Commissioner of Income-Tax, Bombay vs The Scindia Steam Navigation Co. Ltd

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 501 of 1957

Decision Date: 05/04/1961

Coram: S.K. Das, J.L. Kapur, M. Hidayatullah, J.C. Shah, T.L. Venkatarama Aiyar

The case titled Commissioner of Income‑Tax, Bombay versus The Scindia Steam Navigation Co. Ltd was decided by the Supreme Court of India on 5 April 1961. The bench consisted of Justices S.K. Das, J.L. Kapur, M. Hidayatullah and J.C. Shah. The petitioner was the Commissioner of Income‑Tax, Bombay and the respondent was The Scindia Steam Navigation Co. Ltd. The judgment was reported in 1961 AIR 1633 and 1962 SCR (1) 788 and has been cited in many subsequent authorities. The statutory provision in issue was Section 66(1) of the Indian Income‑Tax Act, 1922, as amended by the Income‑Tax (Amendment) Act, 1946 (VIII of 1946). Section 66(1) allows the assessee or the Commissioner, by a prescribed application, to require the Appellate Tribunal to refer any question of law arising out of its order to the High Court, which must then prepare a statement of the case for the High Court. The respondents owned a steamship that had been requisitioned by the Government and subsequently lost in enemy action. The Government compensated the respondents for the loss. The compensation amount of Rs 9,26,532 was taxed under the fourth proviso to Section 10(2)(vii) of the Income‑Tax Act, the proviso having been inserted by the 1946 amendment and coming into force on 4 May 1946. Before the tax authorities, the respondents argued that the compensation should not be treated as income for the assessment year 1946‑47 because the receipt occurred in the preceding financial year; this argument was rejected. No issue regarding the applicability of the fourth proviso was raised before the Appellate Tribunal, nor did the Tribunal consider it. The Commissioner therefore sought a reference to the High Court under Section 66(1), asking whether the sum of Rs 9,26,532 should be properly included in the total income of the respondent company for the assessment year 1946‑47. In the High Court the respondents contended that the fourth proviso did not apply. The Commissioner raised a preliminary objection that the respondents had not raised the question before the Tribunal. The High Court overruled this objection and held that the compensation amount was not chargeable to tax because the proviso was not in force on the relevant date. The Commissioner of Income‑Tax appealed against the High Court’s decision, and the point for determination before the Supreme Court was whether the High Court, in exercising its jurisdiction under Section 66, could decide a question that had not been raised or argued before the Tribunal.

In the appeal, the central issue was whether the High Court, while answering a reference made under section 66 of the Indian Income‑Tax Act, could decide a point that had not been raised or argued before the Tribunal. The Court, speaking through Justices Das, Kapur, Hidayatullah and Venkatarama Aiyar, held that the High Court’s jurisdiction under section 66 is strictly advisory and therefore differs fundamentally from its ordinary jurisdiction as a civil court. Because the advisory jurisdiction is limited in nature, the Court clarified that the High Court may consider only those questions that are expressly referred to it, and such questions must be ones that the Tribunal had before it either considered or decided. The expression “any question of law arising out of such order” in subsection (1) of section 66 of the 1922 Act was interpreted to apply not to any legal issue that might be inferred from the Tribunal’s findings, but solely to questions that were actually raised before the Tribunal or decided by it. The Court further noted that the Indian Income‑Tax Act of 1922 is not pari materia with the British statute from which the corresponding provision was derived, and consequently English decisions are of limited relevance for interpreting section 66 of the Indian Act. The Court cited Commissioner of Income‑Tax v. Shaw Wallace & Co. (1932) L.R. 59 I.A. 206 and Attorney‑General v. Avelino Armavo & Co., [1925] 1 K.B. 86, as authorities that had considered the matter.

The Court explained that the power given to the High Court under subsection (2) of section 66 to direct a reference does not alter the essential limitation, because that power is subject to the same constraints that apply to the Tribunal under subsection (1). The Court referred to several Indian cases, including Commissioner of Income‑Tax, Madras v. M. A. R. S. Arunachalam Chettiar (1953) S.C.R. 463, New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑Tax, [1960] 1 S.C.R. 249, Kusumben D. Mahadevia v. Commissioner of Income‑Tax, [1960] S.C.R. 417, and Zoraster & Co. v. Commissioner of Income‑Tax, [1961] 1 S.C.R. 210, while noting that the decision in Madanlal Dharnidharka v. Commissioner of Income‑Tax, [1948] 16 I.T.R. 227, was disapproved. The Court clarified that the High Court’s jurisdiction to decide a reference under subsection (5) is co‑extensive with the litigant’s right to request a reference and the Court’s power to order one. Accordingly, the High Court may decide legal questions that arise from the Tribunal’s order only if those questions were raised and decided by the Tribunal, or if they were raised before the Tribunal but left undecided, or even if the Tribunal decided them without a prior hearing. However, the Court emphasized that it cannot entertain questions of law that were neither raised nor decided by the Tribunal, even if those questions emerge from the Tribunal’s findings. A legal question may contain several aspects, and section 66(1) does not require each aspect to constitute a separate question; it merely requires that the question of law referred to the Court must have been an issue before the Tribunal.

In this case the Court explained that when a question is referred to the High Court under section 66 of the Income‑tax Act, the statute does not require that the question be limited only to those aspects that were actually argued before the Tribunal. The provision merely requires that the question of law must have arisen before the Tribunal; it does not impose a further restriction that the reference be confined to the points that were specifically raised at the hearing under section 33(4). The Court noted that this view had been approved in the decisions of Commissioner of Income‑tax, Bombay South v. M/s. Ogale Glass Works Ltd. (1955) and Zoraster & Co. v. Commissioner of Income‑tax (1961). Applying the principle to the present matter, the Court held that the question referred to the High Court was sufficiently wide to include the respondent’s contention. Accordingly the High Court was correct in holding that the fourth proviso to section 10(2)(vii) of the Act, because it was not retrospective, could not be applied. Justice Shah, speaking for a portion of the Court, observed that section 66 does not contemplate a requirement that any question referred by the Tribunal or called for by the High Court must have been raised and argued before the Tribunal. The provision does not expressly impose such a limitation, nor can it be read into the language. To read a limitation that the question must have been argued before the Tribunal would place unnecessary fetters on the High Court’s jurisdiction, contrary to the intention of the legislature and potentially causing injustice. The Court reiterated the approval of Madanlal Dharnidharka v. Commissioner of Income‑tax (1948). Under section 66(5) the Court must record its opinion on the questions that arise from the Tribunal’s order, not on the arguments that were advanced before the Tribunal. In the instant case the High Court, having been asked to consider the question arising from the Tribunal’s order, possessed the jurisdiction to determine that the proviso which made the amount taxable was not in operation at the material date.

The appeal before this Court was Civil Appeal No. 501 of 1957, filed by special leave against the judgment and order dated 13 September 1954 of the Bombay High Court in Income‑tax Reference No. 13 of 1954. The appellants were represented by counsel K. N. Rajagopala Sastri and D. Gupta, while the respondents were represented by counsel A. V. Viswanatha Sastri and P. L. Vohra. The judgment was delivered on 6 April 1961. The bench comprised Justice S. K. Das, Justice J. L. Kapur, Justice M. Hidayatullah and Justice T. L. Venkatarama Aiyar, the latter delivering the primary opinion, while Justice J. C. Shah delivered a separate judgment. Justice Venkatarama Aiyar described the factual background: the respondents owned a steamship named “El Madina”, which had been requisitioned by the Government during the Second World War and was subsequently lost due to enemy action on 16 March 1944. As compensation, the Government paid the respondents Rs 20,00,000 on 17 July 1944, Rs 23,00,000 on 22 December 1944 and Rs 33,333 on 10 August 1946. The original cost of the vessel was Rs 24,95,016 and its written‑down value at the beginning of the relevant accounting year was Rs 15,68,484. The difference between the cost price and the written‑down value, amounting to Rs 9,26,532, represented the depreciation deductions that had been allowed in previous years. Because the total compensation received exceeded the original cost, the respondents had effectively recovered the amounts that had previously been deducted as depreciation. The dispute before the Court turned on whether this sum of Rs 9,26,532 should be included in the total income of the company for the assessment year 1946‑47 under section 10(2)(vii) of the Income‑tax Act.

It was observed that the difference between the original cost of the vessel and its written‑down value, namely Rs 9,26,532, represented the cumulative depreciation allowances that had been claimed in each preceding year. Because the total compensation paid by the Government exceeded the ship’s original cost, the respondents had effectively recovered all of the depreciation amounts that had been deducted earlier. The dispute that arose between the respondents and the Income‑Tax Department therefore centered on whether this sum of Rs 9,26,532 should be treated as part of the company’s total income for the assessment year 1946‑47. The statutory provision under which the Department sought to levy tax on the amount was section 10(2)(vii) of the Indian Income‑Tax Act, 1922 (hereinafter “the Act”). The relevant portion of that provision, after omitting extraneous text, read as follows: “(2) Such profits or gains shall be computed after making the following allowances, namely:— (vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written‑down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value: Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written‑down value and the scrap value, no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written‑down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received.” Both parties agreed that, should the proviso apply, the amount of Rs 9,26,532 would constitute taxable profit. The Department also concurred that, in the absence of the proviso, the same amount could only be characterised as a capital receipt and therefore would not be taxable. The respondents, before the tax authorities, attempted to avoid the operation of the proviso by relying on representations they had made to the Board of Revenue. The Board had directed, for the purpose of Rule 4, Schedule II of the Excess Profits Tax Act, 1940, that the compensation payable—both the initial advance and any subsequent payments—should be treated as if it had actually been received within thirty days after the loss of the ship, and consequently should be deemed to have been received on 16 April 1944. If that construction were accepted, the compensation would be regarded as having been received in the financial year preceding the year of account that ran from 1 July 1944 to 30 June 1945, and therefore the amount could not be included in the company’s income for the assessment year 1946‑47. However, the Income‑Tax authorities rejected this contention, finding that the compensation was in fact received in the year of account and should be includable in the total income for the assessment year in question.

The income‑tax authorities had rejected the respondents’ claim, and the Appellate Tribunal addressed the issue in its order dated 15 July 1953. The Tribunal observed that the concession the Board of Revenue intended to grant was confined solely to the excess profits tax and could not be invoked to diminish the effect of the statutory provision contained in the fourth proviso to section 10(2)(vii). It further held that the decisive date was the actual receipt of the compensation, which fell within the relevant financial year of account and not in the preceding year when the compensation became due. Consequently, the Tribunal concluded that the compensation amount had to be included in the total income of the company. Following this decision, the respondent filed an application under section 66(l) of the Income‑Tax Act seeking a reference of certain questions to the court. One of the questions presented was whether, given that the fourth proviso to section 10(2)(vii) did not apply to the assessment year 1945‑46 and that, under the law applicable to that year, the sum of Rs 9,26,532 which had accrued in the previous year was entirely non‑taxable, and considering the assessee’s method of accounting that the sum should not be assessed in any other year, the assessment of that sum in the subsequent assessment year 1946‑47 was legally valid. By an order dated 9 February 1954, the Tribunal referred to the court the specific question of whether the sum of Rs 9,26,532 was properly included in the assessee company’s total income computed for the assessment year 1946‑47. This reference was heard before a bench of the Bombay High Court consisting of Chief Justice Chagla and Justice Tendolkar. The respondents argued that the proviso to section 10(2)(vii) could not be taken into account in the present assessment because it had been introduced by the Income‑Tax (Amendment) Act 1946 (VIII of 1946), which came into force on 4 May 1946, whereas the company’s tax liability was to be determined as of 1 April 1946 when the Finance Act 1946 became operative. The appellant raised a preliminary objection, contending that this question had not been raised before the Tribunal, was not part of the Tribunal’s order, and had not been formally referred to the court, and therefore should not be considered by the bench. The learned judges overruled the objection, observing that the wording of the referred question was sufficiently broad to encompass the new contention; even though the specific aspect had not been argued before the Tribunal, it was implicit in the question as framed, and consequently the assessee was entitled to raise it before the court.

In the earlier decision the tribunal concluded that, since the proviso to section 10(2)(vii) was not retrospective in operation, the sum in dispute could not be treated as part of the taxable income and therefore answered the question in the negative. The present appeal, taken up by special leave, challenges that conclusion. The appellant’s primary argument before the Court was that the High Court was not authorised to consider the question of whether the proviso applied to section 10(2)(vii), because that issue had never been raised before the Tribunal nor examined by it; consequently, the matter could not be characterised as a question arising out of the Tribunal’s order, which alone may be referred for decision under section 66(l) of the Act. The appellant contended that the Court lacked jurisdiction to entertain a question that could not be referred to it under the statutory provision. The respondents, on the other hand, argued that every question of law that emerges from the findings recorded by the Tribunal in its order may be said to arise out of that order. They maintained that, when a reference is made under section 66(l), the Tribunal is not confined to questions that were explicitly raised before it or dealt with in its order, nor to those identified in the application for reference. Further, the respondents submitted that the question as framed in the present reference was sufficiently wide to encompass the issue of the proviso’s applicability, and that therefore the High Court possessed the authority to entertain the reference and to decide the matter. The Court then turned to the relevant statutory framework. Section 66(l) grants both the assessee and the Commissioner the right to apply to the Tribunal, in the prescribed form, for a reference of any question of law that arises out of the Tribunal’s order to the High Court. When the Tribunal is satisfied that such a question exists, it must prepare a statement of the case and refer it to the High Court for decision. If, however, the Tribunal finds that no question of law arises and dismisses the application under section 66(l), the party affected—either the assessee or the Commissioner—may move the High Court under section 66(2). Should the High Court be unconvinced about the correctness of the Tribunal’s dismissal, it may direct the Tribunal to state the case and refer the question for decision. Under section 66(4), the High Court, for the purpose of disposing of a reference made under sections 66(l) and 66(2), may call for additional statements from the Tribunal. Finally, section 66(5) obliges the High Court to decide the question of law that has been raised and to transmit a copy of its judgment to the Tribunal for the appropriate orders to give effect to that decision.

Section 59 of the Income‑Tax Act gives the Central Board of Revenue the authority to formulate rules that are intended to give effect to the purposes of the Act. Under subsection (5) of that provision, any rule that is published in the Official Gazette acquires the same force as if it had been enacted by the Act itself. Pursuant to this power, Rule 22A was promulgated. Rule 22A specifies the required form of an application made under subsection (1) of section 66, when a party seeks to have the Income Tax Appellate Tribunal refer a question of law to the High Court. The rule states that the application must be in the prescribed “R(T)” form, and it highlights that paragraphs three to five of that form are directly relevant to the present dispute. Paragraph three requires that the facts which the Tribunal has admitted or found, and which are essential for preparing a statement of the case, be set out in an enclosure for easy reference. Paragraph four demands that the applicant identify the specific questions of law that arise from the Tribunal’s order. Finally, paragraph five directs that, on the basis of subsection (1) of section 66, the applicant request that a statement of the case be drawn up and that the identified questions of law be numbered and referred to the High Court.

The legal issue that emerges from these provisions is whether, in a reference made under section 66, the High Court is permitted to consider a question of law that was neither raised before the Tribunal nor addressed in its order, even though the question is one of law. Different High Courts have expressed divergent opinions on this point, and the dispute hinges on the interpretation of the expression “any question of law arising out of” the Tribunal’s order. The Supreme Court has not yet issued a definitive ruling on the matter, although several decisions provide guidance. One such decision is Commissioner of Income‑Tax, Madras v. M. T. Ar. S. Ar. Arunachalam Chettiar. In that case, an assessment order issued by an income‑tax officer was corrected by the Appellate Tribunal, not through an appeal under section 33(4) but through a miscellaneous application. Dissatisfied with the Tribunal’s correction, the Commissioner sought a reference under section 66(1). The Tribunal opined that it could correct the order by exercising its inherent jurisdiction and therefore referred the legality of the order to the High Court under section 66(1). The Madras High Court, however, refused to entertain the reference, holding that because the order was not the result of an appeal, the Tribunal lacked the power to refer the matter under section 66(1), which it interpreted as being limited to questions of law arising from an order passed in an appeal. The Supreme Court affirmed the High Court’s view and observed that both the Tribunal’s jurisdiction to make a reference and the High Court’s jurisdiction to hear it are conditional upon the existence of an order by the Tribunal that can be characterized as one made under section 33(4) and upon a question of law arising out of that order. This observation serves as authority for the position that the Tribunal’s power to refer and the High Court’s power to consider a reference must be strictly confined within the four corners of section 66.

The Court observed that the jurisdiction of the Income‑Tax Appellate Tribunal and of the High Court depended upon the existence of an order by the Tribunal that could be characterized as an order made under section 33(4), together with a question of law arising out of such an order. This observation has been cited as authority for the proposition that both the Tribunal’s power to make a reference and the High Court’s power to entertain a reference must be strictly confined within the limits set by section 66 of the Act.

In the case of Commissioner of Income‑Tax, Bombay South v. Messrs Ogale, Glass Works Ltd., the Tribunal, invoking section 66(1), referred to the question whether amounts received by the assessee from the Government through cheques drawn on the Reserve Bank at Bombay should be treated as income received in British India within the meaning of section 4(1)(a) of the Act. The High Court held that because the cheques were physically received in the State of Aundh and effected an unconditional discharge of the claim, the receipt did not occur in British India. On appeal, the assessee contended that the cheques had been posted in British India and therefore the income should be deemed to have been received in British India. An objection was raised that this contention had not been argued before the Tribunal nor decided by it, and consequently it did not arise out of the Tribunal’s order as required by section 66(1). The Supreme Court, however, held that the question as framed and referred was sufficiently broad to encompass the new point raised, and that no party had contested that the reference had been improperly made under section 66(1). Accordingly, the Court decided that the matter could be dealt with under section 66(5) and that it was unnecessary to express any opinion on the broader issue concerning the scope, meaning and import of the words “any question of law arising out of” the Tribunal’s order, a phrase on which judicial opinion has varied widely. As a result, there was no decision on the specific point that was then under consideration.

In New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑Tax, the question before the Court was whether the High Court, under section 66(4), was competent to request an additional statement concerning a question that had not been referred to it under either section 66(1) or section 66(2). The Supreme Court held that the scope of a reference made under section 66(2) was co‑extensive with that of a reference made under section 66(1). Consequently, the Court concluded that the High Court possessed no power under section 66(2) to go beyond the ambit of section 66(1). Both provisions, the Court explained, permit reference only of a question of law that arises out of the Tribunal’s order. The purpose of section 66(4) is to enable the Court to obtain additional statements solely for the purpose of deciding questions that have been referred under sections 66(1) and 66(2). Accordingly, the Court affirmed that no investigative proceedings could be ordered with respect to new questions that were not and could not be the subject‑matter of a reference under sections 66(1) or 66(2).

In the earlier discussion, the Court explained that a High Court could not investigate new questions that were not and could not be the subject‑matter of a reference made under sections 66(1) and 66(2). The Court also noted that there was still no decision interpreting the phrase “any question of law arising out of” the order of the Tribunal. In the case of Kusumben D. Mahadevia v. Commissioner of Income‑tax (2), the specific question referred under section 66(1) concerned whether a sum of Rs 47,120 received by the assessee had accrued to her in the former State of Baroda or whether it had accrued, or should be deemed to have accrued, to her in British India. When the reference reached the High Court, that Court altered the issue so as to consider whether the assessee could claim any concession under the Merged States (Taxation Concessions) Order, 1949, in relation to the same amount of Rs 47,120. The High Court held that the assessee was not entitled to such a concession and consequently answered the reference against her, without finally deciding where the income had actually accrued. The assessee then appealed to this Court, arguing that the High Court had erred by not deciding the original question that had been referred. This Court accepted the appeal and sent the matter back to the High Court for a hearing limited to the original issue. While that decision did not resolve the present controversy, the Court went on to examine another point: namely, that the High Court was not authorised to raise the question of the applicability of the Merged States (Taxation Concessions) Order, 1949, because that question had never been raised before the Tribunal nor referred under section 66(1). In agreeing with this view, the Court observed that section 66 of the Income‑tax Act grants the High Court jurisdiction only to consider a question of law that arises out of the Tribunal’s order; it does not give the Court power to decide a different question of law unrelated to that order. The Court acknowledged that the same legal question might admit different approaches, and the High Court could broaden the question to encompass all such approaches, but the question must still be one that was before the Tribunal and decided by it. These observations are directly relevant to the issue presently before the Court, although the actual outcome in the earlier case was a remand with directions to the High Court to decide the specific question that had been referred. The Court also referred to the case of Zoraster & Co. v. Commissioner of Income‑tax (1), where the assessee manufacturers in Jaipur had sold goods to the Government of India, with payment made by cheques drawn on the Bombay branch of the Reserve Bank of India. The Tribunal had held that the profits from those sales were received in British India, and the assessee subsequently referred that question to the Court.

In the present matter, the High Court sent the case back to the Appellate Tribunal under section 66(4) and directed the Tribunal to obtain a supplemental statement. The High Court noted that, according to the report in [1961] 1 S.C. It. 210, the Tribunal would need, among other things, to determine whether the cheques had been delivered to the assessee firm by post or by hand, and also to ascertain what directions, if any, the assessee firm had given to the Department concerning the same matter. The assessee challenged the correctness of this order on the ground that the High Court did not possess the authority to require a fresh statement for the purpose of investigating a new point of issue. In support of that challenge, the assessee relied upon the earlier decision of this Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑Tax. The Supreme Court, following the precedent set in that earlier case, held that the power to call for a supplemental statement was limited to two aspects: first, to the facts that were already on record or that had been found by the Tribunal; and second, to the question that would arise directly from the Tribunal’s order. The Court further explained that the power could be exercised in relation to a new question only when that question formed an integral or even an incidental part of the question that had been referred to the Tribunal. Moreover, the Court expressed the view that a question which bore no connection with the question already referred could not be raised for the first time in the reference. Because there was no direct decision of this Court interpreting the expression “any question of law arising out of” the Tribunal’s order, the Court turned to the decisions of various High Courts, noting that those decisions were in conflict with one another. In A. Abboy Chetty and Co. v. Commissioner of Income‑Tax (Madras), the assessee filed an application under section 66(1) seeking to have the Tribunal refer a question of res judicata to the court. The Tribunal declined, reasoning that the question had not been argued before it. The assessee then moved the High Court under section 66(2) for an order compelling the Tribunal to refer the question. Patanjali Sastri, J., who presided over that application, dismissed it and observed that a question which had not been raised before the Appellate Tribunal could not be said to “arise out of its order” merely because the facts disclosed by the order might suggest the question. He stated that, in his opinion, a question of law could be said to arise out of an order of the Appellate Tribunal only when the order itself disclosed that the question had been raised before the Tribunal. The judge also referred to the contention that the Privy Council in M. E. Moola Sons Limited v. Burjorjee had allowed a question of law arising on the basis of the facts found to be raised for the first time before it, and he noted that this case did not provide a useful analogy for determining the scope of the remedy available under section 66 of the Indian Income‑Tax Act.

The Court observed that the remedy provided by section 66 of the Income‑Tax Act must be interpreted according to the language of the statute itself. It noted that this approach had been adopted by the Madras High Court in Commissioner of Income‑tax v. Modern Theatres Ltd. and in The Trustees, Nagore Durgah v. Commissioner of Income‑tax. The Andhra High Court, in G. M. Chenna Basappa v. Commissioner of Income‑tax, followed the earlier decision in A. Abboy Chetty and Co. v. Commissioner of Income‑tax, Madras, and held that a question which had not been raised before the Tribunal could not be said to arise out of its order, even if the facts disclosed in the Tribunal’s statement of the case might support such a question; moreover, the Tribunal’s order itself must indicate that the point of law was raised before it. The Patna High Court reached the same conclusion in Maharaj Kumar Kamal Singh v. Commissioner of Income‑tax. While discussing the provisions of sections 66(1) and 66(2) together with Rule 22A, that court explained that sections 66(1) and 66(2) do not grant the High Court a general power to correct or decide any question of law that might possibly arise out of an income‑tax assessment. Rather, the statutes confer a special and limited jurisdiction on the High Court to decide only those specific questions of law that (i) have actually been raised between the assessee and the Department before the Income‑tax Tribunal and (ii) are the subject of the dispute between the parties. Consequently, the Patna High Court held that only a question of law that was truly raised before the Tribunal or actually dealt with by it could be referred under section 66(1). The same view has been consistently adopted by the Calcutta High Court. In Commissioner of Excess Profits Tax v. Jeewanlal Ltd., the Calcutta court, agreeing with the decision in A. Abboy Chetty and Co. v. Commissioner of Income‑tax, Madras, reiterated that a question of law not raised before the Tribunal could not be said to arise out of its order, even if the facts of the case would fairly give rise to such a question. In Chainrup Sampatram v. Commissioner of Income‑tax, the assessee invoked section 66(1) to refer the question of whether a sum of Rs 2,20,887 was assessable to tax on a true construction of section 14(2)(c) of the Act. The Tribunal dismissed the application, holding that the question sought to be raised had not been mentioned at the hearing of the appeal and had not been dealt with by the Tribunal; therefore, it was not a question that arose out of its order. When the matter was brought before the Court under section 66(2), Justice Chakravarti held that, under section 66(1), only a question that actually arose out of the Tribunal’s order could be referred, and that the phrase “no question of law arises” in section 66(2) meant that the specific question for which reference was sought did not arise. The Court further observed that the High Court does not have a duty to correct every assessment it may notice, nor does it possess an appellate or revisional power, or a general supervisory power under section 66; its sole function is to act as the designated mechanism for resolving any conflict that may arise between an assessee and the revenue authority.

The Court explained that only a question that actually arose out of the Tribunal’s order could be referred to the High Court. Such a question must have been expressly raised before the Tribunal and dealt with by it. Accordingly, under section 66(2) the expression “no question of law arises” could be interpreted to mean that the specific question for which the applicant sought a reference did not, in fact, arise from the Tribunal’s decision. The Court further held that the High Court could not compel the Tribunal to refer a question that had not been proposed to it during the proceedings. The learned judge then observed that the Indian Income‑Tax Act does not impose upon the High Court a duty to correct every assessment it may encounter; its jurisdiction is neither appellate nor revisional, nor does it possess a general supervisory power under section 66. The High Court’s sole function is to act as the designated mechanism for resolving any dispute that may emerge between an assessee or the Commissioner on one side and the Tribunal on the other, concerning specific legal questions. Therefore, if, on an application under section 66(2), the High Court determines that the question the applicant asks the Tribunal to refer was not a question that arose out of the Tribunal’s appellate order, the Court should, in its view, refuse to require the Tribunal to refer that question.

The same principle was affirmed in the decisions of Allahabad Bank Ltd. v. Commissioner of Income‑tax (1) and Commissioner of Income‑tax v. State Bank of India (2). In Mash Trading Co. v. Commissioner of Income‑tax (3), a Full Bench of the Punjab High Court examined the true scope of jurisdiction under section 66. Justice Kapur, speaking for the Bench, held that under section 66(1) only questions that had been raised before and considered by the Tribunal could be referred to the High Court. The power of the High Court under section 66(2) to order a reference is therefore limited to those questions that could be referred under section 66(1) and that the applicant has asked to be referred. The Tribunal has no authority to raise a question on its own initiative, and similarly the High Court cannot introduce a question that has not been referred to it under either subsection. Once a question is properly raised and referred, the High Court is bound to answer it. Consequently, a reference to the High Court on a question not raised before or considered by the Tribunal was held to be incompetent. Justice Falshaw, while generally agreeing with this view, noted that strict adherence to the rule might, in some cases, lead to injustice.

The Court explained that a point which had been presented before the Tribunal could nevertheless escape consideration if the Tribunal failed to address it because of a mistake or inadvertence, or if the Tribunal’s own jurisdiction was called into question. The learned Judge further observed that, in the former situation, the order of the Tribunal might be interpreted as having decided against the assessee, thereby attracting the operation of section 66. All of the Judges concurred that the reference under dispute was invalid because the issue had not been raised before the Tribunal.

The Court then turned to earlier decisions that had adopted a somewhat different approach. In Vadilal Lallubhai Mehta v. Commissioner of Income‑tax (1), which arose under section 66 of the Act as it existed before the 1939 amendment, the Court held that even though the assessee had not set out the specific questions that arose from the order in his application for reference, the Commissioner was required to formulate the correct questions and refer them to the court; if the Commissioner failed to do so, the court could direct him to make the necessary reference. That decision did not resolve the larger question of whether questions that had not been raised before or decided by the Commissioner could be treated as questions emanating from his order. In New Piece Goods Bazar Co. Ltd. v. Commissioner of Income‑tax (2), the reference made under section 66(1) concerned whether taxes paid on urban immovable property constituted an allowable deduction under sections 9(1)(iv) and 9(1)(v) of the Indian Income‑tax Act. An objection was raised that the application of section 9(1)(iv) had not been argued before the Tribunal and therefore could not be referred. Rejecting this objection, Kania J., then a Judge of the High Court, observed that the specific question had been presented as a ground of appeal and had been quoted by the Tribunal in its judgment, although the Tribunal had not dealt with it. Consequently, Kania J. ordered that the case be sent back to the Tribunal and invited the Tribunal to express its opinion on that aspect of the contention and to raise a proper question of law on that point. This judgment reaffirmed the principle that only a question raised before and dealt with by the Tribunal could be referred under section 66(1), a view consistent with the observations of the learned Judge that the Privy Council decisions in Commissioner of Income‑tax v. Kameshwar Singh (1) and National Mutual Life Association v. Commissioner of Income‑tax (2) disapproved the practice of raising new questions at the stage of argument before the High Court, although such disapproval did not prevent the case from being referred back to the Tribunal for further consideration.

In the case of Madanlal Dharnidharka v. Commissioner of Income‑tax, the Tribunal invoked section 66(1) of the Income‑Tax Act to submit a specific question to the Court for decision. The question presented was whether a remittance of Rs 2,01,000, which the assessee had transferred out of profits in the years before the financial year 1999‑2000 while he was a non‑resident, could be taken into account under section 4(1)(b)(iii) of the Indian Income‑Tax Act in his total income for the year of account in which he subsequently became a resident of British India. This question had not been argued before the Tribunal; nevertheless, the Tribunal referred it because it perceived that the issue arose from the order it had issued. The reference was heard by Chief Justice Chagla and Justice Tendolkar. During the hearing an objection was raised that the Tribunal should not have referred the question under section 66(1) because the question had not been raised before it. Chief Justice Chagla responded by first clarifying the nature of the Court’s jurisdiction. He explained that the Court was not an appellate body but exercised only advisory jurisdiction, and its judgments were merely advice on the legal questions submitted to it by the Tribunal. He stated that the advice must be confined to questions of law that arise out of the Tribunal’s order, and those questions must be evident from the order itself or from the facts found by the Tribunal and set out in the order. He then observed that there was no reason to limit the Court’s jurisdiction to questions that had actually been argued before the Tribunal. The plain language of section 66(1) does not impose such a limitation, and the expression “arising out of such order” should be understood according to ordinary grammatical construction, not narrowed artificially. He further clarified that the Court could not decide questions that had not been referred by the Tribunal; if the Tribunal failed to refer a legal question that arose from its order, the Court’s only recourse under section 66(2) was to direct the Tribunal to refer that question. While the Court possessed the power to re‑frame legal questions to bring out the real issue between the parties, it was not entitled to introduce entirely new questions that had not been referred. After making these observations, Chief Justice Chagla expressed his disagreement with the Madras High Court’s decision in A. Abboy Chetty and Co. v. Commissioner of Income‑tax, Madras, indicating that the High Court’s approach was inconsistent with the appropriate interpretation of the statutory provision.

In the discussion, the Court warned that allowing a tribunal to ignore a point of law raised by a taxpayer could create an extraordinary situation. It noted that a taxpayer might properly raise a question and present arguments before the tribunal, yet the tribunal could decide not to refer that point of law in the order it issued. In such a circumstance, the Court explained that it would lack jurisdiction to compel the tribunal to forward the unanswered question of law to the High Court. The Court acknowledged that the Income‑Tax Act is a highly technical statute, but it observed that there was no justification for reaching a conclusion that departed from the plain grammatical construction of the relevant provision, because doing so would produce an anomalous result.

The Court then referred to the decision in Mohanlal Hiralal v. Commissioner of Income‑tax, where a bench of the Nagpur High Court was hearing a reference made under section 66(1). The Nagpur Court held that the question of law that the tribunal had framed, based on its statement of the case, was incorrectly formulated. The bench further observed, in light of the Privy Council judgment in Commissioner of Income‑tax v. Kameshwar Singh, that the tribunal itself could not revive the matter and therefore ordered a fresh statement to be taken from the tribunal under section 66(4). The Court explained that this portion of the judgment followed the reasoning applied in New Piecegoods Bazar Co. Ltd. v. Commissioner of Income‑tax and an earlier Nagpur decision in Beohar Singh v. Commissioner of Income‑tax.

When the matter returned for a further statement under section 66(4), the tribunal criticized certain remarks that the court purportedly had no power to direct the tribunal to refer a question that had not been argued before it. The Court observed that such remarks were based on a misconception and quoted, with approval, the observations of Chief Justice Chagla in Madanlal Dharnidharka v. Commissioner of Income‑tax. The Court stated that this could not be considered a decision on the precise point under consideration. After reviewing the various authorities, the Court concluded that all High Courts agreed that section 66 creates a special jurisdiction: the tribunal’s power to make a reference and a litigant’s right to demand such a reference must be exercised strictly within the four corners of section 66(1). The High Court’s jurisdiction to hear references is confined to questions that are properly referred to it under section 66(1), and that jurisdiction is purely advisory, limited to deciding only those questions that have been referred. The Court identified a narrow area of disagreement among the High Courts concerning whether the tribunal may refer, or the High Court may decide, a question of law that was neither raised before the tribunal nor decided by it, but that nevertheless arises “on the facts found by it.” On this issue, two opposing views had been expressed: one view held that the phrase “any question of law arising out of the order of the Tribunal” required that the question be raised before the tribunal, while the other view treated any question of law arising from the tribunal’s factual findings as falling within that phrase.

Two competing interpretations of section sixty‑six, sub‑section one, were set out. One interpretation held that a question of law must have been raised before the Tribunal and examined by it before the Tribunal could refer that question. The opposite interpretation held that any question of law that arose from the facts found by the Tribunal counted as a question of law arising out of the Tribunal’s order. The latter position had been adopted in the Bombay High Court decision reported in Madanlal Dharnidharka v. Commissioner of Income‑tax, citation (1) [1933] 1 I.T.R. 94, and in later cases reported at (3) [1948] 16 I.T.R. 433, (2) [1947] 15 I.T.R. 319, and (4) [1948] 16 I.T.R. 227, 233, 234. The Nagpur High Court approved this view in Mohanlal Hiralal v. Commissioner of Income‑tax. All other High Courts endorsed the former view, which required a prior raising of the legal issue before the Tribunal.

The respondents’ counsel argued in support of the broader interpretation. He contended that the plain grammatical construction of section sixty‑six, sub‑section one, meant that any question of law that could be raised on the factual findings of the Tribunal was a question arising out of the Tribunal’s order, and that to read a requirement that the issue be previously raised before the Tribunal would be to insert words that do not exist in the statute. He further maintained that a fundamental principle of jurisprudence required litigants merely to state the facts, leaving it to the court to apply the appropriate law to those facts. He relied on the observations of Atkin, L.J., in Attorney‑General v. Avelino Aramavo & Co., citation (1), which held that the court was not limited to questions expressly raised by the Commissioners and could address a point of law apparent from the case as stated when no further facts were needed. The counsel also claimed that Indian law mirrored the British statute because section sixty‑six, sub‑section one, required the Tribunal not only to refer questions of law arising from its order but also to provide a statement of the case; section sixty‑six, sub‑section two, allowed the court to require such a statement; and section sixty‑six, sub‑section five, obliged the court to decide the question of law raised. The Court disagreed with this contention. Under the British statute, once the Commissioners issued a decision, the assessee merely needed to express dissatisfaction and ask for referral to the High Court, as noted in citations (1) [1948] 16 I.T.R. 227, (2) [1952] 22 I.T.R. 448, and (3) [1925] 1 K.B. 86. The Commissioners then prepared a statement of the case for the court, and the British statute did not impose on the assessee a duty to state the questions of law as required by section sixty‑six, sub‑section one, of the Act.

In this case the Court explained that an applicant must file an application that sets out the specific questions of law which he wants the Commissioners to refer to the court, and that the Commissioners are required to refer the questions that arise from that order. The Court referred to the decision in Commissioner of Income‑tax, Madras v. Mtt . Ar. S. Ar. Arunachalam Chettiar, where it was held that the requirements of section 66(1) relate to matters that affect the jurisdiction to make a reference under that provision. The respondents attempted to treat the position under section 66(1) of the Income‑Tax Act as if it were the same as the position under the British statute, on the basis that the Tribunal must draw up a statement of the case and refer it, and that the court would then decide the questions of law raised by that statement. The Court rejected that comparison, observing that the real purpose of a statement in a reference is to serve as a pleading in which all the material facts are set out; such a statement does not itself call for a decision by the court. It is only the question of law referred under section 66(1) that demands a decision under section 66(5), and that question constitutes the pivotal point on which the court’s jurisdiction depends. The statement of the case is relevant merely because it supplies the factual background that enables the court to decide the referred question.

The Court noted that the Privy Council has repeatedly held that the Indian Income‑Tax Act is not identical in substance to the British statute and that it is unsafe to interpret the Indian provision by relying on English decisions, as indicated in Commissioner of Income‑tax v. Shaw Wallace & Co. Consequently, because of the difference between section 66(1) and the corresponding provision in the British statute, the Court found no utility in consulting English case law for the interpretation of section 66. Nevertheless, the Court recognized that the respondents’ principal argument remained that the language of section 66(1) is sufficiently broad to admit questions of law that arise from the facts found by the Tribunal, and that nothing justified narrowing its scope by inserting words that are not present in the statute. While the Court acknowledged the force of that argument, it emphasized that certain distinctive features of the jurisdiction created by section 66 must be considered in ascertaining the true meaning of the words “any question of law arising out of such order.” The jurisdiction conferred on a court by a reference under section 66 is a special one, distinct from the court’s ordinary civil jurisdiction. When the High Court hears a reference made under sections 66(1) and 66(2), it does not exercise any appellate, revisional, or supervisory authority over the Tribunal; rather, it acts purely in an advisory capacity. The court’s role is to give advice to the Tribunal on the matter properly referred, and it is ultimately the Tribunal that must give effect to that advice. The essence of this limited jurisdiction is that the court may decide only the questions that are expressly referred to it and nothing beyond that, a principle affirmed in decisions such as New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax, Kusumben D. Mahadevia v. Commissioner of Income‑tax, and Zoraster & Co. v. Commissioner of Income‑tax. Accordingly, if the High Court’s true function is to advise when the Tribunal seeks its opinion, the Tribunal must first have had an opportunity to consider the question and decide whether it should solicit the court’s decision. It would be unreasonable to require the Tribunal to seek advice on a question that it was never called upon to consider and about which it had no chance to determine whether a court reference was appropriate.

In this case, the Court observed that the tribunal was required to give effect to the advice rendered by the High Court. It emphasized that the very nature of the jurisdiction created by section 66(1) limited the court to consider only those questions that were expressly referred to it, and it could not entertain any other matter. This principle had previously been affirmed by the Court in the decisions of New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax, Kusumben D. Mahadevia v. Commissioner of Income‑tax, and Zoraster & Co. v. Commissioner of Income‑tax. The Court reasoned that, if the true scope of the High Court’s jurisdiction under section 66 was to provide advice only when the tribunal sought it, then the tribunal must first have the opportunity to examine the question and decide whether to refer it for the court’s decision. The Court asked how it could be said that the tribunal should seek advice on a question that it had not been called upon to consider and about which it had no chance to determine whether a court reference was appropriate. Counsel for the respondents contended that, because the court could, under section 66(2), compel the tribunal to refer a question of law, the advisory character of the jurisdiction was of little consequence. They further argued that it was inconceivable for one authority to have the power to compel another authority to accept its advice. The Court rejected this contention, finding no merit in it.

The Court then explained that section 66(2) conferred upon the court a power to direct a reference only when the tribunal was already under a duty to refer the question under section 66(1); consequently, the same limitations applicable to section 66(1) also applied to section 66(2). This view had been upheld by the Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax and in Zoraster & Co. v. Commissioner of Income‑tax. Moreover, the Court noted that a direction issued under section 66(2) was essentially a mandamus. It reiterated the well‑settled principle that a mandamus will not be issued unless the applicant has made a clear demand on the appropriate authority for the specific relief sought and that demand has been refused. Accordingly, the Court identified two essential limitations on the court’s power to direct a reference under section 66(2): first, the question must be one that the tribunal was bound to refer under section 66(1); second, the applicant must have requested the tribunal to refer that question. The prescribed form R(T), under Rule 22A for an application under section 66(1), requires the applicant to set out the specific questions he wishes the tribunal to refer, and those questions must arise from the tribunal’s order. Thus, the Court concluded that, under section 66(2), the court cannot direct the tribunal to refer a question unless that question originates in the tribunal’s order and was identified by the applicant in the original application.

In this case, the Court observed that a question which is to be referred must arise out of the Tribunal’s order and must have been identified by the applicant in his application under section 66(1). The Court then explained that permitting the Court to entertain a new question that was not included in the original reference would effectively grant the applicant a right that section 66(1) and (2) expressly deny, and would expand the Court’s jurisdiction to the extent of an ordinary civil court of appeal. The Court further noted that, before the amendment of 1939, section 6P(1) authorised the Commissioner to refer a question of law to the Court on his own initiative, but that power had been removed by the present provision. Consequently, under the current wording of section 66(1) the Tribunal no longer possesses the authority to refer a question of law suo motu for determination by the Court. The Court rejected the proposition, advanced by the respondents and supported by citations to [1960] 1 S.C.R. 249 and [1961] 1 S.C.R. 210, that the Court could entertain, in a reference, any question of law arising from the facts found by the Tribunal, because such a view would render the jurisdiction under section 66(5) broader than that under sections 66(1) and (2). The Court held that the litigant’s right to request a reference, the Tribunal’s power to make a reference, and the Court’s jurisdiction to decide the reference are co‑extensive. Therefore, a question of law that the applicant cannot compel the Tribunal to refer, and which the Tribunal is not competent to refer, cannot be heard by the Court under section 66(5). On this basis, the Court could not interpret the phrase “any question of law arising out of such order” to include any question of law stemming from the Tribunal’s findings. The Court also considered the reasoning of Chief Justice Chagla in Madanlal Dharnidharka v. Commissioner of Income‑tax, where he distinguished the earlier decision in A. Abboy Chetty & Co. v. Commissioner of Income‑tax, Madras, on the ground that limiting the scope to questions raised before the Tribunal would cause great injustice when the Tribunal, through mistake or inadvertence, failed to deal with a question duly raised by the applicant. In such circumstances, the applicant would unjustly lose a statutory right intended by the legislature. However, the Court found no difficulty in holding, consistent with the view of Justice Falshaw in Mash Trading Co. v. Commissioner of Income‑tax, that the Tribunal should be deemed to have decided the question against the appellant, and thus the Court would not entertain a new question not properly referred.

The Court explained that the rule being applied is the well‑known legal principle that a relief which is asked for and not granted must be treated as if it has been refused. On that basis, the Court referred to the decision of Kania, J. in New Piecegoods Bazar Co. Ltd. v. Commissioner of Income‑tax (4), observing that in the circumstances described above the court could direct the Tribunal to present a supplemental case after it had already rendered its decision on the contention. The Court noted the relevant citations: (1) [1948] 16 I.T.R. 227, 233, 234; (3) [1956] 30 I.T.R. 388; (2) [1947] 15 I.T.R. 442; and (4) [1947] 15 I.T.R. 319. The Court further pointed out that the same procedure had been adopted in Mohanlal Hiralal v. Commissioner of Income‑tax (1). It stressed that such occasions must be regarded as exceptional and cannot be used to adopt an interpretation that departs from the plain meaning of section 66(1). The Court also addressed a subsidiary argument concerning the effect of section 66(1) where the Tribunal decides an appeal on a question of law that was not raised before it. It held that such a question would undeniably be a question arising out of the Tribunal’s order, even though it had not been contested before the Tribunal, and that this conclusion does not contradict the construction placed on the language of section 66(1). The Court then summarized the discussion as follows: (1) when a question is raised before the Tribunal and the Tribunal deals with it, the question is clearly one that arises out of the Tribunal’s order; (2) when a question of law is raised before the Tribunal but the Tribunal fails to deal with it, the question must be deemed to have been dealt with by the Tribunal and therefore also arises out of its order; (3) when a question is not raised before the Tribunal yet the Tribunal addresses it, that question similarly arises out of its order; and (4) when a question of law is neither raised before the Tribunal nor considered by it, the question does not arise out of the Tribunal’s order, even though it may be linked to the findings disclosed by the Tribunal. In concise terms, only a question that has been raised before or decided by the Tribunal can be said to arise out of its order. Having set out this principle, the Court turned to the question of whether the matter that was before the High Court qualified as a question arising out of the Tribunal’s order under the above interpretation. The Court observed that the sole issue contested before the income‑tax authorities concerned whether the sum of Rs. 9,26,532 was assessable as income received during the account year 1945‑46. That issue had been decided against the respondents. Consequently, on their application under section 66(1), the Tribunal referred to the question of whether the sum of Rs. 9,26,532 had been correctly included in the assessee company’s total income for the assessment year 1946‑47. That very question was the one that was argued before and decided by the High Court, and therefore it could not be said that the respondents had raised a new question before the Court.

In the matter before the Court, the appellant argued that the respondents had altered their position when they appeared before the Income‑Tax authorities. The respondents had originally contested the tax liability on the basis that the amount in question, Rs 9,26,532, had been received in the financial year preceding the year of account, and therefore should not have been assessed to tax. The appellant maintained that, when the respondents subsequently raised their case before the High Court, they adopted a different line of attack. According to the appellant, the respondents now claimed that even if the income had been received in the year of account, the proviso to section 10(2)(vii) could not be applied, and that this new contention represented a fresh question which they were not entitled to introduce. The Court did not accept this argument. It observed that section 66(1) of the Income‑Tax Act required only that a question of law arising out of the Tribunal’s order be referred for determination, without imposing a further restriction that every facet of the question must have been argued before the Tribunal. A question of law might be simple or complex, might involve several aspects, and might need to be examined from different perspectives. The statutory provision therefore demanded that the question presented to the Court be the same question that had been in issue before the Tribunal, but it did not compel the parties to limit the discussion to the precise arguments that had been advanced at the first stage.

The Court noted that it would be an excessive refinement of the statute to treat each aspect of a broader legal question as a separate question for the purpose of section 66(1). This approach had been endorsed in earlier decisions of this Court, namely The Commissioner of Income‑Tax, Bombay v. Messrs Ogale Glass Works Ltd. ([1955] 1 S.C.R. 185) and Zoraster & Co. v. Commissioner of Income‑Tax ([1961] 1 S.C.R. 210). Applying that principle to the present case, the Court held that the matter referred to it under section 66(1) and decided under section 66(5) was whether the sum of Rs 9,26,532 should be included in the respondents’ taxable income. Consequently, the ground on which the respondents contested their liability before the High Court fell within the scope of the original question, and the High Court was justified in entertaining it. The appellant warned that this interpretation might nullify the legislative limits on references made under section 66(1), allowing parties to introduce entirely new issues not previously argued. While acknowledging that questions can sometimes be framed in very general terms, the Court explained that in such instances the true scope of the reference must be determined by examining the statement of case and limiting the inquiry to the matters that the reference was intended to cover.

In discussing the method of framing questions for reference, the Court stressed that the Tribunal must formulate questions with precision and must clearly indicate the grounds on which the legal issues arise. Nevertheless, when a question is drafted in a sufficiently specific manner, the Court found no reason to limit the arguments to only those contentions that were previously raised before the Tribunal. The Court held that it is permissible for the court to entertain a fresh contention, provided that the new argument falls within the scope of the question as originally referred. In the case before it, the question that had been referred concerned whether the assessment of Rs 9,26,532 was proper. Although the matter argued before the income‑tax authorities revolved around the claim that the income had been received not in the year of account but in the preceding year, the wording of the referred question was broad enough to encompass the issue actually argued before the court—that the assessment was improper because the proviso of the statute was inapplicable. The Court observed that the new contention did not amount to a re‑framing of the issues; the specific terms of the referred question were sufficient to permit the respondents to raise the point. Moreover, the order of reference indicated that the Tribunal was aware that this point could be relevant to the dispute, and therefore it could not be said to lie outside the scope of the question as framed. Consequently, the Court concluded that the applicability of the proviso was implicitly contained in the question, a view endorsed by the earlier judgment of Chief Justice Chagla, and thus the court was obligated to address it. On the merits, the appellant’s arguments were found to be unpersuasive. The appellant contended that, although the proviso had come into force on 5 May 1946, it was intended to be effective retrospectively from 1 April 1946, and he cited other statutes to support this inference. The Court, however, held that it was interpreting the proviso itself, which was not retrospective, and that extraneous legislative material could not be introduced to alter its true effect. The appellant further argued that the sum of Rs 9,26,532, having previously been allowed as a deduction in earlier years, could now be treated as profit received during the assessment year and therefore subject to tax. The Court determined that this argument introduced a completely new point that was not covered by the original question, and, consistent with its view on the proper scope of a reference under section 66(1), it dismissed the contention. As a result, the appeal was dismissed with costs. Justice Shah then noted that the Income‑Tax Appellate Tribunal, Bombay Bench “A”, had referred the following question to the High Court under section 66 of the Indian Income‑Tax Act: whether the sum of Rs 9,26,532 was properly included in the assessee company’s total income computed for the assessment year 1946‑47. The referred question comprised two components: first, whether the amount was properly included in the assessee’s total income, and second, whether the amount was properly included in the taxable income of the assessee for the assessment year 1946‑47.

In this case the Court identified two distinct issues that required determination. The first issue was whether the sum of Rs 9,26,532 was correctly included in the assessee’s total income. The second issue was whether that sum was properly treated as taxable income for the assessment year 1946‑47. The amount in question represented a portion of compensation that the assessee received from the Government of India as restitution for the loss, in 1944, of its vessel “El Madina” due to enemy action. The assessee contended before both the tax authorities and the Income‑Tax Tribunal that the compensation had accrued to it on 16 April 1944. Although the authorities rejected this contention, the Court noted that such rejection did not by itself render the sum taxable; it remained necessary to decide whether the amounts actually received during July and December 1944 should be treated as income for tax purposes. It was undisputed that, prior to the amendment effected by Act 8 of 1946 to section 10(2)(7), the inclusion of a fourth proviso, compensation for the loss of a capital asset such as a ship was not subject to tax under the Indian Income‑Tax Act.

The Tribunal observed that the compensation became due when it was ascertained and that it was received by the assessee in the relevant accounting year, concluding that the amount should therefore be brought within the tax net for the assessment year 1946‑47. In doing so, the Tribunal directed its attention to the statutory provision whose application determined the liability to tax. However, the Court pointed out that proviso IV to section 10(2)(7) only came into force on 4 May 1946, and was not operative on 1 April 1946, the date on which tax liability for the assessment year 1946‑47 crystallised. The Tribunal had wrongly presumed that the amending Act was effective at the commencement of the assessment year, and the assessee did not seek to correct this misunderstanding. Consequently, the question of whether the amount was properly included in taxable income arose from the Tribunal’s order, which had held that the compensation was taxable by virtue of section 10(2)(7) proviso IV. The Court further noted that the enquiry also encompassed whether the statutory provision relied upon was applicable to the amount and whether the Tribunal’s interpretation of the proviso was correct. The assessee maintained that it was not liable under section 10(2)(7) proviso IV because the compensation had been received before the accounting year relevant to the assessment year 1946‑47; the Tribunal rejected this argument and upheld the taxability of the amount. A clear question of law concerning the proper inclusion of the sum in taxable income for the assessment year therefore emerged, and the Tribunal correctly referred that question to the High Court for determination.

The Court observed that, pursuant to section 66 clause (5) of the Income‑tax Act, the High Court was required only to record its opinion on questions that arose from the tribunal’s order and not on the arguments that had been presented before the tribunal. In the Court’s view, the High Court possessed jurisdiction to consider the question raised by the tribunal’s order and, by holding that the statute which rendered the amount taxable was not in operation on the material date, the High Court could have disposed of the appeal. Counsel for the revenue argued, however, that the assessee had never raised before the tribunal the point that the Amending Act 8 of 1946, which made the compensation received by the assessee taxable as income, had come into operation after the commencement of the assessment year 1946‑47, and that the tribunal had never directed its attention to this plea. Consequently, counsel contended that the tribunal lacked jurisdiction to refer that issue to the High Court, and that even if the factual situation gave rise to such a question, the High Court was not competent to answer it. Counsel further asserted that a question “arising out of the order of the tribunal” was limited to the specific question that had been raised and argued before the tribunal and on which the tribunal had rendered a decision. The Court noted that extensive arguments had been heard concerning the true meaning of the expression “any question of law arising out of such order” and the nature of the jurisdiction exercised by the High Court under section 66 of the Income‑tax Act, and that there existed a wide divergence of opinion on the true import of this clause. Before turning to the authorities, the Court found it useful to set out the scheme of the Income‑tax Act relating to the reference of questions to the High Court under section 66 and to describe the nature of the jurisdiction that the High Court exercised. The statute provided that within sixty days of being served with notice of an order under sub‑section (4) of section 33, the assessee or the Commissioner could, by application in the prescribed form, require the Appellate Tribunal to refer to the High Court any question of law arising out of such order, and that the Appellate Tribunal must then draw up a statement of the case and refer it to the High Court. The statute further allowed that if the Tribunal refused to state a case on the ground that no question of law arose, the applicant could apply to the High Court, which could, if dissatisfied with the Tribunal’s decision, require the Tribunal to state a case and refer it. The High Court, upon receiving a case, could decide the questions of law raised therein, deliver a judgment containing the grounds for its decision, and send a copy of that judgment to the Tribunal, which would then pass any necessary orders to dispose of the case in accordance with the judgment.

According to the provision, if the information contained in a reference made under the section is adequate for the High Court to determine the question presented, the court may send the case back to the Appellate Tribunal and order the Tribunal to make any additions or alterations that the court considers necessary. The High Court, after hearing the matter, must decide the questions of law that have been raised and issue a judgment stating the grounds on which its decision is based. A copy of that judgment is to be forwarded to the Appellate Tribunal, which is then required to pass such orders as are needed to dispose of the case in accordance with the judgment. Under the framework of the Indian Income‑Tax Act, the Appellate Tribunal functions as the sole judge of facts. The High Court, on the other hand, possesses a distinct advisory jurisdiction whereby it records its opinion on questions referred to it by the Tribunal; it does not act as a court of appeal or revision on either factual or legal questions. After the Tribunal has disposed of an appeal under section 33(4), either the revenue authority or the taxpayer may ask the Tribunal to state a case on the legal questions that arise from the Tribunal’s order. If the Tribunal refuses to state a case, the aggrieved party may move the High Court to direct the Tribunal to do so, and the High Court may issue such a direction if it is not satisfied with the correctness of the Tribunal’s refusal. The question must be a genuine legal issue, not a mere factual query or an abstract academic point; it must concern a concrete problem that directly affects the rights and obligations of the revenue or the assessee.

The High Court’s power to require the Tribunal to state a case arises only when the court is convinced that the Tribunal’s view, not on the merits of the order under section 33(4) but on the application made under section 66(1), is erroneous. If the Tribunal is not called upon to refer a question, the High Court cannot assume the authority to make the Tribunal refer questions that emerge from the Tribunal’s findings but were not originally referred. However, the judgment makes clear that there is no justification for the view that a question which the Tribunal may refer, or which the High Court may ask the Tribunal to refer after a refusal, must have been raised and argued before the Tribunal at the hearing under section 33(4). The statute does not expressly or implicitly impose such a limitation. To read into the phrase “any question of law arising out of such order” the requirement that the question must have been argued before and addressed by the Tribunal would unduly restrict the High Court’s jurisdiction contrary to the plain intent of the legislation. The source of the question is the Tribunal’s order, but the statute does not require that the Tribunal have been asked to decide that question during the appeal hearing. Frequently, new legal questions emerge for the first time from the Tribunal’s order, such as misapplication of law, reliance on an inapplicable statutory provision, misinterpretation of the issue to be decided, or omission of a statutory provision that plainly applies to the facts. These illustrative situations demonstrate that limiting the assessee or the Commissioner to only those questions previously argued before the Tribunal would cause gross injustice.

The Court held that the statutory language did not limit the source of a legal question to matters that had been expressly asked of the tribunal during the appeal hearing. While the order issued by the tribunal must be the origin of any question that the High Court may consider, the statute did not require that the tribunal have been specifically requested to decide that question at the hearing. The Court observed that it was entirely possible, and indeed a frequent occurrence, for a question of law to emerge for the first time from the tribunal’s order itself. The tribunal might, for example, misapply a provision of law, invoke a statutory clause that is irrelevant to the case, misunderstand the precise issue that needed determination, or overlook a provision that clearly applies to the facts that were found. These situations were offered only as illustrations, and the Court noted that many similar scenarios could readily be imagined.

The Court warned that it would be a grave injustice to confine either the assessee or the Commissioner to only those questions that had been raised and argued before the tribunal, and then to refuse to recognise questions that arise from the tribunal’s order but were not previously argued because the parties could not have anticipated them. A concrete question of law that directly affects the rights and obligations of the parties, and that can be linked to the tribunal’s decision, was deemed by the Court to arise out of the order even if it had not been raised or debated before the tribunal at the hearing of the appeal. The Court explained that it is the tribunal’s duty to prepare a clear statement of the case and to frame the relevant questions; this duty can be properly discharged only when specific questions that relate directly to the dispute are identified. If a question is overly broad, the High Court, while addressing it, must confine its analysis to the true scope of the question as illuminated by the findings recorded by the tribunal. Nevertheless, in examining the question, the High Court may consider not only the issues that were argued before the tribunal but also every aspect that has a direct and material bearing on the dispute. The Court emphasized that the statutory grant of jurisdiction to the High Court is not limited to recording an opinion solely on matters argued before the tribunal, and that no implication should be read into the statute to impose such a restriction. Accordingly, the Court affirmed that the High Court possesses jurisdiction to decide any question that arises from the tribunal’s order, irrespective of whether that question was previously raised and debated. The Court further remarked that judicial opinion on the meaning of “question of law arising out of such order” was divided among the High Courts and that this Court had not yet issued an authoritative ruling on the point. It concluded that analysing the disparate High Court decisions would not serve a useful purpose, noting that those decisions fell into two broad categories.

One view held that a question of law could be said to arise out of an order of the Appellate Tribunal within the meaning of section 66(1) of the Indian Income‑tax Act only when the order itself disclosed that the question had been raised before the Tribunal. According to this position, if a question was not raised before the Tribunal, it could not be said to arise out of the Tribunal’s order, even though the facts disclosed in the order might make the question appear to arise on the face of the case. The leading authorities supporting this approach were A. Abboy Chetty and Co. v. Commissioner of Income‑tax, Madras (1) and The Commissioner of Excess Profits Tax, West Bengal v. Jeewanlal Ltd., Calcutta (2). This reasoning was subsequently adopted, with slight variations in wording, in several other decisions, namely Maharaj Kumar Kamal Singh v. Commissioner of Income‑tax (3), G. M. Chenna Basappa v. Commissioner of Income‑tax, Hyderabad (4) and Punjab Distilling Industries Ltd. v. Commissioner of Income‑tax, Punjab (5).

The opposite view was expressed by Chief Justice Chagla in Madanlal Dharnidharka v. Commissioner of Income‑tax (6). The learned Chief Justice concluded that a question of law arose out of the Tribunal’s order if the question was apparent from the order itself or could be raised on the basis of the facts found by the Tribunal and set out in the order. He rejected the limitation that only questions argued before the Tribunal could be considered, observing that the statute did not impose such a restriction and that there was no grammatical reason to construe the expression “arising out of such order” narrowly. For the reasons already explained, the Court accepted Chief Justice Chagla’s interpretation of the phrase “arising out of such order” as the correct one and consequently dismissed the appeal.