislation by the subordinate legislature, the position is simple enough. Where, however, the language of the Constitution Act does not contain a sufficiently clear indication one way or the other, two views are possible : One is that the language of that statute should be construed conformably to a general presumption against authorizing extra-territorial legislation, and the other view is that the statute should be constructed on the basis that there is no such presumption of limitation. The one view or the other seems to have been taken according as a restricted or unrestricted view was taken of the sovereignty of the Dominions. The views that prevailed prior to 1916 have been discussed at some length in Clement's Canadian Constitution, pp. 85 et. seq. (See also Jennings' Constitutional Laws of the British Empire, pp. 34 and 110, Dicey's Law of the Constitution, 8th edn., p. 99, and 9th edn., note on p. 103). There can be little doubt that the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (which reproduced the language of still earlier statutes) conferred on the Indian Legislature "power to make laws (a) for all persons, for all Courts and for all places and things within British India, (b) for all subjects of His Majesty and servants of the Crown within other parts of India, and (c) for all native Indian subjects of His Majesty without and beyond as well as within British India, etc. etc." The expression "places and things within British India" in clause (a), interpreted in the light of the decisions in Blackwoood v. The Queen and Provincial treasurer of Alberta v. Kerr, would have imposed a strict territorial limitation upon the powers of the Indian Legislature. The extra-territorial power contemplated by clauses (b) and (c) is conferred in specific terms and is not assumed to be included in the power conferred by clause (a). In the Act of 1935, sub-section (1) of Section 99 does not use the expression "things within British India," but empowers the Federal Legislature to make laws "for the whole or any part of British India" and the "topics" on which it can legislate are specified in Lists I and III of the Seventh Schedule. This way of dealing with the matter is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powers, for, it cannot be said that the other powers conferred on the Federal Legislature cannot be made effective without the right to legislate in respect of fisheries beyond territorial waters. The power so to legislate was obviously understood to have been conferred by sub-section (1) of Section 99. The only limitation that now exists is that which is involved in the connection implicit in the expression "laws for British India." The Words of Evatt, J., in Trustees Executors Agency Co., Ltd. v. Federal Commissioner of Taxation, where he was dealing with the position of the Australian legislature independently of Section 3 of the Statute of Westminster, are, in our opinion, equally true of the legal position in India, whatever the differences between the two countries in political conditions may be. The learned Judge said : "The Constitution requires that it must be possible to predicate of every valid law that it is for the peace, order and good government of the Dominion with respect to a granted subject, e.g., customs, taxation, external affairs. In such cases, the presence of non-territorial elements in the challenged law has to be considered upon a slightl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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