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TMI Blog1965 (11) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... t been passed, exempt from taxation in his hands, if he had been resident in British India. In the view on the first question, it is unnecessary to record an answer on the second question. Appeal dismissed. - - - - - Dated:- 12-11-1965 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SHAH J.--The appellant is a private trust, and was within the meaning of sections 4A and 4B of the Income-tax Act, 1922, resident and ordinarily resident within British India in 1948. The appellant held 1,000 shares in an investment company styled Homi Mehta and Sons Ltd. (hereinafter called " the company ") which carried on the business of investing in shares in companies registered in British India and in the former Indian States. Dividends from the British Indian companies were received by the company at its registered office at Bombay, and dividends from the Indian States companies were received by the company at its registered office at Billimora in the State of Baroda. In the calendar years 1948 and 1949 the appellant received at Billimora Rs. 65,000 and Rs. 2,10,000 respectively as dividend in respect of shares held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er paragraph 6 of the Merged States (Taxation Concessions) Order, 1949, the relevant statutory developments in tax laws to effectuate the merger of the former Indian States since August 15, 1947, may be briefly set out. Under section 14(2)(c) of the Income-tax Act, added by Act 23 of 1941 and amended by Act 22 of 1947, it was enacted that : " The tax shall not be payable by an assessee in respect of any income profits or gains accruing or arising to him within an Indian State unless such income, profits or gains are received or deemed to be received in or are brought into British India in the previous year by or on behalf of the assessee, or are assessable under section 12B or section 42. " By paragraph 3 of the States' Merger (Governors' Provinces) Order, 1949, it was provided that the States specified in Schedule II shall, as from August 1, 1949, be administered in all respects as if they formed part of the provinces specified in the schedule, and by paragraph 4 all the laws in force in the merged States or in any part thereof immediately before August 1, 1949, were to continue in force until repealed, modified or amended by a competent legislature or other competent author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in British India, have been exempt under clause (c) of sub-section (2) of section 14 of the Indian Income-tax Act, 1922, if the Act had not been passed. 5. (1) The income, profits and gains of any previous year ending after the 31st day of March, 1948, which is a previous year-- (i) for the merged State assessment year 1948-49, or (ii) for the merged State assessment year 1949-50, shall be assessed under the Indian Income-tax Act, 1922, if, and only if, such income, profits and gains have not, before the 1st day of August, 1949, been assessed under the State law. (2) Where the income, profits and gains referred to in sub-paragraph (1) have not been assessed under the State law, they shall be assessed under the Indian Income-tax Act, 1922, and the tax payable thereon shall be determined as hereunder-- (i) the tax on the amount of such income, profits and gains included in the total income shall be computed at the Indian rate of tax ; (ii) the amount of such income, profits and gains shall be computed under the State law and the tax thereon computed at the merged State rate of tax ; (iii) the amount, if any, by which the tax computed under clause (i) excee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be. " By the application of the Income-tax Act, 1922, to the territories of the merged States, income received, accrued or arisen or deemed to be received, accrued or arisen to any person resident within the territory of the merged States became chargeable to tax under that Act. With a view to avoid hardship caused by the sudden application of high rates of taxation, the Central Government exercised its powers under section 60A of the Indian Income-tax Act and modified the tax levy so as to give certain exemptions and benefits to residents in the areas of the former Indian States. By paragraph 6 of the Merged States (Taxation Concessions) Order, 1949, in respect of the income of any previous year ending with March 31, 1948, which accrued or arose to persons who were residents in the territories of the merged States, benefit of the same rate of income-tax to which it was subject in the merged State was granted by providing that the difference between tax computed at the Indian rate and the State rate shall be allowed as rebate. In respect of income of residents in the merged States arising outside the taxable territories, a similar rebate was to be given (paragraph 6A). The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied to the territories comprised within British India. Section 14(2)(c) undoubtedly remained in force even after the merger of the Indian States effected by the States Merger Order, but its operation was restricted. After the merger of the States, income arising or accruing within the territory of such merged State, could not be deemed to be income arising or accruing within an Indian State, for the State had ceased to exist, and the income was for the purpose of section 4 of the Income-tax Act income arising or accruing to a person resident within the taxable territories. There is nothing in paragraph 4 of the Concessions Order which seeks to grant exemption from liability to tax in respect of income which prior to the merger of the States was not liable to tax by virtue of section 14(2)(c), but has since the application of the Income-tax Act become so liable. The claim that paragraph 4 applies to income of residents of former British India which was exempt from taxation under section 14(2)(c) is belied by the plain words of the Order. Paragraph 4 does not substantively grant any exemption ; it merely designates income to which the provisions of the Order granting exemption wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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