Mrs. Kusumben D. Mahadevia 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. 507 of 1957

Decision Date: 30 March, 1960

Coram: M. Hidayatullah, S.K. Das, J.L. Kapur

In this case, the Supreme Court of India delivered its judgment on 30 March 1960 in the matter of Mrs. Kusumben D. Mahadevia versus the Commissioner of Income‑Tax, Bombay. The judgment was authored by Justice M. Hidayatullah, and the bench comprised Justices M. Hidayatullah, S. K. Das and J. L. Kapur. The petitioner, Mrs. Kusumben D. Mahadevia, appealed against the order of the Commissioner of Income‑Tax, Bombay, which had been rendered on the same date. The official citation of the decision is 1960 AIR 907 and 1960 SCR (3) 417; it is also reported in various citator references including R 1961 SC 107 (13), RF 1961 SC 1633 (13,26), RF 1963 SC 1356 (121), R 1963 SC 1484 (7), RF 1973 SC 1023 (13). The factual background recorded by the Court shows that the petitioner was a shareholder in Mafatlal Gagalbhai and Co., Ltd., a company whose registered office was situated in Bombay and which was, at all material times, resident in British India. The company also conducted business in the former Baroda State and retained in the Baroda State the profits it earned there in a separate entity, Mafatlal Gagalbhai Investment Corporation, located at Navsari. In the financial year 1949 the company declared dividends that were derived partly from profits accruing in British India and partly from profits accruing in the Baroda State. The petitioner was assessed to income‑tax on the dividends that she received. She did not transfer those dividends to British India and therefore claimed that she was entitled to the benefit of paragraph 4 of the States (Taxation Concessions) Order, 1949. The Tribunal, after hearing the matter, held that the income on which the assessment was based did not accrue to the petitioner in the Baroda State. However, the Tribunal did not address the separate question of whether the petitioner could rely upon the concession provided in paragraph 4 of the Taxation Concessions Order. The matter was subsequently referred to the High Court of Bombay. On reference, the High Court held that paragraph 4 of the Taxation Concessions Order did not apply to the assessee. The High Court, however, again declined to determine the other question concerning the locus of accrual of the income to the assessee. The petitioner then appealed to this Court by special leave, contending that because the Tribunal had not expressed any opinion on the applicability of the concession order, the High Court had no authority to raise and decide that issue on its own. The Supreme Court, after considering the submissions, held that the High Court had exceeded its jurisdiction. The Court explained that Section 66 of the Indian Income‑Tax Act, 1922 (the clause that confers jurisdiction on the High Court) permits a reference only of a point of law that arises directly from the order of the Tribunal. Section 66 does not empower the High Court to determine a different point of law that does not arise from the Tribunal’s order. Consequently, the High Court’s decision on the application of paragraph 4 was beyond the scope of its statutory jurisdiction. The Court further supported its conclusion by referring to earlier authorities, including New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑Tax (1959) 37 I.T.R. 11, Scindia Steam Navigation Co. Ltd. v. Commissioner of Income‑Tax (1954) 26 I.T.R. 686, Commissioner of Income‑Tax v. Breach Candy Swimming Bath Trust (1955) 27 I.T.R. 279 and Ismailia Grain Merchants Association v. Commissioner of.

The Court noted that the earlier authorities Incometax, [1957] 31 I.T.R. 433, were distinguished, and that the decision in Mash Trading Co. v. Commissioner of Income‑tax, [1956] 30 I.T.R. 388, was considered. The matter before the Court was Civil Appeal No. 507 of 1957, filed by special leave, challenging an order dated 28 September 1955 and a judgment dated 20 February 1956 rendered by the Bombay High Court in Income‑tax Reference No. 28 of 1955. Counsel for the appellant were R.J. Kolah and I.N. Shroff, while the respondent was represented by the Solicitor‑General of India, C.K. Daphtary, together with B. Ganapathy Iyer and D. Gupta. The appeal was heard on 30 March 1960, and the judgment was delivered by Justice Hidayatullah. The appeal sought to set aside the High Court’s order, which had reframed a question originally referred by the Appellate Tribunal at Bombay and then answered by the High Court in its judgment. The appellant, Mrs Kusumben D. Mahadevia, hereinafter referred to as the assessee, was at all material times a resident of Bombay. She held a shareholding of 760 ordinary shares in Mafatlal Gagalbhai & Co., Ltd., a private limited company having its registered office in Bombay. For the assessment year 1950‑51, which corresponded to the calendar year 1949, the assessing authority fixed her total taxable income at Rs 1,50,765. This total comprised a grossed‑up dividend income of Rs 1,47,026, within which the sum of Rs 47,120 represented dividends declared by Mafatlal Gagalbhai & Co., Ltd. The company, at all relevant times, was resident and ordinarily resident in British India, and it also conducted business in the former Baroda State. Profits earned in Baroda were retained with Mafatlal Gagalbhai Investment Corporation, located in Navsari. In 1949 the company declared dividends out of these accumulated profits by passing three separate resolutions. The first resolution, dated 25 March 1949, declared a further dividend of Rs 17 per ordinary share free of income‑tax for the year 1947, amounting to Rs 4,29,250, payable in Navsari out of the profits of that year lying at Navsari. The second resolution, dated 24 September 1949, declared a further dividend of Rs 24 per ordinary share free of income‑tax for the year 1948, amounting to Rs 6,06,000, also payable in Navsari out of the profits of that year and to be paid on or after 30 April 1949 by Messrs M.G. Investment Corporation Ltd. The third resolution, also dated 24 September 1949, declared an ad‑interim dividend of Rs 21 per ordinary share free of income‑tax for the year 1949, amounting to Rs 5,30,250, to be paid out of the company’s unbrought income of 1949 and payable in Navsari on or after 30 April 1949. The assessee did not remit these dividends to British India and consequently claimed

The assessee claimed the benefit of paragraph four of the Merged States (Taxation Concessions) Order, 1949, but the Tribunal held that the income did not accrue to her in Baroda State. The Tribunal observed that the dividends were declared by Mafatlal Gagalbhai & Co., Ltd. out of its profits, which had partially arisen in what was then called British India and partially in the Indian State. Consequently, the dividend was declared out of composite profits, indicating that the source of income spanned both jurisdictions. The Tribunal noted that the assessee had paid for and acquired the shares of a company situated in British India, thereby holding an asset within British India, and that the income derived from that asset. Nevertheless, at the assessee’s request, the Tribunal prepared a statement of the case under section 66(1) of the Indian Income-tax Act and posed the following question to the High Court. The question framed was whether the dividend income of Rs. 47,120 accrued to the assessee in Baroda State, or whether it was income accrued or deemed to have accrued to the assessee in British India. When the reference was heard, the High Court expressed the view that the Tribunal should also have decided and referred the issue of whether the Concessions Order applied to the assessee. The High Court acknowledged the assessee’s grievance that this point had not been raised before the Tribunal in the proceedings. Nevertheless, by its order dated 28 September 1955, the High Court concluded that a supplemental statement was unnecessary because all facts required to decide the two questions were already before it. The High Court reframed the question to include two points of law, phrasing it as whether the assessee was entitled to concession under Merged States (Taxation Concessions) Order, 1949, regarding dividend income of Rs. 47,120. The reference was finally disposed of on 20 February 1956, and the High Court answered the question in the negative, holding that paragraph four of the Concessions Order did not apply to the assessee. The High Court did not decide the issue of where the income had accrued to the assessee in this case. The High Court refused leave to appeal to this Court, but the assessee obtained special leave against both the order and the judgment, and the present appeal was filed. At the very beginning, the assessee questioned the High Court’s jurisdiction to frame and consider a point of law that did not arise from the Tribunal’s order. The assessee argued the Tribunal had decided that the income accrued in British India, and if Commissioner deemed it necessary, he should have obtained the Tribunal’s decision and asked for a reference on another point.

In this case, the Court observed that the Tribunal had never examined whether the Concessions Order was applicable to the assessee and had not expressed any view on that point. Consequently, the assessee argued that the High Court could not independently raise that issue and render a decision on it. The assessee placed strong reliance on a precedent of this Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑Tax, reported in 1959 at page 11 of the Income‑Tax Reporter. In that earlier decision, the Bombay High Court had directed the Tribunal to file a supplementary statement on matters that did not arise from the Tribunal’s original order, and this Court had held that the High Court lacked jurisdiction to issue such a direction. On the other side, counsel for the Commissioner contended that the true dispute concerned the assessability of the assessee, who was seeking the benefit of the Concessions Order. According to that argument, the principal issue was whether the Concessions Order applied, while the question of where the income had accrued—whether in British India or in Baroda—was only a subsidiary matter. The respondent further asserted that the subsidiary question was subsumed within the principal one, and that the High Court was correct in framing a single comprehensive question and answering it in the order it did. It was also pointed out that, having concluded that the Concessions Order did not apply, the High Court was under no obligation to address the other limb of the question, because that issue became unnecessary. The Court, however, found the assessee’s objection to be well founded. It noted that the Tribunal had decided the assessability of the assessee on the narrow basis that the income had not arisen in Baroda but in British India, and it had not considered whether the Concessions Order was applicable. That specific point had not been examined by the Bombay High Court. Conversely, the High Court had examined the applicability of the Concessions Order, a matter the Tribunal had never addressed. Although both authorities arrived at the same ultimate conclusion regarding the assessment, the bases for their decisions were entirely different. The High Court seemed to believe that its framed question encompassed both aspects, but the Court held that the two matters were neither co‑extensive nor was one included within the other. The question of the place of accrual of income must be decided under the provisions of the Income‑Tax Act and bears little relevance to the Concessions Order. That question could be resolved on the facts of the present case without referring to the Concessions Order. Therefore, it could not be said that the issue of accrual was either co‑extensive with or part of the High Court’s determination of whether the Concessions Order applied. If that understanding was correct, it became clear that the Tribunal had decided a matter that lay completely outside the High Court’s decision. Likewise, the High Court had decided a matter that the Tribunal had never even considered as a step in its own determination.

In this matter, the Court observed that the two decisions were unrelated, although they produced the same outcome. Section 66 of the Income‑tax Act, which gives the High Court jurisdiction, allowed only a reference of a point of law that arose from the Tribunal’s order. The provision did not authorize the High Court to decide a different point of law that also arose from the same order. The Court recognized that a single point of law might be approached in different ways, and that the High Court could broaden the question to include all those approaches. However, the question had to be one that was actually before the Tribunal and that the Tribunal had decided. It could not be a wholly new question that the Tribunal had never considered. The respondent tried to defend the action by arguing that the decision on the accrual of income, with reference to the place of accrual, implied that the Concessions Order applied. The Court disagreed with that contention, noting that if the implication were correct there would have been no need to frame the question anew. The High Court itself had identified two limbs of the assessability question and had reframed the question to cover both limbs. The Court found that the High Court erred by deciding only one of those limbs, and moreover, the limb it decided was the one that the Tribunal had not addressed. Consequently, the Court summed up that the High Court decided something that the Tribunal had not, and the Tribunal decided something that the High Court had not. This, the Court held, was plainly contrary to the requirements of Section 66.

The respondent relied on the decisions in Scindia Steam Navigation Co. Ltd. v. Commissioner of Income‑tax (1), Commissioner of Income‑tax v. Breach Candy Swimming Bath Trust (2) and Ismailia Grain Merchants Association v. Commissioner of Income‑tax (3). The Court noted that all three were decisions of the same Court rendered in different factual settings. In two of those cases, the question was broad enough to accommodate a line of reasoning not taken by the Tribunal, and in the third case the question was widened by removing a reference to one statutory provision while another provision remained relevant. None of those precedents involved a situation where the issues of law decided by the Tribunal and by the High Court were entirely different, which was the situation here. The Punjab High Court had taken an opposite view in Mash Trading Co. v. Commissioner of Income‑tax (1). For the reasons explained, the Court concluded that the High Court had exceeded its jurisdiction by moving beyond the point of law decided by the Tribunal and by deciding a different point of law. Accordingly, the Court set aside the order of the High Court and remitted the matter to that Court to decide the question that had been framed by the Tribunal.

In this case the Court observed that both the assessee and the Commissioner had drawn the High Court’s attention to an apparent procedural anomaly. Despite this joint observation, the High Court proceeded to restate the issue that was before it, thereby reframing the question for determination. The Court therefore directed that the expense incurred in pursuing the present appeal be treated as the costs of the reference that will now be placed before the High Court. Accordingly, the Court ordered that the costs of this appeal be assessed as costs in the forthcoming reference and that the reference be heard by the High Court. The Court further stipulated that the parties must be bound by whatever decision the High Court subsequently renders on the re‑framed question, and that the High Court should decide the matter within the legal limits previously set by the Tribunal, without introducing any new point of law. In view of these directions the appeal was allowed and the entire case was remitted to the High Court for fresh consideration of the question as framed by the Tribunal.