Navinchandra Mafatlal vs The Commissioner Of Income-Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 194 of 1952

Decision Date: 01/11/1954

Coram: Mehar Chand Mahajan, Ghulam Hasan, Natwarlal H. Bhagwati, Das

In this case, the Supreme Court of India delivered its judgment on 1 November 1954 in the matter of Navinchandra Mafatlal versus the Commissioner of Income-Tax, Bombay. The bench comprised Justices Mehar Chand Mahajan, Ghulam Hasan and Natwarlal H. Bhagwati, with the chief justice listed as Mehar Chand Mahajan and other members as Ghulam Hasan, Natwarlal H. Bhagwati, T. L. Venkatarama and others. The petitioner was Navinchandra Mafatlal and the respondent was the Commissioner of Income-Tax for Bombay City. The judgment was reported in the 1955 All India Reporter at page 58 and in the 1955 Supreme Court Reporter (Second Series) at volume 1, page 829. Subsequent citations of the decision appear in numerous law reports, including the 1958 Supreme Court Reports at page 560, the 1959 reports at pages 459 and 582, the 1960 reports at pages 424, 751 and 1073, the 1961 report at page 652, the 1962 report at page 1563, the 1963 report at page 1241, the 1964 report at page 572, the 1965 reports at pages 1375, 1387, the 1966 report at page 1089, the 1967 report at page 1373, the 1968 report at page 1286, the 1971 report at page 792, the 1972 report at page 425, the 1978 reports at pages 449 and 771, the 1981 report at page 907, the 1984 report at page 981, the 1986 report at page 1272, the 1990 reports at pages 781, 1637 and 1664. The statutory provision under consideration was Section 12-B of the Indian Income-Tax Act, 1922, as inserted by Act XXII of 1947, which imposed tax on capital gains. The judgment also referred to the Government of India Act, 1935, specifically the Seventh Schedule, List I, Item 54, concerning taxation of capital gains. The headnote of the case recorded that Section 12-B was not ultra vires the Government of India Act, 1935, because the term “capital gains” falls within the meaning of “income” in the constitutional provision. The Court rejected the argument that income cannot include capital gains and dismissed the notion that a legislative practice draws a strict line between income and capital. The Court explained that the so-called legislative practice is merely the judicial interpretation of the word “income” in tax statutes, which does not override its ordinary natural meaning in the constitutional schedule. The Court emphasized the cardinal rule of interpretation that words should be read in their ordinary natural and grammatical sense, while words in a constitutional enactment conferring legislative powers should be construed liberally and with the widest amplitude. The judgment cited earlier authorities such as Commissioner of Income-Tax v. Shaw Wallace & Co., Ryall v. Hoare, Ryall v. Honeywill, Californian Copper Syndicate (Limited and Reduced) v. Harris, Wallace Brothers & Co. Ltd. v. Commissioner of Income-Tax, and others.

The judgment cited a number of authorities, including 16 I.T.R. 2401; Croft v. Dunphy (L.R. 1933 A.C. 156); Kamakshya Narain Singh v. Commissioner of Income-tax (L.R. 70 I.A. 180, 11 I.T.R. 513, 1943); In re The Central Provinces and Berar Act No. XIV of 1938 (F.C.R. 1939) at page 18; United Provinces v. Atiya Begum (F.C.R. 1940) at page 110; State of Bombay and Another v. F. N. Balsara (S.C.R. 1951) at page 682; Eisner v. Macomber (252 U.S. 189, 64 L. Ed. 521); Merchant’s Loan & Trust Co. v. Smietanka (255 U.S. 509, 65 L. Ed. 751); United States v. Stewart (311 U.S. 60, 85 L. Ed. 40) and Resch v. Federal Commissioner of Taxation (66 C.L.R. 198). The matter before the Court was a civil appeal, numbered 194 of 1952, under the civil appellate jurisdiction. The appeal was filed against a judgment and order dated 7 September 1951 issued by the High Court of Judicature at Bombay in Income-tax Reference No. 46 of 1950. Counsel for the appellant, assisted by additional counsel, appeared for the appellant, while counsel for the respondent, the Attorney-General for India, was assisted by counsel for the respondent. The judgment was delivered on 1 November 1954 by Justice DAS. The appeal challenged the decision of the Bombay High Court, which had been rendered on the reference made by the appellant under section 66(1) of the Indian Income-tax Act, 1922. By an assessment order dated 31 March 1948, the Income-tax Officer, Bombay, had assessed the appellant for the assessment year 1947–1948 on a total income of Rs 19,66,782. Included in this total was Rs 9,38,011 that represented capital gains, which the assessing officer had taxed under section 12-B of the Act. The capital gains arose because the appellant held a one-half share in certain immovable properties situated in Bombay. During the relevant accounting year, which corresponded to the calendar year ending 31 December 1946, the appellant and his co-owners sold those properties to a private limited company named Mafatlal Gagalbhai & Company Ltd. The sale generated profits of Rs 18,76,023, of which the appellant’s one-half share amounted to Rs 9,38,011, and this amount was included in the assessment under section 12-B.

In April 1948 the appellant filed an appeal against the assessment order before the Appellate Assistant Commissioner, arguing that section 12-B, which authorized a tax on capital gains, was ultra vires the Central Legislature. The Appellate Assistant Commissioner dismissed the appeal by order dated 5 April 1949. The appellant then appealed to the Income-tax Appellate Tribunal, which also dismissed the appeal by order dated 30 June 1950. Dissatisfied with the Tribunal’s decision, the appellant invoked section 66(1) of the Act to seek a reference of certain questions of law to the High Court. The Tribunal accepted that questions of law arose from its order and prepared a statement of the case, which was agreed to by the parties and subsequently referred to the High Court for determination.

When the parties agreed on a statement of the case, they referred the matter to the High Court and posed two specific questions for its consideration. The first question asked whether the Central Legislature had exceeded its constitutional authority by imposing a tax under the head “capital gains.” The second question asked whether, even if the first answer were affirmative, the tax might be invalid because it had been introduced through an amendment to the Indian Income-tax Act. After hearing the reference, the High Court delivered its judgment in Income-tax Reference No. 18 of 1950, titled Sir J. N. Duggan and Lady Jeena J. Duggan v. The Commissioner of Income-tax, Bombay City. The Court answered the first question negatively, holding that the tax was not ultra vires, and it expressed the view that it need not answer the second question. Both learned Judges concurred on the negative answer to the first question, although each reached that conclusion on different grounds, and each elaborated those grounds in separate judgments.

The central issue before the High Court, and now before this Court, was whether section 12-B of the Income-tax Act, which authorises the levy of tax on capital gains, was constitutionally invalid because it purported to be beyond the powers of the Central Legislature. Section 12-B had been inserted into the Act by the Indian Income-tax and Excess Profits Tax (Amendment) Act, 1947 (Act XXII of 1947), a Central enactment. Under section 100 of the Government of India Act, 1935, the Central Legislature was empowered to make laws on matters listed in List I of the Seventh Schedule of that Act. The only entries in List I that could support the validity of the impugned amendment were entry 54, “Taxes on income other than agricultural income,” and entry 55, “Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies, and taxes on the capital of companies.” Chief Justice Chagla held that the amendment creating section 12-B fell within entry 55 and was therefore within the Central Legislature’s competence, either in its entirety or at least insofar as it applied to individuals and companies. Although Chief Justice Chagla did not need to decide whether the amendment could also be justified under entry 54, he, after considering the arguments, expressed the view that it could not be supported on that ground. In contrast, Justice Tendolkar held that the amendment was fully intra vires because it fell within entry 54, and he deemed it unnecessary to examine its relationship to entry 55. This Court concurs with Justice Tendolkar’s reasoning regarding entry 54, finding it well-founded. During the proceedings, counsel for the appellant, Mr. Kolah, advanced a clear and skillful argument that entry 54, which deals with “taxes on income,” does not encompass tax on capital gains, a point that was central to the Court’s analysis.

Mr. Kolah argued that entry 54, which deals with taxes on income, does not within its scope cover a tax on capital gains. “Income”, according to him, does not denote capital gains either by its natural meaning, by common usage, or by judicial interpretation of the relevant statutes in England and India. He further submitted that the learned Chief Justice was entirely correct in holding that English lawyers and jurists have consistently drawn a clear line between income and capital. He contended that English legislative practice has always recognised this distinction and that, because the word acquired a particular meaning through such practice, the British Parliament that enacted the Government of India Act, 1935 must have understood and used “income” in entry 54 in that sense. However, the Court noted that no enactment other than fiscal statutes such as the Finance Act and the Income-tax Act had been cited where the word “income” appears, and therefore it could not be said that the term had acquired any specific meaning through broader legislative practice. Reference was made to several cases in which the courts had construed the word “income”, and what is described as legislative practice is in fact merely judicial interpretation of that word as it appears in the fiscal statutes mentioned. A review of those decisions demonstrates that each case was primarily concerned with determining the precise meaning of the term “income” as it was used within the specific framework of income-tax legislation. Thus, the observation of the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co.(1) established the connotation of “income” as it is employed “in this Act”. The passage quoted by the learned Chief Justice from Rowlatt J. in Ryall v. Hoare and Ryall v. Honeywill(2) refers to profits or gains “as used in these Acts”. In Californian Copper Syndicate (Limited and Reduced) v. Harris(3), Lord Justice Clerk held that an enhanced price realised on the sale of certain items over their cost price does not constitute profits “in the sense of Schedule D of the Income Tax Act of 1842”. These cautious observations clearly indicate that they pertain to the term “income” or “profit” as used in the Income-tax Act, and they do not override the ordinary English meaning of the word “income”. The reality is that although Income-tax legislation adopts an inclusive definition of “income”, its scheme is to tax only those incomes that fall under specified heads. Such heads include the five schedules of the English Act of 1918 and the provisions of section 6 read with the following sections, and only income that arises or accrues is chargeable.

The statute uses the expression “or is received or is deemed to arise or accrue or to be received” as it appears in the legislation. The courts have consistently endeavoured to determine the meaning of the word “income” within the particular framework of that statute. They have not intended that the interpretation they gave to the term should exhaust every possible connotation of the ordinary English word “income” outside the confines of the Act. The present petition asks the court to hold that the judicial construction of “income” in the Income-tax Act has become permanently fixed. If such a holding were accepted, any future amendment that broadened the reach of the Income-tax Act would be barred, because the meaning would be regarded as immutable. The court considered that such a conclusion would be excessively extraordinary and virtually unimaginable. The court noted the authorities cited by counsel, namely (1) (1932) L.R. 59 I.A. 206 at page 212, (2) (1923) 8 T.C. 521 at page 525, and (3) (1904) 5 T.C. 159 at page 165, and found that they do not support the proposition that the ordinary English term “income” has acquired a narrowly restricted sense.

The court further examined the authorities relied upon by counsel and concluded that they do not demonstrate a narrow construction of the word “income.” In Wallace Brothers & Co. Ltd. v. Commissioner of Income-tax (1) the issue was not the definition of “income” but whether the foreign earnings of an English company, which was a partner in a Bombay firm and whose Indian income exceeded its foreign income, could be treated as a resident under section 4-A. That decision emphasized that, when interpreting the scope of legislative power, reference must be made to the ordinary understanding of the subject matter as reflected in United Kingdom legislative practice. The case was therefore concerned with the application of the Act to foreign income rather than the meaning of “income” itself, and it does not establish that “income” has acquired any special or limited definition. The same reasoning applies to Croft v. Dunphy (1), which was mentioned by Lord Uthwatt in the Privy Council judgment in Wallace Brothers. In Kamakshya Narain Singh v. Commissioner of Income-tax, Lord Wright observed that “Income, it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation.” Lord Wright then referred to Sir George Lowndes’s observations in Commissioner of Income-tax, Bengal v. Shaw Wallace & Co., where an attempt was made to explain the meaning of “income” as used “in this Act.” Consequently, the court found that none of the authorities cited by counsel establish a legislative practice that limits the meaning of “income” to a special sense apart from the Income-tax statute.

There is no legislative practice that defines the meaning of the term “income” apart from the Income-Tax statute, as indicated by the authorities cited at (1) (1948) L.R. 75 I.A. 86; [1948] F.C.R. 1; 16 I.T.R. 240, (2) L.R. [1933] A.C. 156 and (3) (1943) L.R. 70 I.A. 180; [1943] 11 I.T.R. 513. In the Court’s view it would be erroneous to interpret the word “income” appearing in entry 54 of the Constitution on the basis of any supposed English legislative practice, a position advanced by Mr Kolah. It is noteworthy that the English Income Tax Act of 1945 (8 and 9 Geo. VI, C. 32, sections 37 and 38) expressly includes capital gains within taxable income. The matter before this Court, however, concerns the proper construction of a word that occurs in a constitutional provision, and, as previously observed, such a provision must not be read narrowly or pedantically. Gwyer C.J., speaking in In re The Central Provinces and Berar Act No. XIV of 1938 (1) at pages 36-37, observed that the rules of construction applicable to ordinary statutes also apply to constitutional enactments, subject to the qualification that their application is necessarily conditioned by the subject-matter of the enactment itself. The Court therefore reiterated that the problem to be resolved is the interpretation of a word appearing in entry 54, which constitutes a head of legislative power.

As Gwyer C.J. further explained in The United Provinces v. Atiqa Begum (2) at page 134, none of the items listed in the constitutional Lists may be confined to a narrow or restricted sense; each general term must be understood to extend to all ancillary or subsidiary matters that can fairly and reasonably be said to be encompassed by it. Chief Justice Chagla concurred that, when construing an entry in a List that confers legislative powers, the widest possible construction based on the ordinary meaning of the words must be applied. Reference to legislative practice may be permissible where it serves to narrow the meaning of a word to reconcile two conflicting provisions in different legislative Lists, as was done in The C. P. and Berar Act case (supra), or to broaden the ordinary meaning, as in The State of Bombay and Another v. F. N. Balsara (3). Nonetheless, the cardinal rule of interpretation remains that words should be read in their ordinary, natural and grammatical sense, subject to the qualification that, when interpreting a constitutional enactment that confers legislative power, the most liberal construction should be adopted so that the words operate in their widest amplitude. The question then is: what is the ordinary, natural and grammatical meaning of “income”? Dictionaries define the term as “a thing that comes in” (see Oxford Dictionary, Vol. 11, p. 162; Stroud, Vol. 11, pp. 14-16). The United States of America and Australia, both English-speaking jurisdictions, also understand the word “income” in a wide sense, a point that will be considered in the continuation of this judgment.

The Court observed that the term “income” is interpreted broadly so that it encompasses a capital gain. It referred to the cases Eisner v. Macomber (1), Merchants’ Loan & Trust Co. v. Smietanka (2), United States v. Stewart (3) and Resch v. Federal Commissioner of Taxation (4). In each of those decisions a very wide meaning was attached to the word “income” as the natural meaning of the expression. The Court noted that the observations of the learned judges in those cases, quoted in the judgment of Tendolkar J., made clear that the broad construction was not the result of any specific legislative practice in the United States or in the Commonwealth of Australia, but arose from the ordinary English understanding of the word “income.” The natural meaning, the Court explained, embraces any profit or gain that is actually received, a view that accords with the observations of Lord Wright previously cited. Counsel for the respondent, Mr. Kolah, conceded that the United States and Australia understand “income” in the wide sense argued by the learned Attorney-General, but he contended that English law is different and that entry 54 in a Parliamentary statute should be interpreted according to English law. The Court returned to the argument that the word might have acquired a restricted meaning through a so-called legislative practice, citing the authorities (1) (1920) 252 U.S. 189; 64 L.Ed. 521, (2) (1925) 255 U.S. 509; 65 L.Ed. 751, (3) (1940) 311 U.S. 60; 85 L.Ed. 40, (4) (1942) 66 C.L.R. 198. The Court had already rejected that argument in England. Having discarded the notion of an assumed legislative practice, the Court found no difficulty in applying the ordinary grammatical and natural meaning of “income.” As previously observed, the word should be given its widest connotation because it occurs in a legislative head that confers legislative power. Consequently, the Court held that Act XXII of 1947, which amended the Indian Income-Tax Act by expanding the definition of “income” in section 2(6-C), introducing a new head of income in section 6 and inserting section 12-B, is within the constitutional powers of the Central Legislature acting under entry 54 in List I of the Seventh Schedule of the Government of India Act, 1935. In light of this conclusion, the Court considered it unnecessary to express any opinion on the scope of entry 55 in that List. Accordingly, the appeal was dismissed with costs, and the appeal was dismissed.